Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $15,000 plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. If the average customer payment in this region is $4,800, how many customers are needed, on average, each day to make the system profitable for Cow Chips? Treasury bills are currently yielding 5 percent per year.
> What is the value of an investment that pays $30,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value today if the first payment occurs four years from today
> Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend
> Given an interest rate of 6.1 percent per year, what is the value at Date t = 7 of a perpetual stream of $2,500 annual payments that begins at Date t = 15?
> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,500 payments and has an interest rate of 8.7 percent compounded monthly. Investment B is an 8 percent continuously compounded lump-sum invest
> Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? a. Land you alread
> In the chapter, we discussed one calculation of the sustainable growth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate is ROE 3 b. This equation is identical to the sustainable growth rate equation prese
> First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank
> What is the present value of $5,000 per year, at a discount rate of 6 percent, if the first payment is received 6 years from now and the last payment is received 25 years from now?
> Sony International has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $165 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has
> Titan Inc.’s net income for the most recent year was $8,320. The tax rate was 34 percent. The firm paid $1,940 in total interest expense and deducted $2,730 in depreciation expense. What was Titan’s cash coverage ratio for the year?
> Consider a firm with a contract to sell an asset for $115,000 three years from now. The asset costs $76,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate doe
> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get $1.55 million, and so on. If the appropriate interest
> Compute the future value of $1,000 compounded annually for a. 10 years at 5 percent. b. 10 years at 10 percent. c. 20 years at 5 percent. d. Why is the interest earned in part (c) not twice the amount earned in part (a)?
> As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at the end of the period. Show that the relationship between the value of an ordinary annuity and
> The present value of the following cash flow stream is $7,300 when discounted at 8 percent annually. What is the value of the missing cash flow? Year ……………….Cash Flow 1 …………………………..……. $1,500 2 …………………………..…………….? 3 ………………………….………2,700 4 ……………………..………….
> You need a 30-year, fixed-rate mortgage to buy a new home for $250,000. Your mortgage bank will lend you the money at a 5.3 percent APR for this 360-month loan. However, you can only afford monthly payments of $950, so you offer to pay off any remaining
> Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new proje
> J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,100, including a set of eight chairs. The company feels that sales will be 1,800, 1,950, 2,500, 2,35
> After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache pain. The second is a pill for headache and arthritis pain.
> Consider a four-year project with the following information: Initial fixed asset investment 5 $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price 5 $37; variable costs 5 $23; fixed costs 5 $195,000; quantity so
> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $6,800 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if in
> Lewin Skis, Inc., today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the earnings as dividends to the shareholders. However, Clint Williams, preside
> The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business
> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $65,000, and you plan to spend all of it. However, you want to start saving for retirement beginning next year.
> The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible? 9.125 May 09 100:03 100:04 -2.15
> Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $41,000; costs = $26,400; addition to retained earnings = $4,900; dividends paid = $1,570; interest expense = $1,840; tax rate = 35 percent.
> Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in eq
> The Cornchopper Company is considering the purchase of a new harvester. Cornchopper has hired you to determine the break-even purchase price in terms of present value of the harvester. This break-even purchase price is the price at which the project’s NP
> Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,450,000. The company can continue to rent the building to the present occupants for $61,000 per year. The present occu
> Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $75,000. Cash flows from increased sales will be $21,000 the fi
> Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 8.5 percent, 0 p
> Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a. Payback period. b. Internal rate of return. c. Profi
> Suppose we are thinking about replacing an old computer with a new one. The old one cost us $450,000; the new one will cost $580,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $130,
> Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $405,000, has a six-year life, a
> Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the comp
> Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the comp
> Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in p
> You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be SF 6.9 million per year for the next five years. The dollar required retu
> Your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $26,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indiffe
> Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for Tokyo Rubber Company is 10 percent. a. Based on the payback period, which project should be taken? b. Based on the NPV, which pr
> Corporation Growth has $86,000 in taxable income, and Corporation Income has $8,600,000 in taxable income. a. What is the tax bill for each firm? (Refer to Table 2.3.) b. Suppose both firms have identified a new project that will increase taxabl
> In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet look like? Previous Problem: Atreides International has op
> Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information: Plant also knows that securities analysts expect the earnings and dividends of Palmer to gr
> In Problem 14, what is the break-even quantity for the new credit policy? Problem 14 Current Policy New Policy $108 Price per unit Cost per unit $104 $ 47 $ 47 Unit sales per month 3,240 3,295
> Barrett Pharmaceuticals is considering a drug project that costs $2.5 million today and is expected to generate end-of-year annual cash flows of $227,000, forever. At what discount rate would Barrett be indifferent between accepting or rejecting the proj
> Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require an 11 percent return on this stock, what will you pay for a share today?
> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Redan Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. If the relevant carrying cost per switch assembly is $7, and the fixed order cost is $725, is Redan’s inventory policy optimal? Why or why not?
> Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 15 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c.5 percent
> The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid
> All else being the same, which has more interest rate risk, a long term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon bond compared to a short-term, low coupon bond?
> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Etonic Inc. is considering an investment of $365,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $245,000 and $70,000, respectively. Both reve
> The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent a year. a. Compute the profitability index for each of the three projects. b. Compute the NPV
> First National Bank charges 11.2 percent compounded monthly on its business loans. First United Bank charges 11.4 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?
> The DuPont identity presented in the chapter is commonly referred to as the three-factor DuPont identity. Another common way that the DuPont identity is expressed is the five-factor model, which is: Derive the five-factor DuPont identity (EBT is earnin
> Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate d
> Huang, Inc., is obligated to pay its creditors $10,900 very soon. a. What is the market value of the shareholders’ equity if assets have a market value of $12,400? b. What if assets equal $9,600?
> Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 34,000 solaris, debt in the amount of 12,000 solaris, and equity of 22,000 solaris. a. If the current exchange ratio is 1.20 solari
> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will
> Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here: Bentley currently has a bond issue outstanding with a face value of $125,000. Rol
> Harrods PLC has a market value of £400 million and 30 million shares outstanding. Selfridge Department Store has a market value of £160 million and 18 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that
> Bird’s Eye Tree houses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank
> The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles. The average cost to the shop of a bicycle is $525. The owner knows that only 96 percent of the customers
> 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
> Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 11 percent,
> The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what
> a. What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium
> McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?
> The Locker Co. had $273,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal tax rate? Table 2.3 Taxable Income Tax Rate 0- 50
> You have just won the lottery. You will receive $2,500,000 today, and then receive 40 payments of $1,250,000. These payments will start one year from now and will be paid every six months. A representative from Greenleaf Investments has offered to purcha
> How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?
> Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery can be sold to the Romulans today for $6.5 million. Klingon’s current balance sheet shows net fixed assets of $5.2 million, current liabilities of $2
> Use the information in Figure 31.1 to answer the following questions: a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount? Explain. b. What is the three-month forward rate for B
> The exchange rate for the Australian dollar is currently A$1.40. This exchange rate is expected to rise by 10 percent over the next year. a. Is the Australian dollar expected to get stronger or weaker? b. What do you think about the relative inflation ra
> If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project’s life, what ca
> Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements: Total assets ………………………………………….$75,000 E
> Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 600. Paul plans to raise the annual fee by 6 percent every year and expects the club membership to grow at a consta
> Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $15,000 for James and raises the needed funds through an issue of long-term debt. Co
> Explain why diversification per se is probably not a good reason for merger.
> Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 30. Based on experience, 65 percent of all customers will take the discount. a. What is the average collection period for Kyoto Joe? b. If Kyoto Joe sells 1
> 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 details of the policy are as follows: The purchaser (say, the parent) makes the following six
> When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost
> The Trektronics store begins each week with 750 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $65 per year and the fixed order cost is $395, what is the total carrying cost? What is the restocking co
> Purple Feet Wine, Inc., receives an average of $16,000 in checks per day. The delay in clearing is typically three days. The current interest rate is .018 percent per day. a. What is the company’s float? b. What is the most Purple Feet should be willing
> For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?
> Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
> A corollary to the Rule of 72 is the Rule of 69.3. The Rule of 69.3 is exactly correct except for rounding when interest rates are compounded continuously. Prove the Rule of 69.3 for continuously compounded interest.
> A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you simply divide 72 by the interest rate to determine the number of periods it takes for a value today to double.
> In each of the following cases, find the unknown variable. Ignore taxes. Accounting Break-even Unit Variable Cost Unit Price Fixed Costs Depreciation 95,300 $ 41 $30 $ 820,000 143,806 56 2,750,000 $1,150,000 7,835 97 160,000 105,000
> 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 $10,000 balance from your current credit card, which charges an annual rate of 18.6 percent, to a
> 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! 18% Simple Interest! Three Years to Pay!
> Two banks in the area offer 30-year, $200,000 mortgages at 5.3 percent and charge a $2,400 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.
> You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. Th
> Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Gut
> M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7 million initial investment. M.V.P. expects a total annual operating cash flow of $1.3 million for the next 10 years. The relevant discount rate is 10
> 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
> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on t
> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will in
> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time………….………….……... Salary 0………..…….….….…. $8, 500,000 1…………….….………….3, 900,000 2……………….………….4, 600,000 3……………………………5, 300,000 4……………………….…..5
