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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

If you were to include the effect of taxes in break-even analysis, what do you think would happen to the cash, accounting, and financial break-even points?
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $420,000 one year ago; the new one will cost $368,000. The new machine will be in CCA Class 10 (30
A proposed cost-saving device has an installed cost of $865,000. The device will be used in a six-year project, but is classified as manufacturing and processing equipment for tax purposes. The
Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:Production of the implants will require $800,000 in net working capital to start and additional net
Dexter Company has recently completed a $1.3 million, two-year marketing study. Based on the results, Dexter has estimated that 19,600 of its new RUR-class robots could be sold annually over the next
A proposed cost-saving device has an installed cost of $620,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually function for five years, at which time it will have no value.
Suppose we are thinking about renovating a leased office. The renovations would cost $364,000. The renovations will be depreciated straight-line to zero over the five-year remainder of the lease. The
Kiss 92.5 is considering the replacement of its old, fully depreciated sound mixer. Two new models are available. Mixer X has a cost of $743,000, a six-year expected life, and after-tax cash flow
BIG Industries needs computers. Management has narrowed the choices to the SAL 5000 and the DET 1000. It would need 12 SALs. Each SAL costs $15,900 and requires $1,850 of maintenance each year. At
Consider a project to supply 140 million postage stamps per year to Canada Post for the next five years. You have an idle parcel of land available that cost $1,300,000 five years ago; if you sold the
Suppose in the previous problem that KISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?Data from previous questionKingsmill
Kingsmill Industrial Systems Company (KISC) is trying to decide between two different conveyor belt systems. System A costs $360,000, has a four-year life, and requires $135,000 in pre-tax annual
The Mosley Wheat Company (MWC) has wheat fields that currently produce annual profits of $1,100,000. These fields are expected to produce average annual profits of $820,000 in real terms forever. MWC
Mapleton Enterprises Inc. is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $975,000. The company could continue to rent the building
The Tempo Golf and Country Club in London, Ontario is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million to install and $80,000
A university student painter is considering the purchase of a new air compressor and paint gun to replace an old paint sprayer. (Both items belong to Class 9 and have a 25 percent CCA rate.) These
An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year
A seven-year project has an initial investment of $550,000 and an annual operating cost of $32,000 in the first year. The operating costs are expected to increase at the rate of inflation, which is
You are considering two different methods for constructing a new warehouse site. The first method would use prefabricated building segments, would have an initial cost of $6.5 million, would have
In the previous question, suppose all the costs are before taxes and the tax rate is 39 percent. Both types of equipment would be depreciated at a CCA rate of 25 percent (Class 9), and would have no
Lobo is a leading manufacturer of positronic brains, a key component in robots. The company is considering two alternative production methods. The costs and lives associated with each are:Assuming
The Arva Logging Company is considering a new logging project in Ontario, requiring new equipment with a cost of $280,000. For the upcoming year, they estimate that the project will produce sales of
Next year, Byron Corporation estimates that they will have $425,000 in sales, $96,000 in operating costs, and their corporate tax rate will be 35 percent. Undepreciated capital costs (UCC) will be
We have been requested by a large retailer to submit a bid for a new point-of-sale credit checking system. The system would be installed, by us, in 89 stores per year for three years. We would need
In the previous problem, suppose your required return on the project is 20 percent, your pre-tax cost savings are now $300,000 per year, and the machine can be depreciated at 30 percent (Class 10).
Your firm is contemplating the purchase of a new $720,000 million computer-based order entry system. The PVCCATS is $260,000, and the machine will be worth $280,000 at the end of the five-year life
Fox Hollow Franks is looking at a new system with an installed cost of $560,000. This equipment is depreciated at a rate of 20 percent per year (Class 8) over the project’s five-year life, at the
Melrose Motorworks Corp. currently sells 23,000 compact cars per year at $14,690 each, and 38,600 luxury sedans at $43,700 each. The company wants to introduce a new mid-sized sedan to fill out its
Kilworth Plexiglass Inc. is looking to set up a new manufacturing plant to produce surfboards. The company bought some land seven years ago for $7.2 million in anticipation of using it as a warehouse
Suppose a company has $15,200 in sales during a quarter. Over the quarter, accounts receivable increased by $9,500. What were cash collections?
We believe we can sell 90,000 home security devices per year at $150 a piece. They cost $130 to manufacture (variable cost). Fixed production costs run $215,000 per year. The necessary equipment
In the previous problem, supposed the required return on the project is 12 percent. What is the project’s NPV?Data from previous questionsLast year, Lambeth Pizza Corporation reported sales of
Last year, Lambeth Pizza Corporation reported sales of $102,000 and costs of $43,500. The following information was also reported for the same period:Based on this information, what was Lambeth’
Rick Bardles and Ed James are considering building a new bottling plant to meet expected future demand for their new line of tropical coolers. They are considering putting it on a plot of land they
In the previous question, suppose the monitor was assigned a 25 percent CCA rate. All the other facts are the same. Will the NPV be larger or smaller? Why? Calculate the new NPV to verify your
In the previous question, suppose the new monitor also requires us to increase net working capital by $47,200 when we buy it. Further suppose that the monitor could actually be worth $100,000 in five
A new electronic process monitor costs $990,000. This cost could be depreciated at 30 percent per year (Class 10). The monitor would actually be worthless in five years. The new monitor would save
A proposed new investment has projected sales in Year 5 of $940,000. Variable costs are 41 percent of sales and fixed costs are $147,000. CCA for the year will be $104,000. Prepare a projected
In evaluating Pistachio, what do you think Indigo needs to assume regarding the profit margins that exist in this market? Is it likely they will be maintained when others enter this market?
In evaluating the decision to start Pistachio, under what circumstances might Indigo Books & Music have concluded that erosion was irrelevant?
Avonmore Corp. has a project with the following cash flows:Year ........................ Cash Flow0 ................................. $20,0001 ................................. -26,0002
Parkallen 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
In early 2013, U.S retailer Target planned to open more than 100 stores in Canada. Also, in March 2011, Tata Steel, 10th largest steel maker in the world, announced its intention to invest around $5
An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial
Some companies, such as Canadian Tire, have created classes of stock with no voting rights at all. Why would investors buy such stock?
The next dividend payment by Kilbride Inc. will be $2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for $48.00 per share, what
The Stopperside Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors require a 11
The Metchosin Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2013. What is
Canada bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
With regard to bid and ask prices on a Canada bond, is it possible for the bid price to be higher? Why or why not?
Which has greater interest rate risk, a 30-year Canada bond or a 30-year BB corporate bond?
Is it true that a Government of Canada security is risk-free?
Would long-range financial planning be more important for a capital intensive company, such as a heavy equipment manufacturer, or an import-export business? Why?
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of 0.93 indicates that for
The Morden Corporation has ending inventory of $407,534, and cost of goods sold for the year just ended was $4,105,612. What is the inventory turnover? The days’ sales in inventory? How long on
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $63.82 and all the dividend information remains the same. What required return must investors be
Holyrood Co. just paid a dividend of $2.45 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year
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
Lance Cove Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next 11 years before leveling off at 6 percent into perpetuity. The
Upper Gullies Corp. just paid a dividend of $1.25 per share. The dividends are expected to grow at 28 percent for the next eight years and then level off to a 6 percent growth rate indefinitely. If
You have found the following stock quote for Enerplus Corp. in the Globe Investor on January 19, 2012. What was the closing price for this stock that appeared in yesterday’s paper? If the company
Peachytown Bank just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. If the market requires a 6.4 percent return on this
Codner Corporation stock currently sells for $64 per share. The market requires a 10 percent return on the firm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends,
Foxtrap Inc. is a mature manufacturing firm. The company just paid a $10.46 dividend, but management expects to reduce the payout by 4 percent per year indefinitely. If you require an 11.5 percent
Rabbit Town 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 8 percent per year
Duffs Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return
Kelligrews Inc. has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $4 per share for each of the next 5 years, and
Talcville Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the
Big Pond Inc. has an issue of preferred stock outstanding that pays a $5.50 dividend every year in perpetuity. If this issue currently sells for $108 per share, what is the required return?
Goulds Corp. pays a constant $9.75 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this
Glenhill Co. is expected to maintain a constant 5.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3 percent, what is the required return on the
Torbay Corporation will pay a $3.04 per share dividend next year. The company pledges to increase its dividend by 3.8 percent per year indefinitely. If you require an 11 percent return on your
Aberdeen Records Inc. wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .30. Profit margin is 6.70 percent, and the ratio of total assets to sales is constant at
In Problem 27, suppose the firm wishes to keep its debt-equity ratio constant. What is EFN now?Data from problem 27The most recent financial statements for Hopington Tours Inc. follow. Sales for
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2012. What is EFN now?Data from previous questionsThe most recent financial statements for Hopington Tours Inc.
The most recent financial statements for Hopington Tours Inc. follow. Sales for 2013 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout
A firm wishes to maintain a growth rate of 11.5 percent and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.60, and profit margin is 6.2 percent. If the
Elgin Brick Manufacturing sold $200,000 of red bricks in the last year. They were operating at 94 percent of fixed asset capacity. How fast can Elgin Brick grow before they need to purchase new fixed
If a company is operating at 60 percent of fixed asset capacity and current sales are $350,000, how fast can that company grow before any new fixed assets are needed?
Mud Bay Services Inc. is currently operating at only 95 percent of fixed asset capacity. Current sales are $550,000. How fast can sales grow before any new fixed assets are needed?
Based on the following information, calculate the sustainable growth rate for Lesner’s Kickboxing:Profit margin = 8.2%Capital intensity ratio = .75Debt-equity ratio = .40Net income =
If the Whalley Corp. has a 15 percent ROE and a 25 percent payout ratio, what is its sustainable growth rate?
If Sunbury Hobby Shop has a 8 percent ROA and a 20 percent payout ratio, what is its internal growth rate?
The most recent financial statements for Cariboo Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant
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
Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to
Tillicum Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent.a.
a. What is the relationship between the price of a bond and its YTM?b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the
Colwood Corp. has 8 percent coupon bonds making annual payments with a current yield of 7.5 percent. How many years do these bonds have left until they mature?
You purchase a bond with a coupon rate of 6.8 percent and a clean price of $1,073. If the next semiannual coupon payment is due in three months, what is the invoice price?
At the time of the last referendum, Quebec provincial bonds carried a higher yield than comparable Ontario bonds because of investors’ uncertainty about the political future of Quebec. Suppose you
This problem refers to bond quotes in Figure 7.4. Calculate the price of the Canada Jun 01/15 to prove that it is 111.23 as shown. Assume that today is January 05, 2012.Figure 7.4 FIGURE 7.4 Sample
An investment offers a 14 percent total return over the coming year. Jim Flaherty thinks the total real return on this investment will be only 9 percent. What does Jim believe the inflation rate will
Happy Valley Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8 percent, and a current price of $924. The bonds make semiannual payments. What must the coupon rate be on
Canada bonds are not rated. Why? Often, junk bonds are not rated. Why?
Companies pay rating agencies such as DBRS to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is
Braemar Corp. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
Langford Co. issued 11-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price?
Goldstream Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,045. At this price, the bonds yield 7.5 percent. What must the coupon rate be on

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