Question: What is liquidity, and what is the

> At present, Solartech Skateboards is considering expanding its product line to include gas-powered skateboards; however, it is questionable how well they will be received by skateboarders. Although you feel there is a 60 percent chance you will sell 10,0

> Assume that a new project will annually generate revenues of $2 million. Cash expenses including both fixed and variable costs will be $800,000, and depreciation will increase by $200,000 per year. In addition, let’s assume that the firm’s marginal tax r

> Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new dist

> Racin’ Scooters is introducing a new product and has an expected change in EBIT of $475,000. Racin’ Scooters has a 34 percent marginal tax rate. The project will produce $100,000 of depreciation per year. In addition,

> The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 5 years ago, had an expected life of 10 years and an expected salvage value of zero. Assume Harris uses simplified straight-line depreci

> The G. Wolfe Corporation is examining two capital-budgeting projects with 5-year lives. The first, project A, is a replacement project; the second, project B, is a project unrelated to current operations. The G. Wolfe Corporation uses the risk-adjusted d

> Hewlett-Packard has designed a new type of printer that produces professional-quality photos. These new printers took 2 years to develop, with research and development running at $10 million after taxes over that period. Now all that’s left is an investm

> McDoogals Restaurants has come up with a new fast-food, casual restaurant combining some of the features of Chipotle, Panera, and Shake Shack, but it is not quite sure how the public will react to it. McDoogals feels that there is a 50–

> Go-Power Batteries has developed a high voltage nickel–metal hydride battery that can be used to power a hybrid automobile. It can sell the technology immediately to Toyota for $10 million, or alternatively, Go-Power Batteries can invest $50 million in a

> For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in

> You have come up with a great idea for a TexMex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $6 million. You also estimate that there is a 50 percent chance that this new restauran

> Hurricane Katrina brought unprecedented destruction to New Orleans and the Mississippi Gulf Coast in 2005. Notably, the burgeoning casino gambling industry along the Mississippi coast was virtually wiped out overnight. GCC Corporation owns one of the old

> The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 ye

> Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5

> Double meat Palace is considering a new plant for a temporary customer, and its finance department has determined the following characteristics. The company owns much of the plant and equipment to be used for the product. This equipment was originally pu

> Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the

> Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine properly, workers would

> Ray mobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would ha

> Given the following free cash flows, determine the IRR for the three independent projects A, B, and C. PROJECT A PROJECT B PROJECT C Initial outlay -$50,000 -$100,000 -$450,000 Cash inflows: $10,000 $125,000 $200,000 200,000 Year 1 Year 2 15,000 2

> Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5 million and would generate annual free cash inflows of $1 million per year for 8 years. Calculate the pro

> Phillips Petroleum is an integrated oil and gas company with headquarters in Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production worldwide. In addition, it engages in natural gas gathering and

> You are considering three independent projects: project A, project B, and project C. Given the following free cash flow information, calculate the payback period for each. If you require a 3-year payback before an investment can be accepted, which pr

> You are considering three independent projects: project A, project B, and project C. Given the following free cash flow information, calculate the payback period for each. Calculate the NPV, PI, and IRR for each project and indicate if the project sh

> are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent. a. What is the project’s payback period? b. What is

> awa Inc. is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay would be $1,950,000, and the project would generate incremental free cash flows of $450,00

> The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the current hotel and rebuild, the initial outlay would be $

> Rib & Wings-R-Us is considering the purchase of a new smoker oven for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $50,000, last for 8 years, and produce annual free cas

> Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because both hotels would occupy the sam

> The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with these projects are as follows: The required rate of return on these projects is 10 percent. a. What is each project’s

> The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required

> Determine to the nearest percent the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of year 1, $5,000 at the end of year 2, and $8,000 at the end of year 3 b. An initial outlay of $10,000

> Assume that you write a column for a very widely followed financial blog titled “Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week you are going to address two questions from your readers that h

> You have been assigned the task of evaluating two mutually exclusive projects with the following projected free cash flows: If the appropriate discount rate on these projects is 10 percent, which would be chosen and why? YEAR PROJECT A CASH FLOW

> The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability ind

> Artie’s Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and would generate annual free cash inflows of $2 million per year for 8 years. Calculate the project’s MIRR given: a. A required r

> Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce free cash inflows of $150,000 each year at the end of years 1 through 5, then at the end of year 7 there will be a free cash

> Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7 million and will produce free cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and $2 million

> Sheinhardt Wig Company is considering a project that has the following cash flows: YEAR…………………………. PROJECT CASH FLOW 0 ………………………………………………………...2$100,000 1………………………………………………………………. 20,000 2………………………………………………………………60,000 3………………………………………………………………70,000 4

> Mode Publishing is considering building a new printing facility that will involve a large initial outlay and then result in a series of positive free cash flows for 4 years. The estimated cash flows associated with this project are: YEAR………………………....PR

> Determine the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $1,993 at the end of each year for the next 10 years b. An initial outlay of $10,000 resulting in a free cash flow of $2,054 at the end of each

> Assuming an appropriate discount rate of 11 percent, what is the discounted payback period on a project with an initial outlay of $100,000 and the following free cash flows? Year 1 5………………………………………. $30,000 Year 2 5………………………………………. $35,000 Year 3 5…………

> You are considering a project with the following free cash flows. If the appropriate discount rate is 10 percent, what is the project’s discounted payback period? YEAR…………………..PROJECT CASH FLOW 0 …………………………………………………2$50,000 1………………………….…………………………..20,0

> Camping USA Inc. has been operating for only 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and

> The processes of discounting and compounding are related. Explain this relationship.

> What is the time value of money? Why is it so important?

> What information do the price/earnings ratio and the price/book ratio give us about the firm and its investors?

> What are the differences among a firm’s gross profit margin, operating profit margin, and net profit margin?

> Why is a firm’s operating return on assets a function of its operating profit margin and total asset turnover?

> Distinguish between a firm’s operating return on assets and its operating profit margin.

> What are the limitations of industry average ratios? Discuss briefly.

> Describe the “five-question approach” to using financial ratios.

> Where can we obtain industry norms?

> Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado’s Rocky Mountains. Your firm manufactures only one product, a state-of-the-art snow ski. Up to this p

> What is Economic Value Added? Why is it used?

> Explain what determines a company’s return on equity.

> What are the limitations of financial statements?

> What are the differences between GAAP and IFRS?

> Why might one firm have positive cash flows and be headed for financial trouble, whereas another firm with negative cash flows could actually be in a good financial position?

> Why is it that the preferred stockholders’ equity section of the balance sheet changes only when new shares are sold or repurchased, whereas the common stockholders’ equity section changes from year to year regardless of whether new shares are bought or

> How do dividends and interest expense differ?

> How do gross profits, operating profits, and net income differ?

> A company’s financial statements consist of the balance sheet, income statement, and statement of cash flows. Describe what each statement tells us.

> What is the major difference between a negotiated purchase and a competitive bid purchase?

> It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next ass

> What is an investment banker, and what major functions does he or she perform?

> Explain the popular theories for the rationale of the term structure of interest rates.

> Why do you think most secondary-market trading in bonds takes place over the counter?

> It has been said that in recent years the difference between an organized exchange and the over-the-counter market has blurred. What does this statement mean and do you think it is correct?

> Compare and explain the historical rates of return for different types of securities.

> Explain the term opportunity cost with respect to the cost of funds to the firm.

> What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

> Distinguish between the money and capital markets.

> Why might a large corporation want to raise long-term capital through a private placement rather than a public offering?

> Using the following criteria, specify the legal form of business that is favored: (a) organizational requirements and costs, (b) liability of the owners, (c) the continuity of the business, (d) the transferability of ownership, (e) management control and

> Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also t

> Identify the primary characteristics of each form of legal business organization.

> Define (a) sole proprietorship, (b) partnership, and (c) corporation.

> What is the agency problem, and how might it impact the goal of maximization of shareholder wealth?

> What is the relationship between financial decision making and risk and return? Would all financial managers view risk–return trade-offs similarly?

> Firms often involve themselves in projects that do not result directly in profits. For example, Apple, which we featured in the chapter introduction, donated $50 million to Stanford University hospitals and another $50 million to the African aid organiza

> What are some of the problems involved in implementing the goal of maximization of shareholder wealth?

> Is the evaluation of a direct foreign investment more complicated than the evaluation of a domestic investment?

> What risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic investment?

> What is meant by (a) exchange rate risk and (b) political risk?

> How do purchasing-power parity, interest rate parity, and the Fisher effect explain the relationships among the current spot rate, the future spot rate, and the forward rate?

> ExxonMobil (XOM) is one of the half-dozen major oil companies in the world. The firm has four primary operating divisions (upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years

> This Mini Case is available in My Finance Lab. The final stage in the interview process for an assistant financial analyst at Caledonia Products involves a test of your understanding of basic financial concepts. You are given the following memorandum and

> A share of stock sells for $35 today. The beta of the stock is 1.2 and the expected return on the market is 12 percent. The stock is expected to pay a dividend of $0.80 in one year. If the risk-free rate is 5.5 percent, what should the share price be in

> A stock has a beta of 0.85, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be?

> You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio?

> You own 400 shares of stock A at a price of $60 per share, 500 shares of stock B at $85 per share, and 900 shares of stock C at $25 per share. The betas for the stocks are 0.8, 1.2, and 0.7, respectively. What is the beta of your portfolio?

> You own a stock portfolio invested 10 percent in stock Q, 25 percent in stock R, 50 percent in stock S, and 15 percent in stock T. The betas for these four stocks are 1.4, 0.6, 1.5, and 0.9, respectively. What is the portfolio beta?

> A stock has a beta of 0.8 and an expected return of 11 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?

> A stock has an expected return of 12 percent and a beta of 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be?

> A stock has an expected return of 8.0 percent, its beta is 0.60, and the risk-free rate is 3 percent. What must the expected return on the market be?

> A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

> Calculate the volatility of a portfolio of 35 percent Roll and 65 percent Ross by filling in the following table: Data for Question 7: (1) State of (2) Probability of State of Economy (3) Portfolio Return (4) Squared Devlatlon from Expected Return

> Which of the following is closest to the expected standard deviation of the client’s portfolio if 10 percent of the portfolio is invested in the Quality Commodity (QC) Fund? a. 9.6 percent b. 14.1 percent c. 16.0 percent

> Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): Data for Question 4: Roll Ross (2) Probablity of State of Economy (4) (1) State of (

> Repeat Questions 1 and 2 assuming that all three states are equally likely. Data from Question 1: Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: Data from Question