Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $600 million today, and it will have a cash outflow of $95 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table. Bullock Mining has a 12 percent required return on all of its gold mines. Year …………………………..Cash Flow 0………………..……………..−$600,000,000 1…………………………………….…75,000,000 2……………………………………..120,000,000 3……………………………………..160,000,000 4……………………………………..210,000,000 5…………………………………..…240,000,000 6………………………………………160,000,000 7……………………………………….130,000,000 8………………………………………..90,000,000 9………………………………………−95,000,000 1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine. 2. Based on your analysis, should the company open the mine? 3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.
> Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year …………………………..Unit Sales 1………………………………….………… 93,000 2……………………………………………105,000 3……………………………………………128,000 4……………………………………………134,000 5……………………
> You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fi ne zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.4 million in anticipation of using it as a tox
> 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
> Draw up an income statement and balance sheet for this company for 2008 and 2009. 2008 2009 Sales $ 7,233 $ 8,085 Depreciation 1,038 1,085 Cost of goods sold 2,487 2,942 Other expenses 591 515 Interest 485 579 Cash 3,792 4,041 Accounts receivable 5,0
> The debate regarding CFLs versus incandescent bulbs (see Problems 25–27) has even more wrinkles. In no particular order: 1. Incandescent bulbs generate a lot more heat than CFLs. 2. CFL prices will probably decline relative to incandescent bulbs. 3. CF
> The previous two problems suggest that using CFLs 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
> The previous problem suggests that using CFLs 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
> Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.50 and lasts 1,000 hours. A 15-watt CFL, which provides the same light, costs $3.50 and
> 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 $170,000 per year. Machine B costs $5,100,00
> 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 cal
> 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 $2,400,000 five years ago; if the land were sold today, it would net you $2,700,000 a
> Suppose in the previous problem that DISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?
> Dangerfield Industrial Systems Company (DISC) is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual operating costs. System B costs $570,000, has a six-year
> Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it wil
> Consider the following abbreviated financial statements for Parrothead Enterprises: a. What is owners’ equity for 2008 and 2009? b. What is the change in net working capital for 2009? c. In 2009, Parrothead Enterprises purchased $1,35
> Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other hou
> A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play? To an
> “When evaluating projects, we’re concerned with only the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation erosion?
> If we define the NPV index as the ratio of NPV to cost, what is the relationship between this index and the profitability index?
> A project that provides annual cash flows of $28,500 for nine years costs $138,000 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 an
> For the cash flows in the previous problem, suppose the fi rm uses the NPV decision rule. At a required return of 11 percent, should the fi rm accept this project? What if the required return was 30 percent?
> A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should the firm accept the following project? Year ……………………………… Cash Flow 0……………………………………………….−$34,000 1……………………………………………….…16,000 2………………………………………..………
> You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net i
> An investment project costs $15,000 and has annual cash flows of $4,300 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?
> Dahlia Industries had the following operating results for 2009: sales =$22,800; cost of goods sold =$16,050; depreciation expense =$4,050; interest expense =$1,830; dividends paid =$1,300. At the beginning of the year, net fixed assets were $13,650, curr
> An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What if
> Buy Coastal, 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? Year Cash Flow (A) Cash Flow (B) -$40,000 -$ 60,000 1 19,
> An investment project provides cash inflows of $765 per year for eight years. What is the project payback period if the initial cost is $2,400? What if the initial cost is $3,600? What if it is $6,500?
> What is the payback period for the following set of cash flows? Year ………………………. Cash Flow 0…………………………………………−$6,400 1………………………………………….…1,600 2…………………………………………….1,900 3…………………………………………….2,300 4……………………………………..……..1,400
> Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year ……………………………. Cash Flow 0……….……………………….……….−$750,000 1……………………………………….……..205,000 2……………………………………...……..265,000 3…………………………………...………
> A project has the following cash flows: Year …………………………… Cash Flow 0……………………………..……………. $58,000 1…………………………………..………. −34,000 2…………………………………………….−45,000 What is the IRR for this project? If the required return is 12 percent, should the firm accept the p
> 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 $85,000 for the firm during the first year, and the ca
> This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this project? Year …………………………. Cash Flow 0………………………………..…………−$1,512
> An investment under consideration has a payback of seven years and a cost of $724,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows are conventional.
> A project has an initial cost of I, has a required return of R , and pays C annually for N years. a. Find C in terms of I and N such that the project has a payback period just equal to its life. b. Find C in terms of I, N , and R such that this is a prof
> In Problem 19, suppose Raines Umbrella Corp. paid out $25,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what do you know about the firm’s long-te
> Suppose the company in the previous problem uses an 11 percent discount rate and an 8 percent reinvestment rate on all of its projects. Calculate the MIRR of the project using all three methods using these interest rates.
> Slow Ride Corp. is evaluating a project with the following cash flows: Year ……………………. Cash Flow 0………………………………....−$16,000 1……………………………………..…..6,100 2………………………………….……..7,800 3…………………………..…………….8,400 4……………………..………………….6,500 5…………………………….…………..−5,100 The
> An investment has an installed cost of $684,680. The cash flows over the four-year life of the investment are projected to be $263,279, $294,060, $227,604, and $174,356. If the discount rate is zero, what is the NPV? If the discount rate is infinite, wha
> Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a 15 percent return on your investment. a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the discount
> The Weiland Computer Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm acce
> What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year...………………….. Cash Flow 0………………………………..….−$14,000 1…………………………………...……..7,30
> Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year ……………………………… Cash Flow 0………………………………………−$45,000,000 1……………………………….………….78,000,000 2………………………………….…….−14,000,000 a. If the company requires a 12
> Consider the following two mutually exclusive projects: Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? Year Cash Flow (X) Cash Flow (Y) -$15,000 -$15,00
> Mahjong, Inc., has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? b. If the required r
> For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?
> During 2009, Raines Umbrella Corp. had sales of $730,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $105,000, and $135,000, respectively. In addition, the company had an interest expense of $75,000
> What is the IRR of the following set of cash flows? Year ……………………………… Cash Flow 0………………………………………………..−$19,500 1…………………………………………………….9,800 2…….……………………………..……………..10,300 3…………………………………………………….8,600
> Concerning IRR: a. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule? b. What is the relationship between IRR and NPV? Are there any situations i
> Concerning NPV: a. Describe how NPV is calculated, and describe the information this measure provides about a sequence of cash flows. What is the NPV criterion decision rule? b. Why is NPV considered a superior method of evaluating the cash flows from a
> Concerning AAR: a. Describe how the average accounting return is usually calculated, and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? b. What are the problems associated with usin
> Concerning discounted payback: a. Describe how the discounted payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the discounted payback criterion decision rule? b. What are the problem
> Concerning payback: a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? b. What are the problems associated with using the payba
> It is sometimes stated that “the net present value approach assumes reinvestment of the intermediate cash flows at the required return.” Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do t
> In January 2008, automobile manufacturer Volkswagen announced plans to build an automatic transmission and engine plant in South Carolina. Volkswagen apparently felt that it would be better able to compete and create value with U.S.-based facilities. Oth
> Concerning the profitability index: a. Describe how the profitability index is calculated, and describe the information this measure provides about a sequence of cash flows. What is the profitability index decision rule? b. What is the relationship betwe
> (Refer to Table 2.3 .) Corporation Growth has $88,000 in taxable income, and Corporation Income has $8,800,000 in taxable income. a. What is the tax bill for each firm? b. Suppose both firms have identified a new project that will increase taxable income
> In response to the Sarbanes–Oxley Act, many small firms in the United States have opted to “go dark” and delist their stock. Why might a company choose this route? What are the costs of “going dark”?
> The next dividend payment by Hot Wings, Inc., will be $2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for $48 per share, what is the required return?
> Thirsty Cactus Corp. just paid a dividend of $1.25 per share. The dividends are expected to grow at 28 percent for the next eight years and then level off to a 6 percent growth rate indefinitely. If the required return is 13 percent, what is the price of
> Apocalyptica Corp. pays a constant $9.75 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share pric
> Metroplex Corporation will pay a $3.04 per share dividend next year. The company pledges to increase its dividend by 3.8 percent per year indefinitely. If you require an 11 percent return on your investment, how much will you pay for the company’s stock
> Eva Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 13 percent, and
> Marcel Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 13 percent and the company just paid a $1.80 divid
> Far Side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5, and $2. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 per
> Bread, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $4 per share for each of the next fi ve years, and then never pay another dividend. If you require an 11
> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the fi rm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 10 years and will in
> Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the stock for the first three years, a 12 percent return f
> Dimeback, Inc., is obligated to pay its creditors $7,300 during the year. a. What is the market value of the shareholders’ equity if assets have a market value of $8,400? b. What if assets equal $6,700?
> Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.35 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively.
> Resnor, Inc., has an issue of preferred stock outstanding that pays a $5.50 dividend every year in perpetuity. If this issue currently sells for $108 per share, what is the required return?
> Suppose you know that a company’s stock currently sells for $47 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s t
> Keenan Co. is expected to maintain a constant 5.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3 percent, what is the required return on the company’s stock?
> The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors require an 11 percent return on The Jackson–Timberlake Wardro
> The chapter shows that in the two-stage dividend growth model, the growth rate in the first stage, g1 , can be greater than or less than the discount rate, R . Can they be exactly equal?
> Regarding the two-stage dividend growth model in the chapter, show that the price of a share of stock today can be written as follows: Can you provide an intuitive interpretation of this expression? D, X (1+g,) P.=R- 8, + 81 1+R 1+ 8, 1 + R D, X (1
> Assume a stock has dividends that grow at a constant rate forever. If you value the stock using the constant dividend growth model, how many years worth of dividends constitute one-half of the stock’s current price?
> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $63.82 and all the dividend information remains the same. What required return must investors be demanding on Storico stock?
> Storico Co. just paid a dividend of $2.45 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
> Prepare a 2009 balance sheet for Bertinelli Corp. based on the following information: cash =$195,000; patents and copyrights =$780,000; accounts payable =$405,000; accounts receivable =$137,000; tangible net fixed assets =$2,800,000; inventory =$264,000;
> Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $4.50 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
> Chartreuse County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next 11 years before leveling off at 6 percent into perpetuity. The required return on the company’s stock is 12 percent. I
> You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If the company currently ha
> E-Eyes.com Bank just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. If the market requires a 6.4 percent return on this investment, how much does a share of preferred stock cost today
> Teder Corporation stock currently sells for $64 per share. The market requires a 10 percent return on the firm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stoc
> Antiques R Us is a mature manufacturing fi rm. The company just paid a $10.46 dividend, but management expects to reduce the payout by 4 percent per year indefi nitely. If you require an 11.5 percent return on this stock, what will you pay for a share to
> Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a propriet
> A substantial percentage of the companies listed on the NYSE and NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question?
> One of the assumptions of the two stage growth model is that the dividends drop immediately from the high growth rate to the perpetual growth rate. What do you think about this assumption? What happens if this assumption is violated?
> When it comes to voting in elections, what are the differences between U.S. political democracy and U.S. corporate democracy?
> Given the following information for Rosato Pizza Co., calculate the depreciation expense: sales=$41,000; costs=$19,500; addition to retained earnings=$5,100; dividends paid=$1,500; interest expense=$4,500; tax rate=35 percent.
> Referring to the previous questions, under what circumstances might a company choose not to pay dividends?
> Some companies, such as Reader’s Digest, have created classes of stock with no voting rights at all. Why would investors buy such stock?
> Suppose the real rate is 3 percent and the inflation rate is 4.7 percent. What rate would you expect to see on a Treasury bill?
> Say you own an asset that had a total return last year of 11.4 percent. If the inflation rate last year was 4.8 percent, what was your real return?
> An investment offers a 14 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 9 percent. What does Bill believe the inflation rate will be over the next year?
> Ashes Divide Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8 percent, and a current price of $924. The bonds make semiannual payments. What must the coupon rate be on these bonds?
> Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
> Grohl Co. issued 11-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price?
