Questions and Answers of Essentials Corporate Finance

Hacker Software has 5.9 percent coupon bonds on the market with 13 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on the
RAK Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 5.7 percent coupon bonds on the market that sell for $1,048, have a par value of $1,000,
You purchase a bond with a par value of $1,000 and an invoice price of $943. The bond has a coupon rate of 6.4 percent and there are two months to the next semiannual coupon date. What is the clean
You purchase a bond with a par value of $1,000, a coupon rate of 7.1 percent, and a clean price of $992. If the next semiannual coupon payment is due in four months, what is the invoice price?
Paul’s Dogs Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds have left until they
Edison Corporation needs to raise funds to finance a plant expansion and has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 5.9 percent and
Suppose your company needs to raise $50 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent and you’re evaluating two issue
Bond P is a premium bond with a coupon of 8 percent. Bond D has a coupon of 5 percent and is selling at a discount. Both bonds make annual payments, have a YTM of 6.5 percent, and have 10 years to
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $400 and has an existing customer base of 700. Paul plans to raise the annual fee by 6 percent every
The Change Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first 6 years, then pays $800
Sparkling Water, Inc., expects to sell 3.4 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.43 in real terms and will cost $.85 in real terms. Sales
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $950 per set and have a variable cost of $415 per set. The company has spent $150,000 for a marketing study that
We are examining a new project. We expect to sell 6,500 units per year at $43 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $43 ×
In the previous problem, suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 3,700 units if the first year
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if
Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says,
Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town
Hickock Mining is evaluating when to open a gold mine. The mine has 33,600 ounces of gold left that can be mined and mining operations will produce 4,200 ounces per year. The required return on the
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $8.7 million for the next 10 years. The discount rate for this project is 13 percent.
Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 20 units per year at $235,000 net
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the
Consider a project to supply Detroit with 26,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $18
M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $9.5 million. The company expects a total annual operating cash flow of
You are considering a new product launch. The project will cost $720,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 380 units per
Consider a project with the following information: Initial fixed asset investment = $485,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $41; variable costs
James, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line
You are considering investing in a company that cultivates abalone to sell 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 market with the product, there is only a 55 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 50 percent chance of success. For $155,000 the manager can conduct a
Ang Electronics, Inc., has developed a new DVDR. If successful, the present value of the payoff (when the product is brought to market) is $24 million. If the DVDR fails, the present value of
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 Toys, Inc., purchased a $435,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $16. The
In each of the following cases, find the unknown variable. Ignore taxes. Unit Accounting Unit Variable Cost Fixed Depreciation Break-Even Price Costs $42 $30 $ 820,000 64 2,750,000 95,800 143,806
We are evaluating a project that costs $604,000, has an 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at
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 $5,900, 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 a medication for headache
Kopperud Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $115 million. The firm will depreciate the investment to zero using the
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. The company plans to breed toads and sell them as ecologically desirable
Hardwick Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1.45 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 $450,000; the new one will cost $580,000. The new machine will be depreciated straight-line to zero over
Your company has been approached to bid on a contract to sell 18,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will
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 145,000 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 $645,000. The device will be used in a 5-year project but is classified as 3-year MACRS property for tax purposes. The required initial net
Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit Sales1
Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1.2 million, and its economic life is five years. The machine will be
Calligraphy Pens is deciding when to replace its old machine. The machine’s current salvage value is $2.8 million. Its current book value is $1.6 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,
Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $650,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is
A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1
Market Top Investors, Inc., is considering the purchase of a $385,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line
Bridgton Golf Academy is evaluating new golf practice equipment. The “Dimple-Max” equipment costs $97,000, has a 3-year life, and costs $10,600 per year to operate. The relevant discount rate is
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $345,000. The company is an ongoing operation, but it expects competitive pressures
Lo, Inc., is considering an investment of $435,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year
Consider the following cash flows on two mutually exclusive projects: The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1.98 million and will last for six years. Variable costs are 35 percent of sales and
Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $425,000 and will be eligible for 100 percent
Suppose in the previous problem that HISC always needs a conveyor belt system; when one wears out, it must be replaced. Which system should the firm choose now?Data from previous problemHagar
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a 4-year life, and requires $73,000 in pretax annual operating
Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $670,000 is estimated to result in $245,000 in annual pretax cost savings.
You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $41,000 per year. The Techron II costs $330,000,
Thurston Petroleum is considering a new project that complements its existing business. The machine required for the project costs $4.1 million. The marketing department predicts that sales related
An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $7.6 million and will be sold for $1.4 million at the end of the project. If
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Data from previous problemDog Up! Franks
Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the
Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $60,000 at the
In the previous problem, suppose the project requires an initial investment in net working capital of $250,000 and the fixed asset will have a market value of $230,000 at the end of the project. What
Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.42 million. The fixed asset will be depreciated straight-line to zero
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 percent. Assume all sales revenue is receiv ?
Paul Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine
Suppose the following two independent investment opportunities are available to Fitz, Inc. The appropriate discount rate is 8.5 percent. a. Compute the profitability index for each of the two
The treasurer of Amaro Canned 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
Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 8 percent. a. Based on the payback period, which project
You have won the lottery. You will receive $5,500,000 today, and then receive 40 payments of $1,900,000. These payments will start one year from now and will be paid every six months. A
A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $9,000 each, with the first payment occurring today on your child’s 12th
Your financial planner offers you two different investment plans. Plan X is a $25,000 annual perpetuity. Plan Y is a 10-year, $51,000 annual annuity. Both plans will make their first payment one year
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 company uses the NPV
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
An investment project provides cash inflows of $640 per year for 8 years. What is the project payback period if the initial cost is $2,700? What if the initial cost is $3,900? What if it is $6,800?
An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 11 percent. What is the discounted payback period for these cash flows if the initial
An investment project costs $15,100 and has annual cash flows of $3,900 for 6 years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10
Vital Silence, Inc., has a project with the following cash flows:Year Cash Flows0 ..................... −$27,0001
In June 2017, BMW announced plans to spend $600 million to expand production at its South Carolina plant. The new investment would allow BMW to prepare for new X model SUVs. BMW apparently felt it
Compute the internal rate of return for the cash flows of the following two projects: Project B Project A Year -$7,300 -$4,390 3,940 2,170 2,210 3,450 3 2,480 1,730
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $325,000, to be paid immediately. Bill expects aftertax cash inflows of $67,000 annually for 7 years,
Suppose you are offered $8,700 today butmust make the following payments:Year Cash Flows0
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. As a financial analyst for
Cori?s Sausage Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and the company applies the profitability index
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year
Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash
Hanmi 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 AZ-Motorcars. Assume the discount rate for both projects is 10 percent. a. Based on the payback period, which project
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent. Project ? ?Nagano NP-30. A: ? ?Professional
An investment under consideration has a payback of six years and a cost of $573,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this
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
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 $3,400,000 to open and

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