COMPUTERS CSEW501 Your superior is a cantankerous and very stubborn

| March 14, 2016

Question
3a. Your superior is a cantankerous and very stubborn man who believes that the simplest approaches are the best. Your firm has just bought a van, with a five-year lifetime, for $10000. You superior wants you to use straight line depreciation. You claim that using double declining balance depreciation will save you money. If your discount rate is 10% and your tax rate is 40%, show him how much you will save in present value dollars. ( 3 points)

3b. Brooks Brothers is thinking of investing in a new line of punk rocker clothes for the new executive. You have been hired to evaluate the project. You find that, if the project is accepted, you could use an abandoned warehouse already owned by Brooks with a book value of $500000. Your superior had been planning to rent this warehouse out to another firm for $100000/ year. If your tax rate is 40%, your discount rate is 15%, you use straight line depreciation and your project lifetime is 10 years, what is the opportunity cost of this investment? ( 4 points)

4. You have just been given the following information on Dodger Corp and the S&P 500.

Year Dodger Corp S&P 500
Prices Levels
1979 40 150
1980 36 150
1981 34.2 145.5
1982 20.52* 160.05
1983 22.57 163.25
1984 22.34 159.99
* Stock split 2:1

a. What is your beta estimate for this firm? ( 3 points)

b. What portion of total variance is systematic and what portion is unsystematic?

c. What is the required rate of return on Dodger Corp? (Rf=7%, E(Rm)-Rf=8%) ( 1 point)

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