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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions

What are sunk costs?
What makes an investment cash flow relevant to the evaluation of an investment proposal?
Should questions involving the risk of loss of human life be analyzed in a cost-benefit analysis? After all, don’t life in¬surance companies do this all the time in pricing life insur¬ance policies to older versus younger customers?
Do you think Ford analyzed the problem of redesigning the Pinto fuel tank safety in a reasonable way?
(Comprehensive problem) Garmen Technologies Inc. operates a small chain of specialty retail stores throughout the southwestern part of the U.S. The stores market technology-based consumer products both in their stores and over the internet with sales split roughly equally between the two channels
(Related to Checkpoint 11.1 on page 339, Checkpoint 11.3 on page 346, and Checkpoint 11.4 on page 347) (Net present value, profitability index, and internal rate of return calculations) You are considering two independent projects, Project A and Project B.The initial cash outlay associated with
(Mutually Exclusive Projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows:If the appropriate discount rate on these projects is 10 percent, which would be chosen and why?
(Payback period, net present value, profitability index, and internal rate of return calculations) You are considering a project with an initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for six years. The discount rate for this project is 10%.a. What are the
(Payback period and NPV calculations) Plato Energy is an oil and gas exploration and development company located in Farmington, NM. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very
(Payback and discounted payback period calculations) The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. BarNone’s management is considering three investment projects for next year but doesn’t want to make any investment that requires more
(Discounted payback period) The Callaway Cattle Company is considering the construction of a new feed handling system for its feed lot in Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling $200,000 while the initial investment is only $500,000. Callaway’s
(Discounted payback period) Gio’s Restaurants is considering a project with the following expected cash flows:Year Project Cash Flow 0 $(150 million)1 90 million 2 70 million 3 90 million 4 100 million If the project’s appropriate discount is 12 percent, what is the project’s discounted
(Related to Checkpoint 11.1 on page 339 and Checkpoint 11.4 on page 347) (NPV, PI, and IRR calculations) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,950,000, and the
(MIRR) Star Industries owns and operates landfills for several municipalities throughout the Midwestern part of the United States. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill (required by federal
(Related to Checkpoint 11.6 on page 354) (MIRR) The Dunder Muffin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce cash inflows of $150,000 each year at the end of years 1 through 10.In addition to the cash inflows, at the end of year
(IRR of an uneven cash flow stream) Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of$7 million (CF0 = — $7 million), and will produce cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and
(MIRR calculation) Carraway Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest where it has decided to build a maintenance facility.This project would require an initial cash outlay of $20 million and would generate annual cash inflows of $4 million per
(Related to Checkpoint 11.6 on page 354) (MIRR calculation) Emily’s Soccer Mania is considering building a new plant. This project would require an initial cash outlay of$10 million and would generate annual cash inflows of $3 million per year for years one through four. In year five the project
(IRR, payback, and calculating a missing cash flow) Mode Publishing is considering a new printing facility that will involve a large initial outlay and then result in a series of positive cash flows for four years. The estimated cash flows associated with this project are:If you know that the
(Related to Checkpoint 11.1 on page 339 and Checkpoint 11.4 on page 347) (IRR and NPV calculation) The cash flows for three independent projects are found below:a. Calculate the IRR for each of the projects.b. If the discount rate for all three projects is 10%, which project or projects would you
Find the internal rate of return on this investment.
You then receive the $10,000 at the end of year
(IRR calculation) Your investment advisor has offered you an investment that will provide you with a single cash flow of $ 10,000 at the end of twenty years if you pay premiums of $200 per year in the interim period. Specifically, the annual premiums begin immediately and extend through the end of
(IRR calculation) Jella Cosmetics is considering a project that costs $800,000 and is expected to last for 10 years and produce future cash flows of $175,000 per year. If the appropriate discount rate for this project is 12 percent, what is the project’s IRR?
(Related to Checkpoint 11.4 on page 347) (IRR calculation) Determine the internal rate of return to the nearest percent on the following projects:a. An initial outlay of $10,000 resulting in a cash inflow of $2,000 at the end of year 1,$5,000 at the end of year 2, and $8,000 at the end of year 3.b.
(Related to Checkpoint 11.1 on page 339 and Checkpoint 11.4 on page 347) (NPV and IRR calculation) East Coast Television is considering a project with an initial outlay of$X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $50,000 a year
(IRR calculation) Determine the internal rate of return on the following projects:a. An initial outlay of $10,000 resulting in a cash inflow of $1,993 at the end of each year for the next 10 years.b. An initial outlay of $10,000 resulting in a cash inflow of $2,054 at the end of each year for the
(Related to Checkpoint 11.1 on page 339) (IRR calculation) What are the internal rates of return for the following projects?a. An initial outlay of $10,000 resulting in a single cash inflow of $17,182 in 8 years.b. An initial outlay of $10,000 resulting in a single cash inflow of $48,077 in 10
(Equivalent annual cost calculation) The Templeton Manufacturing and Distribution Company of Tacoma, WA is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both alternatives will accomplish the same task but the Eclipse Model is substantially
(Related to Checkpoint 11.2 on page 342) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm’s new plasma cutter shop. The two alternatives that are denoted A and B below perform
(Net present value calculation) Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $100,000 and will generate net cash inflows of $18,000 per year for 10 years.a. What is the project’s NPV using a
(Net present value calculation) Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of$10,000,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,500,000
(Related to Checkpoint 11.1 on page 339) (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats.This project would require an initial cash outlay of $5,000,000 and would generate annual net cash inflows of $1,000,000 per year for
What is the logic behind using the payback method as a reflection of project risk?
What are the most widely used methods for evaluating capital expenditure projects in practice?
Under what conditions would the payback and discounted payback methods produce identical results?
(Related to The Business of Life: Higher Education as an Investment in Yourself on page 356)In The Business ofLife feature box the decision to get a college education is discussed in the context of an investment decision. Discuss the analogy in more detail by identifying the initial cash outlay(s)
What is the rationale for using the MIRR as opposed to the IRR decision criteria?Describe the fundamental shortcoming of the MIRR method.
If a project’s payback period is less than the maximum payback period that the firm will accept, does this mean that the project’s NPV will also be positive?
Briefly compare and contrast the NPV, PI, and IRR criteria. What are the advantages and disadvantages of using each of these methods?
What are the limitations of the payback period as an investment decision criterion?What are its advantages? Why do you think it is used so frequently?
What does it mean to say that two or more investment projects are mutually exclusive?
Why is the NPV considered to be the best method for capital budgeting? What does the NPV tell you?
How is the presence or absence of competition related to NPV? What are the types of barriers to competition (market entry) that tend to preserve positive NPVs?
Some firms categorize projects as revenue-enhancing, cost-reducing, and mandatory.Describe what this means.
Where do firms learn about new investment ideas, and what is the role of the financial analyst in determining what projects the firm should undertake?
(Related _to Regardless of Your Major: Making Personal Investment Decisions on page 334) In the Regardless ofYour Major feature box what types of personal decisions do individuals make that can be addressed using capital-budgeting analyses?
How does the payback method provide an indication of the risk of an investment proposal?
What is the most widely used measure of capital budgeting in business practice?
What is discounted payback, and how does it improve on the payback measure?
What is the payback method and what is the source of its appeal?
What is the modified internal rate of return metric, and why is it sometimes used?
Describe the situations in which the NPV and IRR metrics can provide conflicting signals.
Describe what the IRR metric tells the analyst about a new investment opportunity.
What is capital rationing?
What is the equivalent annual cost (EAC) measure, and when should it be used?
Describe what the NPV tells the analyst about a new investment opportunity.
What are the three basic types of capital investment projects?
What makes a capital-budgeting project a good one?
Describe the two-phase process typically involved in carrying out a capital-budgeting analysis.
What does the term capital budgeting mean?
What required rates of return would make you indifferent to all three options?
Assume Emerson Electric’s managers expect an earnings downturn and a resulting decrease in growth of 3 percent.How does this affect your answers to parts a and b?
Which investment would you select? Why?
Calculate the value of each investment based on your re¬quired rate of return.
(Preferred stock valuation) Kendra Corporation’s preferred shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume that the market’s required yield is 14%.a. What is the stock’s value to you, the investor?b. Should you purchase the stock?
(Preferred stock valuation) You own 200 shares of Somner Resources’ preferred stock, which currently sells for $40 per share and pays annual dividends of $3.40 per share. If the market’s required yield on similar shares is 10%, should you sell your shares or buy more?
(Preferred stock valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value, and the market’s required yield on similar shares is 12%?
(Preferred stock valuation) Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.a. If the market’s required yield is 10%, what is the value of the stock for that investor?b. Should the investor acquire the stock?
(Related to Checkpoint 10.3 on page 320) (Preferred stock valuation) Calculate the value of a preferred stock that pays a dividend of $6 per share when the market’s required yield on similar shares is 12 percent.
(Common Stock Valuation) Assume the following:• the investor’s required rate of return of 15%,• the expected level of earnings at the end of this year (£,) of $5.00,• the retention ratio is 50%,• the return on equity (ROE) is 20% (that is it can earn 20% on reinvested earnings), and•
(Common stock valuation) Assume the following:• the investor’s required rate of return of 13.5%,• the expected level of earnings at the end of this year (£j) is $6.00,• the retention ratio is 50%,• the return on equity (ROE) is 15% (that is, it can earn 15% on reinvested earnings),
(Related to Checkpoint 10.2 on page 314) (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:• the investor’s required rate of return is 12%,• the expected level of earnings at the end of this
(Common stock valuation) Dubai Metro’s stock price was at $100 per share when it announced that it will cut its dividends from $10 per share to $6 per share, with additional funds used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a 4% rate, but with the
(Measuring growth) Green Gadgets Inc. is trying to decide whether to cut its expected dividends from $8 per share to $5 per share in order have more money to invest in new projects. If it does not cut the dividend, Green Gadgets expected rate of growth in dividends is 5% per year and the price of
(Measuring growth) Solarpower Systems expects to earn $20 per share this year and intends to pay out $8 in dividends to shareholders and retain $12 to invest in new projects with an expected return on equity of 20%. In the future Solarpower expects to retain the same dividend payout ratio, expects
(Measuring growth) Thomas, Inc.’s return on equity is 13% and management has plans to retain 20% of earnings for investment in the company.a. What will be the company’s growth rate?b. How would the growth rate change if management (i) increased retained earnings to 35% or (ii) decreased
(Common stock valuation) Wayne, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20%, and its retention rate is 25%.a. What is the value of the stock to you, given a 15% required rate of return?b.
(Measuring growth) Given that a firm’s return on equity is 18% and management plans to retain 40% of earnings for investment purposes, what will be the firm’s growth rate?If the firm decides to increase its retention rate, what will happen to the value of its common stock?
(Common stock valuation) The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.a. If your required rate of return is 10.5%, what is the value of the stock for you?b. Should you make the investment?
(Common stock valuation) Gilliland Motor, Inc., paid a $3.75 dividend last year. If Gilliland’s return on equity is 24%, and its retention rate is 25%, what is the value of the common stock if the investors require a 20% rate of return?
(Related to Checkpoint 10.1 on page 310) (Common stock valuation) Header Motor, Inc., paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
(Measuring growth) If the Stanford Corporation’s net income is $200 million, its common equity is $833 million, and management plans to retain 70% of the firm’s earnings to finance new investments, what will be the firm’s growth rate?
(Measuring growth) If Pepperdine, Inc.’s return on equity is 16 percent and the management plans to retain 60 percent of earnings for investment purposes, what will be the firm’s growth rate?
(Related to the chapter’s opening vignette on page 303) The opening vignette described Google first going public in 2004. Prior to going public, did Google’s stock have a market price? What principles would go into determining the value of a company that hadn’t gone public yet?
What are over-the-counter markets and how do they differ from organized exchanges?
Is the NYSE considered part of the primary or secondary market?
Common stockholders receive two types of return from their investment. What are they?
The market’s required yield on preferred stock is actually a “promised” rate of return.Explain this statement.
Compare the methods for valuing preferred stock and common stock.
(Related to The Business of Life: Does a Stock by Any Other Name Smell as Sweet? on page 305) In the feature titled The Business ofLife: Does a Stock by Any Other Name Smell as Sweet? we learn that ticker symbols for shares of stock are sometimes chosen with great care. Guess what you think the
Why would a preferred stockholder want to have the cumulative dividend feature?
Because preferred stock dividends must be paid before common stock dividends, should preferred stock be considered a liability and appear on the right side of the balance sheet alongside of the firm’s long-term debt?
Why is preferred stock referred to as a hybrid security?
(Related _to Regardless of Your Major: Getting Your Fair Share on page 304) The feature titled Regardless ofYour Major focuses on the valuation of a new business venture. If you were faced with the need to value this business what would you want to know about the business?
What is the difference between an organized exchange and the over-the-counter market?
What are the largest organized exchanges on which shares of common stock are bought and sold?
Explain the meaning of the following statement: The market yield is a promised rate of return rather than an expected rate of return.
What is the market's required yield on a preferred stock?
What are three common features of preferred stock?

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