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intermediate financial management
Financial Management And Policy 12th Edition James C. Van Horne - Solutions
5. Assuming that a firm has a tax rate of 30 percent, compute the after-tax cost of the following assets:
4. Zosnick Poultry Corporation has launched an expansion program that, in 6 years, should result in the saturation of the Bay Area marketing region of Cali-, -) fornia. As a result, the company is predicting a growth in earnings of 12 percent for 3 years, 6 percent for years 4 through 6, then
c. The dividend next year will be $3 per share.
b. The firm does not change its dividend, the risk complexion of its assets, or its degree of financial leverage.
a. A perpetual-growth valuation model is a reasonable representation of the way the market values ICOM.
3. On March 10, International Copy Machines (ICOM), one of the "favorites" of the stock market, was priced at $300 per share. This price was based on an expected annual growth rate of at least 20 percent for quite some time in the future.In July, economic indicators turned down, and investors
b. If the risk-free rate presently is 13 percent and the expected return on the market portfolio is 17 percent, what return should the company require for the project if it uses a CAPM approach?
a. If Willie Sutton Bank Vault Company wishes to enter the automated bank teller business, what systematic risk (beta) is involved if it intends to employ the same amount of leverage in the new venture as it . .presently employs?
2. Willie Sutton Bank Vault company has a debt-to-equity ratio (market value)of .75. Its present cost of debt funds is 15 percent, and it has a marginal tax rate of 40 percent. Willie Sutton Bank Vault is eyeing the automated bank Chapter 8 Creating Value through Required Returns 233 teller
c. What is the expected value of required rate of return?
b. What is the range of required rates of return?
a. What is the required rate of return for the project using the mode beta of 1.10?
1. Acosta Sugar Company has estimated that the overall return for Standard &Poor's 500-Stock Index wiU be 15 percent over the next 10 years. The company also feels that the interest rate on Treasury securities will average 10 percent over this interval. The company is thinking of expanding into a
b. On what assumptions does a price that high depend?
a. What is the maximum price that Williams Warbler Company might pay for Acme?
5. The Williams Warbler Company is contemplating acquiring the Acme Brass Company. Incremental cash flows arising from the acquisition are expected to be the following (in thousands):Average of Years Cash flow after taxes $100 $150 $200 Investment required -50 -60 -70 Net cash flow $ 50 $ 90 $130 =
b. What would you do if a CAPM approach to the problem suggested a different decision?
a. Would you invest in one or both projects?
4. You are evaluating two separate projects as to their effect on the total risk and return of your corporation. The projects are expected to result in the following(in thousands):Net Present Value of Standard Company Deviation Existing projects only $6,000 $3,000 Plus project 1 7,500 4,500 Plus
The risk-free rate presently is 6 percent, and the expected return on the market portfolio 11 percent. Using the CAPM approach, what required returns on investment would you recommend for these two divisions?
The company has thought about using the capital asset pricing model in this regard. It has identified two samples of companies, with the following mode-value characteristics:Debt/lofal Tax Beta Capitalization Ratio Rate Health Foods .90 .50 .40 Specialty Metals 1.25 .30 .40
3. Novus Nyet Company has two divisions: Health Foods and Specialty Metals.Each of these divisions employs debt equal to 30 percent of its total requirements, with equity capital used for the balance. The current borrowing rate is 8 percent, and the company's tax rate is 40 percent. Novus Nyet
2. Silicon Wafer Company presently pays a dividend of $1. This dividend is expected to grow at a 20 percent rate for 5 years and at 10 percent per annum thereafter. The present market price per share is $20. Using a dividend discount model approach to estimating capital costs, what is the company's
1. Determine the required return on equity for the following project situations, using the capital asset pricing model.C h a p t e r 8 C r e a t i n g V a l u e t h r o u g h R e q u i r e d R e t u r n s 231 Expected Return Risk-Free Situation Market Portfolio Rate Beta What generalizations can
4. Derive the required rate of return on equity using the proxy beta obtained in step 3, together with the expected return on the market portfolio, fZ,, and the risk-free rate, Rf.
3. Calculate the central tendency of the betas of the companies in the sample.Often the median is the best measure to use, because the arithmetic average is distorted by outliers. Sometimes a modal value will be best. In still other cases you may wish to weight the betas on the basis of the
2. Obtain the betas for each proxy company in the sample, if the CAPM is being used. These betas can be obtained from a number of services, in-%MichaeCl . Ehrhardt and Yatin N. Bhagwat, "A Full-Information Approach for Estimating Divisional Betas,"Financial Ma~~agemen2l0. (Summer 1991), 6049,
1. Determine a sample of companies that replicate as nearly as possible the business in which an investment is being contemplated. The matching will only be approximate.
While the option value raises the worth of the project substantially, it does not entirely offset the initial project's negative NPV. Therefore, we still would reject the project.
b. Option value = .3($5.51) + .3($1.94) + .4(0)= $2.23 million Worth of project = -$2.57 + $2.23= -$.34 million
a. At time 0, the initial project has an NPV of -$2.57 million, and it . ~would be rejected.
The coefficient of variation of existing projects (u/NPV) = 18,112/46,000 = .39. The coefficient of variation for existing projects plus puddings= 22,659/58,000 = .39. Although the pudding line has a higher coefficient of variation (9,000/12,000 = .75) than existing products, indicating a higher
b. Net present value = $46,000 + $12,000 = $58,000 Standard deviation = [328,040,000 + (9,000)2+ (2)(.4)(9,000)(8,000)+ (2)(.2)(9,000)(7,000)+ (2)(.3)(9,000)(4,000])'/ ' = [513,440,000]112= $22,659
2.a. Net present value = $16,000 + $20,000 + $10,000 = $46,000 Standard deviation = [(8,000)2 + (2)(.9)(8,000)(7,000)+ (2)(.8)(8,000)(4,000) + (7,000)2+ (2)(.84)(7,000)(4,000)+ (4,000)2]1/2= [328,040,000]1'2 = $18,112
c. From Table C, these standardized differences correspond to probabilities of approximately .38, .45, and .12, respectively. The standard deviation calculated under this assumption is much larger than it would be under an assumption of independence of cash flows over time.
b. The standard deviation of the probability distribution of possible net present values under the assumption of perfect correlation of cash flows over time is
1.a. The expected values of the distributions of cash flows for the three periods are $400,000, $700,000, and $300,000. The standard deviations of the cash flows for the three periods are
a. What are the implications?
b. Suppose now that the possibility of abandonment exists and that the abandonment value of the project at the end of year 1 is $4,500. Calculate the new mean NPV, assuming the company abandons the project if it is worthwhile to do so. Compare your calculations with those in part
a. Calculate the mean of the probability distribution of possible net present values.
To go regional at the end of the 3 years would cost another $10 million. To distribute regionally from the outset would cost $12 million. The risk-free rate is 4 percent. In either case, the product will have a life of 6 years, after which the plant will be worthless. Given the graphical
9. The Kazin Corporation is introducing a new product, which it can distribute initially either in the state of Georgia or in the entire Southeast. If it distributes in Georgia alone, plant and marketing will cost $5 million, and Kazin can reevaluate the project at the end of 3 years to decide
b. What is the value of the option? the worth of the project with the option?Is it acceptable?
a. Is the initial project acceptable?
Pet will be able to expand by another 100 cages at the end of 4 years. The cost per cage would be $200. With the new cages, incremental net cash flows of $17,000 per year for years 5 through 15 would be expected. The company believes there is a 50-50 chance that the location will prove to be a
8. The Ferret Pet Company is considering a new location. If it constructs an office and 100 cages, the cost will be $100,000 and the project is likely to produce net cash flows of $17,000 per year for 15 years, after which the leasehold on the land expires and there will be no residual value. The
b. Which portfolios dominate?
a. Plot the portfolios.
7. The Plaza Corporation is confronted with several combinations of risky investments.Net Present Old Portfolio Value u Chapter 7 Risk and Real Options in Capital Budgeting 193 Net Present New Portfolio Value a
which two proposals dominate?Proposal and2 1 and 3 2 and 3 1.00 .60 .40 .70
Expected net present value 1 $10,000 $8,000 $6,000 Standard deviation 1 4,000 3,000 4,000 Assuming the following correlation coefficients for each possible combination,
6. The Windrop Company will invest in two of three possible proposals, the cash flows of which are normally distributed. The expected net present value(discounted at the risk-free rate) and the standard deviation for each proposal are given as follows:Proposal
e. What decision rule would you suggest for adoption of projects within this context? Which (if any) of the foregoing projects would be adopted under your rule?
d. What is the probability that each of the projects will have a net present value greater than O?
c. May size be ignored?
b. Ignoring size, do you find some projects clearly dominated by others?
a. Determine the coefficient of variation for each of these projects. (Use cost plus net present value in the denominator of the coefficient.)
Use of IT; Analytical reasoning) pg93
show. What competitive advantage does the show pg93 have over existing shows? How many and which differences would you promote? (AACSB: Communication;Reflective thinking) pg93
7-4 Explain how a company differentiates its products from competitors’ products. (AACSB: Communication) pg93
7-3 Explain how companies segment international markets.(AACSB: Communication) pg93
7-2 Compare and contrast consumer and business market segmentation. (AACSB: Communication) pg93
7-1 Name and describe the four major steps in designing a customer-driven marketing strategy. (AACSB:Communication) pg93
6-13 How would other company employees interpret your acceptance of this invitation? pg93
6-12 Do you think the supplier will expect ‘special’ treatment in the next buying situation? pg93
6-10 Do you accept or decline the invitation? pg93
6-3 Discuss the major influences on business buyers.(AACSB: Communication) pg93
➤ Objective 3 List and define the steps in the business buying decision process. pg93 pg93E-procurement and online purchasing (pp. 179–180) pg93
5. What role does the Porsche brand play in the self-concept of its buyers? pg93
3. Which concepts from the chapter explain why Porsche sold so many lower-priced models in the 1970s and 1980s? pg93
1. Analyse the buyer decision process of a traditional Porsche customer. pg93
5. The Hume Corporation is faced with several possible investment projects. For each, the total cash outflow required will occur in the initial period. The cash outflows, expected net present values, and standard deviations are as follows.(All projects have been discounted at a risk-free rate of 8
c. What is the risk of the project?
b. Calculate a net present value for each three-year possibility, using a risk-free rate of 5 percent.
a. Set up a probability tree to depict the foregoing cash-flow possibilities.
Management attaches a 40 percent probability to this occurrence, given the fact that the new technology "bombs out" in the first year. If the technology proves itself, second-year cash flows may be either $1,800, $1,400, or $1,000, with probabilities of .20, .60, and .20, respectively.In the third
4. Xonics Graphics is evaluating a new technology for its reproduction equipment.The technology will have a 3-year life and cost $1,000. Its impact on cash flows is subject to risk. Management estimates that there is a 50-50 chance that the technology will either save the company $1,000 in the
c. Assuming a normal distribution, what is the probability the actual net present value will be less than zero?
b. If the risk-free rate is 10 percent, what are the mean and standard deviation of the probability distribution of possible net present values?
a. What are the joint probabilities of occurrence of the various branches?
3. Ponape Lumber Company is evaluating a new saw with a life of 2 years. The saw costs $3,000, and future after-tax cash flows depend on demand for company's products
e. What is the probability that the profitability index will be 1.00 or less?f. What is the probability that the profitability index will be greater than 2.00?
d. What is the probability that the net present value will be greater than zero?
c. If the total distribution is approximately normal and assumed continuous, what is the probability of the net present value being zero or less?
b. Determine the standard deviation about the mean.
a. Assume that probability distributions of cash flows for future periods are independent. Also, assume that the risk-free rate is 7 percent. If the proposal will require an initial outlay of 55,000, determine the mean net present value.
2. The Dewitt Corporation has determined the following discrete probability distributions for net cash flows generated by a contemplated project
1. The probability distribution of possible net present values for project X has an expected value of $20,000 and a standard deviation of $10,000. Assuming a normal distribution, calculate the probability that the net present value will be zero or less; that it will be greater than $30,000; and
b. What is the worth of the project if we take account of the option to expand?Is the project acceptable?
a. What is the net present value of the initial project? Is it acceptable?
3. Feldstein Drug Company is considering a new drug, which would be sold over the counter without a prescription. To develop the drug and to market it on a regional basis will cost $12 million over the next 2 years, $6 million in each year. Expected cash inflows associated with the project for
b. Compute the expected value and standard deviation for a combination consisting of existing products plus pudding. Compare your results in parts a andb. What can you say about the pudding line?
a. Compute the expected value and the standard deviation of the probability distribution of possible net present values for a combination consisting of existing products.
c. Is the standard deviation calculated larger or smaller than it would be under an assumption of independence of cash flows over time?
b. Assuming a normal distribution, what is the probability of the project providing a net present value of (1) zero or less? (2) $300,000 or more?(3) $1,000,000 or more?
a. Assuming that the risk-free rate is 8 percent and that it is used as the discount rate, calculate the expected value and standard deviation of the probability distribution of possible net present values.
3. The option to postpone, also known as an investment timing option. For some projects there is the option to wait, thereby obtaining new information.
2. The option to abandon. If a project has abandonment value, this effectively represents a put option to the project's owner.
1. The option to vary output. An important option is to expand production if conditions turn favorable and to contract production if conditions turn bad. The former is sometimes called a growth option, and the latter may actually involve the shutdown of production.
10. An investment has an outlay of $800 today, an inflow of $5,000 at the end of 1 year, and an outflow of $5,000 at the end of 2 years. What is its internal rate
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