You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fi ne zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.4 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1.5 million on an aftertax basis. In four years, the land could be sold for $1.6 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,200, 4,300, 3,900, and 2,800 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $780 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $425,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $4.2 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $125,000 will be required immediately. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project? Assume the company has other profitable projects.
> Explain what it means for a firm to have a current ratio equal to .50. Would the firm be better off if the current ratio were 1.50? What if it were 15.0? Explain your answers.
> What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A custo
> Suppose a company lengthens the time it takes to pay suppliers. How would this affect the statement of cash flows? How sustainable is the change in cash flows from this practice?
> In recent years, several manufacturing companies have reported the cash flow from the sale of Treasury securities in the cash from operations section of the statement of cash flows. What is the problem with this practice? Is there any situation in which
> There are many ways of using standardized financial information beyond those discussed in this chapter. The usual goal is to put firms on an equal footing for comparison purposes. For example, for auto manufacturers, it is common to express sales, costs,
> So-called same-store sales are a very important measure for companies as diverse as McDonald’s and Sears. As the name suggests, examining same-store sales means comparing revenues from the same stores or restaurants at two different points in time. Why m
> Why is the Du Pont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.
> Explain what peer group analysis is. As a financial manager, how could you use the results of peer group analysis to evaluate the performance of your firm? How is a peer group different from an aspirant group?
> What types of information do common-size financial statements reveal about the firm? What is the best use for these common-size statements? What purpose do common–base year statements have? When would you use them?
> Fully explain the kind of information the following financial ratios provide about a firm: a. Quick ratio. b. Cash ratio. c. Total asset turnover. d. Equity multiplier. e. Long-term debt ratio. f. Times interest earned ratio. g. Profit margin. h. Return
> What goal should always motivate the actions of a firm’s financial manager?
> In Problem 6, what is the average tax rate? What is the marginal tax rate? Problem 6 The Renata Co. had $236,000 in 2009 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2009 income taxes.
> The Renata Co. had $236,000 in 2009 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2009 income taxes. Taxable Income Тах Rate 2$ 0- 50,000 15% 50,001- 75,000 25 75,001- 100,000 34 100,001- 335
> Suppose the firm in Problem 3 had 85,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?
> Suppose the firm in Problem 2 paid out $73,000 in cash dividends. What is the addition to retained earnings? Information from Problem 2 Papa Roach Exterminators, Inc., has sales of $586,000, costs of $247,000, depreciation expense of $43,000, interest ex
> The 2008 balance sheet of Maria’s Tennis Shop, Inc., showed long-term debt of $2.6 million, and the 2009 balance sheet showed long-term debt of $2.9 million. The 2009 income statement showed an interest expense of $170,000. What was the firm’s cash flow
> The 2008 balance sheet of Saddle Creek, Inc., showed current assets of $2,100 and current liabilities of $1,380. The 2009 balance sheet showed current assets of $2,250 and current liabilities of $1,710. What was the company’s 2009 change in net working c
> Earnhardt Driving School’s 2008 balance sheet showed net fixed assets of $3.4 million, and the 2009 balance sheet showed net fixed assets of $4.2 million. The company’s 2009 income statement showed a depreciation expense of $385,000. What was net capital
> Given the information for Maria’s Tennis Shop, Inc., in Problems 11 and 12, suppose you also know that the firm’s net capital spending for 2009 was $940,000, and that the firm reduced its net working capital investment by $85,000. What was the firm’s 200
> The 2008 balance sheet of Maria’s Tennis Shop, Inc., showed $740,000 in the common stock account and $5.2 million in the additional paid-in surplus account. The 2009 balance sheet showed $815,000 and $5.5 million in the same two accounts, respectively. I
> So Long, Inc., has sales of $27,500, costs of $13,280, depreciation expense of $2,300, and interest expense of $1,105. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
> In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?
> Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $7 million. The machinery can be sold to the Romulans today for $4.9 million. Klingon’s current balance sheet shows net fixed assets of $3.7 million, current liabilities of $1.1
> Papa Roach Exterminators, Inc., has sales of $586,000, costs of $247,000, depreciation expense of $43,000, interest expense of $32,000, and a tax rate of 35 percent. What is the net income for this firm?
> What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.
> In the previous problem, suppose the required return on the project is 12 percent. What is the project’s NPV?
> In the previous problem, suppose you drive the truck x miles per year. How many miles would you have to drive the car before upgrading the car would be the better choice?
> Alson Enterprises needs someone to supply it with 185,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $940,000 to install the equipment necess
> You are evaluating two different silicon wafer milling machines. The Techron I costs $290,000, has a three-year life, and has pretax operating costs of $67,000 per year. The Techron II costs $510,000, has a five-year life, and has pretax operating costs
> A five-year project has an initial fixed asset investment of $270,000, an initial NWC investment of $25,000, and an annual OCF of −$42,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return
> In the previous problem, suppose your required return on the project is 20 percent and your pretax cost savings are $300,000 per year. Will you accept the project? What if the pretax cost savings are $240,000 per year? At what level of pretax cost saving
> Penguin Pucks, Inc., has current assets of $5,100, net fixed assets of $23,800, current liabilities of $4,300, and long-term debt of $7,400. What is the value of the shareholders’ equity account for this firm? How much is net working capital?
> Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at the end of that time. You will save $260,000 before tax
> Dog Up! Franks is looking at a new sausage system with an installed cost of $560,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $85,000. The sausage s
> In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s year 1 net cash flow now? Year 2? Year 3? What is the new NPV?
> In the previous problem, suppose the project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. What is the project’s year 0 net cash flow? Year 1? Year 2
> Summer Tyme, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be wort
> An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,900,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salva
> Consider an asset that costs $548,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $105,000. If the relevant tax rate is 35 per
> A piece of newly purchased industrial equipment costs $1,080,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.
> A proposed new project has projected sales of $108,000, costs of $51,000, and depreciation of $6,800. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches described in the chapter and verify that the answer is the
> Consider the following income statement: Sales…………………………… m,……$824,500 Costs……………………………….….538,900 Depreciation……………..………….126,500 EBIT………………………………………….?….. Taxes (34%)……………………………..…?….. Net income…………………………………?….. Fill in the missing numbers and then
> A proposed new investment has projected sales of $830,000. Variable costs are 60 percent of sales, and fixed costs are $181,000; depreciation is $77,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net in
> Winnebagel Corp. currently sells 30,000 motor homes per year at $53,000 each, and 12,000 luxury motor coaches per year at $91,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 19,000 of these ca
> Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $6 million in anticipation of using it as a warehouse and distribution site, but the company ha
> Suppose we are thinking about replacing an old computer with a new one. The old one cost us $650,000; the new one will cost $780,000. The new machine will be depreciated straight-line to zero over its five year life. It will probably be worth about $150,
> Your company has been approached to bid on a contract to sell 17,500 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment n
> A proposed cost-saving device has an installed cost of $610,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $55,000, the marginal
> Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year …………………………..Unit Sales 1………………………………….………… 93,000 2……………………………………………105,000 3……………………………………………128,000 4……………………………………………134,000 5……………………
> Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets
> Draw up an income statement and balance sheet for this company for 2008 and 2009. 2008 2009 Sales $ 7,233 $ 8,085 Depreciation 1,038 1,085 Cost of goods sold 2,487 2,942 Other expenses 591 515 Interest 485 579 Cash 3,792 4,041 Accounts receivable 5,0
> The debate regarding CFLs versus incandescent bulbs (see Problems 25–27) has even more wrinkles. In no particular order: 1. Incandescent bulbs generate a lot more heat than CFLs. 2. CFL prices will probably decline relative to incandescent bulbs. 3. CF
> The previous two problems suggest that using CFLs is a good idea from a purely financial perspective unless you live in an area where power is relatively inexpensive, but there is another wrinkle. Suppose you have a residence with a lot of incandescent b
> The previous problem suggests that using CFLs instead of incandescent bulbs is a no-brainer. However, electricity costs actually vary quite a bit depending on location and user type (you can get information on your rates from your local power company). A
> Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.50 and lasts 1,000 hours. A 15-watt CFL, which provides the same light, costs $3.50 and
> Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $170,000 per year. Machine B costs $5,100,00
> In the previous problem, suppose you were going to use a three-year MACRS depreciation schedule for your manufacturing equipment, and you could keep working capital investments down to only $25,000 per year. How would this new information affect your cal
> Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $2,400,000 five years ago; if the land were sold today, it would net you $2,700,000 a
> Suppose in the previous problem that DISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?
> Dangerfield Industrial Systems Company (DISC) is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual operating costs. System B costs $570,000, has a six-year
> Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it wil
> Consider the following abbreviated financial statements for Parrothead Enterprises: a. What is owners’ equity for 2008 and 2009? b. What is the change in net working capital for 2009? c. In 2009, Parrothead Enterprises purchased $1,35
> Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other hou
> A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play? To an
> “When evaluating projects, we’re concerned with only the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation erosion?
> If we define the NPV index as the ratio of NPV to cost, what is the relationship between this index and the profitability index?
> A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent between accepting the project an
> For the cash flows in the previous problem, suppose the fi rm uses the NPV decision rule. At a required return of 11 percent, should the fi rm accept this project? What if the required return was 30 percent?
> A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should the firm accept the following project? Year ……………………………… Cash Flow 0……………………………………………….−$34,000 1……………………………………………….…16,000 2………………………………………..………
> You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net i
> An investment project costs $15,000 and has annual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent?
> Dahlia Industries had the following operating results for 2009: sales =$22,800; cost of goods sold =$16,050; depreciation expense =$4,050; interest expense =$1,830; dividends paid =$1,300. At the beginning of the year, net fixed assets were $13,650, curr
> An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What if
> Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Cash Flow (A) Cash Flow (B) -$40,000 -$ 60,000 1 19,
> An investment project provides cash inflows of $765 per year for eight years. What is the project payback period if the initial cost is $2,400? What if the initial cost is $3,600? What if it is $6,500?
> What is the payback period for the following set of cash flows? Year ………………………. Cash Flow 0…………………………………………−$6,400 1………………………………………….…1,600 2…………………………………………….1,900 3…………………………………………….2,300 4……………………………………..……..1,400
> Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year ……………………………. Cash Flow 0……….……………………….……….−$750,000 1……………………………………….……..205,000 2……………………………………...……..265,000 3…………………………………...………
> A project has the following cash flows: Year …………………………… Cash Flow 0……………………………..……………. $58,000 1…………………………………..………. −34,000 2…………………………………………….−45,000 What is the IRR for this project? If the required return is 12 percent, should the firm accept the p
> The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $85,000 for the firm during the first year, and the ca
> This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this project? Year …………………………. Cash Flow 0………………………………..…………−$1,512
> An investment under consideration has a payback of seven years and a cost of $724,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows are conventional.
> A project has an initial cost of I, has a required return of R , and pays C annually for N years. a. Find C in terms of I and N such that the project has a payback period just equal to its life. b. Find C in terms of I, N , and R such that this is a prof
> In Problem 19, suppose Raines Umbrella Corp. paid out $25,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what do you know about the firm’s long-te
> Suppose the company in the previous problem uses an 11 percent discount rate and an 8 percent reinvestment rate on all of its projects. Calculate the MIRR of the project using all three methods using these interest rates.
> Slow Ride Corp. is evaluating a project with the following cash flows: Year ……………………. Cash Flow 0………………………………....−$16,000 1……………………………………..…..6,100 2………………………………….……..7,800 3…………………………..…………….8,400 4……………………..………………….6,500 5…………………………….…………..−5,100 The
> An investment has an installed cost of $684,680. The cash flows over the four-year life of the investment are projected to be $263,279, $294,060, $227,604, and $174,356. If the discount rate is zero, what is the NPV? If the discount rate is infinite, wha
> Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a 15 percent return on your investment. a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the discount
> The Weiland Computer Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm acce
> What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year...………………….. Cash Flow 0………………………………..….−$14,000 1…………………………………...……..7,30
> Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year ……………………………… Cash Flow 0………………………………………−$45,000,000 1……………………………….………….78,000,000 2………………………………….…….−14,000,000 a. If the company requires a 12
> Consider the following two mutually exclusive projects: Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? Year Cash Flow (X) Cash Flow (Y) -$15,000 -$15,00
> Mahjong, Inc., has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? b. If the required r
> For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?
> During 2009, Raines Umbrella Corp. had sales of $730,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $105,000, and $135,000, respectively. In addition, the company had an interest expense of $75,000
> What is the IRR of the following set of cash flows? Year ……………………………… Cash Flow 0………………………………………………..−$19,500 1…………………………………………………….9,800 2…….……………………………..……………..10,300 3…………………………………………………….8,600
> Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after
> Concerning IRR: a. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule? b. What is the relationship between IRR and NPV? Are there any situations i
> Concerning NPV: a. Describe how NPV is calculated, and describe the information this measure provides about a sequence of cash flows. What is the NPV criterion decision rule? b. Why is NPV considered a superior method of evaluating the cash flows from a
> Concerning AAR: a. Describe how the average accounting return is usually calculated, and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? b. What are the problems associated with usin
