45. The Taylor Corporation is using a machine purchased two years before. The machine has a
book value of 66,000 and a current market value of $40,000. The asset is in the Class 8 CCA pool (20 percent CCA rate). It will have no salvage value after 5 years and the tax rate is 40 percent. Jacqueline Elliot, the chief Financial Officer of Taylor is considering replacing this machine with a new model that costs $70,000. The new machine will cut operating costs by $10,000 per year for 5 years. Taylor’s cost of capital is 8 percent. Should the firm replace the asset? (Use the NPV methodology to solve this problem) ( 8 marks )
46. The Presley Corporation is about to go public. It currently has a aftertax earnings of $7.5
million, and 2.5 million shares are owned by the present stockholders (the Presley family).
The new public issue will represent 600,000 new shares. The new shares will be priced the public at $20.00 per share, with a 5 percent spread on the offering price. There will also be $200,000 in out-of-pocket costs to the corporation.
a. Compute the net proceeds to the Presley Corporation. (3 marks )
b. Compute the earnings per share immediately before the stock issue. (3 marks ) c. Compute the earnings per share immediately after the stock issue. (3 marks)
d. Determine what rate of rate of return must be earned on the net proceeds to the corporation so that there will not be a dilution in earnings per share during the year of going public. (4 marks) e. Determine what rate of rate of return must be earned on the net proceeds to the corporation so that there will be a 5 percent increase in earnings per share during the year of going public. (4 marks)
47. The shares of Dyer Drilling Co. sell for $60. The firm has a P/E ratio 15 and 40 percent of
earnings are paid out in dividends. What is the dividend yield? (5 marks)
6