1. Cost-Cutting Proposals. Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,000 in inventory for each succeeding year of the project. If the shop’s tax rate is 35 percent and its discount rate is 9 percent, should the company buy and install the machine press?,,2. Calculating Returns. Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total return.,,,3. Calculating Yields. In Problem 2, what was the dividend yield? The capital gains yield?,,,4. Calculating Returns and Standard Deviations. Based on the following information, calculate the expected return and standard deviation for the two stocks:,, Rate of Return if , State Occurs,,State of Probability of Stock A Stock B,Economy State of Economy ,Recession .15 .05 -.17,Normal .65 .08 .12,Boom .20 .13 .29,,,5. Calculating Cost of Equity. The Down and Out Co. just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock sells for $52 a share, what is the company’s cost of equity? ,,,6. Calculating WACC. Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.,a. What is Mullineaux’s WACC? ,,,,,
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