Question: The treasurer of Riley Coal Co. is

> The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $120,000. Of this amount, $70,000 is subject to five-year MACRS depreciation. The balance is in non

> Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 25 percent tax bracket. a. Compute its cash flow. b. Assume it has $200,000 in depreciation. Re compute its cash flow. c. How large a cash flow benefit d

> Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-11 to determine in what depreciation category the asset falls. (Hint: It is not 10 yea

> Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $300,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. The fir

> The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $160,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: The firm i

> Assume $65,000 is going to be invested in each of the following assets. Using Tables 12-11 and 12-12, indicate the dollar amount of the first year’s depreciation. a. Office furniture. b. Automobile. c. Electric and gas utility property. d. Sewage treatme

> Telstar Communications is going to purchase an asset for $380,000 that will produce $180,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule. (This

> Davis Chili Company is considering an investment of $35,000, which produces the following inflows: You are going to use the net present value profile to approximate the value for the internal rate of return. Please follow these steps: a. Determine the

> What is the net present value profile? What three points should be determined to graph the profile?

> Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The inv

> The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm’s cost of capital is 10 percent. It will only invest $77,000 this year. It has determined the internal rate of return for each of the foll

> The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 11 percent. The project being analyzed is as follows ($26,000 investment): a. What is the modified internal rate of return? An approximation from A

> Turner Video will invest $58,500 in a project. The firm’s cost of capital is 12 percent. The investment will provide the following inflows: The internal rate of return is 11 percent. a. If the reinvestment assumption of the net presen

> Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $40,000, and that it has a 24 percent tax bracket. a. Compute its cash flow using the following format: b. Compute the cash flow for the company if depreciati

> You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method combined with the profitability index approach described in footnote 2 of this chapter, which project would you select? Use a discount rat

> The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows have the following projections: a. If the cost of capita

> The Hudson Corporation makes an investment of $24,000 that provides the following cash flow: Year Cash Flow  1 $ 13,000  2 13,000  3 4,000   a. What is the net present value at an 8 percent discount rate? b. What is the internal rate of r

> Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $34,000. If the cost of capital is 12

> The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years. The firm will also be required to spend $10,000 to close down the project at the end of the three years. If the cost

> How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods?

> What is the difference between technical insolvency and bankruptcy?

> Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? (Note that the fourth year’s cash flow is negative.) Year Cash Fl

> Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $50,000. The annual cash inflows for the next three years will be a. Determine the internal rate of return. b. With a cost of capital of 18 percent, should the ma

> You buy a new piece of equipment for $16,230, and you receive a cash inflow of $2,500 per year for 12 years. What is the internal rate of return?

> X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows: a. Which of the two projects should be chosen based on the payback method? b. Which of the two projects should be chosen based on the net

> Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and a 25 percent tax bracket. Compute its cash flow using the following format: Earnings before depreciation and taxes Depreciation Earnings before

> Airborne Airlines Inc. has a $1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of $88 and is currently selling for $950. Airborne is in a 25 percent tax bracket. The firm wishes to know what the afte

> Royal Jewelers Inc. has an after tax cost of debt of 7 percent. With a tax rate of 25 percent, what can you assume the yield on the debt is?

> Calculate the after tax cost of debt under each of the following conditions: Yield Corporate Tax Rate a. 8.0% 26% b. 9.0 35 8.0 C.

> Calculate the after tax cost of debt under each of the following conditions: Yield Corporate Tax Rate а. 8.0% 18% b. 12.0 34 C. 10.6 15

> Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: a. Comput

> Why does capital budgeting rely on analysis of cash flows rather than on net income?

> A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $240,000 a year for the next 50 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 4 p

> The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 30 percent preferred stock, and 30 percent common equity. Initially, common equity will be in the form of

> The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of

> Delta Corporation has the following capital structure: a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of debt referred to earlier applies only to t

> Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 25 percent. Northwest’s treasurer is trying to determine the corporation’s current weigh

> A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cos

> Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of ca

> Given the following information, calculate the weighted average cost of capital for Digital Processing Inc. Line up the calculations in the order. Percent of capital structure: Additional information: Preferred stock. 20% Common equity 40 Debt.. 4

> Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order. Percent of capital structure: Debt………â€&brvb

> Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: a. Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of

> Why is the cost of debt less than the cost of preferred stock if both securities are priced to yield 10 percent in the market?

> Evans Technology has the following capital structure. The after tax cost of debt is 6 percent; and the cost of common equity (in the form of retained earnings) is 13 percent. a. What is the firm’s weighted average cost of capital? b

> Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 9 percent r

> Global Technology’s capital structure is as follows: The after tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent. Calculate Glo

> Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $1.63. a. Use Appendix A at the back of the text to determine the compound annual rate of growth in ear

> Compute Ke and Kn under the following circumstances: a. D1 = $5.00, P0 = $70, g = 8%, F = $7.00. b. D1 = $0.22, P0 = $28, g = 7%, F = $2.50. c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0 = $30, g = 6.0%, F = $2.20. d.

> Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $2.50 per share, and the current price of its common stock is $50 per share. The expected growth rate is 8 perce

> Wallace Container Company issued $100 par value preferred stock 12 years ago. The stock provided a 9 percent yield at the time of issue. The preferred stock is now selling for $72. What is the current yield or cost of the preferred stock? (Disregard flot

> Medco Corporation can sell preferred stock for $90 with an estimated flotation cost of $2. It is anticipated the preferred stock will pay $8 per share in dividends. a. Compute the cost of preferred stock for Medco Corp. b. Do we need to make a tax adjust

> Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity. a. What is Terrier’s after tax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the co

> What is the concept of marginal cost of capital?

> Russell Container Corporation has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $105 and is currently selling for $880 per bond. Russell Corp. is in a 25 percent tax bracket. The firm wishes

> In March, Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August Mr. Hertz came up with a heating compound that would have a return of 14 percent. The chief financial office

> Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) increase from 9 to 12 percent. a. What is the bond price at 9 percent? b. What is the bond price at 12 percent? c.

> Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent: a. What is the bond price at 11 percent? b. What is the bond price at 8 perc

> Toxaway Telephone Company has a $1,000 par value bond outstanding that pays 6 percent annual interest. If the yield to maturity is 8 percent, and remains so over the remaining life of the bond, the bond will have the following values over time: Graph t

> Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for the following maturity dates: a. 30 years b. 15

> Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 15 percent annual interest. The current yield to maturity on such bonds in the market is 17 percent. Compute the price of the bonds for the following maturity dates: a. 30 years b. 2

> Barry’s Steroids Company has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in 40 years. If the percent yield to maturity is 13 percent, what percent of the total bond value does the repayment of principal represent?

> Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Round al

> Martin Office Supplies paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 7 percent over the next four years. The required rate of return is 14 percent (this will also serve as the discount rate in this problem). Round a

> Gibson Appliance Co. is a very stable billion-dollar company with a sales growth of about 7 percent per year in good or bad economic conditions. Because of this stability (a coefficient of correlation with the economy of +.4, and a standard deviation of

> A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $155 (P0), and a constant growth rate (g) of 10 percent. a. Compute the required rate of return (Ke). Indicate whether each of the following changes would make the required r

> A firm pays a $4.80 dividend at the end of year one (D1), has a stock price of $80, and a constant growth rate (g) of 5 percent. Compute the required rate of return (Ke).

> Justin Cement Company has had the following pattern of earnings per share over the last five years: The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of ea

> Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of r

> Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is a. 5 percent. b. 15 percent.

> Ecology Labs Inc. will pay a dividend of $6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent. a. Compute P0. b. Assume Ke, the required rate of return, goes up to 18 percent

> BioScience Inc. will pay a common stock dividend of $3.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 9 percent. Compute the current price of the stock (P0).

> Stagnant Iron and Steel currently pays a $12.25 annual cash dividend (D0). The company plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke)

> Analogue Technology has preferred stock outstanding that pays a $9 annual dividend. It has a price of $76. What is the required rate of return (yield) on the preferred stock?

> X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $12.00 per share. With the passage of time, yields have soared from the original 10 percent to 17 percent (yield is the same as required rate of return). a. What was the

> The Woodruff Corporation purchased a piece of equipment three years ago for $230,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $90,000. A new piece of equipment can be purchased for $320,000. It

> North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return). a. What was

> The preferred stock of Denver Savings and Loan pays an annual dividend of $5.70. It has a required rate of return of 6 percent. Compute the price of the preferred stock.

> You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 10 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual in

> Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 11 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. Ther

> Evans Emergency Response bonds have 6 years to maturity. Interest is paid semiannually. The bonds have a $1,000 par value and a coupon rate of 8 percent. If the price of the bond is $1,073.55, what is the annual yield to maturity?

> Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is a. 7 percent. b. 10 percent. c. 13 percent.

> Stilley Resources bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5 percent. If the price of the bond is $841.51, what is the yield to maturity?

> Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They have 10 years remaining to maturity. The annual interest

> Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and

> Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as d

> Masco Oil and Gas Company is a very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: The vice president of finance is plannin

> Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point in time as descri

> Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. a. Compute the

> Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point as descri

> Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest

> a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period. b. Assume the interest rate in the m

> Using Table 10-1, assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent. a. What is the price of the bond? b. Assume five years have passed and interest rates in the market have gone down to 12 pe

> The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is a. 6 percent. b. 9 percent. c. 13 percent.

> You are going to receive $205,000 in 18 years. What is the difference in present value between using a discount rate of 12 percent versus 9 percent?

> Your father offers you a choice of $105,000 in 12 years or $47,000 today. a. If money is discounted at 8 percent, which should you choose? b. If money is still discounted at 8 percent, but your choice is between $105,000 in 9 years or $47,000 today, wh

> Your uncle offers you a choice of $105,000 in 10 years or $47,000 today. If money is discounted at 9 percent, which should you choose?

> Medical Research Corporation is expanding its research and production capacity to introduce a new line of products. Current plans call for the expenditure of $100 million on four projects of equal size ($25 million each), but different returns. Project A

> Your aunt offers you a choice of $20,100 in 20 years or $870 today. If money is discounted at 17 percent, which should you choose?

> If you invest $9,000 today, how much will you have a. In 2 years at 9 percent? b. In 7 years at 12 percent? c. In 25 years at 14 percent? d. In 25 years at 14 percent (compounded semiannually)?

> Your parents have accumulated a $120,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giv