CFIN 5th edition Scott Besley, Eugene Brigham - Solutions

Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the cost of issuing new debt:Amount of Debt Issued
Bonanza Gold’s common stock currently sells for $32 per share. Bonanza’s investment banker charges 6.5 percent flotation costs when new common stock is issued. The company expects to pay a $3.36 per share dividend at the end of the year. If Bonanza’s cost of retained earnings is 15.5
Roybow Corporation sells lawn mowers that cost $160 each to purchase and prepare for sale. Annual sales are 5,000 mowers, carrying costs are 20 percent of inventory costs, and Roybow incurs a cost of $32 each time an order is placed. (a) What is the EOQ for the mowers? (b) What will be
Refer to the information provided for Roybow Corporation in Problem 15–19. Suppose that Roybow’s supplier decides to offer a 2 percent cash discount if products are ordered in increments of 1.000. How many mowers should Roybow order each time an order is placed to minimize total inventory
Midwest Mining (MWM) expects its sales to grow by 20 percent next year. Last year, when the firm was operating at full capacity, MWM generated sales equal to $250,000 with assets of $800,000. MWM’s current balance sheet shows that accounts payable and accruals are $150,000, notes payable are
Esther’s Egg Farm is constructing its pro forma financial statements for this year. At year end, assets were $400,000 and accounts payable (the only current liabilities account) were $125,000. Last year’s sales were $500,000. Esther’s expects to grow by 15 percent this year. Assets and
Open Door Manufacturing (ODM) and Closed Window Industries (CWI) have identical operating cost structures. Both firms incur a fixed operating cost equal to $420,000, their variable cost ratio is 80 percent of the unit selling price, and they sell their products for $1,400 each. ODM normally sells
In its most recent fiscal year, SynoCorp generated $810,000 in sales. The firm was operating at 90 percent capacity. How much more sales can SynoCorp generate before it is at full capacity?
TransCan Industries has been operating at 60 percent capacity the past few years. In each of these years, TransCan generated sales of $5.4 million. By what percentage can TransCan increase its sales before full capacity is reached?
Prime Colors (PC) sells one-gallon cans of house paint for $25 each. The variable cost to produce each can is $17.50, and fixed operating costs are $1,500. PC normally sells 30,000 gallons of paint each year, has an interest expense equal to $300, and its marginal tax rate is 40 percent. Given this
Maxine’s Pumps (MP) sells bilge pumps for $250 each. Each pump costs $150 to produce, and MP’s fixed operating costs equal $600,000.(a) What is MP’s operating breakeven point? (b) What is MP’s operating income (NOI) when 10,000 pumps are sold?
Flash Gordon Memory (FGM) sells memory cards for $45 each. Fixed costs are $900,000 for output up to 200,000 cards. Variable costs are $25 per card. (a) What is FGM’s operating income at sales of 75,000 cards? (b) What is the operating breakeven point?
Last Chance Gaming manufactures slot machines that are sold to individuals for $575 each. Fixed operating costs are $690,000, and each machine’s variable cost is 70 percent of its selling price. What is the firm’s degree of operating leverage at sales equal to (a) 6,000 machines, (b)
Lost Time Watch (LTW) Company manufactures watches that are sold for $200 each. Fixed operating costs are $640,000 and variable costs are $120 per watch. (a) What is LTW’s operating breakeven point? (b) What is LTW’s degree of operating leverage (DOL) at sales of 10,000
Canyon Eatery’s common stock, which is currently selling for $50 per share, has a beta coefficient equal to 0.75. Canyon has paid a dividend equal to $6 per share since it has been in business, and expectations are that the same dividend will be paid forever. Canyon’s investment banker charges
Energetic Engines is trying to estimate its cost of retained earnings. The company has outstanding bonds that pay $20 interest every six months. The bonds, which have a $1,000 face value and mature in six years, are currently selling for $900. Estimate Energetic’s cost of retained earnings using
Suppose the current risk-free rate of return is 5 percent and the expected market risk premium is 7 percent. Using this information, estimate the cost of retained earnings for a company with a beta coefficient equal to 2.0?
Suppose the current risk-free rate of return is 3.5 percent and the expected market return is 9 percent. Fashion Faux-Pas’ common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm’s cost of retained earnings.
Jumbo Juice’s preferred stock pays a constant dividend equal to $4.75 per share. The firm’s marginal tax rate is 40 percent. Jumbo Juice incurs a 5 percent flotation cost each time it issues preferred stock. (a) If the firm issues 10,000 shares of preferred stock at $50 per share, how much
Buoyant Cruises plans to issue preferred stock with a $120 par value and a 5 percent dividend. Even though the current market value of its preferred stock is $80 per share, Buoyant expects to net only $75 for each share issued. What is its cost of issuing preferred stock? The firm’s marginal tax
Notable Nothings plans to issue new bonds with the same yield as its existing bonds. The existing bonds have a coupon rate of interest equal to 5.6 percent (semiannual interest payments), 12 years remaining until maturity, and a $1,000 maturity value; they are currently selling for $918
Global Products plans to issue long-term bonds to raise funds to finance its growth. The company has existing bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, mature in 10 years, pay $60 interest annually, and are
The CFO of Bogey Golf has been given the following information about two mutually exclusive investments: The CFO normally uses a risk-adjusted required rate of return to evaluate such investments. The firm?s average required rate of return, which is 15 percent, is adjusted by 5 percent for
Following are three independent projects Peanut/Pecan Processing (PPP) is evaluating: PPP generally considers risk when examining projects by adjusting its average required rate of return, r, which equals 11 percent. A 4 percent adjustment is made for high-risk projects, and a 2 percent adjustment
After completing a scenario analysis for a prospective investment, the CFO of a company reported to the CEO that there is a 60 percent chance the investment will provide the firm with a net present value (NPV) equal to $128,300, there is a 25 percent chance the investment’s NPV will be $185,400,
Qualil evaluated a project using scenario analysis. His results indicate that the project normally will generate a net present value (NPV) equal to $19,800, which will occur 70 percent of the time. But, he also discovered that 10 percent of the time the NPV will be 2$20,100, and 20 percent of the
Logic Legal Leverage (LLL) is evaluating a project that has a beta coefficient equal to 1.3. The risk-free rate is 3 percent and the market risk premium is 6 percent. The project, which requires an investment of $405,000, will generate $165,000 in after-tax operating cash flows for the next three
Quiet Quilts is considering adding another division that requires a cash outlay of $29,500, and is expected to generate $6,250 in after-tax cash flows each year for seven years. The CFO has determined the new division’s beta coefficient is 0.8. The market return is expected to be 11 percent and
Otter Outside Gear must decide whether to replace a 10 year-old packing machine with a new one that costs $153,800. Replacing the old machine will increase net operating income (excluding depreciation) from $70,000 to $110,000 and it will decrease net working capital by $18,000. The new machine
Emotion Cosmetics is considering whether to replace one of its manufacturing machines with a new one that will increase operating income (excluding depreciation) by $14,300 per year for the next three years. The new machine costs $37,500, and it falls in the MACRS 3-year class. If the new machine
Artistic Adobes is considering growing its business by adding a paint machine that costs $90,000. The machine will generate an additional $29,800 in before-tax operating income (excluding depreciation) for the next five years. At the end of five years, the machine can be sold for $8,000. The
Four years ago Progressive Products purchased a machine for $25,000. The machine’s current book value is $6,000. Later today, Progressive plans to sell the machine for $4,000. The company’s marginal tax rate is 35 percent. (a) Compute the tax effect of selling the machine (b) The net
Towers Elevator Company plans to sell one of its machines to another company for $102,000. The book value of the machine is $90,000. Compute(a) The gain (loss) on the sale of the machine (b) The net cash flow that will be generated from the sale of the machine. Towers’ marginal tax rate is
Cool Cat Cabinets (CCC) is evaluating whether to replace an aging machine. The existing machine is being depreciated at $40,000 per year, whereas the depreciation for a new machine is expected to be $35,000 per year. CCC’s operating income, excluding depreciation, is expected to be $90,000 no
Gator Bicycles just bought a new brake calibration machine that is expected to generate $30,000 in new revenues each of the next four years without increasing cash operating costs. The machine falls in the MACRS 3-year class, and its depreciable basis is $120,000. If Gator’s marginal tax rate is
Chiefland Campers is evaluating a project that will not affect revenues, but it will save the firm $110,000 per year in before-tax operating costs, excluding depreciation. The project’s depreciable basis is $840,000, and it will be depreciated on a straight-line basis to a book value equal to
Western Textiles is trying to determine whether to purchase a new weaving machine that costs $214,000. It would cost another $26,000 to install the machine. Western plans to use the machine for four years and then sell it for $80,000. The machine falls into the MACRS 5-year class. (a) What
Underwater Swimwear recently purchased a new machine for $350,000. It cost $20,000 to ship the machine to Underwater’s facility, and it cost another $50,000 to get it installed. Purchase of the new machine will require Underwater to increase its working capital by $25,000. If the new machine
Dave’s Devilish Dogs (3D) expects to generate $92,000 in sales in the long term. 3D’s operating costs, excluding depreciation, are 75 percent of sales. The company has only one asset, a machine that was just purchased for $150,000. The machine will be depreciated according to the MACRS 3-year
Canadian Wilderness Company (CWC) just bought a machine that is expected to generate $25,000 in operating income before depreciation expenses each year. The machine, which has a depreciable basis equal to $60,000, falls into the MACRS 3-year class. What will be CWC’s (a) After-tax operating
The CFO of Horatio?s Hotels gave three college interns three different independent projects to evaluate. Following are the results of their analyses: The CFO agrees with the final accept/reject decision that each intern made. But she spotted an error in the numbers reported by one of the
Following is information about two independent projects that a company is evaluating: (a) Which project(s) should be chosen? Explain why. (b) What can be concluded about the company?s required rate of return, r? Capital Budgeting Technique Net present value Internal rate of return Discounted
Following are the estimated after-tax cash flows for two mutually exclusive projects: The company?s required rate of return is 16 percent. What is the internal rate of return (IRR) of the project(s) the company should purchase? Project S ($16,000) 14,000 Project T ($15,000) 2,000 Year 6,000
Compute the (a) Net present value, (b) Internal rate of return (IRR), (c) Modified internal rate of return (MIRR), (d) Discounted payback period (DPB) for each of the following projects. The firm?s required rate of return is 13 percent. Which project(s) should be purchased if they are
Compute the (a) Net present value, (b) Internal rate of return (IRR), (c) Discounted payback period (DPB) for each of the following projects. The firm?s required rate of return is 14 percent. Which project(s) should be purchased if they are independent? Which project(s) should be purchased it
Pick a day within the past week and construct a yield curve for that day. Pick a day approximately a year ago and construct a yield curve for that day. How are interest rates different? The Globe and Mail or the Natinnal Post (Financial Post) should be of help in solving this problem. What does the
How has Abercrombie’s stock performed this year relative to the S&P 500?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.Forecasting the Future Performance of Abercrombie &
Historically, have Abercrombie’s reported earnings generally met, exceeded, or fallen short of analysts’ forecasted earnings?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s
Have analysts made any significant changes to their forecasted earnings for Abercrombie & Fitch in the past few months?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.Forecasting
Based on analysts’ forecasts, what is the expected long-term growth rate in earnings?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.Forecasting the Future Performance of Abercrombie
What are the mean and median forecasts for Abercrombie’s earnings per share over the next fiscal year?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.Forecasting the Future
Refer back to the FULL COMPANY REPORT and scroll down to the “5 Yr Annual Balance Sheet” section. Does it appear that MSFT has been repurchasing any stock, or has it been issuing new stock?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the Thomson ONE—Business School
Investors are more concerned with future dividends than historical dividends, so go to ESTIMATES and scroll down to the “Consensus Estimates” section. Click on the “Available Measures” menu to toggle between earnings per share and dividends per share. How do analysts expect MSFT’s payout
In the “Interim Financial Data” section of the FULL COMPANY REPORT, identify the dividend declared date, ex date, and pay date. Explain the significance of these dates. Go back to “Overview,” and access the “Interactive Price Chart.” Can you observe price shifts around these dates?
Refer back to the FULL COMPANY REPORT used in Question 1. Manually, plot earnings and dividends over time. In the text we point out that dividends are often much more stable than earnings. Do you see a similar pattern for MSFT?Access the Thomson ONE problems through the ThomsonNOW Web site. Use the
Compare this with other firms in the same industry. To see how MSFT stacks up against its peers, select PEERS>OVERVIEWS>PER SHARE DATA to get MSFT’s peers’ last annual dividends. Accessing PEER>OVERVIEWS>ABSOLUTE RANKINGS will give their dividend yields. You can also get this
To get information about MSFT’s dividend policy, enter its ticker and select OVERVIEW>FULL REPORTS>WORLDSCOPE FULL REPORTS>FULL COMPANY REPORT. Click on STOCK & EARNINGS DATA and scroll down to the “Annual Historical Data” section. What has happened to MSFT’s dividend per
From the submenu just above the list of firms, you may choose a number of options. “List” displays a list of the firms and allows you to access a firm report. “Profiles” provides key information about the firms, such as ticker, country, exchange, and industry code. “Financials” gives a
You can also use Thomson One to search for companies with either very large or very small debt ratios. For example, if you want to find the top 50 companies with the highest debt ratio select: SEARCH FOR COMPANIES, ADVANCED SEARCH, ALL COMPANIES, THOMSON FINANCIAL, RATIOS, and LEVERAGE. From here,
The financial ratios investigated thus far are based on book values of debt and equity. Determine whether using the market value of equity (market capitalization found on the OVERVIEW page) makes a significant difference in the most recent year’s “LT Debt Pct Common Equity” and “Total Debt
Repeat this procedure for the other 3 auto companies. Do you find similar capital structures for each of the 4 companies? Do you find that the capital structures have moved in the same direction over the past 5 years, or have the different companies changed their capital structures in different
To get more details about the companies’ capital structures over the past five years, select FINANCIALS > FUNDAMENTAL RATIOS > THOMSON RATIOS. From here you can select ANNUAL RATIOS and/or 5 YEAR AVERAGE RATIOS REPORT. In each case, you can scroll down and look for “Leverage Ratios.”
To get an overall picture of each company’s capital structure it is helpful to see a chart that summarizes the company’s capital structure over the past decade. To obtain this chart, choose a company to start with and select FINANCIALS. Next, select MORE > THOMSON REPORTS & CHARTS >
Putting all this information together, what is your estimate of MMM’s WACC? How confident are you in this estimate? Explain your answer.Access the Thomson ONE problems though the ThomsonNOW Web site. Use the ThomsonONE—Business School Edition online database to work this chapter’s
Next, we need to calculate MMM’s cost of debt. Unfortunately, Thomson One doesn’t provide a direct measure of the cost of debt. However, we can use different approaches to estimate it. One approach is to take the company’s long-term interest expense and divide it by the amount of
Once again, we can use the CAPM to estimate MMM’s cost of equity. Thomson One provides various estimates of beta—select the measure that you believe is best and combine this with your estimates of the risk-free rate and the market risk premium to obtain an estimate of its cost of equity. What
Finally, you can also use the information in Thomson One to value the entire corporation. This approach requires that you estimate XOM’s annual free cash flows. Once you estimate the value of the entire corporation, you subtract the value of debt and preferred stock to arrive at an estimate of
On the basis of the dividend history you uncovered in question 5 and your assessment of XOM’s future dividend payout policies, do you think it is reasonable to assume that the constant growth model is a good proxy for intrinsic value? If not, how would you use the available data in Thomson One to
It is often useful to perform a sensitivity analysis, where you show how your estimate of intrinsic value varies according to different estimates of D1, rs, and g. To do so, recalculate your intrinsic value estimate for a range of different estimates for each of these key inputs. One convenient way
The required return on equity, rs, is the final input needed to estimate intrinsic value. For our purposes you can either assume a number (say, 8 or 9 percent), or you can use the CAPM to calculate an estimate of the cost of equity using the data available in Thomson One. (For more details take a
In the text, we discussed using the dividend growth model to estimate a stock’s intrinsic value. To keep things as simple as possible, let’s assume at first that XOM’s dividend is expected to grow at some constant rate over time. If so, the intrinsic value equals D1/(rs - g), where D1 is the
Now to see how XOM’s P/E ratio has varied over time—return back to the COMPANY OVERVIEW page. Next click FINANCIALS—GROWTH RATIOS and then select WORLDSCOPE—INCOME STATEMENT RATIOS. Is XOM’s current P/E ratio well above or well below its historical average? If so, do you have any
To provide a starting point for gauging a company’s relative valuation, analysts often look at a company’s price-to-earnings (P/E) ratio. Returning to the COMPANY OVERVIEW page, you can see XOM’s current P/E ratio. To put this number in perspective, it is useful to compare this ratio with
Click on the “NEWS” tab to see the recent news stories for the company. Have there been any recent events impacting the company’s stock price, or have things been relatively quiet?Access the Thomson ONE problems though the ThomsonNOW Web site. Use the ThomsonONE—Business School Edition
For purposes of this exercise, let’s take a closer look at the stock of ExxonMobil Corporation (XOM). Looking at the COMPANY OVERVIEW we can immediately see the company’s current stock price and its performance relative to the overall market in recent months. What is ExxonMobil’s current
Repeat the same exercise for each of the 3 remaining companies. Do the reported betas confirm your earlier intuition? In general, do you find that the higher-beta stocks tend to do better in up markets and worse in down markets? Explain.Access the Thomson ONE problems though the ThomsonNOW Web
Select a beta estimate that you believe is best. (If you are not sure, you may want to consider an average of the given estimates.) Assume that the risk-free rate is 5 percent and the market risk premium is 6 percent. What is the required return on the company’s stock?Access the Thomson ONE
What is the estimated beta on this page? What is the source of the estimated beta? Why might different sources produce different estimates of beta?Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s
Click on the tab labeled PRICES. What is the company’s current dividend yield? What has been its total return to investors over the past 6 months? Over the past year? Over the past 3 years? (Remember that total return includes the dividend yield plus any capital gains or losses.)Access the
Return to the overview page for the stock you selected. If you scroll down the page you should see an estimate of the company’s beta. What is the company’s beta? What was the source of the estimated beta?Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson
Assume that the risk-free rate is 5 percent and the market risk premium is 6 percent. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson
Select one of the four stocks listed in question 2 by selecting COMPANIES, entering the company’s ticker symbol, and clicking on GO. On the overview page, you should see a chart that summarizes how the stock has done relative to the S&P 500 over the past 6 months. Has the stock outperformed
Required rate of return Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent. What is the required rate of return on a stock with a beta of 0.7?Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition
Now let’s take a closer look at the stocks of four companies: Colgate Palmolive (Ticker CL), Gillette (G), Merrill Lynch (MER), and Microsoft (MSFT). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1.0), and which of these
Begin by taking a look at the historical performance of the overall stock market. If you want to see, for example, the performance of the S&P 500, select INDICES and enter S&PCOMP. Click on PERFORMANCE and you will immediately see a quick summary of the market’s performance in recent
Construct a simple Du Pont analysis for Ford and its peers. What are Ford’s strengths and weaknesses relative to its competitors?In Chapter 3, we took a look at Starbucks’ financial statements. Now we use Thomson One to analyze Ford Motor Company. Enter Ford’s ticker symbol (F) and select
Take a look at Ford’s inventory turnover ratio. How does this ratio compare with its peers? Have there been any interesting changes over time in this measure? Do you consider Ford’s inventory management to be a strength or a weakness?In Chapter 3, we took a look at Starbucks’ financial
What has happened to Ford’s liquidity position over the past 3 years? How does Ford’s liquidity compare with its peers?In Chapter 3, we took a look at Starbucks’ financial statements. Now we use Thomson One to analyze Ford Motor Company. Enter Ford’s ticker symbol (F) and select “GO.”
Over the past few years, has there been a strong correlation between stock price performance and reported earnings?Over the past decade, Starbucks coffee shops have become an increasingly familiar part of the urban landscape. Currently, the company operates more than 6,000 coffee shops in all 50
Komfy Karz is evaluating a project that costs $365,000 and is expected to generate $260,000 and $175,000, respectively, during the next two years. If Komfy’s required rate of return is 13 percent, what is the project’s(a) Net present value,(b) Internal rate of return (IRR),(c) Modified
Compute the traditional payback period (PB) for a project that costs $64,000 if it is expected to generate $16,000 per year for six years? If the firm’s required rate of return is 12 percent, what is the project’s discounted payback period (DPB)? Should the project be purchased?
Compute both the traditional payback period (PB) and the discounted payback period (DPB) for a project that costs $270,000 if it is expected to generate $75,000 per year for five years. The firm’s required rate of return is 11 percent. Should the project be purchased?
Rascal Clothing is evaluating a new weaving machine that costs $90,000. It is expected that the machine will generate after-tax cash flows equal to $54,000 per year for two years. Rascal’s required rate of return is 9 percent. Compute the project’s(a) Internal rate of return (IRR)(b)
What is the internal rate of return (IRR) for a project that costs $5,500 and is expected to generate $1,800 per year for the next four years? If the firm’s required rate of return is 8 percent, what is the project’s modified internal rate of return (MIRR)? Should the firm purchase the
Construct an NPV profile for a capital budgeting project that costs $64,000 and is expected to generate $18,200 per year for five years. Using the NPV profile, determine the project’s internal rate of return (IRR) and its net present value (NPV) at required rates of return equal to 10
Kansas Furniture Corporation (KFC) is evaluating a capital budgeting project that costs $34,000 and is expected to generate after-tax cash flows equal to $14,150 per year for three years. KFC’s required rate of return is 12 percent. Compute the project’s (a) Net present value
Piping Hot Food Services (PHFS) is evaluating a capital budgeting project that costs $75,000. The project is expected to generate after-tax cash flows equal to $26,000 per year for four years. PHFS’s required rate of return is 14 percent. Compute the project’s(a) Net present value (NPV) and(b)
What is the internal rate of return (IRR) of a project that costs $74,000 if it is expected to generate $16,500 per year for six years?
The CFO of HairBrain Stylists is evaluating a project that costs $42,000. The project will generate $11,000 each of the next five years. If HairBrain’s required rate of return is 9 percent, should the project be purchased?
Conventional Corporation is evaluating a capital budgeting project that will generate $600,000 per year for the next 10 years. The project costs $3.6 million, and Conventional’s required rate of return is 11 percent. Should the project be purchased?

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CFIN 5th edition Scott Besley, Eugene Brigham - Solutions

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