Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risks with those funds. What ethical limits should managers observe when taking risks with other people’s money?
> Canvas Reproductions has fixed operating costs of $12,500 and variable operating costs of $10 per unit and sells its paintings for $25 each. At what level of unit sales will the company break even in terms of EBIT?
> Marcus Tube, a manufacturer of high quality aluminum tubing, has maintained stable sales and profits over the past 10Â years. Although the market for aluminum tubing has been expanding by 3% per year, Marcus has been unsuccessful in sharing th
> Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $200,000 and will require $30,000 in installation costs. It will be d
> The Environmental Protection Agency sometimes imposes penalties on firms that pollute the environment. But did you know there is a legal market for pollution? For example, a mechanism developed to limit excessive air pollution is the use of carbon credit
> A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million. a. Calculate the present value of cash inflows associated with each project. b. Select the opti
> The Sleek Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. The up-front cost of the equipment is $690,000. The company expects the equipment
> Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15%
> Jenny Rene, the CFO of Asor Products Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm’s manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable bec
> Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 64-inc
> JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years; (2) it can license the design to another manufactu
> Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 14% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash infl
> Powerswitch Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects along with their initial investments and their IRRs are listed in the followi
> Evans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm’s ongoing need for additional aluminum-extrusion capacity. The three machines—A, B, and Câ€
> Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in
> Centennial Catering Inc. is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial’s managers believe that the appropriate market rate of retu
> Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 6 years. The cost of the first investment is $10,000, and Lara expects equal and consecutive year-end payments of $3,000. The second inve
> After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the following table. The firm is considering two mut
> Spin Corp., a media services firm with net earnings of $3,200,000 in the past year, is considering the following projects. The media services business is cyclical and highly competitive. The board of directors has asked you, as chief financial officer,
> For each of the following cases, determine the total taxes resulting from the transaction. Assume a 40% tax rate. The asset was purchased 2 years ago for $200,000 and is being depreciated under MACRS, using a 5-year recovery period. a. The asset sells fo
> Troy Industries purchased a new machine 3 years ago for $80,000. It is being depreciated under MACRS with a 5-year recovery period, using the percentages given. Assume a 40% tax rate. a. What is the book value of the machine? b. Calculate the firm’s tax
> Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 for the applicable depreciation percentages. Recovery period (years) Elapsed time since purchase (years) Asset
> Dave and Ann Stone have been living at their current home for the past 6 years. During that time, they have replaced the water heater for $375, have replaced the dishwasher for $599, and have had to make miscellaneous repair and maintenance expenditures
> Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net
> Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs related to the proposed project, explain whether each would
> Masters Golf Products Inc. spent 3 years and $1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,800,000 in new equipment. The new clubs are expecte
> Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below. a. If project A, which requires an initial investment of $4,650,000, is a replacement for project B and the
> Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,000 to support the expanded
> Scenic Tours Inc. is a provider of bus tours throughout New England. The corporation is considering the replacement of 10 of its older buses. The existing buses were purchased 4 years ago at a total cost of $2,700,000 and are being depreciated using MACR
> For each of the following projects, determine the net cash flows, and depict the cash flows on a timeline. a. A project that requires an initial investment of $120,000 and will generate annual operating cash inflows of $25,000 for the next 18 years. In e
> Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $
> Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (i.e., increase earnings before interest, taxes, depreciation, and amortization) by $16,000 per year for each of the 5 years the new machine is expected
> Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe it is time to buy a new one. They would like to know the ope
> A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-ye
> Like most firms in its industry, Culinary Cafe uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0 to 10. The scale is re-created in the following ta
> A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000. Interest is paid annually. If the required return on this bond is 8%, what is the price of the bond?
> A firm is evaluating the acquisition of an asset that costs $64,000 and requires $4,000 in installation costs. If the firm depreciates the asset under MACRS, using a 5-year recovery period determine the depreciation charge for each year.
> DuPree Coffee Roasters Inc. wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $130,000. The firm has a chance to sell its 4-year-old roaster for $35,000. The existing roaste
> Edwards Manufacturing Company (EMC) is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine under MACRS, using a 5-year recovery period. The new m
> Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depreciated under MACRS, using a 5-year recovery period. Th
> Vastine Medical Inc. is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using MACRS and a 5-year recovery period. A new computer
> Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of $920,000 and total current liabilities of $640,000. As a result of the proposed replacement, the following cha
> Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers. a. An outlay of $27,600 for a marketing research report b. A $275 outlay for an office machine c. A
> A firm can purchase new equipment for a $150,000 initial investment. The equipment generates an annual after-tax cash inflow of $44,400 for 4 years. a. Determine the net present value (NPV) of the equipment, assuming the firm has a 10% cost of capital. I
> Simes Innovations Inc. is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car’s inventor has offered Simes the choice of either a one-time payment of $1,500,000 today or a series of five year-end payments o
> Using a 10% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. Cash flows (CF,) in thousands Year B D E -$2.50 --$375 -$550 -$750 -$1,150 1 50
> You wish to evaluate a project requiring an initial investment of $59,500 and having a useful life of 7 years. What minimum amount of annual cash inflow do you need if your firm has an 8.7% cost of capital? If the project is forecast to earn $11,400 per
> Le Pew Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $360,000 and will generate after-tax cash inflows of $62,650 per year for 8 years. For each of the costs of capital listed, (1) calculate the ne
> Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%. a. Initial investment is $1,000,000; cash inflows are $150,000 per year. b. Initial investme
> Bill Williams has the opportunity to invest in project A, which costs $9,000 today and promises to pay $2,200, $2,500, $2,500, $2,000, and $1,800 over the next 5 years. Or Bill can invest $9,000 in project B, which promises to pay $1,500, $1,500, $1,500,
> Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table. a. Calcul
> Shell Camping Gear Inc. is considering two mutually exclusive projects. Each requires an initial investment (CF0) of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with e
> Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent lights in all of its stores with LED lights. The main advantage of making this swit
> White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows. a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%, 10%, 15%, 20%, 22.5%, 25%, 30%. b
> The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 20%, and HFGC managers believe that 20% is a
> Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table. a. Why is it difficult to calculate the payback period for this project? b. Calcula
> Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years. The company’s cost of capital is 10.87%
> Projects A and B, of equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table. a. Calculate each project&ac
> Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table. a. Calculate the payback period for each project.
> Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table. a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the
> Rieger International is evaluating the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal, as shown in the following table. The firm has a 12% cost of capi
> Nicholson Roofing Materials Inc. is considering two mutually exclusive projects, each with an initial investment of $150,000. The company’s board of directors has set a maximum 4-year payback requirement and has set its cost of capital
> Botany Bay Inc., a maker of casual clothing, is considering four projects. Because of past financial difficulties, the company has a high cost of capital at 15%. a. Calculate the NPV of each project, using a cost of capital of 15%. b. Rank acceptable p
> Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax c
> Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax cash inflows of $4,000 per year for 7 years. The firm has a 10% cost of capit
> Oak Enterprises accepts projects earning more than the firm’s 15% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of $10,000 and requires an initial investment of $61,450. (Note: All amounts are after tax
> Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. a. Calculate the project’s NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the cal
> Bryson Sciences is planning to purchase a high-powered microscopy machine for $385,000 and incur an additional $31,300 in installation expenses. It is replacing older microscopy equipment that can be sold for $116,500, resulting in taxes from a gain on t
> Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm’s warehouse capacity. The relevant cash flows for the projects are shown in the following table. The firm’
> Peace of Mind Inc. (PMI) sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that ari
> For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable. Project A Project B Project
> A project costs $2,500,000 up front and will generate cash flows in perpetuity of $240,000. The firm’s cost of capital is 9%. a. Calculate the project’s NPV. b. Calculate the annual EVA in a typical year. c. Calculate the overall project EVA and compare
> Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital. a. Calculate each project’s payback period. Which project is preferred acco
> Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the master’s program will have an up-front cost of $50,000. If she enrolls in an MBA program, Jenny will quit
> Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following table. The firmâ€
> The Ball Shoe Company is considering an investment project that requires an initial investment of $542,000 and returns after-tax cash inflows of $75,000 per year for 10 years. The firm has a maximum acceptable payback period of 8 years. a. Determine the
> Netflix common stock has a beta, b, of 0.8. The risk-free rate is 3%, and the market return is 10%. a. Determine the risk premium on Netflix common stock. b. Determine the required return that Netflix common stock should provide. c. Determine Netflix’s c
> Determine the cost for each of the following preferred stocks. Preferred stock Par value Sale price Flotation cost Annual dividend A $100 $101 $9.00 11% B 40 38 $3.50 8% C 35 37 $4.00 $5.00 D 30 26 5% of par $3.00 E. 20 20 $2.50 9%
> A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000. Since then, it has taken depreciation deductions totaling $124,250. What is the system’s current book value? If Largo sold the system for $110,00
> Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be paid. a. Calculate the cost of the preferred stock. b. If t
> Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle deal
> Gronseth Drywall Systems Inc. is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The fir
> For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity, using the approximation formula. Life (years) Discount (-) or premium (+) Coupon interest rate Bond Under
> David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 per month over the next 30 years. David can
> Assume that the risk-free rate, RF, is currently 8%; the market return, rm, is 12%; and asset A has a beta, bA, of 1.10. a. Draw the security market line (SML) on a set of “non-diversifiable risk (x-axis)– required return (y-axis)” axes. b. Use the CAPM
> Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 13%. a. Draw the security market line (SML) on a set of “non diversifiable risk (x-axis)– required return (y-axis)” axes. b. Calculate and label the market r
> Jamie Peters invested $100,000 to set up the following portfolio 1 year ago. a. Calculate the portfolio beta on the basis of the original cost figures. b. Calculate the percentage return of each asset in the portfolio for the year. c. Calculate the per
> Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 0.90 when the risk-free rate and market return are 8% and 12%, respectively. b. Find the ris
> Katherine Wilson is wondering how much risk she must undertake to generate an acceptable return on her portfolio. The risk-free return currently is 5%. The return on the overall stock market is 16%. Use the CAPM to calculate how high the beta coefficient
> Landscapes Unlimited has spent $2,200 evaluating a new service area for expanding its business territory. The expansion will require the purchase of a new truck for $35,000, and fitting the truck with a flatbed that will cost $6,500 to install. The compa
> For each case in the following table, use the capital asset pricing model to find the required return. Risk-free rate, Rp Market Case return, rm Beta, ß A 1% 8% 1.30 B 2 6 0.90 C 5 13 -0.20 D 12 1.00 E 10 0.60 64
> Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particularly interested in using beta to compare the risks of the portfolios, so she has gathered the data shown in
> You are considering three stocks—A, B, and C—for possible inclusion in your investment portfolio. Stock A has a beta of 0.80, stock B has a beta of 1.40, and stock C has a beta of -0.30. a. Rank these stocks from the most risky to the least risky. b. If
> During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecasts of Wall Street stock analysts. Some skeptics wondered if GE “managed” earnings to meet Wall Street’s ex
> American Exploration Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 70% debt. American Explorat
> Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 7% coupon rate. Because current market rates for similar bonds are just under 7%, Warren can sell its bonds for $1,010 each; Warren will incur flotation cos
> Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year
> John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years, and he can repay them without penalty any time before maturity. The amounts owed on each loan and the annual interest rate asso
> Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the following weights: 40% long-term debt, 10% preferred stock,
> Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 4
> Iridium Corp. has spent $3.5 billion over the past decade developing a satellitebased telecommunication system. It is currently trying to decide whether to spend an additional $350 million on the project. The firm expects that this outlay will finish the
