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Questions and Answers of Finance

Refer to Problem 11-1. What is the project’s MIRR? In problem Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project’s
Refer to Problem 11-1. What is the project’s discounted payback?In problemProject K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the
What is a “replacement chain?” When and how should replacement chains be used in capital budgeting?
What is an “equivalent annual annuity (EAA)?” When and how are EAAs used in capital budgeting?
Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated?
Haley’s Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $10,000 and are typical average-risk projects for the firm. Project A has
Cotner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine 190-3, which has a cost of $190,000, a 3-year expected
Zappe Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce after-tax cash flows of $30 million per year. Plane B has a
The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs $10 million but
A firm has two mutually exclusive investment projects to evaluate; both can be repeated indefinitely. The projects have the following cash flows:Projects X and Y are equally risky and may be repeated
Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting
Corcoran Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $20,000, which will generate cash flows of $6,000 at the end of
Explain in general terms what each of the following real options is and how it could change projects’ NPVs and their corresponding risk relative to what would have been estimated if the options had
Would a failure to recognize growth options tend to cause a firm’s actual capital budget to be above or below the optimal level? Would your answer be the same for abandonment, timing, and
Companies often have to increase their initial investment costs to obtain real options. Why might this be so, and how could a firm decide if it was worth the cost to obtain a given real option?
How might a firm’s corporate WACC be affected by the size of its capital budget?
What is a post-audit, why do firms use them, and what problems can arise when they are used?
Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual
21st Century Educational Products (21st Century) is a rapidly growing software company; and consistent with its growth, it has a relatively large capital budget. While most of the company€™s
Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%.
Digital Inc. is considering production of a new cell phone. The project will require an investment of $20 million. If the phone is well-received, the project will produce cash flows of $10 million a
Hampton Manufacturing estimates that its WACC is 12% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to
The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $8 million today. Bush estimates that once
Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company’s plan is to spend another $5 million today (t = 0) to build a hotel on
Use a spreadsheet model to evaluate the project analyzed in Problem 13-7. In problem Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased,
Bankers’ Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30% probability of good conditions, in which case the project will
Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were 60% of sales, and fixed
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the research department of
Dan Barnes, financial manager of Ski Equipment Inc. (SKI), is excited, but apprehensive. The company€™s founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan
List seven reasons risk management might increase the value of a firm.
Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a mid-sized California company that specializes in creating exotic candies from tropical fruits such as mangoes,
What is the implied nominal interest rate on a Treasury bond ($100,000) futures contract that settled at 100’16.0 (or 100-160)? If interest rates increased by 1%, what would be the contract’s new
The Zinn Company plans to issue $20,000,000 of 10-year bonds in December to help finance a new research and development laboratory. It is now August, and the current cost of debt to the high-risk
Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan’s stock, with an exercise price of $55, has a market value of $3.06.
Stewart Enterprises’ current stock price is $60 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at
a. Rework Problem 18-4 using the spreadsheet model. b. Construct data tables for the intrinsic value and Black-Scholes exercise value for this option and graph the relationship. Include possible
Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States;
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate
Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in Problem 19-5.a. What is the current exchange rate for changing dollars into 1,000
Use the foreign exchange section of a current issue of The Wall Street Journal to look up the three currencies in Problem 19-8. What is the current exchange rate between Swedish kronas and pounds?
For purposes of measuring a firm’s leverage, should preferred stock be classified as debt or equity? Does it matter if the classification is being made (a) by the firm’s management, (b) by
a. How would a firm’s decision to pay out a higher percentage of its earnings as dividends affect each of the following?(1) The value of its long-term warrants(2) The likelihood that its
You are told that one corporation just issued $100 million of preferred stock and another purchased $100 million of preferred stock as an investment. You are also told that one firm has an effective
One often finds that a company’s bonds have a higher yield than its preferred stock even though an investor considers the bonds to be less risky than the preferred. What causes this yield
Why would a company choose to issue floating-rate as opposed to fixed-rate preferred stock?
Suppose Congress changed the tax laws in a way that (1) permitted equipment to be depreciated over a shorter period, (2) lowered corporate tax rates, and (3) reinstated the investment tax credit.
What effect does the expected growth rate of a firm’s stock price (subsequent to issue) have on its ability to raise additional funds through (a) convertibles and (b) warrants?
Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The
O’Brien Computers Inc. needs to raise $35 million to begin producing a new microcomputer. O’Brien’s straight, nonconvertible debentures currently yield 12%. Its stock sells for $38 per share,
Use the spreadsheet model to rework Parts a and b of Problem 20-8. Then answer the following question. In problem 20-8 a and b parts a. Should the loom be leased or purchased? b. The salvage value is
Storm Software wants to issue $100 million in new capital to fund new opportunities. If Storm raised the $100 million of new capital in a straight-debt 20-year bond offering, Storm would have to
Martha Millon, financial manager for Fish & Chips Inc., has been asked to perform a lease-versus-buy analysis on a new computer system. The computer costs $1,200,000, and if it is purchased, Fish
Martha Millon, financial manager of Fish & Chips Inc., is facing a dilemma. The firm was founded 5 years ago to develop a new fast-food concept; and although Fish & Chips has done well, the
Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost
Morris-Meyer Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the required amount. Alternatively, a Nevada investment banking firm
Pogue Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $21.a. Calculate the exercise value of Pogue’s warrants if the common
In the summer of 2008, the Hadaway Company was planning to finance an expansion with a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if
As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting
The Howe Computer Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of
In the spring of 1984, Disney Productions’ stock was selling for about $3.125 per share. (All prices have been adjusted for 4-for-1 splits in 1986 and 1992.) Then Saul Steinberg, a New York
Two large, publicly owned firms are contemplating a merger. No operating synergy is expected. However, since returns on the two firms are not perfectly positively correlated, the standard deviation
Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.00 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the
Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is 1.30. Vaccaro has been barely profitable, so it
TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld€™s analysts project
Use the spreadsheet model to rework Problem 21-6 and then answer the following question:In problem 21-6 a, b and c partsa. What is the appropriate discount rate for valuing the acquisition?b. What
Smitty€™s Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the
Simplify each of the following. a. 12 + 6 ÷ 3 b. (3 × 8 -6) ÷ 2 c. (7 + 4) × 5 - 2 d. 5 × 3 + 2 × 4 e. 6 (7 - 2) -3 (5 - 3)
Evaluate each of the following. (a) 4320(1+0.18 × (45 / 365) (b) 2160 (0.15 × (105 / 365)) (c) 2880 (1 − 0.12 × (285 / 365)) (d) 410.40 / (0.24 × (135 / 365)) (e) 5124 (1−0.09 × (270 / 365))
A wage earner receives a gross pay of $699.93 for 52.5 hours of work. What is his hourly rate of pay if a regular workweek is 42 hours and overtime is paid at time-and-a-half the regular rate of pay?
A salesperson receives a weekly base salary of $400 on a quota of $4500. On the next $2000, she receives a commission of 11%. On any additional sales, the commission rate is 15%. Calculate her gross
Mahal of Winnipeg, Manitoba, bought a ring for $6400. Since the jeweler is shipping the ring, she must pay a shipping charge of $20. She must also pay GST and PST on the ring. Determine the total
Suppose you went shopping and bought bulk laundry detergent worth $17.95. You then received a $2.50 trade discount, and had to pay a $1.45 shipping charge. Calculate the final purchase price of the
Ilo pays a property tax of $2502.50. In her community the tax rate is 55 per $1000. What is the assessed value of her property, to the nearest dollar?
The following information is shown in your investment account for last year: balance on January 1 of $7200; a withdrawal of $480 on March 1; and deposits of $600 on August 1 and $120 on October 1.
Extend each of the following and determine the total revenue.
Purchases of an inventory item during the last accounting period were as follows:What was the average cost per item?
Hazzid Realty sold lots for $15 120 per 1000 square metre. What is the total sales value if the lot sizes, in 1000 square metre, were 5 1⁄4, 6 1⁄3, 4 3⁄8, and 3 5⁄6?
Carly is paid a semi-monthly salary of $1040. If her regular workweek is 40 hours, what is her hourly rate of pay?
A.Y. receives an annual salary of $26 478.40. She is paid monthly on a 38-hour workweek. What is the gross pay for a pay period in which she works 8.75 hours overtime at time-and-a-half regular pay?
J.B. earns $16.60 an hour with time-and-a-half for hours worked over 8 a day. His hours for a week are 8.25, 8.25, 9.5, 11.5, and 7.25. Determine his gross earnings for that week.
Suppose you own a small business with four employees, namely Roberto, Sandra, Petra, and Lee. At the end of the year you have set aside $1800 to divide among them as a bonus. You have two categories
Suppose your math grade is based on the results of two tests and one final exam. Each test is worth 30% of your grade and the final exam is worth 40%. If you scored 60% and 50% on your two tests,
Reduce each of the following fractions to lowest terms.a. 24 / 36b. 28 / 56c. 210 / 360d. 360 / 225e. 144 / 360
Convert each of the following fractions into decimal form. If appropriate, place a dot above a decimal number to show that it repeats. a. 11 / 8 b. 7 / 4 c. 5 / 3 d. 5 / 6 e. 11 / 6
Convert each of the following mixed numbers into decimal form.a. 3 3/8b. 3 2/5c. 8 1/3d. 16 2/3e. 33 1/3
Round each of the following money values to the nearest cent a. 5.633 b. 17.449 c. 18.0046 d. 353.4856 e. 57.69875
Simplify each of the following.a. 25 000 (15 − 8) − 146 000b. (300 × 8000) − (180 × 8000) − 63000c. 1 − [(1 − 0.4) (1 − 0.25) (1 − 0.08)]d. 1 − [(1 − 0.32) (1 − 0.15) (1 −
Rae sold four pieces of gold when the price was $1569 per ounce. If the pieces weighed, in ounces, 1 1⁄3, 2 3⁄4, 1 5⁄8, and 3 5⁄6, respectively, what was the total selling value of the four
Kim Blair invested $7500 in a business on January 1. She withdrew $900 on March 1, reinvested $1500 on August 1, and withdrew $300 on September 1. What is Kim’s average monthly investment balance
Neuer started a systematic investment program by buying $200.00 worth of mutual funds on the first day of every month starting on February 1. When you purchase mutual funds, you purchase units in
Five carpenters worked 15 1⁄2, 13 3⁄4, 18 1⁄2, 21 1⁄4, and 22 3⁄4 hours, respectively. What was the total cost of labour if the carpenters were each paid $25.75 per hour?
A piece of property valued at $56 100 is assessed for property tax purposes at 6⁄11 of its value. If the property tax rate is $3.75 on each $100 of assessed value, what is the amount of tax levied
A retailer returned 2700 defective items to the manufacturer and received a credit for the retail price of $0.83, or 83 1⁄3¢ per item less a discount of 3⁄8 of the retail price. What was the
Extend the following invoice.
Complete the following inventory sheet.
Records of Montes Service’s fuel oil consumption for the last six-month period show that Montes paid 59.7 cents per liter for the first 1100 liters, 66.7 cents per liter for the next 1600 liters,
On a trip, a motorist purchased gasoline as follows: 56 liters at $1.18 per liter; 64 liters at $1.265 per liter; 70 liters at $1.236 per liter; and 54 liters at $1.225 per liter. (a) What was the
The course credit hours and grades for Bill€™s fall semester are given below. At his college, an A is worth six grade points, a B four points, a C two points, and a D one point.Solve the problems
R. Burton is employed at an annual salary of $31 824 paid Semi-monthly. The regular workweek is 36 hours.(a) What is the regular salary per pay period?(b) What is the hourly rate of pay?(c) What is
A salesclerk at a local boutique receives a weekly base salary of $825 on a quota of $8500 per week plus a commission of 6 1⁄2% on sales exceeding the quota.(a) What are the gross earnings for a

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