Rib & Wings-R-Us is considering the purchase of a new smoker oven for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $50,000, last for 8 years, and produce annual free cash flows of $16,000 per year. The alternative is the deluxe, award-winning Smoke-alator, which costs $78,000 and, because of its patented humidity control, produces the “moistest, tastiest barbecue in the world.” The Smoke-alator would last for 11 years and produce free cash flows of $23,000 per year. Assuming a 10 percent required rate of return on both projects, compute their equivalent annual annuities (EAAs).
> Explain the notion of a perfect capital market. Use common-sense language such as you might use in explaining the concept to your grandfather who has never taken a finance class.
> Your firm needs to raise $12 million to finance its capital expenditures for the coming year. The firm earned $4 million last year and will pay out half this amount in dividends. If the firm’s CFO wants to finance new investments using no more than 40 pe
> Care More, Inc. provides in-home medical assistance to the elderly and earned net income of $5 million that it plans to use to repurchase shares of the firm’s common stock, which is currently selling for $50 a share. Care More has 20 million shares of st
> The Dunn Corporation is planning to pay dividends of $500,000. There are 250,000 shares outstanding, and earnings per share are $5. The stock should sell for $50 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchase
> The debt and equity section of the Robson Corporation balance sheet is shown here. The current market price of the common shares is $20. Reconstruct the financial statement assuming that (a) a 15 percent stock dividend is issued and (b) a 2-for-1 stock
> WW International (WWI) recently declared a 3-for-1 stock split for its common shares. Before the split, the firm’s share price had risen to $450 per share and the firm’s CFO felt that this high stock price inhibited trading in the firm’s shares. Prior to
> In the spring of 2016, the CFO of HTPL Distributing Company decided to distribute a stock dividend to its shareholders. Specifically, the CFO proposed that the company pay 0.05 shares of stock to the holders of each share of common stock, such that the h
> Define each of the following dates and place them in their proper order with respect to the payment and receipt of cash dividends: date of record, ex-dividend date, declaration date, and payment date.
> Parker Prints is in negotiation with two of its largest customers to increase the firm’s sales dramatically. The increase will require that Parker expand its production facilities at a cost of $30 million. Parker expects to pay out $8 million in dividend
> A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative
> What is meant by the term cash flow process?
> Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international retail outlets to distribute and service a full line of ing
> Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage in excessive risk taking (that is, investing in very
> Match each of the following definitions to the appropriate terms: TERMS DEFINITIONS Independence theory-with corporate taxes The cost of capital is unaffected by the firm's choice of debt and equity financing. Independence theoryno taxes The cost
> The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $600. The associated variable cost is $450 per unit. Fixed costs for the firm average
> Footwear Inc. manufactures a complete line of men’s and women’s dress shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for this same pair of shoes is $58. Footwear Inc. incurs fixed cos
> Simple Metal Works, Inc. will manufacture and sell 300,000 units next year. Fixed costs will total $350,000, and variable costs will be 65 percent of sales. a. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What sell
> You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday. Sales…………………………………………………………$ 50,439,375 Variable costs……………………………………………... (25,137,000) Revenue bef
> Financial data for three corporations are displayed here. a. Which firm appears to be excessively leveraged? b. Which firm appears to be employing financial leverage to the most appropriate degree? c. What explanation can you provide for the higher p
> Which of the following sources of new earnings volatility demonstrates the effect of business versus financial risk (discuss the rationale for your decisions): a. Amos Gooding Real Estate Company recently constructed a new office building and borrowed 10
> The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, an
> New Wave Surfing Stuff Inc. is a manufacturer of surfboards and related gear that sells to exclusive surf shops located in several Atlantic and Pacific mainland coastal towns as well as several Hawaiian locations. The company’s headquarters are located
> You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for $1,0
> At present, Solartech Skateboards is considering expanding its product line to include gas-powered skateboards; however, it is questionable how well they will be received by skateboarders. Although you feel there is a 60 percent chance you will sell 10,0
> Assume that a new project will annually generate revenues of $2 million. Cash expenses including both fixed and variable costs will be $800,000, and depreciation will increase by $200,000 per year. In addition, let’s assume that the firm’s marginal tax r
> Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new dist
> Racin’ Scooters is introducing a new product and has an expected change in EBIT of $475,000. Racin’ Scooters has a 34 percent marginal tax rate. The project will produce $100,000 of depreciation per year. In addition,
> The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 5 years ago, had an expected life of 10 years and an expected salvage value of zero. Assume Harris uses simplified straight-line depreci
> The G. Wolfe Corporation is examining two capital-budgeting projects with 5-year lives. The first, project A, is a replacement project; the second, project B, is a project unrelated to current operations. The G. Wolfe Corporation uses the risk-adjusted d
> Hewlett-Packard has designed a new type of printer that produces professional-quality photos. These new printers took 2 years to develop, with research and development running at $10 million after taxes over that period. Now all that’s left is an investm
> McDoogals Restaurants has come up with a new fast-food, casual restaurant combining some of the features of Chipotle, Panera, and Shake Shack, but it is not quite sure how the public will react to it. McDoogals feels that there is a 50–
> Go-Power Batteries has developed a high voltage nickel–metal hydride battery that can be used to power a hybrid automobile. It can sell the technology immediately to Toyota for $10 million, or alternatively, Go-Power Batteries can invest $50 million in a
> For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in
> You have come up with a great idea for a TexMex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $6 million. You also estimate that there is a 50 percent chance that this new restauran
> Hurricane Katrina brought unprecedented destruction to New Orleans and the Mississippi Gulf Coast in 2005. Notably, the burgeoning casino gambling industry along the Mississippi coast was virtually wiped out overnight. GCC Corporation owns one of the old
> The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 ye
> Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5
> Double meat Palace is considering a new plant for a temporary customer, and its finance department has determined the following characteristics. The company owns much of the plant and equipment to be used for the product. This equipment was originally pu
> Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the
> Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine properly, workers would
> Ray mobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would ha
> Given the following free cash flows, determine the IRR for the three independent projects A, B, and C. PROJECT A PROJECT B PROJECT C Initial outlay -$50,000 -$100,000 -$450,000 Cash inflows: $10,000 $125,000 $200,000 200,000 Year 1 Year 2 15,000 2
> Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5 million and would generate annual free cash inflows of $1 million per year for 8 years. Calculate the pro
> Phillips Petroleum is an integrated oil and gas company with headquarters in Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production worldwide. In addition, it engages in natural gas gathering and
> You are considering three independent projects: project A, project B, and project C. Given the following free cash flow information, calculate the payback period for each. If you require a 3-year payback before an investment can be accepted, which pr
> You are considering three independent projects: project A, project B, and project C. Given the following free cash flow information, calculate the payback period for each. Calculate the NPV, PI, and IRR for each project and indicate if the project sh
> are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent. a. What is the project’s payback period? b. What is
> awa Inc. is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay would be $1,950,000, and the project would generate incremental free cash flows of $450,00
> The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the current hotel and rebuild, the initial outlay would be $
> Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because both hotels would occupy the sam
> The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with these projects are as follows: The required rate of return on these projects is 10 percent. a. What is each project’s
> The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required
> Determine to the nearest percent the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of year 1, $5,000 at the end of year 2, and $8,000 at the end of year 3 b. An initial outlay of $10,000
> Assume that you write a column for a very widely followed financial blog titled “Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week you are going to address two questions from your readers that h
> You have been assigned the task of evaluating two mutually exclusive projects with the following projected free cash flows: If the appropriate discount rate on these projects is 10 percent, which would be chosen and why? YEAR PROJECT A CASH FLOW
> The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability ind
> Artie’s Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and would generate annual free cash inflows of $2 million per year for 8 years. Calculate the project’s MIRR given: a. A required r
> Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce free cash inflows of $150,000 each year at the end of years 1 through 5, then at the end of year 7 there will be a free cash
> Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7 million and will produce free cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and $2 million
> Sheinhardt Wig Company is considering a project that has the following cash flows: YEAR…………………………. PROJECT CASH FLOW 0 ………………………………………………………...2$100,000 1………………………………………………………………. 20,000 2………………………………………………………………60,000 3………………………………………………………………70,000 4
> Mode Publishing is considering building a new printing facility that will involve a large initial outlay and then result in a series of positive free cash flows for 4 years. The estimated cash flows associated with this project are: YEAR………………………....PR
> Determine the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $1,993 at the end of each year for the next 10 years b. An initial outlay of $10,000 resulting in a free cash flow of $2,054 at the end of each
> Assuming an appropriate discount rate of 11 percent, what is the discounted payback period on a project with an initial outlay of $100,000 and the following free cash flows? Year 1 5………………………………………. $30,000 Year 2 5………………………………………. $35,000 Year 3 5…………
> You are considering a project with the following free cash flows. If the appropriate discount rate is 10 percent, what is the project’s discounted payback period? YEAR…………………..PROJECT CASH FLOW 0 …………………………………………………2$50,000 1………………………….…………………………..20,0
> Camping USA Inc. has been operating for only 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and
> The processes of discounting and compounding are related. Explain this relationship.
> What is the time value of money? Why is it so important?
> What information do the price/earnings ratio and the price/book ratio give us about the firm and its investors?
> What are the differences among a firm’s gross profit margin, operating profit margin, and net profit margin?
> Why is a firm’s operating return on assets a function of its operating profit margin and total asset turnover?
> Distinguish between a firm’s operating return on assets and its operating profit margin.
> What is liquidity, and what is the rationale for its measurement?
> What are the limitations of industry average ratios? Discuss briefly.
> Describe the “five-question approach” to using financial ratios.
> Where can we obtain industry norms?
> Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado’s Rocky Mountains. Your firm manufactures only one product, a state-of-the-art snow ski. Up to this p
> What is Economic Value Added? Why is it used?
> Explain what determines a company’s return on equity.
> What are the limitations of financial statements?
> What are the differences between GAAP and IFRS?
> Why might one firm have positive cash flows and be headed for financial trouble, whereas another firm with negative cash flows could actually be in a good financial position?
> Why is it that the preferred stockholders’ equity section of the balance sheet changes only when new shares are sold or repurchased, whereas the common stockholders’ equity section changes from year to year regardless of whether new shares are bought or
> How do dividends and interest expense differ?
> How do gross profits, operating profits, and net income differ?
> A company’s financial statements consist of the balance sheet, income statement, and statement of cash flows. Describe what each statement tells us.
> What is the major difference between a negotiated purchase and a competitive bid purchase?
> It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next ass
> What is an investment banker, and what major functions does he or she perform?
> Explain the popular theories for the rationale of the term structure of interest rates.
> Why do you think most secondary-market trading in bonds takes place over the counter?
> It has been said that in recent years the difference between an organized exchange and the over-the-counter market has blurred. What does this statement mean and do you think it is correct?
> Compare and explain the historical rates of return for different types of securities.
> Explain the term opportunity cost with respect to the cost of funds to the firm.
> What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?
> Distinguish between the money and capital markets.
> Why might a large corporation want to raise long-term capital through a private placement rather than a public offering?
> Using the following criteria, specify the legal form of business that is favored: (a) organizational requirements and costs, (b) liability of the owners, (c) the continuity of the business, (d) the transferability of ownership, (e) management control and
> Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also t
> Identify the primary characteristics of each form of legal business organization.
> Define (a) sole proprietorship, (b) partnership, and (c) corporation.
