Questions and Answers of Corporate Finance Core Principles

GDS Co. has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line with no
You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:Sales price per abalone.......................................=
B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 60 percent chance of success. However, the firm can conduct customer segment
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 40 percent chance of success. For $75,000, the manager can conduct a
Ang Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $29 million. If the HD DVD fails, the
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000 per year. You believe the technology used in the machine has a 10-year life; in other
Ayden’s Cars, Inc., just purchased a $483,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for
Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal
Rust Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $379,000. The company is an ongoing operation, but it expects competitive pressures to
Gallatin, Inc., is considering an investment of $615,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues andexpenses at the end of the first
In the previous problem, suppose the project requires an initial investment in net working capital of $450,000 and the fixed asset will have a market value of $575,000 at the end of the project. What
In each of the following cases, find the unknown variable. Ignore taxes. ACCOUNTING BREAK-EVEN UNIT VARIABLE UNIT PRICE $37 FIXED COSTS COST DEPRECIATION 117,500 11,703 7,583 $27 $740,000 685,000
We are evaluating a project that costs $780,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the lifeof the project. Sales are projected
How does sensitivity analysis interact with break-even analysis?
Since East Coast Yachts is producing at full capacity, Larissa has decided to have Dan examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,700, including a set of eight chairs. The
After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is to produce a medication for
Sony International has an investment opportunity to produce a new stereo HDTV. The required investment on January 1 of this year is $85 million. The firm will depreciate the investment to zero using
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect
Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $2.16 million. The company can continue to rent the building to
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $344,000; the new one will cost $371,000. The new machine will be depreciated straight-line to zero over
Your company has been approached to bid on a contract to sell 19,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV
Guthrie Enterprises needs someone to supply it with 175,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the
A proposed cost-saving device has an installed cost of $580,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:YEAR UNIT
Earp Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $990,000 and its economic life is five years. The machine will be fully
Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $2,200 and will last for three years. The copier will require a real after tax cost of $145 per year
Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. Gold Star would need nine SALs, and each SAL costs $3,400 and
Pilot Plus Pens is deciding when to replace its old machine. The machine’s current salvage value is $1.87 million. Its current book value is $1.14 million. If not sold, the old machine will require
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago
With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital,
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $1.91 million. The facility is to be fully depreciated on a straight-line basisover seven years. It is
A firm is considering an investment in a new machine with a price of $9.66 million to replace its existing machine. The current machine has a book value of $2.52 million, and a market value of $4.37
Hailey, Inc., is considering the purchase of a $655,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight line method. The market
Zoysia University must purchase mowers for its landscape department. The university can buy five EVF mowers that cost $8,700 each and have annual, year-end maintenance costs of $2,025 per mower. The
SGS Golf Academy is evaluating different golf practice equipment. The “Dimple-Max” equipment costs $96,500, has a seven-year life, and costs $11,600 per year to operate. The relevant discount
Sparkling Water, Inc., expects to sell 6.5 million bottles of drinking water each year in perpetuity. This year, each bottle will sell for $1.03 in real terms and will cost $.77 in real terms. Sales
Consider the following cash flows on two mutually exclusive projects:The cash flows of Project A are expressed in real terms while those of Project B are expressed in nominal terms. The appropriate
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed
Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $490,000, has a four-year life, and requires $135,000in pretax annual operating costs. System B
An investment under consideration has a payback of six years and a cost of $648,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $800 and has an existing customer base of 525. Paul plans to raise the annual fee by 6 percent every
Blue Line Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $485,000 is estimated to result in $179,000in annual pretax cost
You are evaluating two different silicon wafer milling machines. The Techron I costs $490,000, has a three-year life, and has pretax operating costs of $90,000 per year. The Techron II costs
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.75 million. The marketing department predicts that sales related to
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,300,000 and will be sold for $1,640,000 at the end of the project. If
Symon Meats is looking at a new sausage system with an installed cost of $267,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the
Your firm is contemplating the purchase of a new $625,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $60,000 at
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3,950,000. The fixed asset will be depreciated straight-line to zero
The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 34 percent. Assume all sales revenue is
Creole Restaurant is considering the purchase of a $33,000 soufflé maker. The soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine
Capital Budgeting Considerations A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an “essentialized” version, meaning a
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated
Binomial Corp. has a project with the following cash flows:YEAR.........................................CASH
Consider two projects, A and B. Project A’s first cash flow is $7,000 and is received three years from today. Future cash flows for Project A grow by 3 percent in perpetuity. Project B’s first
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,900,000 to open and
Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can either market the game as a traditional board game or as an interactive DVD, but not both. Consider the following
An investment project costs $13,500 and has annual cash flows of $3,900 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 7
You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $2.65 per share. You will receive a dividend of $2.85 two years from now. You will sell the stock for
Corcoran Corp. pays a constant $10.25 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on
Suppose you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.4 percent. You also know that the total return on the stock is evenly divided
After Dan’s EFN analysis for East Coast Yachts (see the Closing Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell
When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:YEAR..............................................CASH
Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 15 percent.Project A: Server CPU .13 micron processing project By
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both projects is 12 percent.Project A: Nagano NP-30Professional clubs that
Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for both projects is 10 percent.a. Based on the payback period, which
The treasurer of Tropical Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows:Suppose the relevant discount rate is 12 percent per year.a. Compute the profitability index
Broxton Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless
Consider the following cash flows of two mutually exclusive projects for A-Z Motorcars. Assume the discount rate for both projects is 10 percent.a. Based on the payback period, which project should
Bohrer Mining, Inc., is trying to evaluate a project with the following cash flows:YEAR.................................................CASH
The Bosa Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return for both projects is 10 percent and the company applies the
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 15 percent.As a financial analyst for the
Suppose you are offered a project with the following payments.YEAR...............................................CASH FLOWS
Suppose the following two independent investment opportunities are available to Greene, Inc. The appropriate discount rate is 10 percent.a. Compute the profitability indexes for each of the two
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $207,000. Bill expects after tax cash inflows of $64,000 annuallyfor seven years, after which he
Compute the internal rate of return for the cash flows of the following two projects. CASH FLOWS ($) YEAR PROJECT A PROJECT B -$6,700 -$4,600 1 2,100 1,800 2 3,900 2,300 2,700 1,900 3.
Fast Machines, Inc., has a project with the following cash flows.YEAR...............................................CASH FLOWS
The Patches Group has invested $27,000 in a high-tech project lasting three years. Depreciation is $8,100, $12,400, and $6,500 in Years 1, 2, and 3, respectively. The project generates earnings
Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.The machine generates, on average, $5,800 per year in additional net income.a. What is
An investment project has annual cash inflows of $4,300, $4,900, $5,400, and $5,600, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial
An investment project provides cash inflows of $915 per year for eight years. What is the project payback period if the initial cost is $3,400? What if the initial cost is $4,800? What if it is
Tri Star, Inc., has the following mutually exclusive projects.a. Suppose the company€™s payback period cutoff is two years. Which of these two projects should be chosen?b. Suppose the
In early 2016, tire manufacturer Continental, which is based in Germany, announced plans to invest $1.4 billion to manufacture commercial vehicle tires at a plant the company planned to build in
Larissa has been talking with the company€™s directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $64.75 and all the dividend information remains the same. What required return must investors be
Storico Co. just paid a dividend of $3.35 per share. The company will increase its dividend by 16 percent next year and will then reduce its dividend growth rate by 4 percentage points per year until
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.65 per share. Stocks W, X, and Y are expected to maintain constant growth
Maslyn Manufacturing has projected sales of $153 million next year. Costs are expected to be $82 million, and net investment is expected to be $15 million. Each of these values is expected to grow at
Lotharan Corp. has yearly sales of $31.5 million and costs of $17.3 million. The company’s balance sheet shows debt of $59 million and cash of $21 million. There are 975,000 shares outstanding,
Ramsay Corp. currently has an EPS of $3.83, and the benchmark PE for the company is 19. Earnings are expected to grow at 6.5 percent per year.a. What is your estimate of the current stock price?b.
Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.1 million. Without new projects, both firms will continue to generate earnings of $1.1 million in
Four years ago, Bling Diamond, Inc., paid a dividend of $1.73 per share. The firm paid a dividend of $2.36 per share yesterday. Dividends will grow over the next five years at the same rate they grew
Juggernaut Satellite Corporation earned $24.5 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out
Vignette, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent forever. The current stock price
Candescent Gold, Inc., will pay a quarterly dividend per share of $.58 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.1 percent forever. The
Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $6 in perpetuity, beginning 10 years from now. If the market requires a return of 4.6 percent on

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