Questions and Answers of Analysis Financial Management

=1. Below is a recent income statement for Hegel Publishing.Calculate Hegel's free cash flow in this year assuming it spent $480 on new capital equipment and increased current assets net of
=2. A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would
=a. Using a tax rate of 34 percent, estimate the minimum price the owner of the division should consider for its sale.
=b. What is the maximum price the acquirer should be willing to pay?
=c. Does it appear that an acquisition is feasible? Why or why not?
=d. Would a 25 percent increase in stock prices to an industry average price-to-earnings ratio of 15 change your answer to (c)? Why or why not?
=e. Referring to the $275 million price tag as the replacement value of the division, what would you predict would happen to acquisition activity when market values of companies and divisions rise
=3. Stolid, Inc., is a no-growth company expected to pay a $10-pershare annual dividend into the distant future. Its cost of equity capital is 14 percent. The new president abhors the no-growth
=a. Do you agree that the acquisition will likely increase sales, earnings, and assets?
=b. Estimate the per share value of Stolid's stock immediately prior to the president's proposal.
=c. Estimate the per share value immediately after the proposal.
=d. As an owner of Stolid, would you support the president's proposal?Why or why not?
=4.a. What does it mean when a company's free cash flow is negative in one or more years?
=b. Do negative values of free cash flow in any way alter or invalidate the notion that a company's fair market value equals the present value of its free cash flows discounted at the company's
=c. Suppose a company's free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company's stock?
=5. Procureps, Inc. (P), is considering two possible acquisitions, neither of which promises any enhancements or synergistic benefits. V1 is a poorly performing firm in a declining industry with a
=a. Calculate the maximum percentage premium Procureps can afford to pay for V1 and V2 by replacing the question marks in the following table.
=b. What do your answers to part (a) suggest about the wisdom of using“avoid dilution in earnings per share” as a criterion in merger analysis.
=6. Ametek, Inc., is a billion dollar manufacturer of electronic instruments and motors headquartered in Paoli, Pennsylvania. Use the following information on Ametek and five other similar companies
=7. Following is a four-year forecast for Torino Marine.
=a. Estimate the fair market value of Torino Marine at the end of 2006.Assume that after 2010, earnings before interest and tax will remain constant at $210 million, depreciation will equal capital
=b. Estimate the fair market value per share of Torino Marine's equity at the end of 2006 if the company has 50 million shares outstanding and the market value of its interest-bearing liabilities on
=c. Now let's try a different terminal value. Estimate the fair market value of Torino Marine's equity per share at the end of 2006 under the following assumptions:(1) Free cash flows in years 2007
=d. Lastly, let's try a third terminal value. Estimate the fair market value of Torino Marine's equity per share at the end of 2006 under the following assumptions:(1) Free cash flows in years 2007
=(3) At year-end 2010, Torino Marine has $300 million of interestbearing liabilities outstanding at an average interest rate of 10 percent.The following three problems test your knowledge of the
=9. New ventures commonly set aside 10 to 20 percent of company shares at the valuation date for employee bonuses and stock options.Modify the valuation of ZMW Enterprises in Panel B of Table 9A.1 to
=10. Using the information below, please answer the following questions below about Surelock Homes, a start-up company. In your analysis, assume the valuation date is the end of year 6, projected
=a. What percentage ownership at time 0 should round 1 investors demand for their $6 million investment?
=b. If Surelock presently has 1 million shares outstanding, how many shares should round 1 investors demand at time 0?
=c. What is the implied price per share of Surelock stock at time 0?
=d. What is Surelock's premoney value at time 0? What is its postmoney value?
=11. The Excel file C9_Problem_11.xls available at www.mhhe.com/higgins8e (Select Student Edition > Choose a Chapter > Excel Spreadsheets) contains information concerning the potential acquisition of
=12. The spreadsheet available at www.mhhe.com/higgins8e (Select Student Edition > Choose a Chapter > Excel Spreadsheets) presents information concerning The Timberland Company and four of its peers.
=b. Relever the industry asset beta to reflect Ametek's capital structure, and to make another (industry-informed) estimate of Ametek's equity beta.
=a. Estimate the industry asset beta, weighting each company by its proportion of total market value of equity.
=14. The Excel file C8_Problem_14.xls at www.mhhe.com/higgins8e(Select Student Edition > Choose a Chapter > Excel Spreadsheets)gives information regarding Ametek, Inc., and five industry competitors.
=b. Estimate Ametek's weighted-average cost of capital. Prepare a spreadsheet or table showing the relevant variables.
=a. Estimate Ametek's cost of equity capital.
=13. The Excel file C8_Problem_13.xls available at www.mhhe.com/higgins8e (Select Student Edition > Choose a Chapter > Excel Spreadsheets) provides key facts and assumptions concerning Ametek, Inc.
=d. Based on your answers to the preceding questions, what advice would you give Starbucks' management?
=c. What would be the consequences of Starbucks using its WACC(computed in Problem 11) to evaluate this project?
=b. Based on management's projections, should Starbucks invest in this enhancement?
=a. Calculate the appropriate discount rate to evaluate this project. You may assume that Starbucks correctly chose the comparable company, and that differences in leverage between Starbucks and
=12. Use the Standard & Poor's Market Insight website(www.mhhe.com/edumarketinsight) for this problem. Assume that Starbucks contemplates selling music online over a website, via existing wireless
=b. As of September 2004, calculate Starbucks' WACC. (Hint: For purposes of this exercise, use Total Liabilities as the company's book value of debt. You can find Total Liabilities on
=a. Use Starbucks' September 2004 beta (β) to calculate the company's cost of equity capital. (To find beta go to Excel Analytics, Valuation Data, Profitability.)
=11. Use the Standard & Poor's Market Insight website(www.mhhe.com/edumarketinsight) for this problem. Assume Starbucks Corporation is reviewing the cost of equity and the WACC it uses to evaluate
=b. What concerns, if any, would you have about using the betas of these firms to estimate Sweat Equity's asset beta?
=a. Estimate an asset beta for Sweat Equity.
=10. (This problem tests your understanding of the chapter appendix.)Sweat Equity Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the company's beta. You
=b. What is the option's strike price?
=a. Is the option a call or a put?
=9. The chapter discusses General Design's option to expand its diamond film project.
=e. Does inflation make this investment more attractive or less attractive? Why?
=d. How do you explain the fact that inflation causes the internal rate of return to increase and the net present value to decrease?
=c. How do your answers to questions (a) and (b) change when you assume a uniform inflation rate of 8 percent a year over the next 10 years? (Use the following equation to calculate the nominal
=b. Calculate the investment's internal rate of return and its NPV.
=a. Prepare a spreadsheet to estimate the project's annual after-tax cash flows.
=8. (You will need a computer for this problem.) The following information is available about an investment opportunity.Investment will occur at time 0 and sales will commence at time 1.
=c. Why would an investor settle for a 20 percent return on this investment when she can get as high as 80 percent?
=b. Propose an investment-financing package that meets the investor's target when she demands an 80 percent return on equity.
=a. Propose an investment-financing package that meets the investor's return target.
=7. You are a commercial real estate broker eager to sell an office building. An investor is interested but demands a 20 percent return on her equity investment. The building's selling price is $10
=6. What is the present value of a cash flow stream of $1,000 per year annually for 16 years that then grows at 5 percent per year forever when the discount rate is 12 percent?
=c. If undertaken, would you expect this investment to benefit shareholders? Why or why not?
=b. What is Burgundy's weighted-average cost of capital?
=a. What is the internal rate of return on the investment?
=4. You have the following information about Burgundy Basins, a sink manufacturer.Burgundy is contemplating what for the company is an average-risk investment costing $25 million and promising an
=3. Looking at Figure 8.1, explain why a company should reject investment opportunities lying below the market line and accept those lying above the line.
=2. Your company's weighted-average cost of capital is 11 percent. You believe the company should make a particular investment, but its internal rate of return is only 9 percent. What logical
=c. If you can borrow all of the money you need for a project at 6 percent, the cost of capital for this project is 6 percent.
=b. The cost of capital, or WACC, is not the correct discount rate to use for all projects undertaken by a firm.
=a. Using the same risk-adjusted discount rate to discount all future cash flows ignores the fact that the more distant cash flows are often more risky than cash flows occurring sooner.
=1. Is each of the following statements true or false? Explain your answers.
=13. You work for Mattel and you are negotiating with Lucasfilm for the rights to manufacture and sell Star Wars lunchboxes (you already sell related action figures). Your marketing department
=12. This problem asks you to evaluate two mutually exclusive investment alternatives with differing life expectancies under various conditions including capital rationing. Relevant information about
=11. The spreadsheet for this problem provides a brief overview of selected financial functions in Excel and poses several questions regarding mortgage loans requiring monthly payments. The
=e. How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?
=d. How does the internal rate of return change if the discount rate equals 20 percent?
=c. What is the investment's internal rate of return?
=b. What is the investment's net present value at a discount rate of 10 percent?
=a. Complete the spreadsheet to estimate the project's annual after-tax cash flows.
=10. Read the information regarding a possible new investment presented at www.mhhe.com/higgins8e. (Select Student Edition >Choose a Chapter > Excel Spreadsheets.)
=9. In 1987, a Van Gogh painting Sunflowers (not reputed to be one of his best) sold at auction, net of fees, for $36 million. In 1889, 98 years earlier, the same painting sold for $125. Calculate
=c. If the company has a fixed capital budget of $5.5 million, and if the investments are independent of one another, which should it undertake?
=b. If the company can raise large amounts of money at an annual cost of 15 percent, and if the investments are mutually exclusive, which should it undertake?
=a. If the company can raise large amounts of money at an annual cost of 15 percent, and if the investments are independent of one another, which should it undertake?
=8. (Read the chapter appendix before attempting this problem.) A company is considering the following investment opportunities.
=6. Times are tough for Auger Biotech. Having raised $75 million in an initial public offering of its stock early in the year, the company is poised to launch its product. If Auger engages in a
=5. A developer offers lots for sale at $50,000, $10,000 to be paid down and $10,000 to be paid at the end of each of the next four years with“no interest to be charged.” In discussing a possible
=4. If National HealthCare Corp. reported earnings per share of $7.58 in 1996 and $19.38 in 2005, at what annual rate did earnings per share grow over this period?
=c. Your mother expects to stay in this house for only 5 years, at which time she plans to sell her house. Ignoring any differences in the principal values of the loans in five years, which mortgage
=b. How much will her monthly payments be if she chooses the 9 percent loan?
=a. How much will her monthly payments be if she chooses the 10 percent loan? (Hint: the monthly interest rate equals the annual rate divided by 12.)
=3. Your mother is buying a house for $500,000 and intends to pay$100,000 down, and borrow the remaining $400,000 (including all closing costs). She is evaluating two loan options: borrow $400,000 at
=2. An individual wants to borrow $100,000 from a bank and repay it in five equal annual end-of-year payments, including interest. If the bank wants to earn a 10 percent rate of return on the loan,
=m. A company is planning to set aside money to repay $150 million in bonds that will be coming due in 8 years. How much money would the company need to set aside at the end of each year for the next
=l. An investment of $1,300 today returns $61,000 in 50 years. What is the internal rate of return on this investment?
=k. How long must a stream of $600 payments last to justify a purchase price of $ 6,000.00? Suppose the stream lasted only five years. How large would the salvage value (liquidating payment) need to
=j. What return do you earn if you pay $22,470 for a stream of $5,000 payments lasting ten years? What does it mean if you pay less than$22,470 for the stream? More than $22,470?

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