Question: Gordon Driving School’s 2011 balance sheet

> Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a $2.80 di

> Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If int

> The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell “equity in disguise

> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for

> Consider the following cash flows on two mutually exclusive projects: The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflat

> Locate the Treasury bond in Figure 8.4 maturing in February 2037. What is its coupon rate? What is its bid price? What was the previous day’s asked price?

> Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the thr

> Find the EAR in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 7% Quarterly 16 Monthly Daily 12 Infinite

> The Le Bleu Company has a ratio of long-term debt to total assets of .35 and a current ratio of 1.25. Current liabilities are $950, sales are $5,780, profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firm’s net fixed assets

> Which of the following should be treated as an incremental cash flow when computing the NPV of an investment? a. A reduction in the sales of a company’s other products caused by the investment. b. An expenditure on plant and equipment that has not yet be

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the

> Schwert Corp. shows the following information on its 2012 income statement: sales = $185,000; costs = $98,000; other expenses = $6,700; depreciation expense = $16,500; interest expense = $9,000; taxes = $19,180; dividends = $9,500. In addition, you’re to

> Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1 million in Year 3. The current spot exchange rate is $1.09/€ and

> Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual after tax cash flow by $390,000 indefinitely. The current m

> The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period. Curre

> Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 per

> Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of

> Why it that municipal bonds are not is taxed at the federal level, but are taxable across state lines? Why it is that U.S. Treasury bonds are not taxable at the state level?

> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for

> Vandalay 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 $195,000 per year. Machine B costs $5,700,00

> Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for Mari

> FFDP Corp. has yearly sales of $28 million and costs of $12 million. The company’s balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the industry EV/EBITDA multiple is 7.5. What is the company’s ent

> It is sometimes stated that “the internal rate of return approach assumes reinvestment of the intermediate cash flows at the internal rate of return.” Is this claim correct? To answer, suppose you calculate the IRR of a project in the usual way. Next, su

> An investment project provides cash inflows of $840 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,800? What if it is $7,300?

> The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 5.2 percent, how much will you pay for the policy? Suppose the Perpetual L

> A company has net income of $265,000, a profit margin of 9.3 percent, and an accounts receivable balance of $145,300. Assuming 80 percent of sales are on credit, what is the company’s days’ sales in receivables?

> During the year, the Senbet Discount Tire Company had gross sales of $1.06 million. The firm’s cost of goods sold and selling expenses were $525,000 and $215,000, respectively. Senbet also had notes payable of $800,000. These notes carried an interest ra

> Suppose the spot exchange rate for the Hungarian forint is HUF 206. The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you predict the exchange rate will be in one year? In two years? In five years? Wha

> If a U.S. firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them?

> Consider a project with a required return of R percent that costs $ I and will last for N years. The project uses straight-line depreciation to zero over the N -year life; there are neither salvage value nor net working capital requirements. a. At the ac

> Prove that when carrying costs and restocking costs are as described in the chapter, the EOQ must occur at the point where the carrying costs and restocking costs are equal.

> Bucksnort, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $3 per share for each of the next five years, and then never pay another dividend. If you require a

> You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $900 a month in a stock account in real dollars and $300 a month in a bond account in real dollars. The effective annual return of the stock account i

> You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in interest income will you have to declare on your tax return?

> You are considering a new product launch. The project will cost $820,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $18,000; variable cost pe

> Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year …………………….Cash Flow 0 ………………………….−$ 85,000,000 1 …………..………………….125, 000,000 2 ……………………………..−15,000,000 a. If the company requires a 10 percent return

> Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.

> An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?

> Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $34 million. If the DVDR fails, the present value of the payoff is $12 million. If the product goes dir

> Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?

> Your firm is contemplating the purchase of a new $670,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $240,000 before tax

> Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate th

> Compute the internal rate of return for the cash flows of the following two projects: Cash Flows ($) Year Project A Project B -$5,300 -$2,900 2,000 1,100 2 2,800 1,800 3. 1,600 1,200

> The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. a. In

> What are some of the difficulties that might come up in actual applications of the various criteria we discussed in this chapter? Which one would be the easiest to implement in actual applications? The most difficult?

> At 8 percent interest, how long does it take to double your money? To quadruple it?

> If the Layla Corp. has a 13 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?

> One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not converted into a common-size statement. Why do you thi

> The Optical Scam Company has forecast a 15 percent sales growth rate for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the external funds needed for next year. b. Construct the firmâ

> The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will

> Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

> Suppose the Japanese yen exchange rate is ¥85 = $1, and the British pound exchange rate is £ 1 = $1.53. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is ¥131.4 = £ 1. Is there an arbitrage opportunity here? If there is, e

> Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed ass

> Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $285,000 and equity of $176,000 at the beginning of the year. At the end of the year, the company had total assets

> A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if: a. The discount is changed to 2 pe

> What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of the credit period?

> Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per day. The daily interest rate is .015 percent. If the b

> Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the company’s stock?

> Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 19 years to maturity, and a coupon rate

> The Stancil Corporation provided the following current information: Proceeds from long-term borrowing……………….………… $17,000 Proceeds from the sale of common stock…………..…………. 4,000 Purchases of fixed assets………………………………..………….. 21,000 Purchases of inventorie

> How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $475,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will

> What is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is: a. 5 percent? b. 10 percent? c. 15 percent?

> Assume a firm is considering a new project that requires an initial investment and has equal sales and costs over its life. Will the project reach the accounting, cash, or financial break-even point first? Which will it reach next? Last? Will this order

> For each of the following, compute the present value: Present Value Years Interest Rate Future Value 7% $ 13,827 15 43,852 18 725,380 23 18 590,710 69

> In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

> Stone Sour, Inc., has a project with the following cash flows: Year ………………………..Cash Flows ($) 0 ………………………………….………….−$20,000 1 …………………………………………………….8,500 2 …………………………………………………..10,200 3 …………………………………………………….6,200 The company evaluates all projects by ap

> In October 2010, BMW announced plans to spend $1 billion to expand production at its plant in South Carolina. The plant produced the second generation BMW X3 as well as the company’s X5 and X6 models. BMW apparently felt it would be better able to compet

> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 9% $ 1,284 810 4,341 18,400 17 402,662 21,500 8 173,439

> The most recent financial statements for Fontenot Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum

> Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate? Do you know,

> Suppose the spot and three-month forward rates for the yen are ¥80.13 and ¥78.96, respectively. a. Is the yen expected to get stronger or weaker? b. What would you estimate is the difference between the inflation rates of the United States and Japan?

> Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $640,000 is estimated to result in $270,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it wi

> Ranney, Inc., has sales of $18,700, costs of $10,300, depreciation expense of $1,900, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?

> Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in t

> The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and Robb Computer applies the profitability index decision rule, which project should the firm accep

> Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.03. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead

> We are evaluating a project that costs $644,000, 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 70,000 units per year. Price per unit is $37, variab

> Jon Fulkerson has also received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below: Total assets ……………………………...…………$63,000 EBIT ………………………………………………………7,900

> In the previous problem, suppose the fair market value of James’s fixed assets is $15,000 versus the $8,900 book value shown. Jurion pays $23,000 for James and raises the needed funds through an issue of long-term debt. Construct the po

> In July 2011, fast food restaurant chain Wendy’s/Arby’s announced that it had sold its Arby’s restaurants and would change its name back to Wendy’s. Arby’s was purchased by the private equity firm Roark Capital Group. Arby’s was the 11th restaurant chain

> What are the five Cs of credit? Explain why each is important.

> Your neighbor goes to the post office once a month and picks up two checks, one for $11,000 and one for $3,400. The larger check takes four days to clear after it is deposited; the smaller one takes five days. a. What is the total float for the month? b.

> White Wedding Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’

> An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate used in the calculations is adjusted for political risk and any advantages from diversification. Does this mean the project is acceptable? Why or why not?

> Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions.

> Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. As a financial analyst for BRC, you are asked the following questions: a. If your d

> Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,060. The bonds make semiannual payments. What must the coupon rate be on these bonds?

> Toys Inc. just purchased a $390,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $25. The variable cost per toy is $11, and the firm incurs fixed costs

> Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?

> Fuji Software, Inc., has the following mutually exclusive projects. Year Project a. Suppose Fuji’s payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose Fuji uses the NPV rule to rank these two p

> An investment project costs $15,000 and has annual cash flows of $3,800 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent? If it is 15 percent?

> A project has perpetual cash flows of C per period, a cost of I , and a required return of R . What is the relationship between the project’s payback and its IRR? What implications does your answer have for long-lived projects with relatively constant ca

> Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 242 4 $ 307 410 8 896 51,700 16 162,181 18,750 27 483,500

> The most recent financial statements for Martin, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,500 was paid, and Martin wishes to maintain a constant payout ratio. Next yearâ€&#15

> In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the sustainable growth rate for Rosengarten, you will find it

> The following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B ’s stock. Both A and B have no debt outstanding. a. What will the earnings p

> Ramsay Corp. currently has an EPS of $2.35, and the benchmark PE for the company is 21. Earnings are expected to grow at 7 percent per year. a. What is your estimate of the current stock price? b. What is the target stock price in one year? c. Assuming t

> A proposed cost-saving device has an installed cost of $640,000. The device will be used in a five-year project but is classified as three year MACRS property for tax purposes. The required initial net working capital investment is $55,000, the marginal

> Y3K, Inc., has sales of $2,700, total assets of $1,310, and a debt–equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?