1. Collect Yourself Urology Physicians (CYUP) provides the following data (EBIT is Earnings Before Interest and Taxes):
|
EBIT
|
$56,000
|
|
Tax rate
|
40%
|
|
Assets
|
$672,000
|
A. It's assets are currently 100% equity financed (no debt). What is CYUP's current ROE?
B. If they replace some Equity with 40% debt financing, at an interest rate of 8%, what is CYUP's ROE?
C. What advice would you give CYUP regarding the addition of debt to their capital structure?
2. Tooth Tortures is considering building a new office after the first was destroyed by a storm. They estimate the initial cost of land, construction of the new office, and equipment to total $3,000,000. Their cost of capital is 12%. They have forecasted the following cash flows for the six years of operations until Dr. Payne, the dentist, plans to retire:
|
YEAR
|
CASH FLOW(CF1
|
|
1
|
$ 400,000
|
|
2
|
600,000
|
|
3
|
800,000
|
|
4
|
800,000
|
|
5
|
800,000
|
|
6
|
600,000
|
A. What is the traditional payback period?
B. According to the information given, what is the NPV?
C. Dr. Payne states that since, according to the payback period he should get all his investment back, that he should proceed with the new office. What would you tell him?