If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the after-tax salvage value?
> WhackAmOle has two million shares of common stock outstanding, 1.5 million shares of preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per share, the preferred shares are selling for $52 per share, and the bonds are
> Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent, and the expected return on the market is 13.5 percent. What is Diddy’s cost of equity?
> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000 bonds. If the common shares sell for $17 per share, the preferred shares sell for $16 per share, and the bonds sell for 108 perce
> Suppose you were the financial manager for a firm and were considering a proposed increase in the amount of debt in the firm’s capital structure. If you thought the firm was going to consistently earn a level of EBIT above its break-even level of EBIT (b
> FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds. If the common shares sell for $27 per share, the preferred shares sell fo
> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000 bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $26 per share, and the bonds are
> FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds. If the common shares are selling for $27 per share, the preferred shares
> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000 bonds. If the common shares are selling for $17 per share, the preferred shares are selling for $26 per share, and the bonds are
> FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds. If the common shares are selling for $27 per share, the preferred shares
> Marme, Inc. has preferred stock selling for 96 percent of par that pays an 11 percent annual coupon. What would be Marme’s component cost of preferred stock?
> ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon. What would be ILK’s component cost of preferred stock?
> Oberon, Inc. has a $20 million (face value) 10-year bond issue selling for 97 percent of par that pays an annual coupon of 8.25 percent. What would be Oberon’s before-tax component cost of debt?
> JaiLai Cos. stock has a beta of 0.9, the current risk-free rate is 6.2 percent, and the expected return on the market is 12 percent. What is JaiLai’s cost of equity?
> Suppose that LilyMac Photography expects EBIT to be approximately $200,000 per year for the foreseeable future, and that they have 1,000 10-years, 9 percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculatio
> If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?
> KatyDid Clothes has a $150 million (face value) 30-year bond issue selling for 104 percent of par that carries a coupon rate of 11 percent, paid semiannually. What would be Katydid’s before-tax component cost of debt?
> PDQ, Inc. expects EBIT to be approximately $11 million per year for the foreseeable future, and that they have 25,000 20-years, 8 percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculation of the debt compo
> A firm is considering a project that will generate perpetual after-tax cash flows of $15,000 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity flotation costs 14 percent a
> Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.6, 1.0, 1.3, and 1.6, respectively. If all current and future projects will
> An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrec
> An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrec
> Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will
> Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?
> When will the subjective approach to forming divisional WACCs be better than using the firmwide WACC to evaluate all projects?
> Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within three years. If the expansion was going to be financed
> If a firm increased the amount of debt in its capital structure, but a shareholder wanted to switch back to the mixture of expected return and risk she had before the switch, how would she go about doing so?
> Why do we use market-based weights instead of book-value-based weights when computing the WACC?
> Could you calculate the component cost of equity for a stock with nonconstant expected growth rates in dividends if you didn’t have the information necessary to compute the component cost using the CAPM? Why or why not?
> Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model?
> Expressing WACC in terms of iE, iP, and iD, what is the theoretical minimum for the WACC?
> Why don’t we multiply the cost of preferred stock by one minus the tax rate, as we do for debt?
> How would you handle calculating the cost of capital if a firm were planning to issue two different classes of common stock?
> Explain why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division.
> Will an increase in flotation costs increase or decrease the initial cash flow for a project?
> How many TVM formulas do you use every time you calculate EAC for a project?
> In a cost-cutting proposal, what might cause you to sometimes have negative EBIT?
> Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?
> Would it be possible for a firm to announce a “reverse stock dividend”?
> In a replacement problem, will incremental net depreciation always be less than the gross depreciation on the new piece of equipment?
> In a replacement problem, would we ever see changes in NWC?
> Everything else held constant, would you rather depreciate a project with DDB depreciation or deduct it under a Section 179 deduction?
> Everything else held constant, would you rather depreciate a project with straight-line depreciation or with DDB?
> Why does a decrease in NWC result in a cash inflow to the firm?
> Suppose you paid your old college finance professor to evaluate a project for you. If you would pay him regardless of your decision concerning whether to proceed with the project, should his fee for evaluating the project be included in the project’s inc
> How is the pro forma statement we used in this chapter for computing OCF different from an accountant’s income statement?
> Your company, Dawgs “R” Us, is evaluating a new project involving the purchase of a new oven to bake your hotdog buns. If purchased, the new oven will replace your existing oven, which was purchased seven years ago for a total, installed price of $1,000
> KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.
> You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck wil
> In M&M’s perfect world, will the debt holders ever bear any of the risk of the firm?
> Your firm needs a computerized machine tool lathe which costs $50,000, and requires $12,000 in maintenance for each year of its three-year life.
> Suppose you sell a fixed asset for $109,000 when its book value is $129,000. If your company’s marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
> You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $57,000, has a five-year life, and has an annual OCF (after tax) of -$10,000 per year. The Keebler CookieMunster costs $90,000, has a seven-year life, and has an annual OCF (af
> You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,000 to purchase and which will have OCF of -$1,200 annually throughout the vehicle’s expected life of three years as a d
> Your company is considering a new project that will require $1 million of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $150,000 using straight-line depreciati
> You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and
> Continuing the previous problem, what is the operating cash flow for the project in year 2?
> You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year
> Mom's Cookies, Inc. is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now five years old, and it has a current market value of $13,333.33. The old oven is being depreciated over a 10-year life toward a
> Why is debt often referred to as leverage in finance?
> You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and
> You are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product, “Ba
> Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,000 apiece and which you could probably use for another 2 years if y
> Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your
> Use the IRR decision rule to evaluate this project; should it be accepted or rejected?
> Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
> Use the IRR decision rule to evaluate this project; should it be accepted or rejected?
> Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
> Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
> Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?
> Why might current liabilities be considered a spontaneous source of funding for a firm?
> Use the payback decision rule to evaluate this project; should it be accepted or rejected?
> Use the PI decision rule to evaluate this project; should it be accepted or rejected?
> Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
> Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?
> Use the payback decision rule to evaluate this project; should it be accepted or rejected?
> Use the PI decision rule to evaluate this project; should it be accepted or rejected?
> Compute the NPV for Project M and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 8 percent. Project M Time 1 3 4 Cash Flow -$1,000 $350 $480 $520 $600 $100
> How many possible IRRs could you find for the following set of cash flows? Time 1 2 3 4 Cash Flow -$211,000 -$39,350 $440,180 $217,520 | -$2,000
> How many possible IRRs could you find for the following set of cash flows? Time 1 | 3 Cash Flow -$11,000 $3,350 $4,180 $1,520 $2,000
> Compute the PI statistic for Project Q and tell whether you would accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. Project Q 1 Cash Flow -$11,000 $3,350 $4,180 $1,520 $2,000 Time 2 3
> Compare and contrast the use of pro forma financial statements in corporate financial planning with their use in accounting.
> Compute the PI statistic for Project Z for and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 8 percent. Project Z Time 1 2 3 4 5 Cash Flow -$1,000 $350 | $480 | $650
> Compute the IRR statistic for project F and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. Project F Time 1 2 3 4 Cash Flow -$11,000 $3,350 $4,180 $1,52
> Compute the IRR statistic for Project E and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 8 percent. Project E Time 1 2 3 4 5 Cash Flow -$1,000 $350 | $480 | $520
> Compute the discounted payback statistic for Project D and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback i
> Compute the payback statistic for Project A and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 8 percent and the maximum allowable payback is four years. Project A
> Compute the payback statistic for Project B and decide whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable payback is three years. Project B
> Compute the NPV statistic for Project K and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is six percent. Project K Time 1 2 3 4 Cash Flow -$10,000 | $5,000 $6,0
> Compute the NPV statistic for Project U and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is ten percent. Project U Time 1 2 3 4 Cash Flow -$1,000 | $350 $1,480
> Compute the NPV statistic for Project Y and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. Project Y Time 1 2 4 Cash Flow -$8,000 $3,350 $4,180 $1,520 |
> Compute the MIRR statistic for Project I and tell whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. Project I Time 1 2 4 Cash Flow -$11,000 $5,330 | $4,180 | $1,520 $2,000
> How will passive and active capital structure changes differ?
> Compute the discounted payback statistic for Project C and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 8 percent and the maximum allowable discounted payback is
> Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J Time 1 2 3 4 Cash Flow -$1,000 $350 $1,480 -$520 $300 -$100
> Construct an NPV profile and determine EXACTLY how many nonnegative IRRs you can find for the following set of cash flows: Time 1 2 3 4 5 6 7 Cashflow -150 275 150 -100 300 -300 200 -300
> Construct an NPV profile and determine EXACTLY how many nonnegative IRRs you can find for the following set of cash flows: Time 2 3 4 5 6 7 Cashflow -200 400 150 -100 -100 -300 200 -300
> For what range of possible interest rates would you want to use IRR to choose between these two projects? For what range of rates would you NOT want to use IRR?
> Graph the NPV profiles for both projects on a common chart, making sure that you identify all of the “crucial” points.
> Suppose a company faced different borrowing and lending rates. How would this range change the way that you would compute the MIRR statistic?
> Suppose a company wanted to double their firm’s value with the next round of capital budgeting project decisions. To what would they set the PI benchmark to make this goal?
