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Financial Management For Decision Makers 2nd Canadian Edition Peter Atrill, Paul Hurley - Solutions
There are two investments you can make with $150,000: (1) Buy a small house and live in it for 15 years. House prices are expected to rise 3% per year over that period. (2) Invest in the stock market, focusing on capital gains. After 15 years, the expected value of your investment in the stock
You have a choice of investing $50,000 in a 12%, 10-year semi-annual bond, or in shares of TIM Inc., paying a quarterly dividend of $1.00 per share starting the quarter after you buy them. TIM shares currently sell for $25.00 per share.Required:Which is the better investment, assuming the current
You have negotiated your best price and have just signed on the dotted line to buy your first car. The payments are $500 per month starting immediately for four years and two months at a 12% interest rate. Required: How much did the car cost?
Burnaby Bricks Ltd. (BBL) pays cash for everything. BBL is saving to buy a machine for five different projects. Interest is compounded annually in each of the following cases.Required:(a) Calculate the annual deposits that must be made at the end of each year.(b) Calculate the annual deposits that
The B.C. Port Authority is considering acquiring a new ferry at a cost of $122 million. Equal payments are to be made annually over 40 years and the implied interest rate is 5%. Required: (a) Calculate the annual payment, assuming the first payment is made the day the purchase agreement is
Your company is negotiating to acquire a new head office building listed for $25 million. The owner has proposed the following payment plan for the next 20 years:• There would be a 20% down payment and annual payments for the next 10 years of $1.8 million, starting one year from now.• For Years
Calculate the present values of the following cash flows: (a) $1,000 to be received every year, starting one year from now, for 25 years at a discount rate of 8% (b) $2,500 to be received every year, starting one year from now, for 15 years at a discount of 7%.
Shares of Exem Radiator Limited (ERL), a government-controlled company, currently sell for $45.00 on the Toronto Stock Exchange. ERL pays an annual dividend of $8.00 per share at year-end. Government scientists have announced a breakthrough that they say will make radiators obsolete in 10 years, at
The Rambooie Music Company (RMC) has a dilemma. A customer wants RMC to sell it 7,000 CDs at a gross margin of $8.00 each year for five years with payment at the beginning of the year. That is the only way it will buy 7,000 CDs each year from RMC. Otherwise, the customer will only buy 10,000 CDs at
Whispering Pines Golf Club is trying to decide the best course of action for its fleet of new golf carts. Whispering Pines can buy premium tires at a cost of $10,000 per cart. These tires last four years and then must be replaced. It is expected the prices for the tires will not change. A cart is
Summertime Fun Limited (SFL) is evaluating the purchase of a new rocket roller coaster. The initial cost is $1 million with annual maintenance fees equal to 10% of the annual revenues. Annual revenues are expected to be $200,000. The ride should last for 10 years and must be purchased now to be
Rad Footwear is investigating a new line of athletic shoes. The company needs the present value of the future revenue stream to exceed $3 million at a discount rate of 5%. The annual revenue stream, starting one year from now, is as follows:Years Revenues1
Calculate the future values of the following cash flows: (a) $200 to be deposited in a bank account every year, starting now, for 30 years at an interest rate of 5% (b) $350 to be deposited in a bank account every year, starting now, for 18 years at an interest rate of 7%
Why is the net present value method of investment appraisal considered to be theoretically superior to other methods that are found in practice?
The payback method has been criticized for not taking the time value of money into account. Could this limitation be overcome? If so, would this method then be preferable to the NPV method?
Research indicates that the IRR method is a more popular method of investment appraisal than the NPV method. Why might this be?
Why are cash flows rather than profit flows used in the IRR, NPV, and PP methods of investment appraisal?
Prairie Computers Limited (PCL) has three projects it could implement with the following cost and NPV profiles.However, PCL has only $1 million available to spend on capital projects. Define capital rationing and explain how it fits into this situation.
You are a new graduate employed at a small manufacturing company. The president has asked for your advice on a suggestion made by a senior manager that would make the company $ 1 million wealthier. The company would buy a new machine for $1 million to make NBA-endorsed basketballs. The machine
Golden Resources Inc. is predicting the following cash inflows for a proposed new project under three different growth scenarios:Required:(a) Calculate the present value of the cash inflows for each growth scenario, assuming that the appropriate discount rate for Golden Resources is 10%.(b)
Use the data in Problem and Case 6.7 to calculate the internal rate of return for each project. For simplicity, assume the cash flows occur at the end of the year, except for the original cost of the project.In problem
Moncton Semiconductors Corporation (MSC) is considering spending an additional $4 million to expand its computer chip factory to increase production of its best-selling product. The expansion will begin producing revenue in one year. MSC has already spent $500,000 studying the upgrade. The
Island Fabricating Limited is contemplating an investment project with the following cash flows: Year Net Cash Flow ($ thousands)0 ...............................(120,000)1 ............................... 310,0002 ...............................(200,000)Required:(a) Calculate
The Ottawa Micro Brewery Company (OMB) is examining four expansion projects. OMB has adjusted the cost of capital to reflect the risk level of each project. The cash flows, which occur at year end, are as follows:Required:(a) Calculate the net present value for each project.(b) Which project should
Fredericton Allied Networks (FAN) is reviewing three projects. FAN has adjusted the cost of capital to reflect the risk level of each project. The cash flows, which occur at year end, are as follows:Required:(a) Calculate the net present value for each project.(b) Which project should FAN choose if
The directors of Mylo Ltd. are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of a new plant. The following data are available for each project:The business has an estimated cost of capital of 10%, and uses the straight-line method
Arkwright Mills Corporation is considering expanding its production of a new yarn, code name XI5. The plant is expected to cost $1 million and have a life of five years and no residual value. It will be bought, paid for, and ready for operation on December 31, Year 0. $500,000 has already been
The accountant of your business has recently become ill from overwork. In his absence, his assistant has prepared some calculations of the profitability of a project, which are to be discussed soon at the board meeting of your business. His work, which is set out below, includes some errors of
The Saskatchewan Benders are a professional baseball team that has enjoyed considerable success in recent years. As a result, the team has accumulated $10 million to spend on its further development. The board of directors is currently considering two mutually exclusive options for spending the
Haverhill Engineers Ltd. manufactures components for the car industry. It is considering automating its line for producing crankshaft bearings. The automated equipment will cost $700,000. It will replace equipment with a scrap value of $50,000 and a net book value of $180,000.At present, the line
Manitoba Railroad Limited (MRL) is considering spending $522 million to add new locomotives and train cars. It is estimated that the trains will last 15 years and have an estimated salvage value of $50 million at the end of 15 years. Expected annual revenue increases before depreciation for the
A $1,000, 10%, eight-year bond, compounded semi-annually, sells for $900. What is the current interest rate? Hint: You can think of this as an internal rate of return question.
Berry Chips Inc. (BCI) is considering acquiring a new semiconductor fabricator. The machine costs $985,000, will last for eight years, and has a salvage value of $45,000. The forecasted net revenue stream is as shown. For simplicity, assume all net revenues are received at the end of the year. BCI
Use the data from Problem and Case 6.3 to recalculate part (a) using a discount rate of 7%. 6.5In problem
Use the data in (and your solutions to) Problems and Cases 6.3 and 6.4 to determine the internal rate of return for BCI.In problem
You are considering the following three projects.Required:(a) Calculate the net present value of each project.(b) Determine the internal rate of return for each project.
Prairie Eateries Limited (PEL) is considering the following projects. PEL uses straight-line depreciation.Required:Calculate the accounting rate of return for each project.
Use the data in Problem and Case 6.7 to calculate the payback period for each project.In problem
Use the data in Problem and Case 6.7 to calculate the net present value for each project using a discount rate of 12%. For simplicity, assume the cash flows occur at the end of the year, except for the original cost of the project.In problem
What is risk and why is it an important issue for investment decision making?
There is evidence to suggest that some businesses fail to consider inflation in investment decisions. Does this really matter given that, in recent years, the level of inflation has been low? What would be the effect on NPV calculations (that is, would NPV be overstated or understated) if inflation
What practical problems arise when using the risk-adjusted discount rate to deal with the problem of risk?
Explain why the standard deviation may be useful in measuring risk.
Exclusive Luggage Limited Enterprises (ELLE), a retailing organization, is considering opening stores in Calgary, New York, and Paris. Explain, with reasons, what ELLE is trying to accomplish with regard to risk. How does this relate to the concepts of diversifiable risk and non-diversifiable risk?
Quebec Lasers Limited (QLL) is expanding rapidly and has the opportunity to invest in four projects. The forecast cash flows for each project are as follows:QLL has a cost of capital of 12% and an investment budget for the year of $600,000. Required:(a) Calculate the net present value (NPV) to
Acadian Controls Limited (ACE) is designing a new switching device and is very unsure of just how successful it will be. The project will cost $300,000. Ace uses a 10% discount rate. Ace has derived the following annual year-end cash flow options regarding the project.Required:(a) Calculate the
Nimby Corporation is considering two mutually exclusive projects: Delphi and Oracle. The possible NPVs for each project and their associated probabilities are as follows:Required: (a) Calculate the expected net present value and the standard deviation associated with each project. (b) Which project
Portage Mainframes Limited (PML) is studying the following three projects.Required:(a) Calculate the expected net present value for each project(b) Calculate the variance for each project(c) Calculate the standard deviation for each project.
You have obtained cash flow data for the following projects.Required:(a) Calculate the average cash flow for each project over its five-year life(b) Calculate the cash flow variance for each project(c) Calculate the cash flow standard deviation for each project.
The YellowBelly Corporation (YBC) is trying to budget sales for its new wireless device, known by the code name SapSucker. YBC's market research has garnered the following data: Revenues Probability$30,000,000 ............................10%32,000,000 ..............................
The Green Machine Experience (GME), a local rhythm and blues band, has developed the following data for its prospective income statement. All sales and expenses are paid in cash.Required:(a) Calculate the expected cash flows for GME(b) Calculate the standard deviation for GME's cash flows(c)
Plato Pharmaceuticals Ltd. has invested $300,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale, and the marketing manager estimates that the product will sell 150,000 bottles a year over the next five years. The selling price of the insect
Kamloops Gold Breakers (KGB) needs to acquire one of three crushers. KGB uses a discount rate of 6% to evaluate investment decisions. The crushers have the following investment cash flows:Required: (a) Use the shortest-common-period-of-time approach to determine which, if any, machine should be
Canuck Enterprises Limited (CEL) is considering investing in a new machine with the following cash flow data: Year New Machine Cash Year Flows ($ thousands) 0 ............................. (900) 1 ............................. 300 2 ............................. 300 3
The Signal Hill Society (SHS) is considering two large-scale computer investments with the following year-end cash flow patterns. SHS would like you to perform a sensitivity analysis of these projects in relation to the cost of capital, the estimated cost of the project, and the estimated cash
Wu and Chu Chocolates Emporium (WCCE) is considering the acquisition of new production equipment. Based on medical studies extolling the health benefits of daily chocolate intake, demand is expected to grow. WCCE has assembled the following data concerning the possible expansion:The cost of capital
Saskatchewan Aeronautics Corporation (SAC) is considering two mutually exclusive projects with the following net present value profiles:Required: (a) Calculate the expected net present value for each project. (b) Calculate the standard deviation for each project. (c) Which project should SAC
Lee Caterers Ltd. is about to make an investment in new kitchen equipment. It is considering whether to replace the existing kitchen equipment with cook/freeze or cook/chill technology. The following cash flows are expected from each form of technology:The business would expect to replace the new
D'Arcy Builders Ltd. is considering three possible investment projects: A, B, and C. The expected pattern of cash flows for each project is:The business has a cost of capital of 10% and the capital expenditure budget for next year is $25 million. Required: Which investment project(s) should the
Simonson Engineers Limited is considering building a new plant in Indonesia to produce goods for the Southeast Asian market. To date, $450,000 has been invested in market research and site surveys. The cost of building the plant will be $9 million and it will be in operation and paid for in one
What are warrants and what are the benefits to a business of issuing warrants?
Convertible bonds are really a form of delayed equity. Do you agree? Discuss.
What are the benefits of an interest rate swap agreement and how does it work?
Distinguish between invoice discounting and receivables factoring.
Identify the main differences between non-cumulative preferred shares, common shares, and bonds.
Your friend has asked you for some advice about investing in corporate bonds. He shows you the following summary based on bond market quotes in the newspaper. All of these bonds currently pay interest.Required: (a) Which of these bonds is likely to be convertible? (b) What is your best estimate of
The following companies are considering a change in their accounts receivables policy.Required: Determine whether the proposed change in accounts receivables policy is beneficial to any of these companies.
Intercity Commuters Limited (ICL) flies people between Victoria and Vancouver. Last year an average $100 flight had a $35 contribution margin and $5 fixed costs per customer. Credit sales totalled $2,500,000 with an average collection period of 70 days and $50,000 in bad debts. The company
The three companies shown below have gathered data to determine whether they should factor their accounts receivable.Required:Prepare calculations to determine whether any of these companies would be better off to factor its receivables.
Jiminez Skill Shops Limited (JSSL) acquired inventory of $5,000 with terms of 1/5 n30. JSSL maintains access to a line of credit at a bank at 12% interest. Required: Should JSSL use its line of credit to take the discount or not?
Your company normally pays early on its accounts payable in order to take advantage of any discount offered. However, now you would like to slow down payments because your company has been slow to collect on its own accounts receivables. Your company's five most prominent suppliers offer the
Crosby Gloves Ltd. is considering a number of options. Required: Provide reasons why Crosby might decide to: (a) Lease rather than buy an asset that is to be held for long-term use (b) Use retained earnings to finance growth rather than issue new shares (c) Repay a long-term loan earlier than the
H. Brown Ltd. produces a range of central heating systems for sale to builders. As a result of increasing demand for the business's products, management has decided to expand production. The cost of acquiring new plant and machinery and the increase in working capital requirements are planned to be
Securitization is now used in a variety of different industries. In the music industry, for example, rock stars such as David Bowie, Michael Jackson, and Iron Maiden have used this form of financing to their benefit. Required: (a) Explain the term securitization. (b) Discuss the main features of
Raphael Ltd. is a small engineering business that has annual credit sales revenue of $2.4 million. In recent years, the business has experienced credit control problems. The average collection period for sales has risen to 50 days even though the stated policy of the business is for payment to be
Cybele Technology Ltd. is a software business owned and managed by two computer software specialists. Although sales have remained stable at $4 million per year in recent years, the level of receivables has increased significantly. A recent financial report submitted to the owners indicates an
The three companies shown below have gathered data to determine whether they should factor their accounts receivable.Required: Prepare calculations for each company to determine the total cost of collecting its own receivables.
Use the data in Problem and Case 8.2 to prepare calculations for each company to determine the total cost of factoring its accounts receivables.In problem
Use the data in (and your solutions to) Problems and Cases 8.2 and 8.3 to determine for each company whether it should factor its accounts receivables. In problem
Cote Biologique Limitee (CBL) is considering factoring its accounts receivable to improve its cash flow. Shortfalls in collecting the receivables are met by a short-term revolving line of credit. The controller has gathered the following data to help her make the decision:Annual credit sales
The three companies shown below have gathered data to determine whether they should factor their accounts receivable.Required: Prepare calculations to determine whether any of these companies would be better off to factor its receivables.
The following companies are trying to decide whether to change their accounts receivables collection policy.Required: Compute the cost of the current receivables policy for each company.
Use the data in Problem and Case 8.7 to compute the cost of switching to a new accounts receivables policy for each company.In problem
Use the data in Problem and Case 8.7 and 8.8 to determine which company should change its accounts receivables policy.In problem
Canadian venture capitalists have been criticized for their low level of funding invested in business start-ups by comparison with the levels invested by their U.S. counterparts. Can you think of possible reasons why such a difference may exist?
Why might a public business that has a stock exchange listing revert to being an unlisted business?
Distinguish between a bought deal and a best efforts issue of shares.
What attributes should the owners and managers of a business possess in order to attract venture capital financing?
Warren Buffett is chairman of Berkshire Hathaway and is one of the most successful investors of all time. He has generally outperformed the market averages since the 1950s. Explain whether Mr. Buffett's success supports or contradicts the efficient market hypothesis.
The following independent situations have occurred:Required: For each of the independent situations described above, determine with reasons whether the shares were exhibiting a weak, semi-strong, or strong form of efficiency.
These companies are considering a stock dividend as follows.Required: Calculate the new share price after the stock dividend.
EnviroCleaning Inc. (ECI) is considering issuing new shares and wants to maximize the investment funds it receives. However ECI has not yet determined a price at which the shares should be sold.Required: What striking price would you recommend that ECI adopt?
Pizza Shack Ltd. operates a chain of pizza restaurants in the Maritimes. The business started operations five years ago and has enjoyed rapid growth. The directors of the business believe, however, that future growth can only be achieved if the company seeks a listing on the Toronto Stock Exchange.
Harbour Shipping Ltd. (HSL) is considering investing in a separate tug boat enterprise that would be held and managed for five years and then sold. The total cost at the end of 2009 would be $30 million. HSL would acquire 20% of the tugboat company for $5 million. Venture Capitalists Inc. (VCI) has
Sunrise Foods Inc. has decided to add a fifth warehouse distribution centre, partly to take advantage of a new government incentive that has increased the CCA rate for such buildings to 10%. The cost is estimated to be $3 million, with annual payments (whether leasing or buying) of $394,421.33. The
Fanverse Athletic Shoes (FAS) wants to acquire a new leather-sewing machine. To buy it, FAS would have to borrow the entire cost, which would be $162,156.43. There are 10 equal annual payments starting immediately with an interest rate of 5%. On the other hand, FAS could lease the machine for the
You have decided to split your $50,000 investable cash equally into exchange traded funds (ETFs) that mirror the two fastest growing stock sectors based on their one-year growth results.Required:Which sectors would you invest in?
The J. Muserandathon portfolio and the S&P/TSX Composite Index closed the year at the following level, for each of the following years.Required: (a) Calculate the year-over-year percentage change in the J. Muserandathon portfolio and in the S&P/TSX Composite Index for each of the last four
Your Gompany has an opportunity to invest in four companies. You are trying to determine which of these investments make sense. Your company has a 9% cost of capital. It will invest in these companies and do an initial public offering (IPO) at the end of the term of investment.Required: (a)
Your company has an opportunity to invest in four companies. You are trying to determine which of these investments make sense. Your company has a 9% cost of capital. It will invest in these companies and receive an annual cash dividend each year starting one year after the investment. At the end
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