McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $365 per set. The company has spent $150,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,000 sets of its high-priced clubs. The high-priced clubs sell at $1,345 and have variable costs of $730. The company will also increase sales of its cheap clubs by 12,000 sets. The cheap clubs sell for $445 and have variable costs of $210 per set. The fixed costs each year will be $9.45 million. The company has also spent $1 million on research and development for the new clubs. The plant and equipment required will cost $39.2 million and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1.85 million that will be returned at the end of the project. The tax rate is 25 percent, and the cost of capital is 10 percent. Calculate the payback period, the NPV, and the IRR.
> Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 5.3 percent. Assume semi
> You have found the following historical information for the Daniela Company over the past four years: Earnings are expected to grow at 11 percent for the next year. Using the company’s historical average PE as a benchmark, what is the
> Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2021. What is the yield to maturity of the bond? What
> Milton Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
> You purchase a bond with a coupon rate of 6.4 percent, a par value of $1,000, and a clean price of $1,027. If the next semiannual coupon payment is due in two months, what is the invoice price?
> You purchase a bond with an invoice price of $1,053 and a par value of $1,000. The bond has a coupon rate of 5.3 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?
> Uliana Co. wants to issue new 20-year bonds for some muchneeded expansion projects. The company currently has 6 percent coupon bonds on the market with a par value of $1,000 that sell for $967, make semiannual payments, and mature in 20 years. What coupo
> Williams Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.32 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 18 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change o
> Given that Hertz was down by 88 percent in the first half of 2020, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
> Both Bond Sam and Bond Dave have 7.1 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentag
> Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 6.8 percent, has a YTM of 6.2 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.2 percent, ha
> The next dividend payment by Im, Inc., will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. If the stock currently sells for $37 per share, what is the required return?
> The RLX Co. just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the company’s stock, what is the current price? W
> Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.7 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.05 percent. What is the dollar price of the bond?
> Ashburn Corp. issued 25-year bonds two years ago at a coupon rate of 5.6 percent. The bonds make semiannual payments. If these bonds currently sell for 97 percent of par value, what is the YTM?
> You’ve observed the following returns on Pine Computer’s stock over the past five years: 8 percent, −12 percent, 14 percent, 21 percent, and 16 percent. a. What was the arithmetic average return on the company’s stock over this five-year period? b. What
> Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.
> What was the average annual return on large-company stocks from 1926 through 2019: a. In nominal terms? b. In real terms?
> Locate the Treasury bond in Figure 7.5 maturing in November 2026. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in dollars? Assume a par value of $10,000. Figure 7.5:
> Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nomina
> Rework Problems 1 and 2 assuming the ending share price is $61. Problem 2: In Problem 1, what was the dividend yield? The capital gains yield? Problem 1: Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during t
> Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions: a. What is the probability that in any given year, the return on
> Over a 40-year period, an asset had an arithmetic return of 12.8 percent and a geometric return of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5 years? 10 years? 20 years?
> In Problem 1, what was the dividend yield? The capital gains yield? Problem 1: Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total
> 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 6 percent, 29 percent, 13 percent, −19 percent, 34 percent, and −2 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 18 percent, −23 percent, 16 percent, and 9 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 5.1 percent coupon bonds one year ago for $1,010. These bonds have a par value of $1,000, make annual payments, and mature 14 years from now. Suppose you decide to sell your bonds today, when the requir
> 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 2019? Why do you think they were so high during this period? What relationship underlies your answer? Table 12.1: / / / / Figure
> Locate the Treasury issue in Figure 7.5 maturing in February 2029. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000. Figure 7.5:
> 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? Problem 10: For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T
> 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. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on th
> Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total return.
> A project has the following estimated data: Price = $53 per unit; variable costs = $22 per unit; fixed costs = $31,460; required return = 12 percent; initial investment = $46,200; life = four years. Ignoring the effect of taxes, what is the accounting br
> In each of the following cases, find the unknown variable:
> In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even.
> In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Problem 5: We are evaluating a project that costs $84
> We are evaluating a project that costs $845,000, 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 51,000 units per year. Price per unit is $53, variab
> Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 20,000 tons. How does this number compare to the sensitivity figure you found in Problem 28? Verify that either approach
> Stinnett Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,220 per unit; variable costs = $380 per unit; fixed costs = $3.75 million; quantity = 90,000 units. Suppose the company believes all of its estimates
> Say you own an asset that had a total return last year of 14.1 percent. If the inflation rate last year was 2.83 percent, what was your real return?
> Use the results of Problem 25 to find the accounting, cash, and financial break-even quantities for the company in Problem 27. Problem 25: This problem concerns the effect of taxes on the various break-even measures. a. Show that, when we consider taxes
> In Problem 27, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of
> Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3.1 million investment in threading equipment to get the project started; the project will last for five years. The acco
> This problem concerns the effect of taxes on the various break-even measures. a. Show that, when we consider taxes, the general relationship between operating cash flow, OCF, and sales volume, Q, can be written as: b. Use the expression in part (a) to
> Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900 (including tax consequences) more than the comparable gasoline-on
> In Problem 20, McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables? Problem 20: McGilla Golf has decided to sel
> 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? Problem 20: McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have
> Ojo Outerwear Corporation can manufacture mountain climbing shoes for $45.17 per pair in variable raw material costs and $29.73 per pair in variable labor expense. The shoes sell for $210 per pair. Last year, production was 155,000 pairs. Fixed costs wer
> You are considering a new product launch. The project will cost $1,675,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units per year; price per unit will be $16,300, variable cost
> An investment offers a total return of 11.7 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 9 percent. What does Janice believe the inflation rate will be over the next year?
> In the previous problem, what is the degree of operating leverage at the given level of output? What is the degree of operating leverage at the accounting break-even level of output? Problem 17: Consider a four-year project with the following informatio
> Consider a four-year project with the following information: Initial fixed asset investment = $655,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28; variable costs = $16; fixed costs = $245,000; quantity s
> In the previous problem, what will be the new degree of operating leverage in each case? Problem 14: At an output level of 14,500 units, you have calculated that the degree of operating leverage is 3.41. The operating cash flow is $81,000 in this case.
> At an output level of 14,500 units, you have calculated that the degree of operating leverage is 3.41. The operating cash flow is $81,000 in this case. Ignoring the effect of taxes, what are fixed costs? What will the operating cash flow be if output ris
> A proposed project has fixed costs of $76,000 per year. The operating cash flow at 9,200 units is $108,700. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise from 9,200 to 10,000, what will be the increase in oper
> In the previous problem, suppose fixed costs are $183,000. What is the operating cash flow at 38,000 units? The degree of operating leverage? Problem 11: At an output level of 40,000 units, you calculate that the degree of operating leverage is 3.19. If
> At an output level of 40,000 units, you calculate that the degree of operating leverage is 3.19. If output rises to 44,000 units, what will the percentage change in operating cash flow be? Will the new level of operating leverage be higher or lower? Expl
> Consider a project with the following data: Accounting break-even quantity = 14,300 units; cash break-even quantity = 9,700 units; life = 5 years; fixed costs = $205,000; variable costs = $19 per unit; required return = 12 percent. Ignoring the effect of
> Night Shades, Inc., manufactures biotech sunglasses. The variable materials cost is $12.14 per unit, and the variable labor cost is $6.89 per unit. a. What is the variable cost per unit? b. Suppose the company incurs fixed costs of $845,000 during a year
> Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be
> Suppose the real rate is 1.8 percent and the inflation rate is 2.7 percent. What rate would you expect to see on a Treasury bill?
> 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 $5.7 million and will be sold for $1.8 million at the end of the project. If the tax rate is 21 percent, what is the aftertax s
> Consider an asset that costs $745,000 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 $135,000. If the relevant tax rate is 21 per
> A piece of newly purchased industrial equipment costs $1.475 million 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 $215,000, costs of $104,000, and depreciation of $25,300. 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 t
> Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1.4 million; the new one will cost $1.7 million. The new machine will be depreciated straight-line to zero over its fiveyear life. It will probably be worth abou
> Consider the following income statement: Sales ………………….…………………….. $704,600 Costs …………….…..………………………… 527,300 Depreciation ……..………………………….. 82,100 EBIT …………..…..……………………………………. ? Taxes (22%) …..…………………………………….. ? Net income ………………………………………….. ? Fill
> Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment
> To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be
> A proposed cost-saving device has an installed cost of $905,000. 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 $65,000, the tax rate
> Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year ………………………….. Unit Sales 1 …………………………………… 71,000 2 …………………………………. 84,000 3 ………………………………… 103,000 4 ……………………………….… 95,000 5 …………………………….…… 64,0
> If Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent, what is the approximate real rate of interest? The exact real rate?
> In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation in the first year. What is the new NPV? Problem 34: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of
> You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.9 million in anticipation of using it as a toxi
> In the previous problem, suppose you drive the truck x miles per year. How many miles would you have to drive the car before upgrading the car would be the better choice? Problem 32: Your small remodeling business has two work vehicles. One is a small p
> Your small remodeling business has two work vehicles. One is a small passenger car used for job site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets
> Before LEDs became a popular replacement for incandescent light bulbs, compact fluorescent lamps (CFLs) were hailed as the new generation of lighting. However, CFLs had even more wrinkles. In no particular order: 1. Incandescent bulbs generate a lot more
> 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 $515,000. Variable costs are 36 percent of sales, and fixed costs are $173,000; depreciation is $46,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net in
> 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
> Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.1 million and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $315,000 per year. Machine B costs $4.8 mi
> 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
> Union Local School District has a bond outstanding with a coupon rate of 2.9 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 2.7 percent, and the bond has a par value of $5,000. What is the dollar price of the bo
> Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $750,000 five years ago; if the land were sold today, it would net you $1.1 million a
> 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? Problem 23: Rust Industrial Systems Company is trying to decide between two differe
> Rust Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $295,000, has a four-year life, and requires $77,000 in pretax annual operating costs. System B costs $355,000, has a six-year life, and requi
> 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 $525,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $35,000 a
> Tanaka Machine Shop is considering a fouryear project to improve its production efficiency. Buying a new machine press for $445,000 is estimated to result in $160,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it wil
> Martin Enterprises needs someone to supply it with 110,000 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 $940,000 to install the equipment neces
> Winnebagel Corp. currently sells 20,000 motor homes per year at $103,000 each and 14,000 luxury motor coaches per year at $155,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 25,000 of these c
> You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a three-year life, and has pretax operating costs of $74,000 per year. The Techron II costs $445,000, has a five-year life, and has pretax operating costs
> A five-year project has an initial fixed asset investment of $345,000, an initial NWC investment of $25,000, and an annual OCF of −$41,000. 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 chapter opener, we mentioned Toyota’s decision to invest $13 billion to increase production at five U.S. plants. Toyota apparently felt that it would be better able to compete and create value with U.S-based facilities. Other companies such as Fuj
> Given that Zoom was up by about 250 percent for in the first half of 2020, why didn’t all investors hold this stock?
> A carpet is to be installed in a room of length 9.72 m and width 5.3 m. Find the area of the room retaining the proper number of significant figures.
> For an angle θ measured from the positive x- axis, the values of sin θ and cos θ are always (choose one): (a) greater than +1 (b) less than -1 (c) greater than -1 and less than 1 (d) greater than or equal to -1 and less than or equal to 1 (e) less tha
> A rectangular airstrip measures 32.30 m by 210 m, with the width measured more accurately than the length. Find the area, taking into account significant figures.
