Download Answers Key for Quiz 3 - Corporate Financial Management | FIN 4360 and more Quizzes Finance in PDF only on Docsity! Finance 4360; Key to Quiz 3; Spring 2008; 1:00 Class Note: For any question with numbers, all of the points are earned by setting up solutions. There are no points for any calculations. As a result, you will likely earn a higher grade on this quiz if you simply set up problems but never touch your calculator. “Setting up solutions” may involve writing a single number. 1. Which of the capital budgeting rules discussed in chapter 6 measures the “bang for your buck” – the value created per unit of resource consumed? Profitability Index 2. Your firm is considering building a new warehouse that will cost $700,000 today to build. The warehouse will last 4 years and will be depreciated at a rate of $100,000 per year to its $300,000 salvage value. The warehouse will generate net cash flows of $150,000 per year at the end of each year of the warehouse’s life. Using a cost of capital of 10%, calculate the warehouse’s EVA three years from today? I = 700,000 – 2100,000 EVA3 = 150,000 - .1I – 100,000 3. Blastoff Shoes is considering building a new retail store in Waco. Blastoff estimates that some of the sales at the new store will come from customers who would have driven to their existing store in Temple. Should the loss of sales at the existing Temple store be included as part of the incremental earnings of the proposed new store (“yes” or “no” is all that is needed to answer this question)? Yes 4. Games Galore is considering building a new assembly plant in Central Texas. Games Galore has already calculated the plant’s unlevered net income and is now attempting to calculate its free cash flow. Using the following estimates, calculate the impact of working capital on the plant’s free cash flow for the 2nd year of operation if Game Galore’s marginal tax rate is 35%. Year 0 1 2 3 4 5 Cash 5 6 8 9 10 11 Accounts receivable 0 30 32 35 37 40 Inventory 100 120 130 135 140 140 Accounts payable 50 70 75 80 82 85 Net Working Capital 55 86 95 99 105 106 NWC = 95 – 86 FCF = – NWC 5. Office Systems Inc. has just spent $10,000 to purchase new furniture that falls into the seven-year MACRS property class. Assuming that Office System’s marginal tax rate is 35%, calculate the impact of the furniture’s depreciation on the firm’s free cash flow in the fourth year of the furniture’s life (the first year is the year the furniture is put into service). Note: write a “+” to indicate a positive impact and a “–“ to indicate a negative impact. (-10,000.1249)(1-.35) + -10,000.1249 (Note: using 7.5b) +10,000.1249.35 (Note: using 7.6)
