Question: With the market price of gold at

> Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collecti

> American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales

> Columbia Paper has the following stockholders’ equity account. The firm’s common stock has a current market price of $30 per share. a. Show the effects on Columbia of a 5% stock dividend. b. Show the effects of (1) a

> Given the earnings per share over the period 2012– 2019 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d. a. Pay out 50% of earnings in all years with posi

> Over the past 10 years, a firm has had the earnings per share shown in the following table. a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what woul

> Bennett Farm Equipment Sales Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm&acir

> A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders. a. What is

> The Howe Company’s stockholders’ equity account follows: The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 milli

> As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockholder has asked you to estimate the amount of the divide

> Kathy Snow wishes to purchase shares of Countdown Computing Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12. a. What is the last day that Kathy can purchase the stock (trade

> Cobalt Industries had sales of 150,000 units at a price of $10 per unit. It faced fixed operating costs of $250,000 and variable operating costs of $5 per unit. The company is subject to a tax rate of 38% and has a weighted average cost of capital of 8.5

> Harte Textiles Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclical downturn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a

> The following financial data on the Bond Recording Company are available: The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase stock at $21 per share. a. Approximately h

> The board of Wicker Home Health Care Inc. is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appealing to investors. The options under consideration are a

> Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders’ equity position as shown. The current stock price is $120 per share. The most recent period’s earnings available for common s

> Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $122 per share. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 3-for-1. Just before the stock sp

> Growth Industries’ current stockholders’ equity account is as follows: a. Indicate the change, if any, expected if the firm declares a 2-for-1 stock split. b. Indicate the change, if any, expected if the firm declare

> Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common stockholders of $120,000, but it has decided to retain these funds and is considering either

> Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain

> Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share. a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.

> At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10. The firm has 300,000 shares of common stock outstanding and has set a payment date of July 31. Prior to the dividend decla

> Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base level of EBIT of $20,000?

> Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, r

> Stewart Industries sells its finished product for $9 per unit. Its fixed operating costs are $20,000, and the variable operating cost per unit is $5. a. Calculate the firm’s earnings before interest and taxes (EBIT) for sales of 10,000 units. b. Calculat

> Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a

> JWG Company publishes Creative Crosswords. Last year, the book of puzzles sold for $10, with a variable operating cost of $8 per book and a fixed operating cost of $40,000. a. How many books must JWG sell this year to achieve the breakeven point for the

> Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his car requires a flat fee of $500, and the service prov

> Barry Carter is considering opening a used-book store. He wants to estimate the number of books he must sell to break even. The books will be sold for $13.98 each, variable operating costs are $10.48 per book, and annual fixed operating costs are $73,500

>  Fine Leather Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are $473,000 annually, and its variable operating costs are $86.00 per unit. a. Find the firm’s operating breakeven point in units. b. Label the x-a

> Given the price and cost data shown in the accompanying table for each of the three firms, F, G, and H, answer the questions that follow. a. What is the operating breakeven point in units for each firm? b. How would you rank these firms in terms of the

> Kirsten Neal is interested in purchasing a new house, given that mortgage rates are low. Her bank has specific rules regarding an applicant’s ability to meet the contractual payments associated with the requested debt. Kirsten must subm

> Carolina Fastener Inc. makes a patented marine bulkhead latch that wholesales for $6.00. Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13,000 interest and preferred dividends of $7,000 per ye

> Chico’s has sales of 15,000 units at a price of $20 per unit. The firm incurs fixed operating costs of $30,000 and variable operating costs of $12 per unit. What is Chico’s degree of operating leverage (DOL) at a base level of sales of 15,000 units?

> Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per

> Play-More Toys produces inflatable beach balls, selling 400,000 balls per year. Each ball produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6,000, preferred di

> Wells and Associates has an EBIT of $67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a 40% tax rate. a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm. b. Using

> Max Small has outstanding school loans that require a monthly payment of $1,000. He needs to buy a new car for work and estimates that this purchase will add $350 per month to his existing monthly obligations. Max will have $3,000 available after meeting

> Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%. a. Using EBIT values of $80,000 and $120,000, determine the assoc

> Southland Industries has $60,000 of 6% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnin

> Levin Corporation has fixed operating costs of $72,000, variable operating costs of $6.75 per unit, and a selling price of $9.75 per unit. a. Calculate the operating breakeven point in units. b. Compute the degree of operating leverage (DOL) using the fo

> Kate Rowland wishes to estimate the number of flower arrangements she must sell at $24.95 to break even. She has estimated fixed operating costs of $12,350 per year and variable operating costs of $15.45 per arrangement. How many flower arrangements must

> Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 15%, and the risk-free rate, RF, is 10%. The firm has gathered the basic cash flow and risk index da

> Ogden Corporation has compiled the following information on a capital expenditure proposal: (1) The projected cash inflows are normally distributed with a mean of $36,000 and a standard deviation of $9,000. (2) The projected cash outflows are normally di

> The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box. If the firm has a potential investment that would simultaneously raise its fixed

> You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future end of-year cash inflows of $12,000, $12,500, $11,500, $9,000, and $8,500, respectively. Your current opportunity cost is 6.

> Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was reopening an old gold mine that had ceased operations in the past due to l

> Kiosk Corp. produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in a local library. The company makes two types of machines. One distributes soft drinks, and the other distribute

> Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associa

> Boardman Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in pl

> Atlantic Drydock is considering replacing an existing hoist with one of two newer, more efficient pieces of equipment. The existing hoist is 3 years old, cost $32,000, and is being depreciated under MACRS, using a 5-year recovery period. Although the exi

> Jan and Deana have been dreaming about owning a boat for some time and have decided that estimating its cash flows will help them in their decision process. They expect to have a disposable annual income of $24,000. Their cash flow estimates for the boat

> Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of $60,000; it was being depreciated under MACRS, using a 5-year recover

> Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,000, and this amount was being depreciated under MACRS, using a 5-year reco

> 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 10 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&#128

> 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