Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department. One of the major revenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is pre-programmed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone.
Conch Republic can manufacture the new smartphones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smartphone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million.
As previously stated, Conch Republic currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republic has a 21 percent corporate tax rate and a required return of 12 percent.
Shelley has asked Jay to prepare a report that answers the following questions.
QUESTIONS:
1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?
> Find the EAR in each of the following cases:
> Excey Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
> You purchase a bond with a coupon rate of 5.3 percent and a clean price of $951. If the next semiannual coupon payment is due in two months, what is the invoice price?
> Calculate the internal growth rate for the company in Problem 22. Now calculate the internal growth rate using ROA × b for both beginning of period and end of period total assets. What do you observe?Data from Problem 22:Gilmore, Inc., had equity of $145
> You’ve collected the following information about Molino, Inc.:What is the sustainable growth rate for the company? If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity
> Based on the following information, calculate the sustainable growth rate for Hendrix Guitars, Inc.:,,,
> In Question 1, assume the company pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements and determine the external financing needed.Data from Question 1:
> A firm wishes to maintain an internal growth rate of 7.1 percent and a dividend payout ratio of 25 percent. The current profit margin is 6.5 percent, and the firm uses no external financing sources. What must total asset turnover be?
> Ramble On Co. wishes to maintain a growth rate of 12 percent per year, a debt-equity ratio of .90, and a dividend payout ratio of 25 percent. The ratio of total assets to sales is constant at 0.85. What profit margin must the firm achieve?
> You purchase a bond with an invoice price of $948. The bond has a coupon rate of 5.9 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?
> For the company in Problem 16, suppose fixed assets are $520,000 and sales are projected to grow to $790,000. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.Data from Proble
> Hodgkiss Mfg., Inc., is currently operating at only 91 percent of fixed asset capacity. Current sales are $715,000. How fast can sales grow before any new fixed assets are needed?
> Assuming the following ratios are constant, what is the sustainable growth rate?,,,
> Based on the following information, calculate the sustainable growth rate for Kaleb’s Heavy Equipment:,,,
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.3 million in annual p
> If Synyster Corp. has an ROE of 14.7 percent and a payout ratio of 30 percent, what is itss ustainable growth rate?
> If A7X Co. has an ROA of 7.6 percent and a payout ratio of 25 percent, what is its internal growth rate?
> From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming an increase in sales of 15 percent, no new external debt or equity financing, and a constant payout ratio.Data from Problem 9:Consider the following income statement
> The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales approach. Assume that accounts payable vary with sales, wh
> Consider the following simplified financial statements for the Wims Corporation (assuming no income taxes):
> Chamberlain Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market that sell for $1,083, make semiannual payments, and mature in 20 years. What coupon rate should the c
> Based only on the following information for Thrice Corp., did cash go up or down? By how much? Classify each event as a source or use of cash.Decrease in inventory ………………………………………………………………………….. $375Decrease in accounts payable ………………………………………………………………….
> Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.77, and ROE of 15.84 percent. What is this firm’s debt-equity ratio?
> If Roten Rooters, Inc., has an equity multiplier of 1.27, total asset turnover of 2.10, and a profit margin of 6.1 percent, what is its ROE?
> Makers Corp. had additions to retained earnings for the year just ended of $415,000. The firm paid out $220,000 in cash dividends, and it has ending total equity of $5.6 million. If the company currently has 170,000 shares of common stock outstanding, wh
> Queen, Inc., has a total debt ratio of .46. What is its debt-equity ratio? What is its equity multiplier?
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.3 million in annual p
> The King Corporation has ending inventory of $386,735, and cost of goods sold for the year just ended was $4,981,315. What is the inventory turnover? The days’ sales in inventory? How long on average did a unit of inventory sit on the shelf before it was
> A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 6.8 percent interest per week. a. What APR must the store report to its customers? What EAR are customers actually paying? b. N
> You have 45 years left until retirement and want to retire with $4 million. Your salary is paid annually, and you will receive $50,000 at the end of the current year. Your salary will increase at 3 percent per year, and you can earn an annual return of 9
> Twist Corp. has a current accounts receivable balance of $537,810. Credit sales for the year just ended were $5,473,640. What is the receivables turnover? The days’ sales in receivables? How long did it take on average for credit customers to pay off the
> Workman Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 94.31 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> What is the value of an investment that pays $25,000 every other year forever, if the first payment occurs one year from today and the discount rate is 7 percent compounded daily? What is the value today if the first payment occurs four years from today?
> Your financial planner offers you two different investment plans. Plan X is an annual perpetuity of $35,000 per year. Plan Y is an annuity for 15 years and an annual payment of $47,000. Both plans will make their first payment one year from today. At wha
> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $15,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will
> You have just arranged for a $2,350,000 mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 5.2 percent, and it calls for monthly payments over the next 30 years. However, the loan has an eight-year balloon payment, mean
> An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The purchaser (say, the parent) makes the following six payments to the insurance company:First b
> Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $15,000 balance from your current credit card, which charges an annual rate of 17.5 percent, to a
> Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 10 for the depreciation allowances).Problem 1:Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you leas
> You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is interested in your company, but he does not have the necessary
> This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,000 Instant Credit! 17.3% Simple Interest! Three Years to Pa
> Two banks in the area offer 30-year, $275,000 mortgages at 5.1 percent and charge a $4,300 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.
> Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 ercent, what is the percentage price change of
> In the previous problem, suppose that you believe that you will only live in the house for eight years before selling the house and buying another house. This means that in eight years, you will pay off the remaining balance of the original mortgage. Wha
> You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.3 percent. Alternatively, she tells you that you can “buy down”
> The interest rate on a one-year loan is quoted as 12 percent plus 3 points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?
> Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm’s founders, has been talking to Joey about the firm’s investment portfolio. As with any investment, Paul is concerned
> Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the results, but she still has concerns about the new smartp
> Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after
> Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a propriet
> Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examini
> Investment X offers to pay you $4,200 per year for eight years, whereas Investment Y offers to pay you $6,100 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 i
> After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the compan
> Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed
> The All Day Company is currently holding $690,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $140,000 per month. How much of the current cash holdings should be retained, and how much should be used to incr
> You are looking at a one-year loan of $10,000. The interest rate is quoted as 9.8 percent plus 2 points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rat
> Debit and Credit Bookkeepers needs a total of $21,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells $1,500 in securities and transfers in the cash. The interest rate is 4 percent per year, and selling secur
> White Whale Corporation has an average daily cash balance of $1,700. Total cash needed for the year is $64,000. The interest rate is 5 percent, and replenishing the cash costs $8 each time. What are the opportunity cost of holding cash, the trading cost,
> Given the following information, calculate the target cash balance using the BAT model:Annual interest rate ………………………………………………………………………. 4.5%Fixed order cost ………………………………………………………………………………. $25Total cash needed ………………………………………………………………………. $10,200How do
> Rise Against Corporation has determined that its target cash balance if it uses the BAT model is $5,100. The total cash needed for the year is $31,000, and the order cost is $10. What interest rate must Rise Against be using?
> The variance of the daily cash flows for the Pele Bicycle Shop is $890,000. The opportunity cost to the firm of holding cash is 4.1 percent per year. What should the target cash level and the upper limit be if the tolerable lower limit has been establish
> Based on the Miller-Orr model, describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the v
> Both Bond Sam and Bond Dave have 7.3 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the perce
> Slap Shot Corporation has a fixed cost of $40 associated with buying and selling marketable securities. The interest rate is currently .013 percent per day, and the firm has estimated that the standard deviation of its daily net cash flows is $80. Manage
> All Night, Inc., uses a Miller-Orr cash management approach with a lower limit of $43,000, an upper limit of $125,000, and a target balance of $80,000. Explain what each of these points represents; then explain how the system will work
> Suppose a corporation currently sells Q units per month for a cash-only price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be Q′ and the price per unit will be P′. Defaults will be π percent of credit sales. The
> Consider the following information about two alternative credit strategies:The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90
> You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided
> Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI’s products, primarily used in the manufacture of semiconductors, currently sell for $975 per unit. The variable cost is $540 per unit. The order under c
> The Johnson Company sells 2,400 pairs of running shoes per month at a cash price of $99 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to $100 per pair on credit sales. The cash price will remain at
> You expect to receive $10,000 at graduation in two years. You plan on investing it at 9 percent until you have $60,000. How long will you wait from now?
> You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?
> You have just made your first $5,500 contribution to your retirement account. Assuming you earn a return of 10 percent per year and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years b
> Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 7.4 percent, has a YTM of 6.8 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.8 percent, ha
> Suppose you are still committed to owning a $245,000 Ferrari (see Problem 9). If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9 years (on the day you turn 30), how much must you invest t
> Refer back to the Series EE savings bonds we discussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of return you would earn if you held the bond for 20 years until it doubled in value?b. If
> The “Brasher doubloon,” which was featured in the plot of the Raymond Chandler novel, The High Window, was sold at auction in 2014 for $4,582,500. The coin had a face value of $15 when it was first issued in 1787 and had been previously sold for $430,000
> In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2016, the winner’s check was $1,800,000. What was the percentage increase per year in the winner’s check over this period? If the winner’s prize increases at t
> Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2067, assuming they appreciate at an annual rate of 4.3 percen
> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 14.9 percent. You and the lender agree that the interest on
> You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to collect), 80 years from now. What is the present value of you
> Imprudential, Inc., has an unfunded pension liability of $415 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.2 per
> You’re trying to save to buy a new $245,000 Ferrari. You have $50,000 today that can be invested at your bank. The bank pays 4.3 percent annual interest on its accounts. How long will it be before you have enough to buy the car?
> According to the Census Bureau, in October 2016, the average house price in the United States was $354,900. In October 2000, the average price was $215,100. What was the annual increase in the price of the average house sold?
> Locate the Treasury bond in Figure 7.4 maturing in February 2040. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in dollars? Assume a par value of $10,000.Figure 7.4:
> In the previous problem, suppose a sales associate told you the policy costs $800,000. At what interest rate would this be a fair deal?Data from Problem 10:The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and
> At 6.1 percent interest, how long does it take to double your money? To quadruple it?
> Assume the total cost of a college education will be $345,000 when your child enters college in 18 years. You presently have $73,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college educat
> Solve for the unknown number of years in each of the following:
> Solve for the unknown interest rate in each of the following:
> For each of the following, compute the present value:
> For each of the following, compute the future value:
> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:Time ……………………………………………………………………………..…….. Salary0 ……………………………………………………………………………….. $8,400,0001 …………………………………………………………………………………. $4,700,0002 ……………
> In Problem 4, over what range of lease payments will the lease be profitable for both parties?Problem 4:Assume that your company does not anticipate paying taxes for the next several years. What are the cash flows from leasing in this case?
> First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City B
> Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Be
> Suppose Sunburn Sunscreen and Frostbite Thermal wear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 21 percent per year.a. What is the
> Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $185 million for Hybrid Golf. Both companies have niche markets in the golf
> As a new graduate, you’ve taken a management position with Exotic Cuisines, Inc., a restaurant chain that just went public last year. The company’s restaurants specialize in exotic main dishes, using ingredients such as alligator, bison, and ostrich. A c
> S&S Air is preparing its first public securities offering. In consultation with Renata Harper of underwriter Raines and Warren, Chris Guthrie decided that a convertible bond with a 20-year maturity was the way to go. He met the owners, Mark and Todd, and
