Question: Benford Inc. is planning to open a

> Husky Enterprises recently sold an issue of 10-year maturity bonds. The bonds were sold at a deep discount price of $615 each. After flotation costs, Husky received $604.50 each. The bonds have a $1,000 maturity value and pay $50 interest at the end of e

> Calculate the after-tax cost of a $25 million debt issue that Pullman Manufacturing Corporation (40% marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 9.375 percent to the insurance company.

> The Marietta Corporation, a large manufacturer of mufflers, tailpipes, and shock absorbers, is currently carrying out its financial planning for next year. In about two weeks, at the next meeting of the firm’s board of directors, Frank

> What role does diversification play in risk-management strategies?

> What is the difference between an operational restructuring and a financial restructuring?

> ZeeBancorp is considering the establishment of a contract collection service subsidiary that would provide collection services to small and medium-size firms. Compensation would be in the form of a percentage of the amount collected. For amounts collecte

> Boris’ Bucket Works, Inc. (BBW) is the maker of new “easy spill” buckets. These buckets have quickly gained market share and now control 90 percent of the spillable bucket market. BBW is looking to do a product line expansion into the “spill-free” bucket

> Jeff Himm has recently been hired as a financial analyst for the Bunich Corporation. Bunich has traditionally used the payback method in conjunction with NPV as a way to assess the risk of capital investments that the firm makes. Jeff is a new MBA gradua

> Worrall’s Wahoo Novelties is considering a new venture that would produce golden Wahoo commemorative coins. Worrall has estimated that the net investment required will be $15,000, including a $2,000 investment in net working capital. The project is expec

> The Super Muench Cookie Company is considering a diversification effort that would move it into small retail outlets at major malls around the country. Currently, Super Muench has a capital structure consisting of 30 percent debt and 70 percent equity. S

> The Carthage Sceptre Corporation is evaluating a possible investment in a new regional distribution warehouse. A careful evaluation of the anticipated net cash flows and net investment expected from the project indicates that the expected net present val

> The management of Greensboro Products has been evaluating the risk of the cash flows associated with a proposed new project. The expected net cash flow for year 1 is $50,000. The most optimistic estimate (not expected to be exceeded more than 10% of the

> Albright Properties Inc. (API) has three divisions: The leveraged beta for API is 1.2. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division’s capital structure

> You have estimated the expected NPV from a project to be $3 million with a standard deviation of $4 million. The distribution of the possible NPVs is approximately normal. If you are willing to accept a 25 percent chance of incurring a negative NPV on th

> An investment your firm is considering will cost you $5 million today. You expect to receive $7 million one year from now from the sale of the investment. You also expect to receive $500,000 in income from the investment at the end of one year. The expec

> How can the acquisition of additional information be an effective tool of risk management? Give an original example of the use of this technique.

> The 3Z Company has estimated that a major project has an expected internal rate of return (IRR) of 18 percent. The most optimistic estimate of the project’s IRR is 24 percent, and the most pessimistic estimate is 12 percent. The company expects that its

> Essex Chemical Company is considering an expansion into a new product line that is more risky than its existing product mix. The new product line requires an investment, NINV, of $10 million and is expected to generate annual net cash inflows of $2.0 mil

> U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.4. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate

> The managers of U.S. Rubber have analyzed a proposed investment project. The expected net present value (NPV) of the project, evaluated at the firm’s weighted cost of capital of 18 percent, has been estimated to be $100,000. The company’s managers have d

> A new project is expected to have an 8-year economic life. The project will have an initial cost of $100,000. Installation and shipping charges for the equipment are estimated at $10,000. The equipment will be depreciated as a 7-year asset under MACRS ru

> Project Alpha offers the following net cash flows following an initial (year 0), certain outlay (NINV) of $70,000: a. Compute the NPV of this project at a 12 percent cost of capital. b. If the risk-free rate is 4 percent, what is the certainty equival

> The Buffalo Snow Shoe Company is considering manufacturing radial snow shoes, which are more durable and offer better traction. Buffalo estimates that the investment in manufacturing equipment will cost $250,000 and will have a 10-year economic life. Buf

> A simulation model similar to the one described in this chapter has been constructed by the Great Basin Corporation to evaluate the largest of its new investment proposals. After many iterations of the model, Great Basin’s management has arrived at an ex

> The Seminole Production Company is analyzing the investment in a new line of business machines. The initial outlay required is $35 million. The net cash flows expected from the investment are as follows: Year……………Net Cash Flow (Million) 1………….……………………………

> Apple Jacks Inc. produces wine. The firm is considering expanding into the snack food business. This expansion will require an initial investment in new equipment of $200,000. The equipment will be depreciated on a straight-line basis over a 10-year peri

> What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why?

> Fox Enterprises is considering expanding into the growing laser copier business. Fox estimates that this expansion will cost $1.8 million and will generate a 20-year stream of expected net cash flows amounting to $400,000 per year. The company’s weighted

> Valley Products, Inc. is considering two independent investments having the following cash flow streams: Valley uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. It requires that all proje

> Advanced Systems Company is financed one-third with debt and two-thirds with equity. Its market beta has been estimated to be 1.5. The current risk-free rate is 4 percent, and the expected market return is 11 percent. Advanced Systems’ tax rate is 40 per

> Gamma Biosciences is financed entirely with equity. Its beta is 1.5, and its price earnings ratio is 16. The current risk-free rate is 8 percent, and the expected return on the market is 14 percent. a. What rate of return should the company require on p

> American Steel Corporation is considering two investments. One is the purchase of a new continuous caster costing $100 million. The expected net present value of this project is $20 million. The other alternative is the purchase of a supermarket chain, a

> Two projects have the following expected net present values and standard deviations of net present values: a. Using the standard deviation criterion, which project is riskier? b. Using the coefficient of variation criterion, which project is riskier?

> A proposed factory expansion project has an expected net present value of $100,000 with a standard deviation of $50,000. What is the probability that the project will have a negative net present value, assuming that net present value is normally distribu

> A new project has expected annual net cash flows of $400,000 with a standard deviation of $250,000. The distribution of annual net cash flows is approximately normal. a. What is the probability of the project having negative annual net cash flows? b.

> Mitchell Auto Parts Inc. has estimated the probability distribution of its annual net cash flows as follows: Probability………………….Cash Flow (in Thousands of Dollars) 0.10……………….…………….$1,000 0.20……………….……………..1,500 0.40……………………………..2,000 0.20…………….…………

> First Republic Bancorp is considering the acquisition of a new data processing and management information system. The system, including computer hardware and software, will cost $1 million. Delivery and installation of the system is expected to add $100,

> The Swiss franc (CHF) is currently trading in the spot market at $0.5800/CHF. The 180-day forward rate is $0.5743/CHF. The U.S. Treasury bill rate for 180 days is 3.1 percent in the United States. What do you expect is the 180-day Swiss government securi

> Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will generate first-year revenues of $2 million. These revenues are expected

> Hurley’s Winery is planning to acquire a new grape masher. The masher will cost $100,000 including shipping and installation and will be depreciated as a seven-year MACRS asset. At the time the masher is purchased, Hurley will have to invest $5,000 in ne

> Steber Packaging Inc. expects sales next year of $50 million. Of this total, 40 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $25 million. Accelerated depreciation is ex

> Clyne Industries wants to market its new Slammin Jammin Basketball Goal Set. To bring this product to the market will require the purchase of equipment costing $650,000. Shipping and installation expenses associated with the equipment are estimated to be

> Locus Quintatus, Inc., a highly profitable maker of customized chariots, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of $900,000. Freight and installation costs for this equipment will be $100,000.

> Bratton Stone Works is considering an expansion proposal that will require an outlay of $1 million for land and $5 million for equipment. The equipment will be depreciated under MACRS rules as a seven-year class asset. The salvage value of the equipment

> Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1 million. It is classified as a seven-year MACRS asset and will be depreciated as such. Inter

> Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $100,000. A new building will cost $100,000 and will be depreciated on a straight-line basis over 20 years to a s

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated as a seven-year class MACRS asset. The firm’s marginal tax rate is 40 percent. What a

> The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model that forecasts future spot exchange rates. Finley Inco

> Two years ago Agro Inc., purchased an ACE generator that cost $250,000. Agro had to pay an additional $50,000 for delivery and installation, and the investment in the generator required the firm to increase its net working capital position by $25,000. Th

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> Five years ago, the Mori Foods Company acquired a bean processing machine. The machine cost $30,000 and is being depreciated using the straight-line method over a 10-year period to an estimated salvage value of $0. A new, improved processor is now availa

> A firm has an opportunity to invest in a new device that will replace two of the firm’s older machines. The new device costs $570,000 and requires an additional outlay of $30,000 to cover installation and shipping. The new device will cause the firm to i

> The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15

> The Jacob Chemical Company is considering building a new potassium sulfate plant. The following cash outlays are required to complete the plant: Year………….Cash Outlay 0…….……….$4,000,000 1……………….2,000,000 2………………….500,000 Jacob’s cost of capital is 12 pe

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 12-year period to an estimated salvage value of $0. Th

> Johnson Products is considering purchasing a new milling machine that costs $100,000. The machine’s installation and shipping costs will total $2,500. If accepted, the milling machine project will require an initial net working capital investment of $20,

> The Cooper Electronics Company has developed the following schedule of potential investment projects that may be undertaken during the next 6 months: a. If Cooper requires a minimum rate of return of 10 percent on all investments, which projects should

> On January 1, the cost of borrowing Hong Kong dollars (HKD) for 1 year was 18 percent. During the year the U.S. inflation rate was 2 percent and the Hong Kong inflation rate was 9 percent. The exchange rate on January 1 was HKD7/$. On December 31, the ex

> Calculate the annual straight-line depreciation for a machine that costs $50,000 and has installation and shipping costs that total $1,000. The machine will be depreciated over a period of 10 years. The company’s marginal tax rate is 40 percent.

> The MacCauley Company has sales of $200 million and total expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company’s assets is $15 million, and the maximum accelerated depreciation allowed by law is $25 million. Assume

> What are some of the limitations of breakeven analysis? How can these limitations affect actual financial decision making?

> Explain how a linear breakeven chart is constructed when a firm’s selling price, variable costs per unit, and fixed costs are known.

> The Altoona Electric Company is considering refunding its $200 million, 12.5 percent debt issue with a 10 percent, 10-year debt issue. The existing (old) issue also matures in 10 years and now is callable at 104 percent of par. The unamortized issuance c

> The Phillipsburg Power Company is considering refunding its $250 million, 11.5 percent debt issue with a 10 percent, 15-year debt issue. The existing (old) issue also matures in 15 years and now is callable at 103.5 percent of par. The unamortized issuan

> The Springfield Gas and Electric Company is considering refunding $50 million of 11 percent debt with an 8 percent, 20-year debt issue. The existing, or old, issue also matures in 20 years and now is callable at 108 percent of par. The unamortized issuan

> The Warren Electric Company is considering refunding its $150 million, 12 percent debt issue with a 10 percent, 20-year debt issue. The existing (old) issue also matures in 20 years and now is callable at 105 percent of par. The unamortized issuance cost

> Use the option price calculator that can be found at www.numa.com, or another option price calculator, to test the sensitivity of option values to changes in the key input variables. Use the data from Problem 1 as the base case and vary the values for th

> Targezept Bionics Inc. has a common stock outstanding that sells for $21 per share. A call option on the stock has an exercise price of $20 and will expire in three months. Based on an analysis of the stock’s past volatility, you have estimated the stand

> The Jennette Corporation, a firm based in Mt. Pleasant, South Carolina, has an account payable with a British firm coming due in 180 days. The payable requires Jennette to pay £200,000. Winthrop Jennette, the firm’s founder

> The Covington Engine Company is considering opening a new plant facility to build truck engines. As part of a detailed analysis of the proposed facility, Covington’s management wants some information on the cash breakeven point. Fixed costs for the facil

> The current price per unit for shock absorbers produced by Leveland Products is $25. The variable cost per unit is $10. Fixed costs are $600,000. a. What is the breakeven point in units? b. What is the DOL at the breakeven point? Explain what this valu

> Rodney Rogers, a recent business school graduate, plans to open a wholesale dairy products firm. Rogers expects first-year sales to total $5.50 million. He desires to earn a target pretax profit of $1 million during his first year of operation. Variable

> Francis Furniture has current fixed costs of $1 million. Francis’s only product, a rolltop desk, sells for $3,000. Variable operating costs per unit are $1,000. Francis plans to buy a new lathe that will produce a more precise roller for the desk. The la

> Logue Lock Company expects its fixed costs next year to be $750,000. The selling price for its lock is $40. Logue is considering the purchase of new equipment that is expected to reduce unit variable costs from a current level of $25 to a new level of $2

> Vargo Industries has computed its breakeven level of output to be 25,000 units. Based on forecasts from its sales force and past experience, expected unit sales are 32,000, with a standard deviation of 5,200. What is the probability that Vargo will have

> Jenkins Appliances produces microwave ovens. Jenkins has computed its breakeven level of sales to be 60,000 units. An analysis of the market has led Jenkins to expect sales of 75,000 units with a standard deviation of 10,000 units. Assume that sales are

> East Publishing Company is doing an analysis of a proposed new finance text. Using the following data, answer Parts a through e. Fixed Costs (per edition): Development (reviews, class testing, and so on)……………….$18,000 Copyediting……………………………………………………………

> Calculate the depreciation schedule for a $100,000 office building placed in service in October 2013.

> Calculate the MACRS depreciation schedule for a drill press that costs $148,000 and has installation and shipping costs of $2,000. The drill press is classified as a sevenyear MACRS asset.

> Shoesmith Wave Inc., a new and largely unproven economic forecasting service, expects the inflation rate in South Korea to average 9 percent per year over the next 5 years. In comparison, Shoesmith expects a U.S. inflation rate over this same period to b

> Calculate the annual MACRS depreciation for a $20,000 truck that qualifies as a five-year MACRS asset. The truck is estimated to have a $7,000 salvage value six years from now.

> a. Calculate the annual MACRS depreciation for a machine in the seven-year MACRS asset class, assuming that the asset costs $20,000. b. If you knew that the asset had an expected salvage value of $2,000 at the end of its 12-year economic life, would you

> Turbomachinery Parts Inc. is considering two mutually exclusive equipment investments that would increase its production capacity. The firm uses a 14 percent required rate of return to evaluate capital expenditure projects. The two investments have the f

> Germania Corporation is considering replacing its plant cooling unit. The existing unit has recently “died” and has no salvage value. Of the two competing cooling units, B has a long life but a higher initial cost than

> BC Minerals is considering a new production process. Two alternative pieces of equipment are available. Alternative P costs $100,000, has a 10-year life, and is expected to generate annual cash inflows of $22,000 in each of the 10 years. Alternative R co

> The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. The two projects have the following costs and

> What method of depreciation would you prefer, MACRS or straight-line, if your objective is to maximize the present value of your firm’s cash flows?

> Calculate the MACRS depreciation schedule for a milling machine that costs $47,500 and has installation and shipping costs of $2,500. The milling machine is classified as a seven-year MACRS asset. The milling machine is estimated to have a salvage value

> Assuming that all other factors remain unchanged, determine how a firm’s breakeven point is affected by each of the following developments: a. The firm finds it necessary to reduce the price per unit because of competitive conditions in the market. b.

> How is the opportunity cost concept used in the capital budgeting process?

> As of today, the following information is available: Using this information, make three independent forecasts of the 1-year future spot rate for the Israeli shekel. (Use exact, not approximation, relationships.) United States Israel Real rate of in

> Distinguish between asset expansion and asset replacement projects. How does this distinction affect the capital expenditure analysis process?

> Why is it generally incorrect to consider interest charges when computing a project’s net cash flows?

> What are the potential tax consequences of selling an old asset in an asset replacement investment decision?

> Depreciation is a noncash expense; why is it considered when estimating a project’s net cash flows?

> What factors should be considered when estimating a project’s NINV?

> Cash flows for a particular project should be measured on an incremental basis and should consider all the indirect effects of the project. What does this involve?

> What are the primary types of capital investment projects? Does a project’s type influence how it is analyzed?

> What effect does capital rationing have on a firm’s ability to maximize shareholder wealth?