Question: You are considering investing in a private

> You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a web site. Things are going well now, but you know that it is only a matter of time before so

> Nugent Communication Corp. is investing $9,365,000 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant

> Regent Corp. management is evaluating three competing types of equipment. Costs and cash flow projections for all three are given in the following table. Which would be the best choice based on payback period? Year Туре 1 Туре 2 Туре 3 $(1,311,450) S

> Timeline Manufacturing Co. management is evaluating two projects. The company uses payback criteria of three years or less. Project A has a cost of $912,855, and project B’s cost is $1,175,000. Cash flows from both projects are given in

> Creative Solutions, Inc., has just invested $4,615,300 in new equipment. The firm uses a payback period criteria of not accepting any project that takes more than four years to recover its costs. Management anticipates cash flows of $644,386, $812,178, $

> Emporia Mills management is evaluating two alternative heating systems. Costs and projected energy savings are given in the following table. The firm uses 11.5 percent to discount such project cash flows. Which system should be chosen? Year System 10

> Cranjet Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 16.4 percent for such projects. a. What are

> Why is D&A first subtracted and then added back in FCF calculations?

> Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450, have a life of five years, and would produce the cash flows shown in the following tab

> Champlain Corp. management is investigating two computer systems. The Alpha 8300 costs $3,122,300 and will generate cost savings of $1,345,500 in each of the next five years. The Beta 2100 system costs $3,750,000 and will produce cost savings of $1,125,0

> What is the profitability index, and why is it helpful in the capital rationing process?

> Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the stock price a year from now is $37.50. If the required rate of return is 14 percent, what is the current stock price? Assume constant growth.

> Refer to Problem 10.4. What is the IRR that Franklin Mints management can expect on this project? Refer to Problem 10.4. Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They

> Capitol Corp. management is expecting a project to generate after-tax income of $63,435 in each of the next three years. The average book value of the project’s equipment over that period will be $212,500. If the firm’s investment decision on any project

> Nakamichi Bancorp has made an investment in banking software at a cost of $1,875,000. Management expects productivity gains and cost savings over the next several years. If, as a result of this investment, the firm is expected to generate additional cash

> Northern Specialties just purchased inventory-management computer software at a cost of $1,645,276. Cost savings from the investment over the next six years will produce the following cash flow stream: $212,455, $292,333, $387,479, $516,345, $645,766, an

> Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company’s management expects the machinery to produce cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years, respectively. What is the payback period?

> Riggs Corp. management is planning to spend $650,000 on a new- marketing campaign. They believe that this action will result in additional cash flows of $325,000 over the next three years. If the discount rate is 17.5 percent, what is the NPV on this pro

> Why do we care about incremental cash flows at the firm level when we evaluate a project?

> Fresno Corp. is a fast-growing company whose management expects it to grow at a rate of 30 percent over the next two years and then slow down to a growth rate of 18 percent for the following three years. If the last dividend paid by the company was $2.15

> Why is excess cash a nonoperating asset (NOA)? Why does it make sense to add the value of excess cash to the value of the discounted cash flows when we use the WACC or FCFE approach to value a business?

> It is April 4, 2018, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat Chrysler Automobiles N.V, the automobile manufacturer that owns Chrysler, have hinted that they might be i

> Why is it especially difficult for an entrepreneur with a new business to raise capital? What tool can help him or her to raise external capital?

> You believe you have a great business idea and want to start your own company. However, you do not have enough savings to finance it. Where can you get the additional funds you need?

> List two useful tools to help an entrepreneur to understand the cash requirements of a business and to estimate the financing needs of his or her business?

> You own a company that produces and distributes course packets for classes at local universities via the Internet. You have asked a friend to invest $35,000 in the business. Your friend wants to know what the business is worth so that he can determine ho

> The S&P 500 P/E multiple of 25.54 at the end of 2016 was higher than its historical average of approximately 15. Some financial commentators argued that this meant that the firms in the S&P 500 were, on average, overvalued at the end of 2016. Based on yo

> Explain how financial liabilities differ among different forms of business organization?

> At the end of 2016 the value of the S&P 500 Index divided by the estimated 2016 earnings for S&P 500 firms (the S&P 500 P/E multiple) was 25.54. Assume that the long-term Treasury bond yield was 2.88 percent, the market risk premium was 5.92 percent, and

> What changes have taken place in the capital budgeting techniques used by U.S. companies?

> Mad Rock Inc. is a company that sells mp3 music online. It is expected to generate earnings of $1 per share this year after its Web site is upgraded and online marketing is stepped up. Given the popularity of the iPod and iPad devices, the stock price of

> Forever Youth Technology is a biochemical company that is two years old. Its main product, an antioxidant drink that is supposed to energize the consumer and delay aging, is still under development. The company’s equity consists of $5 million invested by

> A friend of yours is trying to value the equity of a company and, knowing that you have read this book, has asked for your help. So far she has tried to use the FCFE approach. She estimated the cash flows to equity to be as follows: Sales ………………………………………

> Your friend is starting a new company. He wants to write a business plan to clarify the company’s business outlook and raise venture capital. Knowing that you have taken this course, he has asked you, as a favor, to help him prepare a template for a busi

> For the previous question, assume that you do not have sufficient savings to cover the entire amount required to start your sun-block business. You are going to have to get external financing. A local banker whom you know has offered you a six-month loan

> You plan to start a business that sells waterproof sun block with a unique formula that reduces the damage of UVA radiation 30 percent more effectively than similar products on the market. You expect to invest $50,000 in plant and equipment to begin the

> A few years ago, a friend of yours started a small business that develops gaming software. The company is doing well and is valued at $1.5 million based on multiples for comparable public companies after adjustments for their lack of marketability. With

> You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows: Revenue ……………………………………………………. $3,000,000 Cost of goods sold ………………………………………. 600,000 Gross profit …

> You are using the FCFF approach to value a business. You have estimated that the FCFF for next year will be $123.65 million and that it will increase at a rate of 8 percent for each of the following four years. After that point, the FCFF will increase at

> What are some of the things that the founder of a company must do to launch a new business?

> How can the Profitability Index (PI) help in choosing projects when a firm faces capital constraints? What are its limitations?

> How do dealers differ from brokers?

> Which of the above multiples analyses do you believe is more appropriate? Refer to the information Johnson Machine Tool Company: Use the following information concerning Johnson Machine Tool Company. Johnson’s income statement from the fiscal year that

> Using the enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tool Company? What is the per share value of Johnson’s stock? Refer to the information Johnson Machine Tool Company: Use the following information concerning Johnson

> You are an analyst at a private equity firm that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of the Johnson Machine Tool Company. Billy’s Tools is a

> Aggie Motors is a chain of used car dealerships that has publicly traded stock. Using the adjusted book value approach, you have estimated the value of Aggie Motors to be $45,646,000. The company has $40.5 million of debt outstanding. Its stock price is

> You have started a business that sells a home gardening system that allows people to grow vegetables on the countertop in their kitchens. You are considering two options for marketing your product. The first is to advertise on local TV. The second is to

> Discuss the pros and cons of an S-corporation compared with a C-corporation?

> Does the expected rate of return that is calculated using CAPM, with a beta estimated from stock returns in the public market, reflect a minority or a controlling ownership position? How is it likely to differ between a minority and a controlling positio

> You want to estimate the total intrinsic value of a large gas and electric utility company. This company has publicly traded stock and has been paying a regular dividend for many years. You decide that, due to the predictability of the dividend that this

> List some common forms of business organization, and discuss how access to capital differs across these forms of organization?

> What might cause a firm to face capital constraints?

> Explain how a stock repurchase is different from a dividend payment?

> Explain why managers of firms might prefer that their firms’ shares trade in a moderate per-share price range rather than in a high per-share price range. How do managers of firms keep their shares trading in a moderate price range?

> Explain why holders of a firm’s debt should insist on a covenant that restricts the amount of cash dividends the firm pays?

> Explain how the issuance of new securities by a firm can produce useful information about the issuing firm. How can this information make the shares of the firm more valuable, even if it only confirms existing information about the firm?

> You are the CFO of a public company that advises distressed companies about how to manage their businesses. Your company has been performing extremely well. In fact, it has earned so much money that the increase in its retained earnings has resulted in a

> You are the Chief Financial Officer (CFO) of a large publicly traded company. You would like to convey positive information about the firm to the market. If you agree with the conclusions from the Lintner study, will you keep paying your currently high d

> You purchased 1,000 shares of Zebulon Copper Co. five years ago for $50 per share. Today Zebulon management is trying to decide whether to repurchase shares for $70 per share through a fixed-price tender offer or pay a $70 cash dividend per share. If cap

> Place the following in the proper chronological order, and describe the purpose of each: ex-dividend date, record date, payment date, and declaration date?

> Cholla Company currently has 30,000 shares outstanding. Each share has a market value of $20. If the firm repurchases $150,000 worth of shares, then what will be the value of each share outstanding after the repurchase? Ignore taxes?

> Saguaro Company currently has 30,000 shares outstanding. Each share has a market value of $20. If the firm pays $5 per share in dividends, what will each share be worth after the dividend payment? Ignore taxes?

> Why should the NPV method be the primary decision tool used in making capital investment decisions?

> Shadows, Inc., had shares outstanding that were valued at $120 per share before a two-for-one stock split. After the stock split, the shares were valued at $62 per share. If we accept that the firm’s financial maneuver did not create any new value, then

> WeAreProfits, Inc., has not issued any new debt securities in 10 years. It will begin paying cash dividends to its stockholders for the first time next year. Explain how a dividend might help the firm get closer to its optimal capital structure of 50 per

> Dividend reinvestment programs (DRIPs) sometimes sell shares at a discount to stockholders who reinvest their dividends through such plans. Your boss tells you that such plans are just a scheme to transfer wealth from nonparticipating to participating st

> In the early 1990s, the amount of time that elapsed between purchasing a stock and actually obtaining that stock was five business days. This period was known as the settlement period. The settlement period for stock purchases is now two business days. D

> What is the advantage of a Dutch auction over a fixed-price tender offer?

> Briefly discuss the methods available for a firm to repurchase its shares and explain why you might expect the stock price reaction to the announcement of each of these methods to differ?

> You read that a number of public companies have been financing their dividend payments in recent years entirely through equity issues. A colleague of yours argues that this only increase taxes paid by individual stockholders and boosts underwriting and o

> Consider a firm that repurchases shares from its stockholders in the open market, and explain why this action might be detrimental to the stockholders from whom the firm buys shares?

> Stock repurchases, once announced, do not actually have to occur in total or in part. From a signaling perspective, why would a special dividend be better than a stock repurchase?

> You own shares in a firm that has extra cash on hand to distribute to stockholders. You do not want the cash. What course of action would you prefer the firm take?

> What is the Internal Rate of Return (IRR) method?

> A commentator on a financial talk show on TV says that “On average, firms pay out too little to stockholders. This is why stock prices go up with dividend increases and down with dividend decreases.” Is the commentator right?

> A firm can deliver a negative signal to stockholders by increasing the level of dividends or by reducing the level of dividends. Explain why this is true?

> Undecided Corp. has excess cash on hand right now, although management is not sure about the level of cash flows going forward. If management would like to put cash in stockholders’ hands, what kind of dividend should the firm pay, and why?

> CashCo increased its cash dividend each quarter for the past eight quarters. While this may signal that the firm is financially very healthy, what else could we conclude from these actions?

> Explain what the introduction of transaction costs does to the Modigliani and Miller assumption that dividends are irrelevant. Start with a firm that pays dividends to investors that do not want to receive dividend payments. Do not consider taxes?

> You have just encountered two identical firms with identical investment opportunities, as well as the ability to fund these opportunities. One of the firms has just announced that it will pay a dividend, while the other has continued to pay no dividend.

> The Poseidon Shipping Company has paid a $0.25 dividend per quarter for the past three years. Poseidon just lowered its declared dividend to $0.20 for the next dividend payment. Discuss what this new information might convey concerning Poseidon managemen

> What does it mean when a company has a very high P/E ratio? Give examples of industries in which you believe high P/E ratios are justified?

> Under what conditions does it make sense to use the constant-growth dividend model to value a stock?

> Why are common stockholders considered to be more at risk than the holders of other types of securities?

> What are the major shortcomings of using the Accounting Rate of Return (ARR) method as a capital budgeting method?

> Why are investors and managers concerned about stock market efficiency?

> Why can the market price of a stock differ from its true (intrinsic) value?

> Explain how the financial statements of a private company might differ from those of a public company. What does this imply for valuing a private company?

> Your boss has asked you to estimate the intrinsic value of the equity for Google, which does not currently pay any dividends. You are going to use an income approach and are trying to choose between the free cash flow to equity (FCFE) approach and the di

> You want to estimate the value of a company that has three very different lines of business. It manufactures aircraft, is in the data-processing business, and manufactures automobiles. How could you use an income approach to value a company such as this—

> Is the replacement cost of a business generally related to the value of the cash flows that the business is expected to produce in the future? Why or why not? Illustrate your answer with an example?

> You have just received a business valuation report that is dated six months ago. Describe the factors that might have changed during the past six months and, therefore, caused the value of the business today to be different from the value six months ago.

> You are entering negotiations to purchase a business and are trying to formulate a negotiating strategy. You want to determine the minimum price you should offer and the maximum you should be willing to pay. Explain how the concepts of fair market value

> What is a business plan? Explain how a business plan can help an entrepreneur succeed in building a business?

> Explain how the taxation of a C-corporation differs from the taxation of the other forms of business organization discussed in this chapter?

> What are the five steps used in NPV analysis?

> Explain why it is difficult to value a young, rapidly growing company?

> Given that many new businesses fail in the first few years after they are established, how should an entrepreneur think about the risk of failure associated with a new business? From what you have learned in this chapter, what can an entrepreneur do to i

> Fled Flightstone Mining’s management does not like to pay cash dividends due to the volatility of the company’s cash flows. Fled management has found, however, that when it does not pay dividends, its stock price becomes too high for individual investors

> Some people argue that a high tax rate on dividends creates incentives for managers to go about their business without credibly convincing investors that the firm is doing well, even when it is. Discuss why this may be true?