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Corporate Finance
What is the IRR of a project that costs $45,000 if it is expected to generate $15,047 per year for five years?
If the firm’s required rate of return is 14 percent, what is the net present value of the following project? Year Cash Flow0 .......... $(75,000)1 .......... 50,0002
Plasma Blood Services is deciding whether to purchase a new blood cleaning machine that is expected to generate the following cash flows. What is the machine’s IRR? Year Cash
The capital budgeting manager of Conscientious Production Company (CPC) submitted the following report to the CFO:CPC generally takes risk into consideration by adjusting its average required rate
The Gehr Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has both a book value and a market value of $0; it is in good
Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $54,000 per year. The new
Exit Corporation is evaluating a capital budgeting project that costs $320,000 and will generate $67,910 for the next seven years. If Exit’s required rate of return is 12 percent, should the
Compute the IRRs for following capital budgetingprojects:
Following is a table that shows the expected cash flows of a machine that QQQ Inc. is currently evaluating for possible purchase. Both the expected annual cash flows (CF) and the present values (PV)
If the firm’s required rate of return is 12 percent, what is the MIRR for the following project? Year Cash Flow0 .......... $(105,000)1 .......... 70,0002 .......... 50,000
Compute the IRR and the MIRR for each of the following capital budgeting projects. Assume that the firm’s required rate of return is 14 percent.Which project(s) should be purchased if they
Project P costs $15,000 and is expected to produce benefits (cash flows) of $4,500 per year for five years. Project Q costs $37,500 and is expected to produce cash flows of $11,100 per year for five
Your company is considering two mutually exclusive projects—C and R—whose costs and cash flows are shown in the following table:The projects are equally risky, and their required rate
The after-tax cash flows for two mutually exclusive projects have been estimated, and the following information has been provided:The company’s required rate of return is 14 percent, and it
Diamond Hill Jewelers is considering the following independent projects:Which project(s) should be accepted if the required rate of return for the projects is 10 percent? Compute the NPVs and the
Project K has a cost of $52,125, and its expected net cash inflows are $12,000 per year for eight years.a. What is the project’s payback period (to the closest year)?b. If the required rate of
The risk-free rate of return is currently 5 percent, and the market risk premium is 4 percent. The beta of the project under analysis is 1.4, with expected net cash flows estimated to be $1,500 per
Companion Computer Corporation (CCC), a producer of office equipment, currently has assets of $15 million and a beta of 1.4. The risk-free rate is 8 percent, and the market risk premium is 5 percent.
A college intern working at Anderson Paints evaluated potential investments using the firms average required rate of return (r), and he produced the following report for the capital
Olsen Engineering is considering including two pieces of equipment—a truck and an overhead pulley system—in this year’s capital budget. The projects are independent. The cash outlay for the
Horrigan Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will
You have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would
The Ewert Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use by the firm.
The Dauten Toy 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
Atlantic Control Company (ACC) purchased a machine two years ago at a cost of $70,000. At that time, the machine’s expected economic life was six years and its salvage value at the end of its life
The Boyd Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful
Goodtread Rubber Company has two divisions: the tire division, which manufactures tires for new autos, and the recap division, which manufactures recapping materials that are sold to independent tire
Your firm, Agrico Products, is considering the purchase of a tractor that has a net cost of $72,000, will increase pretax operating cash flows before taking account of depreciation effects by $24,000
Derek’s Donuts is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:a. Construct NPV profiles for Projects A and B.b. What is each
You are a financial analyst for Damon Electronics Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of
The Southwestern Oil Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $12 million
The Chaplinsky Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $40 million on a large-scale, integrated plant that will provide an
Argile Textiles is evaluating a new product, a silk/wool blended fabric. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the proposed
Problem 13-35 contained the details of a new-project capital budgeting evaluation being conducted by Argile textiles. Although inflation was considered in the initial analysis, the riskiness of the
Use the model in File C09 to solve this problem. West Coast Chemical Company (WCCC) is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:a.
Use the computerized model in File C13 to work this problem. Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new
Christina Manning, great-granddaughter of the founder of Manning Tile Products and current president of the company, believes in simple, conservative accounting. In keeping with her philosophy, she
Explain why the following statement is true: “Other things being equal, firms with relatively stable sales are able to carry relatively high debt/assets ratios.”
Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?
If investors have the same information (symmetric information) as the managersand executives of a firm, which of the dividend policies mentioned in the chaptershould the firm follow to maximize
Your firm’s R&D department has been working on a new process that, if it works, can produce oil from coal at a cost of $25 per barrel; the current market price for oil is $60 per barrel. The
As an investor, would you rather invest in a firm that has a policy of maintaining (1) a constant payout ratio, (2) a stable, predictable dividend per share with a target dividend growth rate, or (3)
Assume that asymmetric information exists in the financial markets. If a firm’searnings fluctuate every year, everything else being equal, which of the dividendpolicies discussed in the chapter
The firms HL and LL are identical except for their debt-to-total-assets ratios and interest rates on debt. Each has $20 million in assets, earned $4 million before interest and taxes, and has a 40
Last year Breaking News Company earned $15 million, and it paid $6 million in dividends. The company follows a constant payout ratio dividend policy. If the company would like to pay $8 million in
The Scanlon Company’s optimal capital structure calls for 50 percent debt. The interest rate on its debt is a constant 10 percent; its cost of common equity from retained earnings is 14 percent;
The Damon Company wishes to calculate next year’s ROE under different leverage ratios. Damon’s total assets are $14 million, and its marginal tax rate is 40 percent. The company can estimate next
a. Given the following information, calculate the expected value for Firm C’s EPS. E(EPSA) = $5.10 and σA = $3.61; E(EPSB) = $4.20 and σB = $2.96; and σC = $4.11.b. Discuss the relative
Wired Communications Corporation (WCC) supplies headphones to airlines for use with movie and stereo programs. The headphones sell for $288 per set, and this year’s sales are expected to be 45,000
Early next year, the Strasburg Company plans to raise a net amount of $270 million to finance new equipment and working capital. Two alternatives are being considered: common stock can be sold to net
In 2015, the Sirmans Company paid dividends totaling $3,600,000 on net income of $10.8 million. The year 2015 was a normal one for the company, and for the past 10 years, earnings have grown at a
Ybor City Tobacco Company has for many years enjoyed a moderate but stable growth in sales and earnings. In recent times, however, cigar consumption and consequently Ybor’s sales have been falling,
Assume that you have just been hired by Adams, Garitty, and Evans (AGE), a consulting firm that specializes in analyses of firms’ capital structures and dividend policies. Your boss has asked
Now your boss wants you to evaluate the dividend policy of Information Systems, Inc. (ISI), which develops software for the health care industry. ISI was founded five years ago by Donald Brown and
Use the model in File C14 to work this problem.a. Rework Problem 14-13, assuming that the old long-term debt will not remain outstanding, but rather must be refinanced at the new long-term interest
Refer back to Problem 14-15. Assume that Ybor’s management is considering a change in the firm’s capital structure to include more debt. Management would therefore like to analyze the effects of
Open Door Manufacturer earned $100,000 this year. The company follows the residual dividend policy when paying dividends. Open Door has determined that it needs a total of $120,000 for investment in
Last year the Bulls Business Bureau (BBB) retained $400,000 of the $1 million net income it generated. This year BBB generated net income equal to $1.2 million. If BBB follows the constant dividend
After a 5-for-1 stock split, the Swenson Company paid a dividend of $0.75 per new share, which represents a 9 percent increase over last year’s presplit dividend. What was last year’s dividend
Northern California Heating and Cooling, Inc. has a six-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand the firm’s production capacity
The Garlington Corporation expects next year’s net income to be $15 million. The firm’s debt/assets ratio currently is 40 percent. Garlington has $12 million of profitable investment
Describe the relationships between accounts payable, inventories, accounts receivable, and the cash account by tracing the effects on these accounts of a product manufactured and sold by a company.
Describe the cash conversion cycle. How can a financial manager use knowledge of the cash conversion cycle to better manage the firm’s working capital?
In general, does a firm want to speed up or slow down collections of payments made by its customers? Why? How does the same firm want to manage its disbursements? Why?
What are aging schedules, and how can the credit manager use them to more effectively manage accounts receivable?
Describe the three classifications of inventory, and indicate the purpose of holding each type.
“Every firm should use the EOQ model to determine the optimal level of inventory to maintain.” Discuss the accuracy of this statement with respect to the form of the EOQ model presented in this
Why is it important for a financial manager to understand the concept of float to effectively manage the firm’s cash?
Why would a lockbox plan make more sense for a firm that makes sales all over the United States than for a firm with the same volume of business but for which the sales are concentrated in the
What are the elements of a firm’s credit policy? To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by “the competition”?
The Cristo Candy Corporation carries an average balance of inventory equal to $400,000. The company’s cost of goods sold averages $4.5 million. What are Cristo’s (a) Inventory turnover (b)
Wally’s Motors generally has inventory that equals $48 million. If the inventory turnover for the company is 8, what is its (a) Inventory conversion period (b) Cost of goods sold?
Small Fry Pools generally carries an amount of receivables equal to $80,000, and its annual credit sales equal $2.4 million. What are Small Fry’s (a) Receivables turnover (b) Receivables collection
Unique Uniforms generally has accounts receivables that equal $480,000. If the accounts receivables turnover for the company is 12, what is its (a) Receivables collection period (DSO) (b) Annual
At any point in time, Grandiron Fertilizer generally owes its suppliers $180,000. The company’s cost of goods sold averages $2.52 million. What are Small Fry’s(a) Payables turnover(b) Payables
The accounts payables of Momma’s Baby, Inc. generally equal $1.6 million. If the turnover of accounts payables is 20, what is its (a) Payables deferral period (DPO) (b) Annual credit purchases?
The McCollough Company has a variable operating cost ratio of 70 percent, its cost of capital is 10 percent, and current sales are $10,000. All of its sales are on credit, and it currently sells on
a. If a firm buys under terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the APR of its nonfree trade credit?b. Does the firm receive more or less credit
Boles Corporation needs to raise $500,000 for one year to supply capital to a new store. Boles buys from its suppliers on terms of 3/10, net 90, and it currently pays on Day 10 and takes discounts;
The Saliford Corporation has an inventory conversion period of 60 days, a receivables collection period of 36 days, and a payables deferral period of 24 days.a. What is the length of the firm’s
Susan Visscher, owner of Visscher’s Hardware, is negotiating with First Merchant’s Bank for a $50,000, one-year loan. First Merchant’s has offered Visscher the following alternatives. Calculate
Clearwater Glass Company examined its cash management policy and found that it takes an average of five days for checks that the company writes to reach its bank and thus be deducted from its
Calculate the APR and the rEAR of nonfree trade credit under each of following terms. Assume payment is made either on the last due date or on the discount date.a. 1/15, net 20b. 2/10, net 60c. 3/10,
Gifts Galore Inc. borrowed $1.5 million from National City Bank (NCB). The loan was made for three months at a simple annual interest rate of 9 percent. A 20 percent compensating balance requirement
Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000. Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40
Helen Bowers, the new credit manager of the Muscarella Corporation, was alarmed to find that Muscarella sells on credit terms of net 50 days whereas industry-wide credit terms have recently been
Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs
The Garvin Company is setting up a new checking account with Barngrover National Bank. Garvin plans to issue checks in the amount of $1.6 million each day and to deduct them from its own records at
The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and DSO on its cash flow cycle. Flamingo’s 2015 sales (all on credit) were $180,000, and it earned a net
Durst Corporation began operations five years ago as a small firm serving customers in the Denver area. However, its reputation and market area grew quickly so that today Durst has customers
The Pettit Corporation has annual credit sales of $2 million. Current expenses for the collection department are $30,000, bad debt losses are 2 percent, and the days sales outstanding is 30 days.
Bey Technologies is considering changing its credit terms from 2/15, net 30, to 3/10, net 30, to speed collections. At present, 40 percent of Bey’s paying customers take the 2 percent discount.
Computer Supplies Inc. must order diskettes from its supplier in lots of one dozen boxes. Given the information provided here, complete the following table and determine the economic ordering
The following inventory data have been established for the Thompson Company:(1) Orders must be placed in multiples of 100 units.(2) Annual sales are 338,000 units.(3) The purchase price per unit is
Look back in the chapter to Table, which showed the balance sheets for Argile Textiles on three different dates. Argile’s sales fluctuate during the year due to the seasonal nature of its business;
Verbrugge Corporation is a leading U.S. producer of automobile batteries. Verbrugge turns out 1,500 batteries per day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to
The Meyer Company must arrange financing for its working capital requirements for the coming year. Meyer can (a) Borrow from its bank on a simple interest basis (interest payable at the end of the
The UFSU Corporation intends to borrow $450,000 to support its short-term financing requirements during the next year. The company is evaluating its financing options at the bank where it maintains
Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty’s Sports Paradise (SSP). Ray decided that, at age 62, he wasn’t quite ready to stay at home living the
Ray now asks you to examine his company’s credit policy to determine whether changes are needed. One of his employees, who graduated recently with a finance major, has recommended that the credit
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