Questions and Answers of Fundamentals Of Corporate Finance

In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe that
Ursala, Inc., has a target debt-equity ratio of .65. Its WACC is 10.4 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt?b. If
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.34 and the total portfolio is equally as risky as the market, what must the beta be for
You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36,
A portfolio is invested 45 percent in Stock G, 40 percent in Stock J, and 15 percent in Stock K. The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively. What is
Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B: Rate of Return if State Occurs Probability of State of Economy State of Economy Stock
Based on the following information, calculate the expected return: Probability of State of Portfolio State of Return if State Economy Economy Occurs Recession .10 -.17 Normal .60 .08 Boom .30 .27
Based on the following information, calculate the expected return: Probability of Portfolio State of State of Return Economy Economy if State Occurs Recession .20 -.13 Boom .80 .19
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.4 percent and Stock Y with an expected return of 10.1 percent. If your goal is to create a
You own a portfolio that is invested 15 percent in Stock X, 35 percent in Stock Y, and 50 percent in Stock Z. The expected returns on these three stocks are 9 percent, 15 percent, and 12 percent,
You own a portfolio that has $4,450 invested in Stock A and $9,680 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return
What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47 per share and 200 shares of Stock B that sell for $21 per share?
A stock has had returns of 6 percent, 29 percent, 13 percent, −19 percent, 34 percent, and −2 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions:a. What
Given that Zoom was up by about 250 percent for in the first half of 2020, why didn’t all investors hold this stock?
Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2019? Why do you think they were so high during this period? What
You’ve observed the following returns on Pine Computer’s stock over the past five years: 8 percent, −12 percent, 14 percent, 21 percent, and 16 percent.a. What was the arithmetic average return
Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total return.
In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane had a list price of $280 million. In discussing
Refer to Table 12.1 in the text and look at the period from 1973 through 1980.a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this
Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3.1 million investment in threading equipment to get the project
What was the average annual return on large-company stocks from 1926 through 2019:a. In nominal terms?b. In real terms?
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year ............................ Unit Sales1 .................................... 71,0002
We are evaluating a project that costs $845,000, 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
Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 today.a. Assuming a $1,000 face value, what was your total dollar return on this
Given that Hertz was down by 88 percent in the first half of 2020, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $365 per set. The company has spent $150,000 for a marketing study that
As we have seen, over the 1926–2019 period, small-company stocks had the highest return and the highest risk, while U.S. Treasury bills had the lowest return and the lowest risk. While we certainly
Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 20,000 tons. How does this number compare to the sensitivity
Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900
You are considering a new product launch. The project will cost $1,675,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units
Consider a four-year project with the following information: Initial fixed asset investment = $655,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28;
In each of the following cases, find the unknown variable: Accounting Unit Variable Break-Even Unit Price Cost Fixed Costs Depreciation 143,286 $39 $30 $ 820,000 104,300 ? 27 2,320,000 $975,000
In the previous problem, suppose fixed costs are $183,000. What is the operating cash flow at 38,000 units? The degree of operating leverage?Previous problemAt an output level of 40,000 units, you
At an output level of 40,000 units, you calculate that the degree of operating leverage is 3.19. If output rises to 44,000 units, what will the percentage change in operating cash flow be? Will the
Consider a project with the following data: Accounting break-even quantity = 14,300 units; cash break-even quantity = 9,700 units; life = 5 years; fixed costs = $205,000; variable costs = $19 per
You are at work when a co-worker excitedly comes to your desk and shows you the scenario analysis that he has just completed for a potential new project. All three scenarios show a positive NPV. He
A project has the following estimated data: Price = $53 per unit; variable costs = $22 per unit; fixed costs = $31,460; required return = 12 percent; initial investment = $46,200; life = four years.
In each of the following cases, calculate the accounting break-even and the cash break even points. Ignore any tax effects in calculating the cash break-even. Unit Price Unit Variable Cost Fixed
Your small remodeling business has two work vehicles. One is a small passenger car used for job site visits and for other general business purposes. The other is a heavy truck used to haul equipment.
Stinnett Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,220 per unit; variable costs = $380 per unit; fixed costs = $3.75 million; quantity = 90,000
Ojo Outerwear Corporation can manufacture mountain climbing shoes for $45.17 per pair in variable raw material costs and $29.73 per pair in variable labor expense. The shoes sell for $210 per pair.
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
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 $525,000 and will be eligible for 100 percent
Night Shades, Inc., manufactures biotech sunglasses. The variable materials cost is $12.14 per unit, and the variable labor cost is $6.89 per unit.a. What is the variable cost per unit?b. Suppose the
What is forecasting risk? In general, would the degree of forecasting risk be greater for a new product or a cost-cutting proposal? Why?
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1.4 million; the new one will cost $1.7 million. The new machine will be depreciated straight-line to zero
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
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.1 million and will last for six years. Variable costs are 35 percent of sales, and
A proposed cost-saving device has an installed cost of $905,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Before LEDs became a popular replacement for incandescent light bulbs, compact fluorescent lamps (CFLs) were hailed as the new generation of lighting. However, CFLs had even more wrinkles. In no
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 $5.7 million and will be sold for $1.8 million at the end of the
Tanaka Machine Shop is considering a fouryear project to improve its production efficiency. Buying a new machine press for $445,000 is estimated to result in $160,000 in annual pretax cost savings.
Rust Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $295,000, has a four-year life, and requires $77,000 in pretax annual operating costs.
Martin Enterprises needs someone to supply it with 110,000 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 $265,000, has a three-year life, and has pretax operating costs of $74,000 per year. The Techron II costs
A five-year project has an initial fixed asset investment of $345,000, an initial NWC investment of $25,000, and an annual OCF of −$41,000. The fixed asset is fully depreciated over the life of the
Your firm is contemplating the purchase of a new $535,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at
Dog Up! Franks is looking at a new sausage system with an installed cost of $385,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the
Esfandairi Enterprises is considering a new threeyear expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight line to zero
Consider an asset that costs $745,000 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 $1.475 million and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end of-the-year book values
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 $2.8 million in anticipation of
A proposed new project has projected sales of $215,000, costs of $104,000, and depreciation of $25,300. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches
Consider the following income statement:Sales ............................... $704,600Costs ................................. 527,300Depreciation ..................... 82,100EBIT
A proposed new investment has projected sales of $515,000. Variable costs are 36 percent of sales, and fixed costs are $173,000; depreciation is $46,000. Prepare a pro forma income statement assuming
A project has the following cash flows:Year .................. Cash Flow0 ....................... $74,0001 ....................... − 49,0002 ....................... − 41,000What is the IRR for
Winnebagel Corp. currently sells 20,000 motor homes per year at $103,000 each and 14,000 luxury motor coaches per year at $155,000 each. The company wants to introduce a new portable camper to fill
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years
This problem is useful for testing the ability of financial calculators and spreadsheets. Consider the following cash flows. How many different IRRs are there? Search between 20 percent and 70
Mako Corp. has a project with the following cash flows:Year ................. Cash Flow0 .......................... $25,0001 ......................... − 11,0002 ..............................
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 $745,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
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
Duo Corp. is evaluating a project with the following cash flows:Year ........................... Cash Flow0 ................................. −$53,0001 ................................. 16,7002
The Michner 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
An investment has an installed cost of $574,380. The cash flows over the four-year life of the investment are projected to be $216,700, $259,300, $214,600, and $167,410, respectively. If the discount
One of the less flattering interpretations of the acronym MIRR is “meaningless internal rate of return.” Why do you think this term is applied to MIRR?
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 this
In the chapter opener, we mentioned Toyota’s decision to invest $13 billion to increase production at five U.S. plants. Toyota apparently felt that it would be better able to compete and create
What is the IRR of the following set of cash flows?Year ....................... Cash Flow0 .......................... −$18,7001 ................................ 9,4002 .............................
project that provides annual cash flows of $15,300 for nine years costs $74,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate
Concerning the profitability index:a. Describe how the profitability index is calculated, and describe the information this measure provides about a sequence of cash flows. What is the profitability
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.6 million, which will be depreciated straight-line to
Concerning AAR:a. Describe how the average accounting return is usually calculated, and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion
An investment project costs $19,000 and has annual cash flows of $5,100 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 9 percent. What is the discounted payback period for
Kara, 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? Year Cash Flow
An investment project provides cash inflows of $835 per year for eight years. What is the project payback period if the initial cost is $1,900? What if the initial cost is $3,600? What if it is
The most recent financial statements for Assouad, Inc., are shown here:Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a
Locate the Treasury issue in Figure 7.5 maturing in February 2029. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000. Treasury
Locate the Treasury bond in Figure 7.5 maturing in November 2026. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The
Suppose your company needs to raise $65 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 4.9 percent, and you’re evaluating two
You want to have $2.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.1 percent and the inflation rate is 3.4 percent. What real amount
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
Cookie Dough 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 $900
At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2021:The bond in the middle is callable in February 2022. What is the
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
You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $700 per month in a stock account in real dollars and $300 per month in a bond account in real

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