Question: A project has perpetual cash flows of

> What are some of the difficulties that might come up in actual applications of the various criteria we discussed in this chapter? Which one would be the easiest to implement in actual applications? The most difficult?

> At 8 percent interest, how long does it take to double your money? To quadruple it?

> If the Layla Corp. has a 13 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?

> One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not converted into a common-size statement. Why do you thi

> The Optical Scam Company has forecast a 15 percent sales growth rate for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the external funds needed for next year. b. Construct the firmâ

> Gordon Driving School’s 2011 balance sheet showed net fixed assets of $1.42 million, and the 2012 balance sheet showed net fixed assets of $1.69 million. The company’s 2012 income statement showed a depreciation expense of $145,000. What was Gordon’s net

> The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will

> Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

> Suppose the Japanese yen exchange rate is ¥85 = $1, and the British pound exchange rate is £ 1 = $1.53. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is ¥131.4 = £ 1. Is there an arbitrage opportunity here? If there is, e

> Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed ass

> Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $285,000 and equity of $176,000 at the beginning of the year. At the end of the year, the company had total assets

> A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if: a. The discount is changed to 2 pe

> What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of the credit period?

> Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per day. The daily interest rate is .015 percent. If the b

> Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the company’s stock?

> Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 19 years to maturity, and a coupon rate

> The Stancil Corporation provided the following current information: Proceeds from long-term borrowing……………….………… $17,000 Proceeds from the sale of common stock…………..…………. 4,000 Purchases of fixed assets………………………………..………….. 21,000 Purchases of inventorie

> How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $475,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will

> What is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is: a. 5 percent? b. 10 percent? c. 15 percent?

> Assume a firm is considering a new project that requires an initial investment and has equal sales and costs over its life. Will the project reach the accounting, cash, or financial break-even point first? Which will it reach next? Last? Will this order

> For each of the following, compute the present value: Present Value Years Interest Rate Future Value 7% $ 13,827 15 43,852 18 725,380 23 18 590,710 69

> In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

> Stone Sour, Inc., has a project with the following cash flows: Year ………………………..Cash Flows ($) 0 ………………………………….………….−$20,000 1 …………………………………………………….8,500 2 …………………………………………………..10,200 3 …………………………………………………….6,200 The company evaluates all projects by ap

> In October 2010, BMW announced plans to spend $1 billion to expand production at its plant in South Carolina. The plant produced the second generation BMW X3 as well as the company’s X5 and X6 models. BMW apparently felt it would be better able to compet

> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 9% $ 1,284 810 4,341 18,400 17 402,662 21,500 8 173,439

> The most recent financial statements for Fontenot Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum

> Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate? Do you know,

> Suppose the spot and three-month forward rates for the yen are ¥80.13 and ¥78.96, respectively. a. Is the yen expected to get stronger or weaker? b. What would you estimate is the difference between the inflation rates of the United States and Japan?

> Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $640,000 is estimated to result in $270,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it wi

> Ranney, Inc., has sales of $18,700, costs of $10,300, depreciation expense of $1,900, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?

> Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in t

> The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and Robb Computer applies the profitability index decision rule, which project should the firm accep

> Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.03. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead

> We are evaluating a project that costs $644,000, 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 70,000 units per year. Price per unit is $37, variab

> Jon Fulkerson has also received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below: Total assets ……………………………...…………$63,000 EBIT ………………………………………………………7,900

> In the previous problem, suppose the fair market value of James’s fixed assets is $15,000 versus the $8,900 book value shown. Jurion pays $23,000 for James and raises the needed funds through an issue of long-term debt. Construct the po

> In July 2011, fast food restaurant chain Wendy’s/Arby’s announced that it had sold its Arby’s restaurants and would change its name back to Wendy’s. Arby’s was purchased by the private equity firm Roark Capital Group. Arby’s was the 11th restaurant chain

> What are the five Cs of credit? Explain why each is important.

> Your neighbor goes to the post office once a month and picks up two checks, one for $11,000 and one for $3,400. The larger check takes four days to clear after it is deposited; the smaller one takes five days. a. What is the total float for the month? b.

> White Wedding Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’

> An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate used in the calculations is adjusted for political risk and any advantages from diversification. Does this mean the project is acceptable? Why or why not?

> Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions.

> Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. As a financial analyst for BRC, you are asked the following questions: a. If your d

> Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,060. The bonds make semiannual payments. What must the coupon rate be on these bonds?

> Toys Inc. just purchased a $390,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $25. The variable cost per toy is $11, and the firm incurs fixed costs

> Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?

> Fuji Software, Inc., has the following mutually exclusive projects. Year Project a. Suppose Fuji’s payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose Fuji uses the NPV rule to rank these two p

> An investment project costs $15,000 and has annual cash flows of $3,800 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent? If it is 15 percent?

> Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 242 4 $ 307 410 8 896 51,700 16 162,181 18,750 27 483,500

> The most recent financial statements for Martin, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,500 was paid, and Martin wishes to maintain a constant payout ratio. Next yearâ€&#15

> In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the sustainable growth rate for Rosengarten, you will find it

> The following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B ’s stock. Both A and B have no debt outstanding. a. What will the earnings p

> Ramsay Corp. currently has an EPS of $2.35, and the benchmark PE for the company is 21. Earnings are expected to grow at 7 percent per year. a. What is your estimate of the current stock price? b. What is the target stock price in one year? c. Assuming t

> A proposed cost-saving device has an installed cost of $640,000. 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 $55,000, the marginal

> Y3K, Inc., has sales of $2,700, total assets of $1,310, and a debt–equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?

> What is the value today of a 15-year annuity that pays $650 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 11 percent for Years 1 through 5, and 13 percent thereafter.

> What is the present value of an annuity of $6,500 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 7 percent.

> Rite Bite Enterprises sells toothpicks. Gross revenues last year were $7.5 million, and total costs were $3.4 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year. Rite B

> The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 every six months over the subsequent eight years, and fin

> Consider the following project for Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $8 million that will be depreciated straight-line to zero

> Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 ……………………….……….. 83,000 2 ………….…………………….. 92,000 3 …………….………………… 104,000 4 ……..…..…………………….. 98,000 5 ……..….……………………… 84,000

> McKeekin Corp. has a project with the following cash flows: Year …………………Cash Flow 0 ……………………………….$20,000 1 ………………………………..−26,000 2 …………………………………..13,000 What is the IRR of the project? What is happening here?

> Define the following: S = Previous year’s sales A = Total assets E = Total equity g = Projected growth in sales PM = Profit margin b = Retention (plowback) ratio Assuming that all debt is constant, show that EFN can be written as: EFN = – PM(S)b + [A – P

> The Stambaugh Corporation currently has earnings per share of $9.40. The company has no growth and pays out all earnings as dividends. It has a new project that will require an investment of $1.95 per share in one year. The project is only a two-year pro

> Investment X offers to pay you $4,500 per year for nine years, whereas Investment Y offers to pay you $7,000 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is

> The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a 5.6 perc

> Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?

> Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project started; the project will last for five years. The accou

> Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $975,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine

> Darin Clay, the CFO of MakeMoney.com, has to decide between the following two projects: The expected rate of return for either of the two projects is 12 percent. What is the range of initial investment ( Io ) for which Project Billion is more financial

> A prestigious investment bank designed a new security that pays a quarterly dividend of $4.50 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the stated annual interest rate is 6.5 percent, compounded

> Refer to the corporate marginal tax rate information in Table 2.3. a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate at a taxable income of

> Consider Pacific Energy Company and U.S. Blue chips, Inc., both of which reported earnings of $950,000. Without new projects, both firms will continue to generate earnings of $950,000 in perpetuity. Assume that all earnings are paid as dividends and that

> Bond P is a premium bond with a 9 percent coupon. Bond D is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have 10 years to maturity. What is the current yield for Bond P? For Bond D

> Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project started; the project will last for five years. The accoun

> Prince Albert Canning PLC had a net loss of £37,543 on sales of £345,182. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? Why? In dollars, sales were $559,725. What was the net

> Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $900 and will last for three years. The copier will require a real aftertax cost of $120 per year after all relevant expenses. The RH45 costs $1,400 and will l

> Consider two streams of cash flows, A and B. Stream A’s first cash flow is $8,900 and is received three years from today. Future cash flows in Stream A grow by 4 percent in perpetuity. Stream B’s first cash flow is – $10,000, is received two years from t

> Suppose you were the financial manager of a not-for- profit business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be appropriate?

> Bulla Recording, Inc., wishes to maintain a growth rate of 12 percent per year and a debt–equity ratio of .40. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at .75. Is this growth rate possible? To answer, determine wha

> On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account, which records the acquisition cost of fixed assets, minus the accumulated depreciation (AD) account, which records the total depreciation taken by t

> Four years ago, Bling Diamond, Inc., paid a dividend of $1.35 per share. Bling paid a dividend of $1.77 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow

> Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a 6 percent

> You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite like material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new m

> Pilot Plus Pens is deciding when to replace its old machine. The machine’s current salvage value is $2.2 million. Its current book value is $1.4 million. If not sold, the old machine will require maintenance costs of $845,000 at the end of the year for t

> Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year ………………..Cash Flow 0…………………..……….−$950,000 1……………..………..……….285,000 2………………….….…………345,000 3…………………..……………415,000 4…………………..……………255,0

> The Grandmother Calendar Company clearly had a cash flow problem. In the context of the cash flow analysis we developed, what was the impact of customers not paying until orders were shipped?

> You’re trying to choose between two different investments, both of which have up-front costs of $65,000. Investment G returns $125,000 in six years. Investment H returns $185,000 in 10 years. Which of these investments has the higher return?

> You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $98 million in current taxes and had an interest expense of $48 million. Use the accounti

> Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year divide

> Use the information in Figure 31.1 to answer the following questions: a. Which would you rather have, $100 or £100? Why? b. Which would you rather have, 100 Swiss francs (SF) or £100? Why? c. What is the cross-rate for Swiss fra

> Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 7 percent. a. What will these bonds sell for at issuance? b. Using t

> Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $305,000 net cash flow per unit for the next five years. The enginee

> 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 million in anticipation of using it as a toxic

> The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,400,000 to open and will have an economic life of 11 years. It will generate a cas

> Suppose an investment offers to quadruple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?

> You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a month in a stock account and $350 a month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 6

> Ritter Corporation’s accountants prepared the following financial statements for year-end 2012: a. Explain the change in cash during 2012. b. Determine the change in net working capital in 2012. c. Determine the cash flow generated by t

> Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent, forever. The current stock price is $45. What is next year’s dividend payment if the req