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intermediate financial management
Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions
(Computing the cost of common equity) Quba Media Plc is issuing new ordinary shares at a market price of £32 each. Last year they paid dividends of £1.20 per share. Analysts expect the dividends to grow at an annual rate of 6 percent forever.What is Quba’s cost of common equity capital?
(Computing the cost of common equity) (Related to Checkpoint 14.2 on page 490)Tamlin Semiconductors Limited is based in Singapore and specializes in the design and manufacturing of high-end miniature camera circuits used in smartphones. They are planning to expand their existing factory and expect
(Computing individual or component costs of capital) Compute the cost of capital for the firm for the following:a. Currently, new bond issues with a credit rating and maturity similar to those of the firm’s outstanding debt are selling to yield 8 percent, while the borrowing firm’s corporate
(Computing individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation.a. Cost of debt: Because Mindflex’s bonds do not trade very frequently, you have decided to use 7 percent as your
(Computing individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:a. A bond that has a $1,000 par value (face value)
(Computing individual or component costs of capital) Compute the cost of capital for each of the following sources of financing:a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. Interest payments are $55.00 and are paid semiannually. The bond
(Defining capital structure weights) In August 2015 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) was as follows:($ Millions) Book Value Market Value Short-term debt $ 2,553 $ 2,553 Long-term debt 4,289 4,289 Common equity 8,081 35,690 Total
(Defining capital structure weights) Apex Builders Ltd. is a Hong Kong–based reputed property developer with a portfolio of projects around the territory. The government has recently approved parts of Lantau Island, which is near Hong Kong, for housing estate development. Apex has decided to
The return provided by Treasury bonds is considered as risk-free return and provides a basis to compare the return offered by corporate bonds. Refer to Figure 14.3, which shows yields to maturity for corporate bonds for different maturities and default ratings. Calculate the spread to Treasury for
Explain the rationale given for the differences we observe in interest rates among countries discussed in Finance in a Flat World: Why Do Interest Rates Differ Among Countries? on page 500.
In the chapter introduction, we discussed the Starbucks (SBUX) acquisition of Seattle’s Best Coffee Company in 2003. Discuss the relevance of Seattle’s Best’s WACC as the opportunity cost of funds that should be used in valuing the acquisition. What if Starbucks planned to finance the entire
The central bank of the United Kingdom, the Bank of England, announced its decision to reduce its bank rate from the existing 0.5 percent to a new 0.25 percent in August 2016. It was estimated that this will further release £170 billion into the economy by making government bonds less attractive
Companies that face large investments that they cannot finance internally through the retention of earnings must go to the financial markets to raise the needed funds.When they do this, they will incur what are commonly referred to as flotation costs.Discuss how these flotation costs should be
Divisional WACCs are the most popular method used in practice to risk adjust the cost of capital. Describe how you might go about estimating divisional WACCs.What are the pros and cons of using divisional WACCs?
In theory, every project should be assessed using a discount rate that has been risk adjusted for that specific project. What are the practical limitations to this theoretical expectation for corporates who deal with multiple projects at the same time?
Looking back at Regardless of Your Major: Understanding the Role of the Cost of Capital on page 478, what should be the opportunity cost of funds in valuing the cash flows from the ownership of a McDonald’s franchise? How would you respond to your friend after having read the entire chapter?
What are the basic sources of financing included in a firm’s capital structure? Specifically, what financing sources are excluded from the firm’s capital structure when calculating firm WACC?
Describe the three-step process for estimating WACC.
What is a firm’s WACC?
How can flotation costs be incorporated into project analysis?
What are flotation costs, and how do they affect a firm’s cost of raising capital?
What are divisional WACCs, and how do they address the problems encountered in using a single, company-wide WACC?
What is the main problem that firms encounter when using the firm’s WACC as the cost of capital for all their investment analyses?
Why are current costs and required rates of return used when estimating a firm’s WACC instead of historical costs?
Why do we use market values as the basis for the weights used in calculating the WACC?
Describe the two approaches that can be taken to estimate the cost of common equity
How is the cost of new preferred stock estimated?
How can we estimate the cost of new debt financing?
Why are accounts payable not included in the capital structure used to estimate a firm’s WACC?
Should book or market values be used to determine the weights used in calculating the WACC? Explain.
List the three-step procedure used to estimate a firm’s weighted average cost of capital.
Why is the firm’s cost of capital calculated as a weighted average?
How is an investor’s required rate of return related to the firm’s cost of capital?
Adjust the NPV for the costs of issuing new securities when analyzing new investment opportunities.
Discuss the pros and cons of using multiple, risk-adjusted discount rates and describe the divisional cost of capital as a viable alternative for firms with multiple divisions.
Calculate a firm’s weighted average cost of capital.
Calculate the after-tax cost of debt, preferred stock, and common equity
Evaluate a firm’s capital structure and determine the relative importance (weight) of each source of financing.
Understand the concepts underlying the firm’s overall cost of capital and the purpose for its calculation.
What is sensitivity analysis, and what is its purpose?
How can break-even analysis be helpful in evaluating project risk?
Explain how simulations work. What is the value of using a simulated approach?
What are real options? How does the presence of optionality in an investment that the firm makes cause the traditionally calculated NPV of a project to be underestimated?
Explain how sensitivity analysis and scenario analysis are useful tools for evaluating project risk?
(Incorporating real options in capital budgeting) Jake is the project manager for a 10-year project which is in its sixth year. All the upfront funding has been spent and the project is now running out of cash. The projections suggest that without some significant change, they can only pay salaries
(Incorporating real options in capital budgeting) (Related to Checkpoint 13.5 on page 465) You are considering introducing a new Tex-Mex–Thai fusion restaurant. The initial outlay for this new restaurant is $6 million, and the present value of the free cash flows(excluding the initial outlay) is
(Identifying real options) GB Motors is considering a new project to produce gear box units for its van manufacturing business. Currently, these gear box units are procured from its supplier in Poland. The project is expected to be funded by borrowing long-term debt from its existing banker. As
(Using degree of operating leverage) See Study Problem 13-11. Mishkin’s friend who is an accountant has suggested that he should consider the one-off deposit for the workshop as an upfront cash payment and not as spread over twelve months. How many units of his wooden buses does Mishkin need to
(Using degree of operating leverage) See Study Problem 13-8. The marketing manager of MCN Ltd. has estimated that it can sell 160,000 units per year at an average price of £13 each. What impact will it have on the firm’s NOI for the year?
(Using break-even analysis) Mishkin is planning to make wooden replicas of the iconic double-decker London buses and sell these to local souvenir retailers in London. He has negotiated a price of £40 per bus which will require a variable cost of £25 per unit. He will also need to rent a workshop
(Using break-even analysis) (Related to Checkpoint 13.4 on page 457) Mayborn Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing whether to start a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its
(Using break-even analysis) (Related to Checkpoint 13.4 on page 457)Project Accounting Break-Even Point (in units) Price per Unit Variable Cost per Unit Fixed Costs Depreciation A 6,250 $55 $100,000 $ 25,000 B 750 $1,000 $500,000 $100,000 C 2,000 $ 20 $15 $ 5,000 D 2,000 $ 20 $ 5 $ 15,000a.
(Using break-even analysis) (Related to Checkpoint 13.4 on page 457) MCN Ltd.Is considering whether to construct a new production facility for its memory cards.This new production facility will require an initial outlay of £800,000, will last for five years, and will be depreciated down to zero
(Conducting a comprehensive risk analysis) (Related to Checkpoint 13.2 on page 447 and Checkpoint 13.3 on page 451) Blindfold Technologies Inc. (BTI) is considering whether to introduce a new line of hand scanners that can be used to copy material and then download it into a computer. These
(Using scenario analysis) (Related to Checkpoint 13.3 on page 451) Family Security is considering introducing a tiny GPS tracker that is inserted in the sole of a child’s shoe, which would then allow for the tracking of that child if he or she was ever lost.You have prepared the following
(Calculating the expected NPV of a project) Managers at the Physicians’ Bone and Joint (PB&J) Clinic are considering whether to purchase a newly developed MRI machine that the manufacturer tells them will provide the basis for better diagnoses of foot and knee problems. The new machine is quite
(Forecasting revenues using scenario analysis) (Related to Checkpoint 13.3 on page 451) Floating Homes, Inc., is a manufacturer of luxury pontoon and houseboats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three
(Forecasting cash flows using the expected value) Rao Roofing of Stillwater, Oklahoma, is also considering the acquisition of Simpkins Storage Company. Rao’s management team has analyzed the annual cash flows for Simpkins and come up with these estimates for the three states of the
(Forecasting cash flows using the expected value) (Related to Checkpoint 13.1 on page 444) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch’s CFO estimates that during the next year LH Transport’s flows from the acquisition will vary
(Calculating expected revenues) (Related to Checkpoint 13.1 on page 444) The owner of the Petreno Pharmaceuticals Company is evaluating the expected annual sales for a new line of facial care products and estimates that there is a 60 percent chance that the product line will be extremely
A project to build a new bridge with 50 percent government funding commenced operations three months ago. You have just found out that the government funding may be delayed by up to six months. Which real options considerations might be appropriate?
What is the difference between accounting break-even and NPV break-even? Which will offer the higher break-even level of output, and why?
Describe each of the five steps involved in carrying out a simulation analysis to assess project risk.
Finance in a Flat World: Currency Risk on page 454 discussed the currency risk that multinational firms face. Between July 2008 and December 2009, the value of the yen relative to the U.S. dollar went up by about 17 percent, and as a result, when companies traded dollars for yen, they got fewer
Which of the following sentences is true?a. A sensitivity analysis will use repetition to test the validity of a risky project.b. A simulation analysis will use repetition to test the validity of a risky project.c. A scenario analysis will use repetition to test the validity of a risky project.
What is the objective of project risk analysis, and why is it critical to the investment decision-making process?
Regardless of Your Major: Project Risk for Entrepreneurs on page 442 discussed the risks that entrepreneurs face, with about 40 percent of new businesses shutting their doors during their first year. If you had to pick a business to start, what would it be, and what type of risks might you face?
What is an option to contract an investment? When would you expect this type of option to be most valuable?
What is an expansion option?
Define timing options, and describe how they add value to investments.
What are real options, and how do they relate to the notion of managerial flexibility?
What is operating leverage?
What is NPV break-even analysis, and why does it differ from accounting break-even analysis?
What is accounting break-even analysis?
Explain the concepts of fixed and variable costs. Which is an indirect cost, and which is a direct cost?
Describe the five-step process used to carry out simulation analysis. How is simulation analysis similar to scenario analysis?
Describe scenario analysis, and contrast it with sensitivity analysis.
What is sensitivity analysis, and how does an analyst use this tool to evaluate the risk of project cash flows?
What are value drivers, and how are they important in the analysis of project risk?
Describe the types of real options.
Use break-even analysis to evaluate project risk.
Use sensitivity, scenario, and simulation analyses to investigate the determinants of project cash flows.
Explain the importance of risk analysis in the capital-budgeting decision-making process.
(Computing depreciation) The Mason Falls Manufacturing Company just acquired a depreciable asset this year, costing $500,000. Furthermore, the asset falls into the seven-year property class using the MACRS.a. Using the MACRS, compute the annual depreciation.b. What assumption is being made about
(Computing depreciation) Compute the annual depreciation for an asset that costs$250,000 and is in the five-year property class. Use the MACRS in your calculation.
Should the project be accepted? Why or why not?
What is the internal rate of return?
What is the project’s NPV?
Sketch out a cash flow diagram for this project.
What will be the project’s initial cash outlay?
What are the incremental cash flows for the project in Years 1 through 5, and how do these cash flows differ from accounting profits or earnings?
Why should Soya Foods focus on the project’s free cash flows as opposed to the accounting profits it would earn when analyzing whether to undertake the project?
What are NPV, internal rate of return, and profitability of this project, both including cash flows from existing games(Exhibit 1) and excluding cash flows resulting from sales diverted from the existing games (Exhibit 2)? Under the assumption that there is a good chance that competitors would
If debt was used to finance this project, should the interest payments associated with this new debt be considered cash flows?
Would you suggest that the cash flow resulting from the replacement of existing sales from the existing games be included as a cash inflow? If there was a chance that this cash flow would be lost to other competitors if WGM does not introduce Snapworld, would this affect your answer?
Would you suggest that Snapworld should be charged for the use of the existing team of developers and building space?
What would your opinion be as to how to deal with the question of working capital?
If you were put in the place of Peter Jung, would you argue for the cost of beta testing to be included in the cash flow?
(Calculating replacement project cash flows) The Louisiana Land and Cattle Company (LL&CC) is one of the largest cattle buyers in the country. It has buyers at all the major cattle auctions throughout the U.S. Southeast who buy on the company’s behalf and then have the cattle shipped to Sulpher
(Calculating replacement project cash flows) The Minot Kit Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a used cutter it purchased four years ago.The cutter has a remaining $80,000 book value that
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