Question

What are the following project’s operating cash flows for year 1:

Sales: $10,000
All costs excluding depreciation: 20% of sales Annual depreciation expense: $3,000
Tax rate: 21%
Purchase price of asset: $2,200
Current assets: $1,000
Current liabilities: $700

1. A $4,200

2. B $6,200

3. C $6,218

4. D $6,318

5. E None of the above

2. Suppose a firm has just paid a dividend of $4 per share. Subsequent dividends will remain at $4 indefinitely. Assuming a 5% required rate, what is the value of one share?

1. A) $22.50

2. B) $27.25

3. C) $32.50

4. D) $37.25

5. E) $80.00

Answer 1

1. Operating cash flow is computed as shown below:

= Sales - all costs excluding depreciation - tax expenses

Tax expense is computed as follows:

= (Sales - all costs excluding depreciation - depreciation) x tax rate

= ($ 10,000 - $ 10,000 x 20% - $ 3,000) x 21%

= $ 1,050

So, the amount will be as follows:

= $ 10,000 - $ 2,000 - $ 1,050

= $ 6,950

So, the correct answer is option E.

. The amount is computed as follows:

= Dividend / rate of return

= $ 4 / 5%

= $ 80.00

So, the correct answer is option E.

Feel free to ask in case of any query relating to this question      

answered by: anonymous