The TLC Yogurt Company has decided to capitalize on the exercise fad and plans to open an exercise facility in conjunction with its main yogurt and health foods store. To get the project under way, the company will rent additional space adjacent to its current store.

                        

The equipment required for the facility will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be depreciated on a straight-line basis over its five-year economic life to an estimated salvage value of $0.

 

In order to open the exercise facility, TLC estimates that it will have to add about $7,000 initially to its net working capital in the form of additional inventories of exercise supplies, cash, and accounts receivable for its exercise customers. In addition, TLC expects that it will have to add about $5,000 per year to its net working capital in years 1, 2, and 3 and nothing in years 4 and 5. All net working capital that was spent on the project will be recovered in the final year.

 

During the first year of operations, TLC expects its total revenues (from yogurt sales and exercise services) to increase by $50,000 above the level that would have prevailed without the exercise facility addition. These incremental revenues are expected to grow to $60,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $45,000 during the fifth year of the project's life.

 

The company's incremental operating costs associated with the exercise facility, including the rental of the facility, are expected to total $25,000 during the first year and increase at a rate of 6 percent per year over the five-year project life.  TLC has a marginal tax rate of 40 percent

 

1. Calculate the Net Investment of this project. [3]
2. Calculate the Net Cash Flows for the five (5) years [12]
3. Calculate the Net Present Value (NPV) of this project if the company's required rate of return is 12%. [4]
4. Would you, as the Finance Manager, recommend to the CEO to accept this project? [1]

 

Question 2 (20 Marks) - Ratio Analysis

Tanesha D Company Limited makes sales of $6,900,000 over the 2019 fiscal period.
If the company states the following financials:

1. Costs of goods sold $4,200,000.00
2. Depreciation expenses $235,000.00
3. Interest expenses $85,000.00
4. Preferred stocks dividends $10,800.00

 

Use the figures above to complete the income statement on the next page and perform calculations.

1. Copy and Update the Income Statement                    (8 Marks)
2. Calculate the current ratio                                          (2 Marks)
3. Calculate the Average collection period                    (2 Marks)
4. Determine the Time interest earned                           (2 Marks)
5. Determine the Debt-to-Equity ratio                            (2 Marks)
6. Determine the ROE using the DuPont model            (4 Marks)
7.     
Question 3: CLO 3 Capital Investment Decision (20 marks)
1. Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000. The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment? (3 marks)

 

1. Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen? (5 marks)

 

1. ABC limited company looking to invest in one of the Project cost that project is $50,000 and cash inflows and outflows of a project for 5 years, as shown in the below table. Calculate Profitability Index using a 5% discount rate and estimate Internal Rate of Return of the Project using  Discount rates of 8% and 5%. 
2.  
Question 4: CLO2 Valuation Principles  (20 marks) 
1. Phoenix Company's common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution

to the price of (and rate of return on) Phoenix stock one year from now:

 

Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the coefficient of variation for the rate of return on Phoenix stock. (7 marks)

1. Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if investors require 12% return?  (8 marks)

 

1. A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000.Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV? (5 marks)

 

 

 

Question 5: CLO 4 Long-term Financing Choices / CLO 5 Short-term Financial Management (20 marks)

1. The various costs and weighted costs, what is the weighted average cost of capital for Foggy Futures Weather Forecasters? 

The firm is in the 40% tax bracket.  (3+3+3+6=12 marks)

The optimal capital structure is listed below:

 

1. Laserscope has an inventory conversion period of 45 days, a receivables conversion 

       period of 42 days, and a payables deferral period of 51 days. 

       What is the length of its cash conversion cycle? (2 marks)

1. Tool Mart sells 1,400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the firm's EOQ? (3 marks)

 

1. Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its customers in New York and California. If the firm deposits these checks in its local bank, two business days are required for the checks to clear and the funds to become usable by the firm. However, if Osborne sends an employee to New York or California and presents the check for payment at the bank upon which it is drawn, the funds are available immediately to the firm. The firm can earn 8% per annum on short-term investments, and the cost of sending an employee to New York or California to present the check for payment is $500. What is the net benefit to the firm of employing this special handling technique for a $5 million check received on Tuesday? (Assume 365 days per year.) 

Transcribed Image Text:

TANESHA D COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2019 Sales Revenue Less Cost of goods sold Gross Profit less Operating Expenses sales expenses General Administrative expense Lease expenses Depreciation expenses Total operating expenses Earnings before interest and taxes Less Interest expenses Net profit before tax Less Taxes (Rate 40%) Net profit after tax Less Preferred stock dividends Net Income Eamings per share (EPS) $ 750,000.00 $ 1,150,000.00 $ 210,000.00 $ 355,000.00 $ $ $ $ 270,000.00 81,000.00 189,000.00 1.43 TANESHA D COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2019 Sales Revenue Less Cost of goods sold Gross Profit less Operating Expenses sales expenses General Administrative expense Lease expenses Depreciation expenses Total operating expenses Earnings before interest and taxes Less Interest expenses Net profit before tax Less Taxes (Rate 40%) Net profit after tax Less Preferred stock dividends Net Income Eamings per share (EPS) $ 750,000.00 $ 1,150,000.00 $ 210,000.00 $ 355,000.00 $ $ $ $ 270,000.00 81,000.00 189,000.00 1.43

Answer rating: 100% (QA)

Here are the answers to the questions 1 Calculate the Net Investment of this project 3 Net Investment Equipment cost Shipping and installation Salvage value 50000 5000 0 55000 2 Calculate the Net Cash ... View the full answer