Question: Consider a project to supply 100 million

> Beginning three months from now, you want to be able to withdraw $2,500 each quarter from your bank account to cover college expenses over the next four years. If the account pays .57 percent interest per quarter, how much do you need to have in your ban

> A stock has had the following year-end prices and dividends:What are the arithmetic and geometric average returns for the stock?

> A stock has had returns of 8 percent, 26 percent, 14 percent, −17 percent, 31 percent, and −1 percent over the last six years. What are the arithmetic and geometric average returns for the stock?

> You find a certain stock that had returns of 9 percent, −16 percent, 18 percent, and 14 percent for four of the last five years. If the average return of the stock over this period was 10.3 percent, what was the stock’s return for the missing year? What

> You bought one of Great White Shark Repellant Co.’s 5.8 percent coupon bonds one year ago for $1,030. These bonds make annual payments and mature 14 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 5.1

> Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2016? Why do you think they were so high during this period? What relationship underlies your answer?Data from Figure 12.7:,,,

> 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

> Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Data from Problem 10:For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the av

> For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent.Data from Problem 9:You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five y

> Suppose a stock had an initial price of $65 per share, paid a dividend of $1.45 per share during the year, and had an ending share price of $71. Compute the percentage total return.

> A project has the following estimated data: Price = $62 per unit; variable costs = $28 per unit; fixed costs = $27,300; required return = 12 percent; initial investment = $34,800; life = four years. Ignoring the effect of taxes, what is the accounting br

> In the previous problem, suppose you make $5,700 annual deposits into the same retirement account. How large will your account balance be in 30 years?Previous problem:You are planning to make monthly deposits of $475 into a retirement account that pays 1

> Consider the following income statement for the Heir Jordan Corporation:A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. What is the projected a

> In each of the following cases, find the unknown variable:,,,

> In each of the following cases, calculate the accounting break-even and the cash breakeven points. Ignore any tax effects in calculating the cash break-even.,,,

> We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 65,000 units per year. Price per unit is $48, variab

> For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern? Describe how you would calculate your answer. What values would you u

> Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,440 per unit; variable costs = $460 per unit; fixed costs = $3.9 million; quantity = 85,000 units. Suppose the company believes all of its estimates are

> Suppose in the previous problem that the company always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?Previous problem:Letang Industrial Systems Company (LISC) is trying to decide between

> Consider four different stocks, all of which have a required return of 13 percent and a most recent dividend of $3.75 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 pe

> In the previous problem, you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained o

> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $845 per set and have a variable cost of $405 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for

> K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair in variable raw material costs and $24.36 per pair in variable labor expense. The shoes sell for $170 per pair. Last year, production was 145,000 pairs. Fixed costs we

> You are planning to make monthly deposits of $475 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years?

> Consider a four-year project with the following information: Initial fixed asset investment = $575,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $29; variable costs = $19; fixed costs = $235,000; quantity so

> Your firm is contemplating the purchase of a new $485,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $35,000 at the end of that time. You will save $140,000 before tax

> In the previous problem, what will be the new degree of operating leverage in each case?Data from Problem 14:At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.26. The operating cash flow is $78,000 in this

> At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.26. The operating cash flow is $78,000 in this case. Ignoring the effect of taxes, what are fixed costs? What will the operating cash flow be if output ris

> Input area:Fixed costs89000Units sold10400OCF127400New units sold11100Output area:Original DOL1.69858712715856%DQ0.0673076923076923%DOCF0.114327979712595New OCF141965.3846New DOL1.62691338625342

> In the previous problem, suppose fixed costs are $175,000. What is the operating cash flow at 43,000 units? The degree of operating leverage?Data from Problem 11:At an output level of 45,000 units, you calculate that the degree of operating leverage is 2

> At an output level of 45,000 units, you calculate that the degree of operating leverage is 2.79. If output rises to 48,000 units, what will the percentage change in operating cash flow be? Will the new level of operating leverage be higher or lower? Expl

> Perine, Inc., has balance sheet equity of $6.8 million. At the same time, the income statement shows net income of $815,000. The company paid dividends of $285,000 and has 245,000 shares of stock outstanding. If the benchmark PE ratio is 16, what is the

> Consider a project with the following data: Accounting break-even quantity = 13,700 units; cash break-even quantity = 9,600 units; life = five years; fixed costs = $185,000; variable costs = $23 per unit; required return = 12 percent. Ignoring the effect

> Night Shades, Inc. (NSI), manufactures biotech sunglasses. The variable materials cost is $11.13 per unit, and the variable labor cost is $7.29 per unit.a. What is the variable cost per unit?b. Suppose the company incurs fixed costs of $875,000 during a

> Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for $245,000. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?

> Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worth

> An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $5,100,000 and will be sold for $1,600,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salva

> Consider an asset that costs $680,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $143,000. If the relevant tax rate is 21 per

> A piece of newly purchased industrial equipment costs $1,375,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.

> A proposed new project has projected sales of $175,000, costs of $93,000, and depreciation of $24,800. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches described in the chapter and verify that the answer is th

> Consider the following income statement:Sales ……………………………………………………………………………………… $747,300Costs ……………………………………………………………………………………….. 582,600Depreciation ………………………………………………………………………………… 89,300EBIT …………………………………………………………………………………………………… ?Taxes (22%) ………………………

> The previous two problems suggest that using LEDs is a good idea from a purely financial perspective unless you live in an area where power is relatively inexpensive, but there is another wrinkle. Suppose you have a residence with a lot of incandescent b

> A proposed new investment has projected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs are $187,000; depreciation is $51,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net in

> This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that

> The previous problem suggests that using LEDs instead of incandescent bulbs is a no-brainer. However, electricity costs actually vary quite a bit depending on location and user type (you can get information on your rates from your local power company). A

> Gilmore, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the company had total assets of $210,000. During the year, the company sold no new equity. Net income for the year was $27,000 and dividends were $5,800. What is

> Light-emitting diode (LED) light bulbs have become required in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.45 and lasts for 1,000 hours. A 7- watt LED, which provides the same light, costs $2.

> Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $210,000 per year. Machine B costs $5,800,00

> In the previous problem, suppose you were going to use a three-year MACRS depreciation schedule for your manufacturing equipment and you could keep working capital investments down to only $25,000 per year. How would this new information affect your calc

> Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life,

> Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $425,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $25,000 a

> Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $385,000 is estimated to result in $145,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it w

> Martin Enterprises needs someone to supply it with 125,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $910,000 to install the equipment neces

> Winnebagel Corp. currently sells 20,000 motor homes per year at $97,000 each and 14,000 luxury motor coaches per year at $145,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 30,000 of these ca

> Lucas Corp. has a debt-equity ratio of .65. The company is considering a new plant that will cost $51 million to build. When the company issues new equity, it incurs a flotation cost of 7 percent. The flotation cost on new debt is 2.7 percent. What is th

> One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $450 per month. You will charge 1.3 percent per month interest on the overdue balance. If the current balance is $18,000, how long will

> What is the NAL of the lease from the lessor’s viewpoint? Assume a 21 percent tax rate

> You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs

> A five-year project has an initial fixed asset investment of $315,000, an initial NWC investment of $25,000, and an annual OCF of −$35,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return

> In the previous problem, suppose your required return on the project is 11 percent and your pretax cost savings are $150,000 per year. Will you accept the project? What if the pretax cost savings are $100,000 per year? At what level of pretax cost saving

> In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation in the first year. What is the new NPV?Data from Problem 14:Dog Up! Franks is looking at a new sausage system with an installed cost of $460,000. This

> Dog Up! Franks is looking at a new sausage system with an installed cost of $460,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $55,000. The sausage s

> In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation in the first year. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?Data from Prob

> In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?Data from Problem 11:In the previous pr

> In the previous problem, suppose the project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2

> In the previous problem, suppose the required return on the project is 12 percent. What is the project’s NPV?Data from Problem 9:Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 m

> Sunburn Sunscreen has a zero coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $16,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and

> Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $3.6 million in anticipation of using it as a warehouse and distribution site, but the company

> Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .60. It’s considering building a new $65 million manufacturing facility. This new plant is expected to generate aftertax

> A project that provides annual cash flows of $11,700 for nine years costs $63,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent between accepting the project and

> For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 24 percent?

> A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project? Year …………………………………………………………………………………….. Cash Flow0 …………………………………………………………………………………………. −$34,0001 …………………………

> You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $13.5 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net

> An investment project costs $17,000 and has annual cash flows of $4,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent?

> You’re prepared to make monthly payments of $175, beginning at the end of this month, into an account that pays 7 percent interest compounded monthly. How many payments will you have made when your account balance reaches $15,000?

> An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 11 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if

> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought an annuity with 11 annual payments of $8,500 per year at the current interestof 10 percent per year. What happens to the value of your inves

> You want to buy a new sports coupe for $84,500, and the finance office at the dealership has quoted you an APR of 5.2 percent for a 60-month loan to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

> You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $800 per month in a stock account in real dollars and $400 per month in a bond account in real dollars. The effective annual return of the stock accou

> When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost

> In the previous problem, suppose you believe that sales in five years will be $29.2 million and the price-sales ratio will be 2.45. What is the share price now?Previous problem:You have looked at the current financial statements for Reigle Homes, Co. The

> You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a

> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $54.50 and all the dividend information remains the same. What required return must investors be demanding on the company’s stock? (Hint: Set up the valua

> Storico Co. just paid a dividend of $3.15 per share. The company will increase its dividend by 20 percent next year and then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growt

> In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.36.

> Bronco, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? ,,,

> RAK, Inc., currently has an EPS of $2.45 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 23, what is the target share price five years from now?

> Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year …………………………………………………………………………………………….. Cash Flow0 ……………………………………………………………………………………………… −$1,275,0001 …………………………………………………………………………………………

> Big Dom’s Pawn Shop charges an interest rate of 27 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?

> McKeekin Corp. has a project with the following cash flows: Year ………………………………………………………………….. Cash Flow0 ………………………………………………………………………… $25,0001 ………………………………………………………………………… − 11,0002 …………………………………………………………………………….. 7,000What is the IRR of the project? What

> A project has the following cash flows: Year …………………………………………………………………………………………. Cash Flow0 ………………………………………………………………………………………………... $59,0001 ……………………………………………………………………………………………….. − 34,0002 ………………………………………………………………………………………………… − 39,000What is the IRR fo

> The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $145,000 for the firm during the first year, and the c

> Use the Black-Scholes model for pricing a call, put-call parity, and Problem 25 to show that the Black-Scholes model for directly pricing a put can be written as:P = E × e Rt × N (d2) − S × N (d1)

> This problem is useful for testing the ability of financial calculators and spreadsheets. Consider the following cash flows. How many different IRRs are there? (Hint: Search between 20 percent and 70 percent.) When should we take this project?Year ………………

> An investment under consideration has a payback of seven years and a cost of $685,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows are conventional.

> E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.65 percent on this investment, how much does a share of preferred stock cost to

> Mannix Corporation stock currently sells for $57 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 3.75 percent growth rate in dividends, what was the most recent dividend per share paid on the

> Suppose the company in the previous problem uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. Calculate the MIRR of the project using all three methods using these interest rates.Data from Problem 19:Solo Cor

> An investment project provides cash inflows of $745 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if it is $6,100?

> An investment will pay you $80,000 in 10 years. If the appropriate discount rate is 9 percent compounded daily, what is the present value?