Questions and Answers of Principles Managerial Finance

Currently under consideration is an investment with a beta, b, of 1.50. At this time, the risk-free rate of return, RF, is 7%, and the return on the market portfolio of assets, rm, is 10%. You
Suppose you are the fund manager of a portfolio that has three asset classes. U.S. government T-bills account for 25% of the portfolio, large-company stocks constitute 50%, and small-company stocks
Stephen So, the financial manager for Cathay Pacific In corporation, wishes to evaluate three prospective investments: A, B, and C. Stephen will evaluate each of these investments to decide whether
Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown
Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech, Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is
Christine Law is the Chief Investment Officer for Elite Investment Company. She is now calculating the equity value of Rays Food Company. She compiled the following dividend information for the
Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.The following financial data are also
Randy & Wiskers Enterprises reported sales of $15.5 million for the 2015 financial year. In order to identify the financial needs for the 2016 financial year, you were requested to compile a pro
Basic Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2016. The firm expects 2016 sales to total $3,000,000. The following information has been gathered:(1) A minimum
Allen Products, Inc., wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic
Expected return, standard deviation, and coefficient of variation Three assets—F, G, and H—are currently being considered by Perth Industries. The probability distributions of expected returns
Quick Profit Entity is considering a capital expenditure that requires an initial investment of $84,000 and returns after-tax cash inflows of $7,000 per year for 20 years. The firm has a maximum
NPV for varying costs of capital Empire Hotel is considering acquiring new flat-panel displays to replace the antiquated computer terminals at the registration desk. The new computer displays require
Almost all firms have to deal with limited financial resources and therefore cannot undertake all positive NPV projects. Based on the information provided at MFL, use a spreadsheet to rank various
In addition to using NPV to elevate projects, most firms also use IRR. Based on the information provided at MFL, use a spreadsheet to rank various projects based on their IRRs.
Assume a project costs $860,000 initially and will generate cash flows in perpetuity of $320,000. The firm’s cost of capital is 12%.a. Calculate the project’s NPV.b. Calculate the annual EVA in a
IRR method Kelvin and Vivian Wong have $33,000 to invest. On average, they do not make any investment that will not return at least 7% per year. They have been approached with a “profitable”
Gigantic Group has prepared the following estimates for a long-term expansion project. The initial investment is $248,250, and the project is expected to yield after-tax cash inflows of $65,000 per
Given the following list of expenditures, indicate whether each is normally considered an operating expenditure or a capital expenditure. Explain your answers.a. An initial lease payment of $7,500
A few years ago, Tasty Food Company purchased an automatic production line at an installed cost of $325,000. The company has recognized depreciation expenses totaling $215,250 since its installation.
Research Clinic purchased a blood-testing machine 4 years ago for $96,000. It is being depreciated under MACRS with a 7-year recovery period using the percentages given in Table 4.2 on page 166.
Colorado Cleaning has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new washing machine and must choose between two alternative ones. The first machine
Sweet Potato Corporation is considering the acquisition of a new cooking machine. The initial investment is estimated at $2.52 million, and the machine will have a 5-year life with no salvage value.
DC Fragrance intends to purchase new fragrance-mixing equipment for a $245,000 initial investment. The equipment generates an annual after-tax cash inflow of $68,500 for 5 years.a. Determine the net
Mavis Chan is currently a Financial Controller of a listed company, and has researched the financial pros and cons of enrolling in a 1-year Executive MBA (EMBA) program at her local university. The
Mutually exclusive projects Ocean Pacific Restaurant is evaluating two mutually exclusive projects for expanding the restaurant’s seating capacity. The relevant cash flows for the projects are
The chapter opener talked about Diamond Comic Distributor’s attempt to reduce the cost of opening a retail comic book store. Suppose that the current cost of opening such a store is $400,000 and
Irvin Enterprises is considering the purchase of a new piece of equipment to replace the current equipment. The new equipment costs $75,000 and requires $5,000 in installation costs. It will be
A machine currently in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under MACRS using a 5-year recovery period; it has 3 years of usable life remaining. The
Stable Nuclear Plant Corporation has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.a. If project A were actually a
Tasty Bakery Corporation is evaluating the acquisition of a bakery machine that costs $72,000 and requires $3,000 in installation costs. If the corporation depreciates the machine under MACRS, using
Sony Pacific Music Corporation is considering the purchase of a new sound board used in recording studios to improve its sound effect. The existing sound board was purchased 3 years ago at an
The chapter opener describes the expropriation of a Spanish company’s investment in an Argentina oil and gas company as well as the decision by Chevron to undertake a major new investment in that
Miller Dental, Inc. is considering replacing its existing laser checking system, which was purchased 3 years ago at a cost of $568,000. The laser checking system can be sold for a lump sum of
MSF Manufacturing Company is considering the purchase of a new machine to improve its production efficiency. The company has total current assets amounting to $865,000 and total current liabilities
Determine the total taxes payable, with a 20% tax rate, for each of the following situations. The asset was purchased 5 years ago for $460,200 and is being depreciated under MACRS using a 7-year
CBA Company is considering two mutually exclusive projects, A and B. The following table shows the CAPM-type relationship between a risk index and the required return (RADR) applicable to CBA
Automotive Assemblers is considering buying new equipment with an investment value of $30,000. The equipment has a 5-year life and no salvage value at the end. There are many uncertainties in the
The Golden Company specializes in manufacturing goldplated jewelry. The company is considering buying new equipment costing $220,000 to improve the efficiency of the production process. The equipment
Blair Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Blair to build a new gas production facility close to an existing
To judge the sensitivity of a project’s NPV, financial managers will often compare a project’s forecasted cash inflows to the breakeven cash flows. Based on the information provided at MFL,
Projects is currently evaluating two new aluminum cutting machines with the intention of purchasing one of them. The economists estimated the pessimistic, most likely, and optimistic cash inflows for
The Choc Shop is considering buying new equipment with an initial investment outlay of $32,000. The equipment has a 5-year life with cash inflows in years 1 to 5 of $11,500, $12,000, $12,500,
Mayflower Interiors is evaluating three mutually exclusive projects. The cost of capital, r, is 13.5% and the risk-free rate, RF, is 10%. The following information is available regarding the three
The Wentworth Art School is evaluating a few investment opportunities. It developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the following table.The
TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm
Diane’s Florist has fixed operating costs of $3,825, variable operating costs of $9.50 per flower arrangement, and an average selling price of $24.50 per flower arrangement.a. What is Diane’s
Millard’s Enterprises sells wooden baby chairs for $28 per chair. The fixed operating costs are $23,000, and the variable operating cost is $18 per chair.a. Calculate Millard’s Enterprises’
Paul Scott has a 2008 Cadillac that he wants to update with a GPS system so that he will have access to up-to-date road maps and directions. Aftermarket equipment can be fitted for a flat fee of
Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.a. Compute the estimated share
The following sales price and cost data are available for three companies that are competitors.a. Calculate the operating breakeven point in units for each of the three competitors.b. How would you
Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the
Shelby’s Photographs has fixed operating costs of $16,500 and variable operating costs of $8 per photograph pack. The photograph packs sell for $20 each. How many photograph packs must be sold for
The chapter opener describes a shift in Lowe’s financial strategy that began in April 2012. Specifically, Lowe’s took actions that increased its reliance on debt. The following table shows
Hotel Amazing made a list of various independent projects it wants to launch with a fixed capital budget of $5.5 million. Management established that any unused portion of the fixed capital budget
Warehouse Systems Enterprises (WSE) designed a new inventory management system. WSE managers must choose among three alternative courses of action: (1) WSE can sell the design of the new system to a
Duan 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 receive
Comparing projects with unequal lives is often done by comparing the projects’ annualized net present value. Based on the information provided at MFL, use a spreadsheet to compare projects based on
Porter & Sons is evaluating three different machines to be used in its workshop to polish marble. All three of the machines are equally risky. The cost of capital of Porter & Sons is 15%. The initial
Roots to Branches Corporation, a company specializing in event décor, is considering two mutually exclusive investments: “Roots” and “Branches.” Both investments will assist the company with
The Wood Connection decided to offer cash discounts to its regular credit customers, provided the credit customers have a proven track record of on-time payment. The Wood Connection is offering
Mix and Brix Suppliers is contemplating shortening its credit period from 45 to 30 days. Based on an analysis, it is estimated that this change will reduce the average collection period from 50 to 45
In the chapter opener, you learned about FastPay, a company that lends to online ad publishers based on advertising receivables. Suppose that you are running a business that relies on online ad
Maitland Enterprises has $70,000 of 10% (annual interest) bonds outstanding, 500 shares of preferred stock paying an annual dividend of $45 per share, and 6,000 shares of common stock outstanding.
The Plastic Corporation has a current capital structure consisting of $150,000 of 15% debt and 3,500 shares of common stock. The tax rate is 40%.a. Determine the earnings per share (EPS) when EBIT is
Multiple leverage measures Hugg-a-Bugg Soft Toys manufactures teddy bears. The annual sales are 350,000 teddy bears at $26 per teddy bear. Fixed operating costs are $28,000 while variable operating
Cosmetic Manufacturers is contemplating changing the capital structure of the firm. The firm has $45,000,000 in total assets, earnings before interest and taxes of $8,500,000, and is taxed at a rate
Welding Manufacturing is currently financed with 100% equity. To take advantage of financial leverage, Welding Manufacturing wants to acquire debt. Management is considering various debt ratios,
Whirlpool’s decision to dramatically increase its dividend in early 2013 to $0.625 per share. When it made that announcement, Whirlpool indicated that the date of record for the dividend would be
Stock repurchase The Off-Shore Steel Company has earnings available for common stockholders of $2 million and has 500,000 shares of common stock outstanding at $60 per share. The firm is currently
At the quarterly dividend meeting, Perfect Frame Manufacturing declared a $2.00 per share dividend for the holders on record as at Monday, March 10. The outstanding common stock is 250,000 shares.
Staff Excellence Enterprises identified two independent projects to enhance staff training. The investments would require financing of $750,000 and $980,800, respectively. Retained earnings are $1.3
Sandra Gray owns 800 shares of Steel & Fittings Corporation. At the annual dividend meeting, a dividend payment of $1.05 was declared to be paid on September 30 to all the holders of record as at
The stockholders’ equity account of Plastic Enterprises is as follows: The earnings available for the common stockholders are $280,000 and are included in the $1,200,000 retained earnings.a.
The new intern is trying to understand the dividend policy of your firm. Having studied dividend policies at university, the intern wonders why the firm chose its dividend policy. The intern also
Steel Enterprises’ earnings per share (EPS) for the period 2008 to 2015 are summarized in the table below. Use this information to calculate the dividends per share for each of the years and
The stockholders’ equity account for Paper Manufacturers is shown below. The firm’s common stock has a current market price of $20 per share.a. How will the stockholders’ equity account change
The stockholders’ equity account of Paper Weight Company is as follows:a. How will the stockholders’ equity account change if Paper Weight Company declares a 2-for-1 stock split?b. How will the
John McKay holds 500 common shares of Smart Life Corporation. The corporation has 50,000 shares outstanding. The current price per share is $25. Smart Life Corporation has reported earnings available
Distilled Water Corporation is a company specializing in water purification and distributing bottled water to retailers. The corporation is considering a 3-for-2 stock split. The current stock price
U.S. companies had been building up their cash balances after the financial crisis, even though the interest rates that they could earn on low risk, liquid investments were extremely low. Describe
Hurkin Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40 days. The firm currently has
Metal Supplies is concerned about its cash management. On average, the day’s sales in inventory (duration of inventory on shelf) is 90 days. Accounts receivable are collected in 90 days, while
The Furniture Corporation has an inventory turnover of 7, an average collection period of 45 days, and an average payment period of 30 days. Annual sales are $5 million, while the cost of goods sold
Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each. Bad-debt expenses are 1% of sales,
Cohen Industrial Products uses 2,100 switch assemblies per month and then reorders another 2,100. The relevant carrying cost per switch assembly is $20 every year, and the fixed order cost is $300.
Enviro Exhaust Company purchases 1,200,000 units per year of a component with a purchase price of $50. The fixed cost is $15 per order, and the carrying cost is 30% of the purchase price.a. Calculate
Outdoor Living Manufacturers uses 1,000 units of a product per year. The fixed cost is $28 per order, while the carrying cost is $5 per unit per year. The lead time is 5 days and, therefore, the firm
Clear Glass Company sells glass containers. It reported total sales of $1,580,000, with 60% of the sales on credit. It takes 60 days to collect accounts receivable. The selling price is $20 per
Farmers World, a firm specializing in fertilizers, is evaluating a proposal to relax the credit standards to increase sales. The implementation of the proposed plan is expected to result in an
Pebbles & Stone Enterprises currently sells on credit only and does not offer any discounts. In an attempt to increase sales, the board is considering offering a 5% discount for payment within 15
Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000, while variable
The credit terms for each of three suppliers are shown in the following table. Assume a 365-day year.a. Determine the approximate cost of giving up the cash discount from each supplier.b. Assuming
On March 25, the following invoices were issued for a $500 purchase on credit. Indicate the meaning of each credit term.a. 2/10, net 30 date of invoiceb. 2/10, net 40 EOMc. 2/10, net 20 EOMd. 2/10,
Wendy Interior Design received four invoices with different credit terms. The manager needs to determine when the invoices, all dated March 25, need to be paid to avoid late-payment charges. A
Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The
The Floral Boutique approached two banks to obtain a $10,000 bank loan. Bank A will give a 120-day loan at an annual rate of 12% while Bank B will give a 90-day loan at an annual rate of 15%. Assume
Lindsey Shaw requires a short-term loan of $55,000 to cover some of the costs of buying a new house. She will also use a portion of the money for renovations to the house. The bank is willing to lend
Charlton Enterprises negotiated a line of credit at the bank that requires it to pay 12.5% interest on its borrowing. The firm is required to maintain a compensating balance equal to 10% of the
Automotive Accessories needs to borrow $135,000 for 6 months for renovations. It is considering two financing options: Bank Helping Hand offers an 8% annual rate subject to a 10% compensating

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