Question: You have calculated the cost of common

> MasterCard, Inc. completed a 10-for-1 stock split on January 22, 2014. Immediately before the stock split there were 120.38 million shares outstanding at a price of $826.00 per share. After the split how many shares were outstanding, and at what price wo

> How do you estimate the cost of debt for a firm with more than one type of debt?

> What does the price-earnings ratio tell us?

> Why does an ongoing stock repurchase program offer management greater flexibility in distributing value to stockholders than a regular cash dividend?

> Staunton Energy Corporation managers are considering a capital budgeting project to replace some machinery used in one of the company’s oil refineries. Is the company’s WACC the appropriate discount rate to use in the NPV analysis of this project?

> Use the information in questions 13.2 and 13.3 as well as the following information to compute the WACC for Quarri Industries. In addition to common stock, Quarri has 500,000 preferred shares outstanding that pay a quarterly dividend of $0.50 per share a

> Quarri Industries has eight percent coupon bonds outstanding. These bonds have a market price of $954.41, pay interest semiannually, and will mature in 6 years. If the tax rate is 35 percent, what are the pre-tax cost and after-tax cost of this debt?

> Howard Power and Telecommunications Corporation has three divisions. The names of these divisions, along with the after-tax cost of capital for each division and the market value of the assets in each division are as follows: What is the overall after-t

> Paper Christmas Trees Inc. is considering introducing a new line of inexpensive Christmas trees. The initial outlay for the project is $175,000, and the company will have to invest $5,000 in working capital and $10,000 in fixed assets each year during th

> Luminosity Inc. produces modern light fixtures that sell for $150 per unit. The firm’s management is considering purchasing a high-capacity manufacturing machine. If the high-capacity machine is purchased, then the firm’s annual cash fixed costs will be

> The manager of Roy’s Restaurant has determined that if revenues were to increase by 20 percent, then EBIT would increase by 45 percent to $87,000. What would be the corresponding change in EBITDA if revenues increased 20 percent and cash fixed costs are

> How would a capital intensive company fare during good and poor economic times as compared with other companies? Explain?

> Retro Inc. sells vintage football jerseys for $72 each. Variable costs are $58 per unit and total fixed costs (including depreciation and amortization expense) are $84,000 per year. If sales for next year are expected to equal 8,000 jerseys, how much can

> Why do analysts care about the current cost of long-term debt when estimating a firm’s cost of capital?

> You have inherited an apple orchard and want to sell it in the next four years. An expert in apple orchard valuation has estimated the after-tax cash flow you would receive if you sold at the end of each of the next four years as follows: $1,000,000 if y

> Managers of Central Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $100,000 and is expected to last five years. The second machine costs $160,000 and is expected to last ei

> After examining the NPV analysis for a potential project that would increase the firm’s output by 5 percent, an analyst’s manager tells the analyst to increase the initial fixed capital outlay in the analysis by $480,000. The initial fixed capital outlay

> A division of Virginia City Highlands Manufacturing is considering purchasing for 1,500,000 a machine that automates the process of inserting electronic components onto computer motherboards. The annual cost of operating the machine will be $50,000, but

> You purchased 100 shares of stocks of an oil company, Texas Energy, Inc., at $50 per share. The company has 1 million shares outstanding. Ten days later, Texas Energy announced an investment in an oil field in east Texas. The probability that the investm

> West Street Automotive is considering adding state safety inspections to their service offerings. The equipment necessary to perform these inspections will cost $557,000 and will generate cash flows of $195,000 over each of the next five years. If the co

> What do we know about that project’s IRR if we know that it has a positive NPV?

> You are chairperson of the investment committee at your firm. Five projects have been submitted to your committee for approval this month. The investment required and the project profitability index for each of these projects are presented in the followi

> The preferred stock of Wellcare Inc. is currently trading at $137.50 per share. If the required rate of return is 8 percent and this stock has no maturity date, what is the quarterly dividend paid by this stock? What is the quarterly dividend if the stoc

> What is a dividend yield? What does it tell us?

> How is the WACC for a firm calculated?

> What does NASDAQ stand for? What is NASDAQ?

> Kingston, Inc. management is considering purchasing a new machine at a cost of $4,133,250. They expect this equipment to produce cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriat

> What is a stock market index?

> Kresler Autos has preferred shares outstanding that pay annual dividends of $12, and the current price of the shares is $80. What is the after-tax cost of new preferred shares for Kresler if the flotation (issuance) costs for preferred shares are 5 perce

> Two-Stage Rocket paid an annual dividend of $1.25 yesterday, and it is commonly known that the firm’s management expects to increase its dividend by 8 percent for the next two years and by 2 percent thereafter. If the current price of Two-Stage’s common

> Whitewall Tire Co. just paid an annual dividend of $1.60 on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent per year into the foreseeable future and the current price of Whitewall’s common shares is $11.66, what i

> List and describe each of the three methods used to calculate the cost of common stock?

> Estimate the weighted average cost of capital for Coral Gables using your estimated beta and the information in the problem statement in Problem 13.36? Assume that the average and marginal tax rates for Coral Gables are both 25 percent?

> The CFO described in Problem 13.35 asks you to estimate the beta for Coral Gables’s common stock. Since the common stock is not publicly traded, you do not have the data necessary to estimate the beta using regression analysis. However, you have found a

> You are working as an intern at Coral Gables Products, a privately owned manufacturing company. Shortly after you read Chapter 13 in this book, you got into a discussion with the Chief Financial Officer (CFO) at Coral Gables about weighted average cost o

> Why does the market value of the claims on the assets of a firm equal the market value of the assets?

> Hurricane Corporation is financed with debt, preferred equity, and common equity with market values of $20 million, $10 million, and $30 million, respectively. The betas for the debt, preferred stock, and common stock are 0.2, 0.5, and 1.1, respectively.

> Discuss what valuable information would be lost if you decided to use book values in order to calculate the cost of each of the capital components within a firm’s capital structure?

> Enigma Corporation’s management believes that the firm’s cost of capital (WACC) is too high because the firm has been too secretive with the market concerning its operations. Evaluate that statement?

> RetRyder Hand Trucks has a preferred share issue outstanding that pays a dividend of $1.30 per year. The current cost of preferred equity for RetRyder is 9 percent. If RetRyder issues additional preferred shares that pay exactly the same dividend and the

> In your analysis of the cost of capital for a common stock, you calculate a cost of capital using a dividend discount model that is much lower than the calculation for the cost of capital using the CAPM model. Explain a possible source for the discrepanc

> How are taxes accounted for when we calculate the cost of debt?

> You are an external financial analyst evaluating the merits of a stock. Since you are using a dividend discount model approach to evaluate a cost of equity capital, you need to estimate the dividend growth rate for the firm in the future. Describe how yo

> You are analyzing the cost of capital for MacroSwift Corporation, which develops software operating systems for computers. The firm’s dividend growth rate has been a very constant 3 percent per year for the past 15 years. Competition for the firm’s curre

> If a firm’s management anticipates financing a project with a capital mix that is different from its current capital structure, describe how the firm is subjecting itself to a calculation error if its historical WACC is used to evaluate the project?

> For the Imaginary Products firm in Problem 13.24, calculate the appropriate cost of capital for a new project that is financed with the same proportion of debt, preferred shares, and common shares as the firm’s current capital structure. Also assume that

> How does a scenario analysis differ from a sensitivity analysis?

> The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The

> The managers of a firm financed entirely with common stock are evaluating two distinct projects. The first project has a large amount of unsystematic risk and a small amount of systematic risk. The second project has a small amount of unsystematic risk a

> Write out the general equation for the price of the stock for a firm that will grow dividends very rapidly at a constant rate for the four years after the next dividend is paid and will grow dividends thereafter at a constant, but lower rate. Discuss the

> Underestimated Inc.’s common shares currently sell for $36 each. The firm’s management believes that its shares should really sell for $54 each. If the firm just paid an annual dividend of $2 per share and management expects those dividends to increase b

> What is the weighted average cost of capital for a firm?

> You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 9.5 percent semiannual coupon bonds are selling at a price of $1,200. If these bonds are the only debt outstanding for the firm, what is the after-tax cos

> Holding all other things constant, does a decrease in the marginal tax rate for a firm provide incentive for the managers of a firm to increase or decrease its use of debt?

> You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 8.5 percent coupon bonds are selling at a price of $823.48. The bonds pay interest semiannually. If these bonds are the only debt outstanding, what is the after-tax

> You know that the after-tax cost of debt capital for Bubbles Champagne Company is 7 percent. If the firm has only one issue of five-year bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 10 percent? Assume the

> What is a simulation analysis, and what can it tell us?

> Explain why the cost of capital for a firm is equal to the expected rate of return to the investors in the firm?

> Explain why the total value of all of the securities used to finance a firm must be equal to the value of the firm?

> Describe the alternatives to using a firm’s WACC as a discount rate when evaluating a project?

> KneeMan Markup Company has total debt obligations with book and market values equal to $30 million and $28 million, respectively. It also has total equity with book and market values equal to $20 million and $70 million, respectively. If you were going t

> Why is the per-unit contribution important in a break-even analysis?

> Caterpillar, Inc. is a manufacturer of large earth-moving and mining equipment. This firm, and other heavy equipment manufacturers, have accounting degrees of operating leverage that are relatively high. Explain why?

> The degree of pretax cash flow operating leverage at Rackit Corporation is 2.7 when it sells 100,000 units of its new tennis racket and its EBITDA is $95,000. Ignoring the effects of taxes, what are the fixed costs for Rackit Corporation?

> WalkAbout Kangaroo Shoe Stores forecasts that it will sell 9,500 pairs of shoes next year. The firm buys its shoes for $50 per pair from the wholesaler and sells them for $75 per pair. If the firm will incur fixed costs plus depreciation and amortization

> The Fulcrum Company produces decorative swivel platforms for home televisions. If Fulcrum produces 40 million units, it estimates that it can sell them for $100 each. The variable production costs are $65 per unit, whereas the fixed production costs are

> Commodore Motors management is considering a project to produce toy cars. The project would require an initial outlay of $100,000 and have an expected life of 10 years. Management estimates that each year during the life of the project depreciation and

> How is the per-unit contribution related to the accounting operating profit break-even point?

> You are the project manager for Eagle Golf Corporation. You are considering manufacturing a new golf wedge with a unique groove design. You have put together the estimates in the following table about the potential demand for the new club, and the asso

> Using the same logic as with the accounting break-even calculation in Problem 12.19, adapt the formula for crossover level of unit sales to find the number of units sold where the pretax operating cash flow is the same whether the firm chooses the large

> If a firm’s costs (both variable as well as fixed) are known with certainty, then what are the only two sources of volatility for the firm’s operating profits or its operating cash flows?

> Silver Polygon, Inc., has determined that if its revenues were to increase by 10 percent, then EBIT would increase by 25 percent to $100,000. The fixed costs (cash only) for the firm are $100,000. Given the same 10 percent increase in revenues, what woul

> If a firm has a fixed asset base, meaning that its depreciation and amortization for any year is positive, discuss the relation between its Accounting DOL and its Cash flow DOL?

> The Generic Publications Textbook Company sells all of its books for $100 per book, and it currently costs $50 in variable costs to produce each text. The fixed costs, which include depreciation and amortization for the firm, are currently $2 million per

> Mick’s Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $80,000. The projected EBIT is $100,000, and the Accounting DOL is expected to be 2.0. What is the Cash Flow DOL for the firm?

> If you were interested in calculating the probability that your project will have a positive FCF, what type of risk analysis tool will you most likely use?

> Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 10 percent. Chip’s v

> Describe the circumstances under which sensitivity analysis might be a reasonable basis for determining changes to a firm’s EBIT or FCF?

> What is the difference between the pretax operating cash flow break-even point and the accounting operating profit break-even point?

> Sensitivity analysis and scenario analysis are somewhat similar. Describe which is a more realistic method of analyzing the impact of different scenarios on a project?

> The BowGus Archery Company management estimates that its new Galactically Flexible Bow project will have to generate EBIT of $20,000 each year to be viable. The project’s fixed cash expenses are expected to equal $8,000 and its depreciation and amortizat

> RoseWeiser Company Management is considering a project that will require an initial investment of $50,000 and will last for 10 years. No other capital expenditures or increases in working capital are anticipated during the life of the project. What is

> Management of March and Dine Inc. has estimated that the firm’s new TV dinner project must generate $10,200 in FCF during each of the next six years to have an NPV of $0. Management anticipates that depreciation and amortization charges will equal $3,00

> Your analysis tells you that at a projected level of sales, a project your firm is considering will be below accounting break-even but above cash flow break-even. Explain why this might still be a viable project for your firm?

> Calculate the pretax operating cash flow break-even point for both factory choices for Dandle’s Candles? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of pro

> Describe the role that the mix of variable versus fixed costs has in the variation of earnings before interest and taxes (EBIT) for the firm?

> Calculate the number of candles for which the accounting operating profit at Dandle's Candles is the same regardless of the factory choice? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the com

> Calculate the accounting operating profit break-even point for both factory choices for Dandle’s Candles? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of pr

> For the Vinyl CD Co. in Self-Study Problem 12.3, what percentage increase in pretax operating cash flow will be driven by the additional revenue?

> What do the degree of pretax cash flow operating leverage (Cash Flow DOL) and the degree of accounting operating leverage (Accounting DOL) tell us?

> The pretax operating cash flow of Memphis Motors declined so much during the recession of 2008 and 2009 that the company almost defaulted on its debt. The owner of the company wants to change the cost structure of his business so that this does not happe

> Specialty Light Bulbs anticipates selling 3,000 light bulbs this year at a price of $15 per bulb. It costs Specialty $10 in variable costs to produce each light bulb, and the fixed costs for the firm are $10,000. Specialty has an opportunity to sell an a

> Duplicate Footballs, Inc., expects to sell 15,000 balls this year. The balls sell for $110 each and have a variable cost per unit of $80. Fixed costs, including depreciation and amortization, are currently $220,000 per year. How much can either the fixed

> What is simulation analysis, and how is it used?

> The accounting operating profit break-even point tells us the number of units that must be sold for a firm to break-even in a given year from an accounting operating profit perspective. What measure tells us the number of units that must be sold each yea

> Calculate the accounting operating profit break-even point and pretax operating cash flow break-even point for each of the three production choices outlined below?

> Define variable costs and fixed costs, and give an example of each?

> Zippy Corporation just purchased computing equipment for $20,000. The equipment will be depreciated using a five-year MACRS depreciation schedule. If the equipment is sold at the end of its fourth year for $12,000, what are the after-tax proceeds from th

> When forecasting operating expenses, explain the difference between a fixed cost and a variable cost?

> What are variable costs and fixed costs? What are some examples of each? How are these costs estimated in forecasting operating expenses?