Faculty of Economics Trisakti University

Take Home Quiz of Even Semester Academic 2011/2012

Subject Submitted Time Room Building Lecturer : : : : : : Financial Management I Friday/ July 6, 2012 8 am 4 pm New Student Information Center Hendriawan Sie, 1st floor Team teaching

The Oniel Corporation currently uses an injection molding machine that was purchased two years ago. This machine is being depreciated on a straight line basis toward a $500 salvage value, and it has six years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time. Oniel is offered a replacement machine that has a cost of $8,000, an estimated usefull life of six years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machines much greater efficiently would still cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Rangos marginal tax rate is 40 percent, and its required rate of return is depend on cost of capital. Oniel finance this investment using $3,200 of debt, $1,200 of preferred stock and $3,600 of common stock equity. The firm can raise an unlimkted amount of debt by selling $1,000 par value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond must be given. The firm must also pay flotation costs of $20 per bond. The firm can sell 11% preferred stock at its $100 per share par value. The cost of issuing and selling the preferred stock is expected to be $4 per share. An unlimited amount of preferred stock can be sold under these terms. The firms common stock is currently selling for $80 per share. The firm expects to pay cash dividens of $6 per share next year. The firms dividends have been growing at an annual rate of %, and this rate is expected to continue in the future. The stock will have to be underpriced by $4 per share, and flotationcosts are expected to amount to $4 per share. The firm can sell an unlimited amount of new common stock under these terms. Using payback period, net present value and internal rate of return, should it replace the old machine?

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