1. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a...

  

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1. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $90 with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike? Should Fat Tire start producing the off-road bike? 2. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000. Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was $600,000. Should Revolution Records consider the land as part of the cash flow of the recording studio? If yes, what value should be used, $450,000 or $780,000? How will the value affect the project? 3. Brock Florist Company buys a new delivery truck for $29,000. It is classified as a light-duty truck. Calculate the depreciation schedule using a five-year life and MACRS depreciation. 4. Brock Florist Company sold their delivery truck in problem (see Problem 3) after three years of service. If MACRS was used for the depreciation schedule, what is the after tax cash flow from the sale of the truck (continue to use 30% tax rate) if a. the sales price was $15,000? the sales price was $10,000? b. c. the sales price was $5,000? 5. Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed costs for production at $180,000, and depreciation expense (straight-line) of $240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system? Current Assets: Long-Term Assets: Total Assets: Outstanding Market Price DMI Company Balance Sheet (in thousands) $32,000 $66,000 $98,000 Debt 54,000 $1085 Current Liabilities: Long-Term Liabilities Bonds Payable Market price Outstanding units Book value Cost of capital Owner's Equity Preferred Stock Common Stock Total L & OE Market Information Preferred Stock 120,000 $95.40 so $54,000 $12,000 $32,000 $98,000 Common Stock 1,280,000 $32.16 13. Clark Explorers Inc., an engineering firm has the following capital structure: Equity Preferred Stock Debt $30.00 $110.00 $955.00 120,000 10,000 6,000 $6,000,000 $3,000,000 15% $1,000,000 12% 9% Using market value and book value (separately, of course), find the adjusted WACC for Clark Explorers at tax rate equal to 35%. 14. Hollydale's is a clothing store in East Park. It paid an annual dividend of $2.50 last year to its shareholders and plans to increase the dividend annually at 2%. It has 500,000 shares outstanding. The shares currently sell for $21.25 per share. Hollydale's has 10,000 semiannual bonds outstanding with a coupon rate of 7.5%, a maturity of 16 years, and a par value of $1,000. The bonds are currently selling for $874.08 per bond. What is the adjusted WACC for Hollydale's if the corporate tax rate is 35%? 1. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $90 with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike? Should Fat Tire start producing the off-road bike? 2. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000. Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was $600,000. Should Revolution Records consider the land as part of the cash flow of the recording studio? If yes, what value should be used, $450,000 or $780,000? How will the value affect the project? 3. Brock Florist Company buys a new delivery truck for $29,000. It is classified as a light-duty truck. Calculate the depreciation schedule using a five-year life and MACRS depreciation. 4. Brock Florist Company sold their delivery truck in problem (see Problem 3) after three years of service. If MACRS was used for the depreciation schedule, what is the after tax cash flow from the sale of the truck (continue to use 30% tax rate) if a. the sales price was $15,000? the sales price was $10,000? b. c. the sales price was $5,000? 5. Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed costs for production at $180,000, and depreciation expense (straight-line) of $240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system? Current Assets: Long-Term Assets: Total Assets: Outstanding Market Price DMI Company Balance Sheet (in thousands) $32,000 $66,000 $98,000 Debt 54,000 $1085 Current Liabilities: Long-Term Liabilities Bonds Payable Market price Outstanding units Book value Cost of capital Owner's Equity Preferred Stock Common Stock Total L & OE Market Information Preferred Stock 120,000 $95.40 so $54,000 $12,000 $32,000 $98,000 Common Stock 1,280,000 $32.16 13. Clark Explorers Inc., an engineering firm has the following capital structure: Equity Preferred Stock Debt $30.00 $110.00 $955.00 120,000 10,000 6,000 $6,000,000 $3,000,000 15% $1,000,000 12% 9% Using market value and book value (separately, of course), find the adjusted WACC for Clark Explorers at tax rate equal to 35%. 14. Hollydale's is a clothing store in East Park. It paid an annual dividend of $2.50 last year to its shareholders and plans to increase the dividend annually at 2%. It has 500,000 shares outstanding. The shares currently sell for $21.25 per share. Hollydale's has 10,000 semiannual bonds outstanding with a coupon rate of 7.5%, a maturity of 16 years, and a par value of $1,000. The bonds are currently selling for $874.08 per bond. What is the adjusted WACC for Hollydale's if the corporate tax rate is 35%?

Answer rating: 100% (QA)

1 The erosion cost from the new bike is 8000 Fat Tire should start producing the offroad b... View the full answer