Questions and Answers of Principles Managerial Finance

Volkswagen AG (VW) uses a maximum payback period of 4 years and currently must choose between two mutually exclusive electric car projects. Project Crozz requires an initial outlay of €25,000,000;
RII, a Japanese electronic accessories firm, uses the internal rate of return (IRR) to select projects. Project RK100 Rubber Keyboard requires an initial investment of ¥1,000,000 and generates cash
Conad, an Italian supermarket chain, is considering two mutually exclusive projects. Each project requires an initial investment (CF0) of €1,000,000. Francesco Pugliese, the general director of
Francesco Giovanni’s business partner, Pepino, has proposed that they invest in a coffee shop. This investment costs €90,000 today and promises to pay €22,000, €25,000, €25,000, €20,000,
Diamantis Masoutis S.A. is considering the following 10-year projects. Comment on the acceptability of each project. Assume that the firm has a cost of capital of 5%.a. Initial investment is
The BMW Group is considering the replacement of one of its car-manufacturing robot lines. Three alternative replacement robot lines are under consideration. The relevant cash flows associated with
Internal rate of return Sigma is an insurance company based in Albania. Altin, a product manager, is responsible for evaluating the viability of a new insurance product, which covers electronic
Wesfarmers, an Australian conglomerate, is considering investing in a project that has the following unusual cash flow pattern.a. Calculate the project’s NPV at each of the following discount
Woolworths Ltd. is evaluating the feasibility of investing A$1,000,000 in a new store in Sydney, having a 5-year life. The firm has estimated the cash inflows from the proposed store, as shown in the
Apart from opening a new store in Sydney, Woolworths Ltd. is also considering opening a store in Canberra. Like the Sydney store, this store will have the same initial cost of A$1,000,000. The
BP is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table.a. Why is it difficult to calculate the payback
Hoffmann-La Roche is considering purchasing a capsule counting and packing machine for €5,500,000 and incurs an additional €130,000 in installation expenses. It is replacing older machines that
Omni Motors is considering buying new equipment with an initial investment value of $30,000. The equipment has a 5-year life and no residual value at the end of the 5 years. There are many
Mulliri Vjeter, an Albanian coffee shop chain, uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale
Kubi Software Inc., based in Turkey, has hired Rezart to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, Gamma and Beta. The cash flows for each
Luxottica Group spent 2 years and €1,000,000 to develop its new line of folding eyewear to replace an older line. To begin manufacturing them, the company will have to invest €2,500,000 in new
Hans has been living in his current apartment in the Helmholtzkiez neighborhood in Berlin for the past 10 years. During that time, he has replaced the coffee maker for €300, has replaced the
Novartis International AG is considering replacing one labeling system with a new model. The old system was purchased 2 years ago for an installed cost of CHf 500,000. The firm is depreciating the
Michele operates a local tourist agency. He has been using an Olivetti personal computer (PC) for several years and believes it is time to buy a new one. He would like to know the operating cash
Hoffmann-La Roche is considering replacing one permeability test equipment with a new model. The old equipment is fully depreciated and would last 3 more years. The new equipment is expected to have
Central Laundry is replacing an existing piece of machinery with a new model. The old machine was purchased 3 years ago for $50,000 and was being depreciated under MACRS, using a 5-year recovery
Pirelli & C. S.p.A. is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and the other products used in the process of tire manufacturing. This line will
Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), one of the world’s largest semiconductor foundries, is considering building a new production facility close to one of its main business partners.
Novartis International AG, a global healthcare company based in Switzerland, is considering producing either a generic multivitamin or a specific blend of vitamins A, C, and D. Novartis expects both
Mayflower Interiors is considering investing in one of three mutually exclusive projects, X, Y, and Z. The firm’s cost of capital, r, is 13.5% and the risk-free rate, RF, is 10%. The firm has
Diane Smith is interested in two mutually exclusive investments. Both investments have a time horizon of 8 years. The first investment opportunity requires an initial investment of $10,000, to
Roots to Branches Corp., a company specializing in event décor, is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its
Patek Philippe & Co. is attempting to select one of three mutually exclusive projects for the redesign of its classic watches: Nautilius, Grand Complications, and Calatrava. Although all the
Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research,
Suppose Dave Marberger, the CFO of Godiva Chocolatier, has just completed an evaluation of a proposed capital expenditure for the expansion of the firm’s chocolate factory in Brussels. Using the
Hotel Amazing is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $5.5 million. Management recognizes that any unused portion of
In less than three decades, China has become the second largest economy in the world. But this rapid growth has led to a lot of environmental and health issues. These developments have placed
Rio Mare currently has fixed operating costs of €1,100,000, and it sells canned tuna for €1.50 per can, while incurring variable operating costs of €0.65 per can. If the company can invest in
Shaga shpk is an Albanian company that produces and sells furniture. Last year it had sales of 2,000 units at a price of L12,000 per unit (Albania’s currency is Albanian lek, L). It faced fixed
The Golf Shop needs to forecast the number of a specific golf set it needs to sell to break even. The golf set sells for $1,250 per set. The fixed operating costs are $21,000 while the variable
Jaipur Rugs, FabIndia, and Ashok Carpets are three carpet and rug manufacturing companies in India. Based on the information in the table below, answer the questions that follow:a. What is the
Anke Perks is opening an arts and crafts store that focuses on canvases, paints, and pencils. Each canvas is sold for $24. The variable operating costs are $14 per canvas while the fixed operating
Anki is a Finnish manufacturer of rugs. Last year, it sold rugs for €350, with a variable operating cost of €200 per rug and a fixed operating expense of €1,050,000.a. How many rugs must Anki
Antonio and his friend, Giancarlo, are both talented painters. Last year they began painting original artistic postcards, which they gave to their friends as holiday gifts. In addition, they began
Olivetti Corporation has fixed operating costs of €850,000, variable costs of €350 per unit of personal computers (PC) produced, and a selling price of €550 per unit.a. Calculate the operating
Margaret has just received an MS degree from Oxford University. She has outstanding school loans that require a monthly payment of £800. She wants to rent a small apartment in London near her new
Profarma shpk, an Albanian pharmaceutical company, makes a patented flu medicine that wholesales for L600. Each bottle of the flu medicine has variable operating costs of L400, while fixed costs are
Altin Greene is looking to buy a new apartment in Tirana, the capital of Albania. He visits Credins Bank and reviews all the data that is required to get a loan. He must submit his personal financial
Barrilla Group’s CEO has made the forecast of sales as shown in the following table.The company has fixed operating costs of €1,500,000 and variable operating costs of 75% of the sales level. The
Geniaware is considering two capital structures. The key information is shown in the following table. Assume a 24% tax rate.a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT
Suppose SpazioDatti is considering adding preferred stock to its capital structures. The key information is shown in the following table. Assume a 24% tax rate.a. Calculate the EBIT-EPS coordinates
Theodora works as a financial analyst for Berrios S.A., a construction company headquartered in Athens, Greece. She has been asked to make an analysis of the possibilities of optimizing the capital
Attica Group, a transportation company, has fixed operating costs of €250,000 and variable costs of 60% of sales. It has made the following sales estimates, with the probabilities noted.The company
Royal Mail Group, a British postal services provider, pays regular dividends. It declared a dividend of £0.077 per share for its shareholders on record on December 7. The Group has 1 million shares
Legal & General, an insurance company, has the following stockholders’ equity account:Assuming that laws and regulators in the United Kingdom define legal capital solely as the par value of
Legal & General, with the equity account as described in E14-3, announces its plans to issue an additional 58,710 shares of common stock as part of its stock dividend plan. The current market price
Steel Enterprises’ earnings per share for the period 2013–2020 are summarized in the table below. Use this information to calculate the dividends per share for each of the years and scenarios
Luxottica, an Italian eyewear company, has the following stockholders’ equity account. The firm’s common stock currently sells for €40 per share.a. Show the effects on the firm of a cash
Brembo, an Italian automotive braking-systems supplier, announced that it was going to split the stock 5-for-1. Brambilla Fumagalli owns 100 shares of the company, which he had purchased for €40
The board of Diamantis Masoutis S.A. is considering increasing the number of shares, and making the price more appealing to investors. It is considering either a 30% stock dividend or a 2-for-1 stock
The following data are available on Volkswagen AG as of December 22, 2017:The firm’s board is currently considering whether it should use €295,000,000 of its earnings to pay cash dividends of
Heidelberg Cement, one of the world’s largest building materials companies is concerned about preserving the wealth of its stockholders during a cyclical downturn in the building and construction
Rajasthani Umbrella is a seasonal business that sells umbrellas. At the peak of its rainy selling season, the firm has INR 2,500,000 in cash, INR 3,600,000 in inventory, INR 400,000 in accounts
The Furniture Corporation turns over its inventory 7 times a year, has an average collection period of 45 days, and has an average payment period of 30 days. It has annual sales of $5 million and
Alessandro is a successful soccer player. He is considering buying a new Porsche. There are two options available: the new Porsche Panamera and the Porsche Boxter. Whichever model he chooses he plans
Germanos Group is evaluating an accounts receivable change that would increase bad debts from 5% to 10% of sales. Sales are currently 100,000 units of batteries, the selling price €25 per unit, and
Uneblej.com is an online retail company, which operates in Albania. It has daily cash receipts of L150,000. Its CFO is analyzing the time it takes for the collection of the customers’ payment to
Aditya Birla Retail Limited, an Indian retail company, is considering a lockbox system that can shorten its accounts receivable collection by 1 day.Credit sales are INR 550,000,000 per year, billed
Alumina Ltd. is considering establishing a zero-balance account. The company currently maintains an average of A$1,380,000 in its disbursement account. As compensation to the bank of maintaining the
Dream Cakes bought some baking ingredients costing $12,500 on credit. The credit terms are 2.5/5 net 30 EOM. If Dream Cakes pays the invoice within 5 days after the purchase, how much should it pay?
Diamantis Masoutis S.A., a Greek supermarket chain, borrowed €250,000 under a line-of-credit agreement. Although the company normally maintains a checking account balance of €15,000 in the
Antonio is considering renovating his apartment in Milan. He visits Meridiani and looks at different bedroom furniture sets. The bedroom sets are generally very expensive, and even though he has the
Brembo, an Italian automotive braking-systems supplier, has three alternative carbon ceramic suppliers, all of which offer different terms.Except for the different credit terms, their products are
After consultation with its employees, Sunshine Company decides to switch the employee pay period to biweekly instead of weekly. Sunshine’s weekly payroll is $925,000. The annual cost of funds is
Lifestyle International, a wholesales company in India, is looking to get a loan using its accounts receivable as collateral. The firm’s credit extension is net-30-day credit. The amounts that are
Heidelberg Cement factors the accounts of Titan Cement. All five factored accounts are shown in the following table, with the amount factored, the date due, and the status on November 30. Indicate
Which legal form of business organization is most common? Which form do the largest businesses typically take and why?
Explain why corporations face a double taxation problem? For corporations, how are the marginal and average tax rates related?
You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments toward
The Quickclick Media Ltd. announced that the profit for the previous year is twice the amount earned in the previous year, an improvement from the projected numbers. The chief human resources officer
The chief financial officer (CFO) of New Age Fashion Ltd. has just received a request from a project manager to authorize an expenditure in the amount of £45,000. The manager states that this
Premier Baking Ltd. has recently appointed a new CEO to run its bakery business, which supplies to supermarkets and restaurants. The new CEO has instituted a new compensation policy and dropped the
Eastern Trading Company has a pretax trading profit of €250,000. Britain has a flat corporation tax rate of 19% on trading profits while Ireland has a flat rate of 12.5% on trading profits. As
The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the end of the financial year, the dealer still owed The Motor Corporation $350,000. The cost of the
Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system. The new system would require an initial cash outlay of $250,000. The current system could be
You are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson Corporation. To obtain all the stock of Nelson
Southern Textile Ltd. is a manufacturer of sportswear that supplies to a number of European retail stores. Its registered office is in Singapore. During 2017, the firm earned SGD 112,000 before
Depot Logistics Inc. has declared pretax income from its operations for the year of $560,000. In addition, it also received interest payment of $40,000 on bond stock held in Warehouse PLC. During the
Derwent Ltd. has announced that the earnings before income and taxes is going to be £300,000 for the current year. Assuming corporate tax rate for Derwent Ltd. is a flat 30%, compute the firm’s
One of the key risk areas that corporates need to manage is “ethical risks.” Do you think that management of ethical risks is as important for businesses as management of financial risks? Explain
Who are the key customers of financial institutions? Who are net suppliers, and who are net demanders of funds?
What is a private placement versus a public offering?
What is the difference between an angel investor (angel) and a venture capitalist (VC)?
Transaction costs Assume that you use a TD Ameritrade brokerage account and place your stock trades through the Interactive Voice Response (IVR) Phone System, which charges a $34.99 commission per
FastFood Ltd. manufactures vending machines for schools. To meet the increasing demand, FastFood decides to build a new factory. The company requires £5 million to expand production. How do you
What are the sources of short-term funding available to large corporations? Differentiate these sources from those needed to raise funds for a long-term capital investment.
There is a renewed interest in the extent to which government regulations can be incorporated in corporate governance and financial markets and institutions. There are various arguments both in favor
Dean Drones Ltd., based in Hong Kong, has 1 million shares outstanding. The firm is planning on issuing an additional 100,000 shares at an offer price of $5 by way of crowdfunding. They have engaged
Three of your former classmates from the University of London have started a business—supplying custom-made construction materials (like pre-fabricated bathroom units) to construction companies and
You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager gives you the following list of accounts and asks you to prepare a
Ocean Terminal Company Ltd. started its business in 2019 with retained earnings of $68.45 million. It paid two semiannual dividends of $0.23 per share to 3.25 million preferred stockholders during
Crane Housing PLC has a current ratio of 2.5 and total current assets worth £5 million. Crane housing also has some long-term borrowings where the bank has stipulated that the current ratio of the
Geotherm Energy Ltd. has a net profit margin of 6%, a financial leverage multiplier of 1.5, and a total asset turnover of 1.2. What is the ROE? What is the advantage of using the DuPont system to
On January 1, 2019, Belle Florist opened a store in an upmarket area of Soho, London. The business is owned by Boris Kimmel, the sole proprietor. During the year, Boris has kept a record of all
Parsons Electronics Inc. ended 2017 with a net profit before taxes of €560,000. The company is subject to a 20% tax rate and must pay €50,000 in preferred stock dividends. The balance sheet shows

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