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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.26. The operating cash flow is $78,000 in this case. Ignoring the effect of taxes, what are fixed
A proposed project has fixed costs of $89,000 per year. The operating cash flow at 10,400 units is $127,400. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise
In the previous problem, suppose fixed costs are $175,000. What is the operating cash flow at 43,000 units? The degree of operating leverage? Data from previous problemAt an output level of
At an output level of 45,000 units, you calculate that the degree of operating leverage is 2.79. If output rises to 48,000 units, what will the percentage change in operating cash flow be? Will the
Consider a project with the following data: Accounting break even quantity = 13,700 units; cash break-even quantity = 9,600 units; life = five years; fixed costs = $185,000; variable costs = $23 per
A project has the following estimated data: Price = $62 per unit; variable costs = $28 per unit; fixed costs = $27,300; required return = 12 percent; initial investment = $34,800; life = four years.
In each of the following cases, find the unknown variable: Unit Variable Cost Depreciation Accounting Break-Even 125,736 165,000 Unit Price Fixed Costs $39 $30 $ 820,000 27 2,320,000 $975,000 92
In each of the following cases, calculate the accounting break even and the cash breakeven points. Ignore any tax effects in calculating the cash break-even. Unit Variable Cost $2,135 Depreciation
We are evaluating a project that costs $786,000, has an eight year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern? Describe how
Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,440 per unit; variable costs = $460 per unit; fixed costs = $3.9 million; quantity = 85,000 units.
K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair in variable raw material costs and $24.36 per pair in variable labor expense. The shoes sell for $170 per pair.
Night Shades, Inc. (NSI), manufactures biotech sunglasses. The variable materials cost is $11.13 per unit, and the variable labor cost is $7.29 per unit.a. What is the variable cost per unit?b.
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,560,000; the new one will cost $1,872,000. The new machine will be depreciated straight-line to zero
Your company has been approached to bid on a contract to sell 4,800 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be
A proposed cost-saving device has an installed cost of $735,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
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
Light-emitting diode (LED) light bulbs have become required in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.45 and lasts for 1,000 hours.
Vandelay 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
Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $750,000 five years ago; if
Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual
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
Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $385,000 is estimated to result in $145,000 in annual pretax cost savings.
Martin Enterprises needs someone to supply it with 125,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract.
You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs
A five-year project has an initial fixed asset investment of $315,000, an initial NWC investment of $25,000, and an annual OCF of −$35,000. The fixed asset is fully depreciated over the life of the
Your firm is contemplating the purchase of a new $485,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $35,000 at
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation in the first year. What is the new NPV?Data from previous problemDog Up! Franks is looking at a
Dog Up! Franks is looking at a new sausage system with an installed cost of $460,000. This cost will be depreciated straight line to zero over the project’s five-year life, at the end of which 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 $180,000 at the end of the project.
In the previous problem, suppose the required return on the project is 12 percent. What is the project’s NPV?Data from previous problemQuad Enterprises is considering a new three-year expansion
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset will be depreciated straight-line to zero over its
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 $5,100,000 and will be sold for $1,600,000 at the end of the project. If
Consider an asset that costs $680,000 and is depreciated straight line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
A piece of newly purchased industrial equipment costs $1,375,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
A proposed new project has projected sales of $175,000, costs of $93,000, and depreciation of $24,800. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches
Consider the following income statement:Sales ..................... $747,300Costs ...................... 582,600Depreciation ........... 89,300EBIT ................................... ?Taxes (22%)
A proposed new investment has projected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs are $187,000; depreciation is $51,000. Prepare a pro forma income statement assuming
Winnebagel Corp. currently sells 20,000 motor homes per year at $97,000 each and 14,000 luxury motor coaches per year at $145,000 each. The company wants to introduce a new portable camper to fill
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $3.6 million in anticipation of
A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year .......................... Cash Flow0 ............................
A project has the following cash flows: Year ................. Cash Flow0 .......................... $59,0001 ......................... − 34,0002 ......................... − 39,000 What
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
An investment under consideration has a payback of seven years and a cost of $685,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
Suppose the company in the previous problem uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. Calculate the MIRR of the project using all three methods
Solo Corp. is evaluating a project with the following cash flows: Year .................. Cash Flow0 ......................... −$47,0001 ............................. 16,9002
An investment has an installed cost of $527,630. The cash flows over the four-year life of the investment are projected to be $212,200, $243,800, $203,500, and $167,410, respectively. If the discount
Consider the following two mutually exclusive projects:Whichever project you choose, if any, you require a return of 11 percent on your investment.a. If you apply the payback criterion, which
The Sloan 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
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Bruin, Inc., has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is
What is the IRR of the following set of cash flows? Year ................... Cash Flow0 ......................... −$15,4001 ............................... 7,3002
A project that provides annual cash flows of $11,700 for nine years costs $63,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 24
A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project? Year ................... Cash Flow0
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $13.5 million, which will be depreciated straight-line to
An investment project costs $17,000 and has annual cash flows of $4,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5
An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 11 percent. What is the discounted payback period
Bronco, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Cash
An investment project provides cash inflows of $745 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if it is
What is the payback period for the following set of cash flows? Year ............... Cash Flow0 ................... −$8,3001 ....................... 2,1002 ....................... 3,0003
In 2016, automobile manufacturer BMW completed its $1 billion investment to increase production at its South Carolina plant by 50 percent. BMW apparently felt that it would be better able to compete
Suppose the current share price for the firm in the previous problem is $54.50 and all the dividend information remains the same. What required return must investors be demanding on the company’s
Storico Co. just paid a dividend of $3.15 per share. The company will increase its dividend by 20 percent next year and then reduce its dividend growth rate by 5 percentage points per year until it
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
Consider four different stocks, all of which have a required return of 13 percent and a most recent dividend of $3.75 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Perine, Inc., has balance sheet equity of $6.8 million. At the same time, the income statement shows net income of $815,000. The company paid dividends of $285,000 and has 245,000 shares of stock
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark
RAK, Inc., currently has an EPS of $2.45 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 23, what is the target share price five years from now?
In the previous problem, we assumed that the stock had a single stock price for the year. However, if you look at stock prices over any year, you will find a high and low stock price for the year.
You have found the following historical information for the Daniela Company over the past four years:Earnings are expected to grow at 11 percent for the next year. Using the company’s historical
Domergue Corp. currently has an EPS of $3.76, and the benchmark PE for the company is 21. Earnings are expected to grow at 5.1 percent per year. a. What is your estimate of the current stock
Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 18 percent per year for the next 11 years before leveling off at 4 percent into perpetuity. The
A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 21 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If the
E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.65 percent on this
Mannix Corporation stock currently sells for $57 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 3.75 percent growth rate in
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.80, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 9.5
Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 6 percent per year
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends
Maurer, Inc., has an odd dividend policy. The company has just paid a dividend of $2.75 per share and has announced that it will increase the dividend by $4.50 per share for each of the next five
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company
Moody Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 3.8 percent per year indefinitely. Investors require a return of 15 percent for the
TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $2.1 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what
The Perfect Rose Co. has earnings of $3.18 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.65 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s
Bedekar, Inc., has an issue of preferred stock outstanding that pays a $3.40 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return?
Burnett Corp. pays a constant $8.25 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this
Suppose you know that a company’s stock currently sells for $74 per share and the required return on the stock is 10.6 percent. You also know that the total return on the stock is evenly divided
Grateful Eight Co. is expected to maintain a constant 3.7 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the
Hudson Corporation will pay a dividend of $3.28 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 10 percent on your
The next dividend payment by Savitz, Inc., will be $2.34 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share,
The Jackson-Timberlake Wardrobe Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors
Some companies, such as Alphabet, have created classes of stock with no voting rights at all. Why would investors buy such stock?
1. The security of the bond—that is, whether the bond has collateral.2. The seniority of the bond.3. The presence of a sinking fund.4. A call provision with specified call dates and call prices.5.
You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $800 per month in a stock account in real dollars and $400 per month in a bond account in real
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

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