2.99 See Answer

Question: An investment project has annual cash inflows


An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? What if the initial cost is $12,000? What if it is $16,000?



> Some accountants have said that the development and acceptance of generally accepted accounting principles (that is, standard setting) is undergoing a “politicization.” Some use the term “politicization” in a narrow sense to mean the influence by governm

> Some critics argue that having different organizations establish accounting principles is wasteful and inefficient. Instead of mandating accounting standards, each company could voluntarily disclose the type of information it considered important. In add

> The national credit rating agency downgraded the credit rating of Grand Limited by two levels from BB to B+. The credit rating agency was concerned about the company’s ability to refinance portions of its debt. Both BB and B+ are considered “junk” bonds

> Boston Clothing Limited was a private company that experienced cash flow difficulties and hired new management to turn the company around. The company then went public and the shares sold at $15 per share. Within months, however, the share price plummete

> When the AcSB issues new standards, the implementation date is usually 12 months after the issue date, but early implementation is encouraged. In this case, Paula Popov, controller, is discussing with her financial vice-president the need for early imple

> What is the difference between principles-based and rules-based accounting standards? In which category does IFRS belong? ASPE? Explain.

> Some individuals have argued that the ACSB and the International Accounting Standards Board (IASB) need to be aware of the economic consequences of their pronouncements. What is meant by “economic consequences”? What are some of the dangers if politics p

> What are some possible reasons why another organization, such as the OSC or the Securities and Exchange Commission (SEC), should not issue financial reporting standards?

> What is the role of the Ontario Securities Commission (OSC) in standard setting?

> Explain the role of the Canadian Accounting Standards Board (AcSB) in establishing generally accepted accounting principles.

> Which organization is currently dominant in the world for setting accounting standards?

> The chairman of the Financial Accounting Standards Board (FASB) at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountant

> What are some of the developments or events that occurred between 1900 and 1930 that helped bring about changes in accounting theory or practice?

> In 2012, Hans Hoogervorst, Chairman of the IASB, gave a speech at the FEE Conference on Corporate Reporting of the Future entitled “The Concept of Prudence: Dead or Alive?”. The speech can be found on the IFRS website at: www.ifrs.org. Instructions (a)

> What follows is part of the testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He testified in the hope of receiving no prison time when he was ultim

> Find the FASB website and locate the “Update Report to the FSB Plenary on Accounting Convergence” that was issued in 2012. Convergence between the standards in the United States and IFRS is an ongoing topic of discussion among standard setters. Some of t

> In 2002, the Sarbanes-Oxley Act was passed in the United States to strengthen the capital market- place. In the following year, there were many debates in Canada about whether the securities com-missions in Canada should adopt the same regulations. In th

> The Canadian Coalition for Good Governance was formed in 2002 and represents a significant number of institutional investors in Canada. Instructions (a) How does an institutional investor differ from other investors? (b) In your opinion, what impact wou

> Michael Sharpe, then deputy chairman of the International Accounting Standards Committee, made the following comments before the Financial Executives International 63rd Annual Conference: There is an irreversible movement toward the harmonization of fina

> The IASB released an Exposure Draft (ED) in May 2012 titled Annual Improvements to IFRSs: 2010 – 2012 Cycle. This IASB publication is intended to invite comment on changes that might improve various standards. The ED is available on the IASB website. In

> How does information asymmetry hurt investors in the capital marketplace?

> The IASB has instituted four principles related to its funding to ensure that funding does not lead to politicization of standard setting. The standards specify that funding should be broad-based, compelling, open-ended, and country-specific. This differ

> Explain the difference between primary and other sources of GAAP.

> The integrated reporting initiative discussed in this chapter focuses on extending the disclosure of financial statements to include more information about a company and its objectives and performance. Instructions Discuss what type of users of the fina

> While it is a goal of standard setters to develop accounting standards that will provide comparability across organizations and over time, there are instances when professional judgement must be used in determining the correct amount of disclosure. Assum

> There are many situations in which management of a company may want to disclose more or less information about their operations. In a situation where a manufacturer is preparing for the launch of a new product line, the information available to managemen

> Financial statements can be a valuable tool for many interested parties in the performance of a company. Consider a public company in Alberta that drills oil and sells it to refineries in the United States. The company prepares its financial statements u

> Effective 2011, Canada now has a two-tiered system for determining GAAP for private versus public companies. Private companies will follow ASPE as prepared by the AcSB, and public companies will have to follow IFRS. Private companies will be allowed to u

> As mentioned in the chapter, the capital marketplace’s reaction to recent corporate failures has been to increase the amount of government regulation. Instructions (a) Identify what steps Canada and the United States have taken to increase government re

> Nortel Networks Inc., the former telecommunications giant, was accused of misstating its financial statements. The auditors for the company signed audit reports in which they stated that the financial statements of the company were fairly presented. Ins

> The increased availability and accessibility of information has had a major impact on the process of financial reporting. Most companies have websites and make available to stakeholders a significant amount of financial information, including annual repo

> Three models for setting accounting standards follow: 1. The purely political approach, where national legislative action decrees accounting standards 2. The private, professional approach, where financial accounting standards are set and enforced by pri

> Describe what is meant by information asymmetry.

> If you were given complete authority to decide this, how would you propose that accounting principles or standards be developed and enforced?

> Identify at least three major stakeholders that use financial accounting information and briefly explain how these stakeholders might use the information from financial statements.

> Your company has been approached to bid on a contract to sell 15,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment n

> One of the less flattering interpretations of the acronym MIRR is “meaningless internal rate of return.” Why do you think this term is applied to MIRR?

> Travis, Inc., has sales of $387,000, costs of $175,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What is the a

> Why don’t all firms simply increase their payables periods to shorten their cash cycles? Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control c

> You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 12 percent per year, with an annual standard deviation of 25 percent. A

> California Real Estate, Inc., expects to earn $71 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16 million today and $5 million in one year in real estate. The new investment will generat

> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $78.43 and all the dividend information remains the same. What required return must investors be demanding on Storico stock?

> Universal Laser, Inc., just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent retu

> You’re prepared to make monthly payments of $350, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your account balance reaches $35,000?

> What is the value of an investment that pays $30,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value today if the first payment occurs four years from today

> Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend

> Given an interest rate of 6.1 percent per year, what is the value at Date t = 7 of a perpetual stream of $2,500 annual payments that begins at Date t = 15?

> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,500 payments and has an interest rate of 8.7 percent compounded monthly. Investment B is an 8 percent continuously compounded lump-sum invest

> Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? a. Land you alread

> In the chapter, we discussed one calculation of the sustainable growth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate is ROE 3 b. This equation is identical to the sustainable growth rate equation prese

> First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank

> What is the present value of $5,000 per year, at a discount rate of 6 percent, if the first payment is received 6 years from now and the last payment is received 25 years from now?

> Sony International has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $165 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has

> Titan Inc.’s net income for the most recent year was $8,320. The tax rate was 34 percent. The firm paid $1,940 in total interest expense and deducted $2,730 in depreciation expense. What was Titan’s cash coverage ratio for the year?

> Consider a firm with a contract to sell an asset for $115,000 three years from now. The asset costs $76,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate doe

> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get $1.55 million, and so on. If the appropriate interest

> Compute the future value of $1,000 compounded annually for a. 10 years at 5 percent. b. 10 years at 10 percent. c. 20 years at 5 percent. d. Why is the interest earned in part (c) not twice the amount earned in part (a)?

> As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at the end of the period. Show that the relationship between the value of an ordinary annuity and

> The present value of the following cash flow stream is $7,300 when discounted at 8 percent annually. What is the value of the missing cash flow? Year ……………….Cash Flow 1 …………………………..……. $1,500 2 …………………………..…………….? 3 ………………………….………2,700 4 ……………………..………….

> You need a 30-year, fixed-rate mortgage to buy a new home for $250,000. Your mortgage bank will lend you the money at a 5.3 percent APR for this 360-month loan. However, you can only afford monthly payments of $950, so you offer to pay off any remaining

> Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new proje

> J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,100, including a set of eight chairs. The company feels that sales will be 1,800, 1,950, 2,500, 2,35

> After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache pain. The second is a pill for headache and arthritis pain.

> Consider a four-year project with the following information: Initial fixed asset investment 5 $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price 5 $37; variable costs 5 $23; fixed costs 5 $195,000; quantity so

> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $6,800 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if in

> Lewin Skis, Inc., today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the earnings as dividends to the shareholders. However, Clint Williams, preside

> The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business

> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $65,000, and you plan to spend all of it. However, you want to start saving for retirement beginning next year.

> The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible? 9.125 May 09 100:03 100:04 -2.15

> Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $41,000; costs = $26,400; addition to retained earnings = $4,900; dividends paid = $1,570; interest expense = $1,840; tax rate = 35 percent.

> Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in eq

> The Cornchopper Company is considering the purchase of a new harvester. Cornchopper has hired you to determine the break-even purchase price in terms of present value of the harvester. This break-even purchase price is the price at which the project’s NP

> Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,450,000. The company can continue to rent the building to the present occupants for $61,000 per year. The present occu

> Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $75,000. Cash flows from increased sales will be $21,000 the fi

> Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 8.5 percent, 0 p

> Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a. Payback period. b. Internal rate of return. c. Profi

> Suppose we are thinking about replacing an old computer with a new one. The old one cost us $450,000; the new one will cost $580,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $130,

> Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $405,000, has a six-year life, a

> Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the comp

> Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the comp

> Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in p

> You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be SF 6.9 million per year for the next five years. The dollar required retu

> Your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $26,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indiffe

> Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for Tokyo Rubber Company is 10 percent. a. Based on the payback period, which project should be taken? b. Based on the NPV, which pr

> Corporation Growth has $86,000 in taxable income, and Corporation Income has $8,600,000 in taxable income. a. What is the tax bill for each firm? (Refer to Table 2.3.) b. Suppose both firms have identified a new project that will increase taxabl

> In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet look like? Previous Problem: Atreides International has op

> Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information: Plant also knows that securities analysts expect the earnings and dividends of Palmer to gr

> In Problem 14, what is the break-even quantity for the new credit policy? Problem 14 Current Policy New Policy $108 Price per unit Cost per unit $104 $ 47 $ 47 Unit sales per month 3,240 3,295

> Barrett Pharmaceuticals is considering a drug project that costs $2.5 million today and is expected to generate end-of-year annual cash flows of $227,000, forever. At what discount rate would Barrett be indifferent between accepting or rejecting the proj

> Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require an 11 percent return on this stock, what will you pay for a share today?

> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

> Redan Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. If the relevant carrying cost per switch assembly is $7, and the fixed order cost is $725, is Redan’s inventory policy optimal? Why or why not?

> Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 15 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c.5 percent

> Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $15,000

> The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid

> All else being the same, which has more interest rate risk, a long term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon bond compared to a short-term, low coupon bond?

> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

> Etonic Inc. is considering an investment of $365,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $245,000 and $70,000, respectively. Both reve

> The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent a year. a. Compute the profitability index for each of the three projects. b. Compute the NPV

> First National Bank charges 11.2 percent compounded monthly on its business loans. First United Bank charges 11.4 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?

2.99

See Answer