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principles of finance
Questions and Answers of
Principles Of Finance
EAC Approach You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance
Project Cash Flows KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation
Depreciation Tax Shield Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 in maintenance for each year of its 3-year life. After three years, this machine
After-Tax Cash Flow from Sale of Assets If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the after-tax salvage value? (LG4)
Project Cash Flows You have been asked by the president of your com- pany to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class,
Change in NWC You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and sales volume to be
Operating Cash Flow Continuing the previous problem, what is the operating cash flow for the project in year 2? (LG3)
Project Cash Flows You are evaluating a project for The Ultimate recre- ational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per
Project Cash Flows Mom's Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now five years old, and it has a current market value of
Is the set of cash flows depicted below normal or non-normal? Explain. (LG1) Time: 1 2 3 Cash flow -$100 -$50 -$80 50 5 $100 $100
Derive an accept/reject rule for IRR similar to equation 13-8 that would make the correct decision on cash flows that are non-normal, but which always have one large positive cash flow at time zero
Is it possible for a company to initiate two products that target the same market that are not mutually exclusive? (LG1)
Suppose that your company used "APV," or "All-the-Present Value- Except-CF," to analyze capital budgeting projects. What would this rule's benchmark value be? (LG3)
Under what circumstances could payback and discounted payback be equal? (LG2)
Could a project's MIRR ever exceed its IRR? (LG4)
Suppose a company wanted to double the firm's value with the next round of capital budgeting project decisions. To what would it set the PI benchmark to make this goal? (LG6)
Suppose a company faced different borrowing and lending rates. How would this range change the way that you would compute the MIRR statistic? (LG4)
NPV with Normal Cash Flows Compute the NPV for Project M and accept or reject the project with the cash flows shown below if the appro- priate cost of capital is 8 percent. (LG3) Project M Time: 1 2
NPV with Normal Cash Flows Compute the NPV statistic for Project Y and indicate whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital
NPV with Non-normal Cash Flows Compute the NPV statistic for Proj- ect U and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of
NPV with Non-normal Cash Flows Compute the NPV statistic for Proj- ect K and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of
Payback Compute the payback statistic for Project B and decide whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent
Payback Compute the payback statistic for Project A and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent
Discounted Payback Compute the discounted payback statistic for Project C and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of
Discounted Payback Compute the discounted payback statistic for Project D and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of
IRR Compute the IRR statistic for Project E and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent. (LG4)
IRR Compute the IRR statistic for project F and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent. (LG4)
MIRR Compute the MIRR statistic for Project I and indicate whether to accept or reject the project with the cash flows shown below if the appro- priate cost of capital is 12 percent. (LG4) Project I
MIRR Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown below if the appro- priate cost of capital is 10 percent. (LG4) Project]
PI Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown below if the appro- priate cost of capital is 8 percent. (LG6) Project
PI Compute the PI statistic for Project Q and indicate whether you would accept or reject the project with the cash flows shown below if the appro- priate cost of capital is 12 percent. (LG6) Project
Multiple IRRS How many possible IRRS could you find for the following set of cash flows? (LG1) Time: Cash flow 1 2 3 4 -$11,000 $3.350 $4.180 $1,520 $2,000
Multiple IRRS How many possible IRRS could you find for the following set of cash flows? (LG1) Time: 1 3. Cash flow -$211,000 -$39.350 $440,180 $217.520 -$2,000
Payback Use the payback decision rule to evaluate this project; should it be accepted or rejected? (LG2)
Discounted Payback Use the discounted payback decision rule to evalu- ate this project; should it be accepted or rejected? (LG2)
IRR Use the IRR decision rule to evaluate this project; should it be accepted or rejected? (LG4)
MIRR Use the MIRR decision rule to evaluate this project; should it be accepted or rejected? (LG4)
NPV Use the NPV decision rule to evaluate this project; should it be accepted or rejected? (LG3)
PI Use the PI decision rule to evaluate this project; should it be accepted or rejected? (LG6)
NPV Profiles Graph the NPV profiles for both projects on a common chart, making sure that you identify all of the "crucial" points. (LG5)
IRR Applicability For what range of possible interest rates would you want to use IRR to choose between these two projects? For what range of rates would you NOT want to use IRR? (LG5)
Multiple IRRS Construct an NPV profile and determine EXACTLY how many nonnegative IRRS you can find for the following set of cash flows: (LG5) Time: 1 2 3 4 5 6 7 Cash flow -$200 $400 $150 -$100
Multiple IRRS Construct an NPV profile and determine EXACTLY how many nonnegative IRRS you can find for the following set of cash flows: (LG5) Time: 1 2 3 4 5 6 7 Cash flow -$150 $275 $150 -$100
Cumulative Net Cash Flow The net cash flow for a firm in January, February, and March is $-2.5 million, $-3.0 million, and $2.4 million, respectively. What is the cumulative net cash flow for March?
Cumulative Net Cash Flow The net cash flow for a firm in January, February, and March is $3.5 million, $-1.0 million, and $1.4 million, respectively. What is the cumulative net cash flow for March?
Cash Disbursement The Hug-a-Bear company makes its teddy bears the month before they are sold and pays for all materials in the month of purchase. If sales of $2.5 million are expected in November
Cash Disbursement The Snow Adventures company makes its snow- boards the month before they are sold and pays for all materials in the month of purchase. If sales of $7.8 million are expected in
Cash Collection Consider a company that has sales in May, June, and July of $10 million, $12 million, and $9 million, respectively. The firm is paid by 35 percent of its customers in the month of the
Cash Collection Consider a company that has sales in May, June, and July of $11 million, $10 million, and $12 million, respectively. The firm is paid by 25 percent of its customers in the month of
Cash Surplus or Deficit A firm has estimated the 2-month cash budget below. What is the cash surplus or deficit for these two months? (LG12) ($ in millions) Sales MAR APR 120.0 130.0 Cash
Cash Surplus or Deficit A firm has estimated the two-month cash budget below. What is the cash surplus or deficit for these two months? (LG12) ($ in millions) Sales Cash collection MAR APR 75.0 68.0
Cash Budget Spreadsheet Problem The company from the text, Yellow Jacket, has decided to change its production strategy. Instead of a steady production throughout the year, they will produce the
Compare and contrast the use of pro forma financial statements in corporate financial planning with their use in accounting. (LG1)
Why might current liabilities be considered a spontaneous source of funding for a firm? (LG2)
What approach should be used to forecast sales if a firm believes that sales will be stable over time? (LG3)
What approach should be used to forecast sales if a firm believes that sales will increase over time? (LG3)
What is the optimal length of time over which to take an average of historic sales when using the average approach? (LG3)
What is the theoretical minimum value for MAPE? (LG3)
Can the procedure described in this chapter for adjusting for seasonality apply to periods longer than a year? How? (LG3)
Everything else held constant, which will be greater: AFN for a firm with excess fixed-asset capacity, or AFN for a firm with no excess fixed-asset capacity? Why? (LG4)
What does a negative value for AFN mean? (LG4)
Which specific item of a pro forma income statement should be most expected to vary proportionately with sales? Why? (LG5)
Explain why we need to use the iterative calculation approach described in the text to get a complete solution for AFN. (LG5)
Describe the type of people who use the financial markets. (LG1)
What is the purpose of financial management? Describe the kinds of activities that financial management involves. (LG1)
What is the difference in perspective between finance and accounting? (LG2)
What personal decisions can you think of that will benefit from your learning finance? (LG3)
What are the three basic forms of business ownership? What are the advantages and disadvantages to each? (LG4)
Between the three basic forms of business ownership, describe the ability of each form to access capital. (LG4)
Explain how the founder of a business can eventually lose control of the firm. How can the founder ensure this will not happen? (LG4)
Explain the shareholder wealth maximization goal of the firm and how it can be measured. Make an argument for why it is a better goal than maxi- mizing profit. (LG5)
Name and describe as many corporate stakeholders as you can. (LG5)
What conflicts of interest can arise between managers and stockholders? (LG6)
Figure 1.9 shows firm monitors. In your opinion, which group is in the best position to monitor the firm? Explain. Which group has the potential to be the weakest monitor? Explain. (LG6)
Every year, the media report on the vast amounts of money (sometimes hundreds of millions of dollars) that some CEOs earn from the compa- nies they manage. Are these CEOs worth it? Give examples.
Why is ethical behavior so important in the field of finance? (LG7)
Does the goal of shareholder wealth maximization conflict with behaving ethically? Explain. (LG7)
Describe how financial institutions and markets facilitate the expansion of a company's business. (LG8)
List and describe the four major financial statements. (LG1)
On which of the four major financial statements (balance sheet, income state- ment, statement of cash flows, or statement of retained earnings) would you find the following items? (LG1)a. Earnings
What is the difference between current liabilities and long-term debt? (LG1)
How does the choice of accounting method used to record fixed asset depreciation affect management of the balance sheet? (LG1)
What are the costs and benefits of holding liquid securities on a firm's bal- ance sheet? (LG1)
Why can the book value and market value of a firm differ? (LG2)
From a firm manager's or investor's point of view, which is more important the book value of a firm or the market value of the firm? (LG2)
What do we mean by a progressive tax structure? (LG3)
What is the difference between an average tax rate and a marginal tax rate? (LG3)
How does the payment of interest on debt affect the amount of taxes the firm must pay? (LG3)
The income statement is prepared using GAAP. How does this affect the reported revenue and expense measures listed on the balance sheet? (LG4)
Why do financial managers and investors find cash flow to be more impor- tant than accounting profit? (LG4)
What is the difference between net cash flow from operating activities, net cash flow from investing activities, and net cash flow from financing activi- ties? (LG5)
What are free cash flows for a firm? What does it mean when a firm's free cash flow is negative? (LG5)
What is earnings management? (LG6)
What does the Sarbanes-Oxley Act require of firm managers? (LG6)
Balance Sheet You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000, accounts
Balance Sheet Zoeckler Mowing & Landscaping's year-end 2012 balance sheet lists current assets of $435,200, fixed assets of $550,800, current liabil- ities of $416,600, and long-term debt of
Income Statement The Fitness Studio, Inc.'s, 2012 income statement lists the following income and expenses: EBIT = $538,000, interest expense = $63,000, and net income = $435,000. Calculate the 2012
Income Statement The Fitness Studio, Inc.'s, 2012 income statement lists the following income and expenses: EBIT = $773,500, interest expense = $100,000, and taxes = $234,500. The firm has no
Corporate Taxes Oakdale Fashions, Inc., had $245,000 in 2012 taxable income. Using the tax schedule in Table 2.3, calculate the company's 2012 income taxes. What is the average tax rate? What is the
Corporate Taxes Hunt Taxidermy, Inc., is concerned about the taxes paid by the company in 2012. In addition to $42.4 million of taxable income, the firm received $2,975,000 of interest on
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