Questions and Answers of Principles Managerial Finance

What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?
Scenario analysis Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was
Kiosk Corp. produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in a local library. The company makes two types of
Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic
Boardman Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an
The Sleek Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. The up-front cost of the
Power switch Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects along with their
Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the
Like most firms in its industry, Culinary Cafe 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
You wish to evaluate a project requiring an initial investment of $59,500 and having a useful life of 7 years. What minimum amount of annual cash inflow do you need if your firm has an 8.7% cost of
Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years.
With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening
Marcus Tube, a manufacturer of high quality aluminum tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 3% per year,
Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs
Tesla Systems 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, which requires an initial investment of
Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers.a. An outlay of $27,600 for a marketing
Bryson Sciences is planning to purchase a high-powered microscopy machine for $385,000 and incur an additional $31,300 in installation expenses. It is replacing older microscopy equipment that can be
Landscapes Unlimited has spent $2,200 evaluating a new service area for expanding its business territory. The expansion will require the purchase of a new truck for $35,000, and fitting the truck
A core concept in economics is marginal analysis––decisions should depend on incremental costs and benefits. Costs already incurred that cannot be recovered––sunk costs––are irrelevant.
Diagram and describe the three types of net cash flows for a capital budgeting project.
How do you calculate the book value of an asset?
White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.Year
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern.Year
Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the master’s program will have an up-front cost of
Using a 10% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. Cash flows (CF;) in thousands
Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $360,000 and will generate after-tax cash inflows of $62,650 per year for 8 years. For each of
Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%.a. Initial investment is $1,000,000;
The Ball Shoe Company is considering an investment project that requires an initial investment of $542,000 and returns after-tax cash inflows of $75,000 per year for 10 years. The firm has a maximum
Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $52,500 and generate cash inflows of
Volkswagen had come a long way. In 1934, Hitler challenged German industry to come up with an inexpensive vehicle for ordinary families––“a People’s Car.” Ferdinand Porsche’s design got
WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $70.67. The firm just recently paid a dividend of $4. The
Cost of common stock equity: CAPM Netflix common stock has a beta, b, of 0.8. The risk-free rate is 3%, and the market return is 10%.a. Determine the risk premium on Netflix common stock.b.
Cost of preferred stock Determine the cost for each of the following preferred stocks. Preferred stock Par value Sale price Annual dividend Flotation cost 11% $100 40 35 30 $101 38 37 26 $9.00 A B
Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be
Bella Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow
Before-tax cost of debt and after-tax cost of debt David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he
Duke Energy has been paying dividends steadily for 20 years. During that time, dividends have grown at a compound annual rate of 3%. If Duke Energy’s current stock price is $78 and the firm plans
Your firm, People’s Consulting Group, has been asked to consult on a potential preferred stock offering by Brave New World. This 9% preferred stock issue would be sold at its par value of $55 per
Gertrude Stein––who shaped 20th century art and literature through discussions in her 1920s Paris home with the likes of Pablo Picasso and Ernest Hemingway––famously wrote of Oakland,
Capital asset pricing model (CAPM) For each case in the following table, use the capital asset pricing model to find the required return. Risk-free Market Case Beta, ß rate, Rp return, rm A 1% 8%
A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10
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 an
Your portfolio has three asset classes. U.S. government T-bills account for 45% of the portfolio, large-company stocks constitute another 40%, and small-company stocks make up the remaining 15%. If
Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 per share. Although you are very much
Constant growth Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table.Year
Constant growth The common stock of Barr Labs Inc. trades for $114 per share. Investors expect the company to pay a $1.35 dividend next year, and they expect that dividend to grow at a constant rate
Constant growth Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends:Year
Zero growth Kelsey Drums Inc. is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of
In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid? Dividend
Acura Labs Inc. has an outstanding issue of preferred stock with a $40 par value and an 8% annual dividend.a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each
Mark Goldsmith’s broker has shown him two bonds issued by different companies. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by
The Salem Company bond currently sells for $867.59, has a 6% coupon rate and a $1,000 par value, pays interest annually, and has 15 years to maturity.a. Calculate the yield to maturity (YTM) on this
Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 per year for each of the next 4 years and $15,000 in 5 years. Her research indicates that she must earn
Using the information provided in the following table, find the value of each asset today. Cash flow Appropriate required return Asset Year Amount $ 3,000 A 8% 2 3,000 3 3,000 1 through oo 500 B 5%
Imagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an apartment. If you buy the condo, during each of the next 4 years you
Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matures on May 15, 2027, has a current price quote of 97.708, and has a yield to maturity (YTM) of
In January 2016, Anheuser-Busch issued an outstanding bond that pays a 3.3% coupon rate, matures in January 2023, and has a yield to maturity of 2.82%. In January 2017, Santander Holdings issued an
A 1-year Treasury bill currently offers a 5% rate of return. A 2-year Treasury note offers a 5.5% rate of return. Under the expectations theory, what rate of return do investors expect a 1-year
Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar
Economic forecasters predict that the rate of inflation will hold steady at 2% per year indefinitely. The table below shows the nominal interest rate paid on Treasury securities having different
The real rate of return Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up
Assume that the rate of inflation expected over the coming year is 3.3%. Explain how a 1-year T-bill could earn a negative real rate of return over the next year. How could it have a zero real rate
The nominal, risk-free rate on T-bills is 1.23%. If the real rate of interest is 0.80%, what is the expected inflation rate?
Nationally Recognized Statistical Rating Organizations (NRSROs), or creditrating agencies, provide investors with independent assessments of a debt issuer’s ability to make scheduled interest and
Samantha Fong sold her home in San Francisco in 2017 for$1.5 million, which was the median home price for that city. Samantha had lived inthat house for 17 years, having purchased it from Michael
On January 1, 2010, she bought shares of stock in Amazon, Chipotle Mexican Grill, and Netflix. The table below shows the price she paid for each stock, the price she received when she eventually sold
Tim Smith is shopping for a used luxury car. He has found one priced at $30,000. The dealer has told Tim that if he can come up with a down payment of $5,000, the dealer will finance the balance of
Joan Messineo borrowed $45,000 at a 4% annual rate of interest that she must repay over 3 years. The loan is amortized into three equal, end-of-year payments.a. Calculate the end-of-year loan
Developing the mine will cost $10 million right away, but cash flows of $4 million will arrive starting in 1 year and then continuing for the next 4 years (i.e., years 2 through 5). After that, no
You are evaluating an investment that will pay $75 in 1 year, and it will continue to make payments at annual intervals thereafter, but the payments will grow by 4% forever.a. What is the present
Suppose that today’s date is January 1, 2019. You have the opportunity to make an investment that will pay you $100 on January 1 of every year, starting in 2020 and continuing forever. Assume the
Emily Jacob is 45 years old and has saved nothing for retirement. Fortunately, she just inherited $75,000. Emily plans to put a large portion of that money into an investment account earning an 11%
Marian Kirk wishes to select the better of two 10-year annuities. Annuity 1 is an ordinary annuity of $2,500 per year for 10 years. Annuity 2 is an annuity due of $2,300 per year for 10 years.a. Find
In exchange for a $23,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 9%.Alternative
You have $100 to invest. If you put the money into an account earning 5% interest compounded annually, how much money will you have in 10 years? How much money will you have in 10 years if the
As the housing market began to boom at the end of the twentieth century and into the early twenty-first, the market share of subprime mortgages climbed from near 0% in 1997 to about 20% of mortgage
As a finance major, you realize that you can quickly estimate your retirement age by knowing how much you need to retire, how much you can contribute each month to your retirement account, and what
You want to buy a new car as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount. Using the information provided at MyLab Finance, find
Rather than comparing future values, you often compare the effective annual rates of various investment opportunities with differing compounding frequencies. Using the information provided at MyLab
What if your short-term investments provide continuous compounding?Using the information provided at MyLab Finance, determine the future value of an investment opportunity based on continuous
You are responsible for managing your company’s short-term investments and you know that the compounding frequency of investment opportunities is quite important. Using the information provided at
To give yourself a financial head start after college, you have decided to work summer jobs and invest the money you earn until after graduation. You expect that your earnings each summer will vary
Rather than making contributions to an IRA at the end of each year, you decide to make equal contributions at the beginning of each year. Using the information provided at MyLab Finance, solve for
Because tax time comes around every year, you smartly decide to make equal contributions to your IRA at the end of every year. Using the information provided at MyLab Finance, calculate the future
It is never too soon to begin investing for a child’s college education. Using the information provided at MyLab Finance, determine the present value you would need to invest today to ensure that
It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Using the information provided at MyLab Finance, find the future value of an IRA
Provincial Imports Inc. has assembled past (2019) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year
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
Peabody & Peabody has 2019 sales of $10 million. It wishes to analyze expected performance and financing needs for 2021, which is 2 years ahead. Given the following information, respond to parts
Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2020. The firm expects 2020 sales to total $3,000,000. The following information has been gathered:(1) A minimum cash
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 prediction
The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay
The actual sales and purchases for Xenocore Inc. for September and October 2019, along with its forecast sales and purchases for the period November 2019 through April 2020, follow. The firm
Sam and Suzy Sizeman need to prepare a cash budget for the last quarter of 2020 to make sure they can cover their expenditures during the period. Sam and Suzy have been preparing budgets for the
Below we reproduce the stockholders’ equity section of the 2019 and 2018 balance sheets for Baker Corporation, which also appear as part of Table 4.5.a. The Baker Corporation statement of cash
Consider the following balance sheets and selected data from the income statement of Keith Corporation.a. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December
Pavlovich Instruments Inc., a maker of precision telescopes, expects to report pretax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new
In early 2019, Sosa Enterprises purchased a new machine for $10,000 to make cork stoppers for wine bottles. The machine has a 3-year recovery period and is expected to have a salvage value of $2,000.
On March 20, 2019, Norton Systems acquired two new assets. Asset A was research equipment costing $17,000 and having a 3-year recovery period. Asset B was duplicating equipment with an installed cost

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