you have been hired as a new financial analyst at Blue Ocean, a large manufacturing firm that is currently looking into diversification opportunities. The vice president of marketing is particularly interested in a venture that is only marginally connected with what the firm does now. Other managers have suggested enterprises in more closely related fields. The proponents of the various ideas have all provided you with business forecasts from which you have developed financial projections including project cash flows. You have also calculated each project's IRR with the following results:

Project IRR Comments

A 19.67% Marketing's project, an almost totally new field

B 19.25% Proposed by manufacturing, also a very different field.

C 18.05% Proposed by engineering, a familiar field.

You are now in a meeting with senior managers that was called to discuss the options. You have just presented your analysis ending your talk with the preceding information.

After your presentation, the vice president of marketing stands, congratulates you on a fine job, and states that the figures clearly show that Project A is the best option. He also says that your financial analysis shows that project A has the full backing of the finance department. All eyes, including the CFO's, turn to you. How do you respond

you have been hired as a new financial analyst at Blue Ocean, a large manufacturing firm that is currently looking into diversification opportunities. The vice president of marketing is particularly interested in a venture that is only marginally connected with what the firm does now. Other managers have suggested enterprises in more closely related fields. The proponents of the various ideas have all provided you with business forecasts from which you have developed financial projections including project cash flows. You have also calculated each project's IRR with the following results:

Project IRR Comments

A 19.67% Marketing's project, an almost totally new field

B 19.25% Proposed by manufacturing, also a very different field.

C 18.05% Proposed by engineering, a familiar field.

You are now in a meeting with senior managers that was called to discuss the options. You have just presented your analysis ending your talk with the preceding information.

After your presentation, the vice president of marketing stands, congratulates you on a fine job, and states that the figures clearly show that Project A is the best option. He also says that your financial analysis shows that project A has the full backing of the finance department. All eyes, including the CFO's, turn to you. How do you respond

You are the CFO of Saunders Trucking, a privately held firm whose owner, Irvin Saunders, is interested in selling the company and retiring. He therefore wants to pump up its value by any means possible. Irvin read an article about leverage in a business magazine the other day and has sent you a memo directing that you restructure the firm's capital to the "optimum" in order to maximize the company's value. Prepare a brief response to Joe's memo

4.

The present format for the statement of cash flows is organized according to operating activities, investing activities, and financing activities. That format has only been in use since the late 1980s. The previous format first listed all sources and then all uses of cash, giving a subtotal for each. Cash flow was then the difference between the two subtotals. What advantages or disadvantages do you see of the current format in relation to the old one? Which would you prefer if you had a choice

You are an analyst in the finance department of Sunset Corp., a new firm in a profitable but risky high-tech business. Several growth opportunities have presented themselves recently, but the company doesn't have enough capital to undertake them. Stock prices are down, so it doesn't make

sense to try to raise new capital through the sale of equity. The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow Sunset to borrow. Write a brief memo summarizing your ideas

The Winton Heights Corporation located on the eastern end of New Providence decides that it is desirous of obtaining new capital but is having difficulty raising it. One of the reasons why the firm is having difficulty is because the firm's stock price is at a ten-year low, so selling new equity means giving up an interest in the company for a very low price. The debt market is tight and interest rates are unusually high, making borrowing difficult and expensive. In fact, it is not certain that anyone will lend to The Winton Heights Corporation because it is a risky company.

1. On the other hand, the firm's long-term prospects are good, and management feels the stock price will recover within a year or two. Ideally management would like to expand the company's equity base, so it can borrow more later on, but at the moment the stock price is just too low. Suggest a capital strategy that addresses both the short and long-run explaining why it is likely to work.
2. Discuss mortgage loans in terms of the time value of money and loan amortization. What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting the mortgage paid off.
3. Compare the cost of capital concept with the idea of the required return on a stock investment made by an individual. Relate both ideas to the risk of the investment. How would a very risky investment/ project be handled in the capital budgeting/cost of capital context?

Suppose 3HHH Company sold an issue of bonds with a 10-year maturity, a $1000 par value, a 10% coupon rate, and semiannual interest payments.

a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?

b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?

1. c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?

The Alpha Bean Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the projects' expected net costs are listed in the Table 3:

a. What is the IRR of each alternative?

1. b. What is the present value of the costs of each alternative? Which method should be chosen?