1. Bhangra Inc. is a Silicon Valley start-up. It will pay no dividends for two years. The company will pay a dividend of $7.00 per share exactly three years from today. The dividends will grow at 2% for the next two years after which the dividends will grow at the rate of 4.5% for the future. If the required return on this stock is 12 percent, what is the current share price.
2. Bhalu electronics has developed a new chip for use with the 5G network. The R&D (Research and Development) cost in developing this chip was $5.0 million. Company policy is not to sell its R&D to outside parties. The company is now considering going into production. The company has a plot in an industrial park which was purchased for $2.0 million three years ago. The current market price of the land is $2.5 million after tax. The chip has a life of 6 years after which it will become obsolete and will not be produced anymore. At the end of the life of the project, the land will be sold for $2.75 million after tax. The plant and equipment necessary for production will cost $4.5 million and will be depreciated according to a5 yearMACR schedule. The salvage value of the equipment will be $0.5 million. Sales revenue each year will be $7 million and operating costs not including depreciation will be $2.5 million. Net working capital requirement for the project is estimated to be $1.2 million which will be recovered at the end of the life of the project. Bhalu has a tax rate of 34%. The required return on the project is 12 percent. What is the NPV of the project? What is its IRR? What is the payback of this project?
5 Year MACR Schedule
Year
|
MACR Depreciation Rate
|
1
|
20%
|
2
|
32%
|
3
|
19.2%
|
4
|
11.52%
|
5
|
11.52%
|
6
|
5.76%
|
3.You are evaluating two different pastry making machines. Bash 1 costs $235,000, has a three-year life, and has operating costs of $28,000 per year. Bash II costs $305,000, has a five-year life, and has operating cost of $17,500 per year. Assume that thestraight linedepreciation method is used and that the equipment is fully depreciated to zero. Both machines have zero salvage value. The relevant tax rate is 34%. If your discount rate is 15%, compute the EAC for both machines. Which do you prefer? Why?
4.A stock has had the following year end prices and dividends:
Year
|
Price
|
Dividend
|
1
|
$43.12
|
-
|
2
|
49.07
|
$0.55
|
3
|
51.19
|
0.60
|
4
|
47.24
|
0.63
|
5
|
56.09
|
0.72
|
6
|
67.21
|
0.81
|
What are the arithmetic and geometric returns for the stock?
THEORY:(5 points each)
1.Under what circumstances can IRR and NPV give conflicting signals regarding the acceptanceor rejection of mutually exclusive projects? If a conflict occurs which method is preferable?
2.What are the conditions under which the NPV needs to be jettisoned in favor of using the EAC?
3.Define the following terms used in project analysis and state whetheror not itis a relevant costfor inclusion in project cash flows:a)Sunk costb)Opportunity costc)Side effects or Externalitiesd)Allocated costse)Interest Expense