Question: What is the profitability index, and why

> Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses an 18 percent discount rate for projects like thi

> Suppose that you could invest in the following projects but have only $30,000 to invest. How would you make your decision and in which projects would you invest? Project Cost NPV A $ 8,000 $4,000 B 11,000 7,000 9,000 5,000 D 7,000 4,000

> What is the difference between variable and fixed costs, and what are examples of each?

> Compute the IRR for the following project cash flows: a. An initial outlay of $3,125,000 followed by annual cash flows of $565,325 for the next eight years. b. An initial investment of $33,750 followed by annual cash flows of $9,430 for the next five yea

> Compute the IRR on the following cash flow streams: a. An initial investment of $25,000 followed by a single cash flow of $37,450 in year 6. b. An initial investment of $1 million followed by a single cash flow of $1,650,000 in year 4. c. An initial inve

> Ancala Corporation management is considering investments in two new golf apparel lines for next season: golf hats and belts. Due to a funding constraint, these lines are mutually exclusive. A summary of each project’s estimated cash flo

> Refer to problem 10.5. Compute the IRR for both production System 1 and production System 2. Which has the higher IRR? Which production system has the higher NVP? Explain why the IRR and NPV rankings of Systems 1 and 2 are different? Refer to proble

> Management of Great Flights, Inc., an aviation firm, is considering purchasing three aircraft for a total cost of $161 million. The company would lease the aircraft to an airline. Cash flows from the proposed leases are shown in the following table. What

> Management of Sycamore Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $263,400 and will generate cash flows of $85,000 over each of the next six years. If the cost of capital

> Morningside Bakeries recently purchased equipment at a cost of $650,000. Management expects the equipment to generate cash flows of $275,000 in each of the next four years. The cost of capital is 14 percent. What is the MIRR for this project?

> Hathaway, Inc., a resort management company, is refurbishing one of its hotels at a cost of $7.8 million. Management expects that this will lead to additional cash flows of $1.8 million for the next six years. What is the IRR of this project? If the appr

> An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return? a. 28.19 percent b. 28.39 percent c. 28.59 percent

> An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to a. $42.22 b. $58.33 c. $68.52 d. $98.95

> How can FCF in the terminal year of a project’s life differ from FCF in the other years?

> Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent. The discounted payback period is a. 0.16 year longer than the payback period. b. 0.80 year longer

> Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. …. NPV …………â€&brvba

> You are analyzing two proposed capital investments with the following cash flows: The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. Which project, or projects, should be accepted if you have un

> Management of Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate is 12 percent. The cash flows that management expects the new technology to generate are as follo

> Trident Corp. management is evaluating two independent projects. The costs and expected cash flows are given in the following table. The cost of capital is 10 percent? a. Calculate the projects’ NPV. b. Calculate the projectsâ&#

> Management of Skywards, Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next five years. Annual depreciation expense will be $650,0

> Quasar Tech Co. management is investing $6 million in new machinery that will produce the next-generation routers. Sales to its customers will amount to $1,750,000 for the next three years and then increase to $2.4 million for three more years. The proje

> Primus Corp. management is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the nex

> Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends for the next three years. In year 4, management expect

> Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle to a constant growth rate of 6 percent. The company recently paid a dividend of $2.35. The required rate of return is 15 percent. a. Find the present value o

> What is a progressive tax system? What is the difference between a firm’s marginal and average tax rates?

> ZweitePharma is a fast-growing drug company. Management forecasts that in the next three years, the company’s dividend growth rates will be 30 percent, 28 percent, and 24 percent, respectively. Last week it paid a dividend of $1.67. After three years, ma

> Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecasted a constant-growth rate of 7 percent for its dividends, forever. The required rate of return is 18 percent. a. Compute the expected divi

> Management of Dravid, Inc., is currently evaluating three projects that are independent. The cost of funds can be either 13.6 percent or 14.8 percent depending on their financing plan. All three projects cost the same at $500,000. Expected cash flow stre

> Refer to Problem 10.31. a. What are the IRRs for the projects? b. Does the IRR criterion suggest a different decision than the NPV criterion? c. Explain how you would expect the management of Draconian Measures to decide which project(s) to invest in. R

> Riker Departmental Stores management has forecasted a growth rate of 40 percent for the next two years, followed by growth rates of 25 percent and 20 percent for the following two years. It then expects growth to stabilize at a constant rate of 7.5 perce

> Equation 9.4 shows the relation between a stock’s value and the dividend that is expected next year if dividends grow at a constant rate forever. If a firm pays all of its earnings as dividends, show how Equation 9.4 can be rearranged to calculate that f

> Tin-Tin Waste Management, Inc., is growing rapidly. Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18 percent over the next four years. Thereafter, management expects dividends to grow at a constant rate of 7 percent.

> Diaz Corp. is expected to grow rapidly/ at a rate of 35 percent for the next seven years. The company’s first dividend, to be paid three years from now, will be $5. After seven years, the company (and the dividends it pays) will grow at a rate of 8.5 per

> Staggert Corp. will pay dividends of $5.00, $6.25, $4`.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 6 percent. If the required rate of return is 18.5 percent, what is the current value of

> Quansi, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in y

> What is the difference between nominal and real dollars? Why is it important not to mix them in an NPV analysis?

> Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend, of $4.25, will be paid in year 3. If the required rat

> Management of ProCor, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. Management then expects the company to grow at a constant rate of 9 percent forever. The company paid a dividend

> Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The fi

> You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a web site. Things are going well now, but you know that it is only a matter of time before so

> Nugent Communication Corp. is investing $9,365,000 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant

> Regent Corp. management is evaluating three competing types of equipment. Costs and cash flow projections for all three are given in the following table. Which would be the best choice based on payback period? Year Туре 1 Туре 2 Туре 3 $(1,311,450) S

> Timeline Manufacturing Co. management is evaluating two projects. The company uses payback criteria of three years or less. Project A has a cost of $912,855, and project B’s cost is $1,175,000. Cash flows from both projects are given in

> Creative Solutions, Inc., has just invested $4,615,300 in new equipment. The firm uses a payback period criteria of not accepting any project that takes more than four years to recover its costs. Management anticipates cash flows of $644,386, $812,178, $

> Emporia Mills management is evaluating two alternative heating systems. Costs and projected energy savings are given in the following table. The firm uses 11.5 percent to discount such project cash flows. Which system should be chosen? Year System 10

> Cranjet Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 16.4 percent for such projects. a. What are

> Why is D&A first subtracted and then added back in FCF calculations?

> Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450, have a life of five years, and would produce the cash flows shown in the following tab

> Champlain Corp. management is investigating two computer systems. The Alpha 8300 costs $3,122,300 and will generate cost savings of $1,345,500 in each of the next five years. The Beta 2100 system costs $3,750,000 and will produce cost savings of $1,125,0

> Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the stock price a year from now is $37.50. If the required rate of return is 14 percent, what is the current stock price? Assume constant growth.

> Refer to Problem 10.4. What is the IRR that Franklin Mints management can expect on this project? Refer to Problem 10.4. Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They

> Capitol Corp. management is expecting a project to generate after-tax income of $63,435 in each of the next three years. The average book value of the project’s equipment over that period will be $212,500. If the firm’s investment decision on any project

> Nakamichi Bancorp has made an investment in banking software at a cost of $1,875,000. Management expects productivity gains and cost savings over the next several years. If, as a result of this investment, the firm is expected to generate additional cash

> Northern Specialties just purchased inventory-management computer software at a cost of $1,645,276. Cost savings from the investment over the next six years will produce the following cash flow stream: $212,455, $292,333, $387,479, $516,345, $645,766, an

> Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company’s management expects the machinery to produce cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years, respectively. What is the payback period?

> Riggs Corp. management is planning to spend $650,000 on a new- marketing campaign. They believe that this action will result in additional cash flows of $325,000 over the next three years. If the discount rate is 17.5 percent, what is the NPV on this pro

> Why do we care about incremental cash flows at the firm level when we evaluate a project?

> Fresno Corp. is a fast-growing company whose management expects it to grow at a rate of 30 percent over the next two years and then slow down to a growth rate of 18 percent for the following three years. If the last dividend paid by the company was $2.15

> Why is excess cash a nonoperating asset (NOA)? Why does it make sense to add the value of excess cash to the value of the discounted cash flows when we use the WACC or FCFE approach to value a business?

> It is April 4, 2018, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat Chrysler Automobiles N.V, the automobile manufacturer that owns Chrysler, have hinted that they might be i

> Why is it especially difficult for an entrepreneur with a new business to raise capital? What tool can help him or her to raise external capital?

> You believe you have a great business idea and want to start your own company. However, you do not have enough savings to finance it. Where can you get the additional funds you need?

> List two useful tools to help an entrepreneur to understand the cash requirements of a business and to estimate the financing needs of his or her business?

> You own a company that produces and distributes course packets for classes at local universities via the Internet. You have asked a friend to invest $35,000 in the business. Your friend wants to know what the business is worth so that he can determine ho

> The S&P 500 P/E multiple of 25.54 at the end of 2016 was higher than its historical average of approximately 15. Some financial commentators argued that this meant that the firms in the S&P 500 were, on average, overvalued at the end of 2016. Based on yo

> Explain how financial liabilities differ among different forms of business organization?

> At the end of 2016 the value of the S&P 500 Index divided by the estimated 2016 earnings for S&P 500 firms (the S&P 500 P/E multiple) was 25.54. Assume that the long-term Treasury bond yield was 2.88 percent, the market risk premium was 5.92 percent, and

> What changes have taken place in the capital budgeting techniques used by U.S. companies?

> Mad Rock Inc. is a company that sells mp3 music online. It is expected to generate earnings of $1 per share this year after its Web site is upgraded and online marketing is stepped up. Given the popularity of the iPod and iPad devices, the stock price of

> Forever Youth Technology is a biochemical company that is two years old. Its main product, an antioxidant drink that is supposed to energize the consumer and delay aging, is still under development. The company’s equity consists of $5 million invested by

> A friend of yours is trying to value the equity of a company and, knowing that you have read this book, has asked for your help. So far she has tried to use the FCFE approach. She estimated the cash flows to equity to be as follows: Sales ………………………………………

> Your friend is starting a new company. He wants to write a business plan to clarify the company’s business outlook and raise venture capital. Knowing that you have taken this course, he has asked you, as a favor, to help him prepare a template for a busi

> For the previous question, assume that you do not have sufficient savings to cover the entire amount required to start your sun-block business. You are going to have to get external financing. A local banker whom you know has offered you a six-month loan

> You plan to start a business that sells waterproof sun block with a unique formula that reduces the damage of UVA radiation 30 percent more effectively than similar products on the market. You expect to invest $50,000 in plant and equipment to begin the

> A few years ago, a friend of yours started a small business that develops gaming software. The company is doing well and is valued at $1.5 million based on multiples for comparable public companies after adjustments for their lack of marketability. With

> You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows: Revenue ……………………………………………………. $3,000,000 Cost of goods sold ………………………………………. 600,000 Gross profit …

> You are using the FCFF approach to value a business. You have estimated that the FCFF for next year will be $123.65 million and that it will increase at a rate of 8 percent for each of the following four years. After that point, the FCFF will increase at

> What are some of the things that the founder of a company must do to launch a new business?

> How can the Profitability Index (PI) help in choosing projects when a firm faces capital constraints? What are its limitations?

> How do dealers differ from brokers?

> Which of the above multiples analyses do you believe is more appropriate? Refer to the information Johnson Machine Tool Company: Use the following information concerning Johnson Machine Tool Company. Johnson’s income statement from the fiscal year that

> Using the enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tool Company? What is the per share value of Johnson’s stock? Refer to the information Johnson Machine Tool Company: Use the following information concerning Johnson

> You are an analyst at a private equity firm that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of the Johnson Machine Tool Company. Billy’s Tools is a

> Aggie Motors is a chain of used car dealerships that has publicly traded stock. Using the adjusted book value approach, you have estimated the value of Aggie Motors to be $45,646,000. The company has $40.5 million of debt outstanding. Its stock price is

> You have started a business that sells a home gardening system that allows people to grow vegetables on the countertop in their kitchens. You are considering two options for marketing your product. The first is to advertise on local TV. The second is to

> Discuss the pros and cons of an S-corporation compared with a C-corporation?

> Does the expected rate of return that is calculated using CAPM, with a beta estimated from stock returns in the public market, reflect a minority or a controlling ownership position? How is it likely to differ between a minority and a controlling positio

> You are considering investing in a private company that is owned by a friend of yours. You have read through the company’s financial statements and believe that they are reliable. Multiples of similar publicly traded companies in the same industry sugges

> You want to estimate the total intrinsic value of a large gas and electric utility company. This company has publicly traded stock and has been paying a regular dividend for many years. You decide that, due to the predictability of the dividend that this

> List some common forms of business organization, and discuss how access to capital differs across these forms of organization?

> What might cause a firm to face capital constraints?

> Explain how a stock repurchase is different from a dividend payment?

> Explain why managers of firms might prefer that their firms’ shares trade in a moderate per-share price range rather than in a high per-share price range. How do managers of firms keep their shares trading in a moderate price range?

> Explain why holders of a firm’s debt should insist on a covenant that restricts the amount of cash dividends the firm pays?

> Explain how the issuance of new securities by a firm can produce useful information about the issuing firm. How can this information make the shares of the firm more valuable, even if it only confirms existing information about the firm?

> You are the CFO of a public company that advises distressed companies about how to manage their businesses. Your company has been performing extremely well. In fact, it has earned so much money that the increase in its retained earnings has resulted in a

> You are the Chief Financial Officer (CFO) of a large publicly traded company. You would like to convey positive information about the firm to the market. If you agree with the conclusions from the Lintner study, will you keep paying your currently high d

> You purchased 1,000 shares of Zebulon Copper Co. five years ago for $50 per share. Today Zebulon management is trying to decide whether to repurchase shares for $70 per share through a fixed-price tender offer or pay a $70 cash dividend per share. If cap

> Place the following in the proper chronological order, and describe the purpose of each: ex-dividend date, record date, payment date, and declaration date?

> Cholla Company currently has 30,000 shares outstanding. Each share has a market value of $20. If the firm repurchases $150,000 worth of shares, then what will be the value of each share outstanding after the repurchase? Ignore taxes?