Questions and Answers of Foundations Of Financial Management 17th

28. Mack Trucking Company is considering buying 50 new diesel trucks that are 15 percent more fuel-efficient than the ones the firm is now using. Mr. Mack, the president, has found that the company
27. Tobacco Company of America is a very stable billion-dollar company with sales growth of about 5 percent per year in good or bad economic conditions. Because of this stability (a correlation
26. Gail Perkins recently received her MBA from the University of Chicago. She has joined the family business, Perkins Office Machines, as vice president of finance.She believes in adjusting projects
25. Mr. Boone is looking at a number of different types of investments for his portfolio.He identifies eight possible investments, going from A to H.a. Graph the data in a manner similar to Figure
24. Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations.
23. Gifford Western Wear makes blue jeans and cowboy shirts. It has seven manufacturing outlets in Texas, Oklahoma, and New Mexico. It is seeking to diversify its business and lower its risk. It is
22. The Palo Alto Microchip Corporation projects a pattern of inflows from the investment shown below. The inflows are spread over time to reflect delayed benefits. Each year is independent of the
21. When returns from a project can be assumed to be normally distributed, such as those shown in Figure 13-6 on page 414 (represented by a symmetrical, bellnormal shaped curve), the areas under the
20. Roper Fashions is preparing a product strategy for the fall season. One option is to go to a highly imaginative new, four-gold-button sport coat with special emblems on the front pocket. The
19. Referring to problem 18, Mr. Terry is likely to hold the shopping center of his choice for 25 years and will use this period for decision-making purposes. Either shopping center can be purchased
18. Mr. Monty Terry, a real estate investor, is trying to decide between two potential small shopping center purchases. His choices are the Wrigley Village and Crosley Square. The anticipated annual
17. Silverado Mining Company is analyzing the purchase of two silver mines. Only one investment will be made. The Alaska mine will cost $2,000,000 and will produce$400,000 per year in years 5 through
16. Larry’s Athletic Lounge is planning an expansion program to increase the sophistication of its exercise equipment. Larry is considering some new equipment priced at $20,000 with an estimated
15. Fill in the table below from Appendix B. Does a high discount rate have a greater or lesser effect on long-term inflows compared to recent ones? Years 1.. 10 20 Discount Rate 5% 20%
14. Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method 1 (implosion) is relatively low in risk for this business and
13. Waste Industries is evaluating a $70,000 project with the following cash flows.The coefficient of variation for the project is .847.Based on the following table of risk-adjusted discount rates,
12. Bridget’s Modeling Studios is considering opening in a new location in Miami, An aftertax cash flow of $120 per day (expected value) is projected for each of the two locations being
11. Mountain Ski Corp. was set up to take large risks and is willing to take the great-rest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.a. Which of
10. Tom Fears is highly risk-averse while Sonny Outlook actually enjoys taking a risk.a. Which one of the four investments should Tom choose? Compute coefficients of variation to help you in your
9. Digital Technology wishes to determine its coefficient of variation as a company over time. The firm projects the following data (in millions of dollars):a. Compute the coefficient of variation
8. In problem 7, if you were to choose between Alternatives B and C only, would you need to use the coefficient of variation? Why?
7. Five investment alternatives have the following returns and standard deviations of returns.Using the coefficient of variation, rank the five alternatives from lowest risk to highest risk.
6. Five investment alternatives have the following returns and standard deviations of returns.Using the coefficient of variation, rank the five alternatives from the lowest risk to the highest risk.
5. Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.Rank the three alternatives in terms of risk (compute the coefficient of variation).
4. A1 Bundy is evaluating a new advertising program that could increase shoe sales.Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation. Possible
3. Monarck King Size Beds, Inc., is evaluating a new promotional campaign that could increase sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of
2. Sampson Corp. is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given.a. What is the expected value of unit sales for
1. Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given below:a. What is the expected value of
2. Hanson Auto Supply in the prior problem uses the risk-adjusted discount rate and relates the discount rate to the coefficient of variation as follows:Coefficient of Variation Discount Rate 0-.30
10. Hanson Auto Supplies is examining the following probability distribution. What is the coefficient of variation?Cash Flow Probability $ 2 0 ........................30 4 0
9. What is the purpose of using simulation analysis? (LO4)
8. Explain the effect of the risk-return trade-off on the market value of common stock. (LO3)
7. Assume a firm has several hundred possible investments and that it wants to analyze the risk-return trade-off for portfolios of 20 projects. How should it proceed with the evaluation? (LO5)
6. Assume a company, correlated with the economy, is evaluating six projects, of which two are positively correlated with the economy, two are negatively cor- related, and two are not correlated with
5. If risk is to be analyzed in a qualitative way, place the following investment deci- sions in order from the lowest risk to the highest risk: (LOI)a. New equipment.b. New market.c. Repair of old
4. Explain how the concept of risk can be incorporated into the capital budgeting process. (LO3)
3. When is the coefficient of variation a better measure of risk than the standard deviation? (LOI)
2. Discuss the concept of risk and how it might be measured. (LOI)
1. If corporate managers are risk-averse, does this mean they will not take risks? Explain. (LO2)
3. What are your conclusions about Apple’s capital budgeting decisions over the last five years?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on “Company,”
2. Now close the balance sheet and under “Excel Analytics” find the annual ratio spreadsheet. What has happened to the return on assets and return on investment since the introduction of the
1. Calculate the dollar change in net plant and equipment and the percentage change in net plant and equipment for the years given.Log onto the S&P Market Insight Web site,
1. Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on “Commentary,” which is the third box below the Market Insight title. The second major heading on the left side
2. What is the general pattern of the stock movement? Keep in mind the overall market might affect the price movement for Northrop Grumman.
1. Scroll up to “Investor Relations,” select “Financial Info,” and then “Fundamentals.”Record the following:a. Recent price.b. 52-week high.c. 52-week low.d. 52-week price percent
33. The Woodruff Corporation purchased a piece of equipment three years ago for$230,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $90,000.A
32. Graphic Systems purchased a computerized measuring device two years ago for$80,000. It falls into the five-year category for MACRS depreciation. The equipment can currently be sold for $28,400.A
31. Polycom Technology is considering the purchase of a new piece of equipment for $110,000. It has a nine-year midpoint of its asset depreciation range (ADR).It will require an additional initial
30. An asset was purchased three years ago for $140,000. It falls into the five-year category for MACRS depreciation. The firm is in a 35 percent tax bracket.Compute the:a. Tax loss on the sale and
29. The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $120,000. Of this amount, $70,000 is
28. The Thorpe Corporation is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-8 on page 387 to determine
27. Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $300,000. If the equipment is purchased, the following earnings before depreciation
26. The Keystone Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $60,000 and the asset will provide the following stream of earnings before
25. Assume $80,000 is going to be invested in each of the following assets. Using Tables 12-8 and 12-9 on page 387, indicate the dollar amount of the first year’s depreciation.a. Computersb.
24. Howell Magnetics Corporation is going to purchase an asset for $400,000 that will produce $ 180,000 per year for the next four years in earnings before depreciation and taxes. The asset will be
23. Software Systems is considering an investment of $20,000, which produces the following inflows:You are going to use the net present value profile to approximate the value for the internal rate of
22. Miller Electronics is considering two new investments. Project c calls for the purchase of a coolant recovery system. Project H represents an investment in a heat recovery system. The firm wishes
21. Oliver Stone and Rock Company uses a process of capital rationing in its decision making. The firm’s cost of capital is 12 percent. It will invest only $80,000 this year. It has determined the
20. The 21st Century Corporation uses the modified internal rate of return. The firm has a cost of capital of 8 percent. The project being analyzed is as follows($20,000 investment):a. What is the
19. Cablevision, Inc., will invest $48,000 in a project. The firm’s discount rate (cost of capital) is 9 percent. The investment will provide the following inflows.The internal rate of return is 15
18. You are asked to evaluate two projects for Adventures Club, Inc. Using the net present value method combined with the profitability index approach described in footnote 2 on page 379, which
17. The Danforth Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $66,000. The annual cash
16. The Ogden Corporation makes an investment of $25,000, which yields the following cash flows:a. What is the present value with a 9 percent discount rate (cost of capital)?b. What is the internal
15. Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the
14. The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years.The firm will also be required to spend $10,000 to close down
13. Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? (Note: The fourth year’s
12. Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $20,000. The annual cash inflows for the next three years will be:a. Determine the internal rate of
11. Warner Business Products is considering the purchase of a new machine at a cost of $11,070. The machine will provide $2,000 per year in cash flow for eight years. Warner’s cost of capital is 13
10. You buy a new piece of equipment for $16,980, and you receive a cash inflow of$3,000 per year for 12 years. What is the internal rate of return?
9. X-treme Vitamin Company is considering two investments, both of which cost$10,000. The cash flows are as follows:a. Which of the two projects should be chosen based on the payback method?b. Which
8. The Short-Line Railroad is considering a $100,000 investment in either of two companies. The cash flows are as follows:a. Using the payback method, what will the decision be?b. Explain why the
7. Referring back to problem 6, if the inflow in the fifth year for Investment X were$20,000,000 instead of $20,000, would your answer change under the payback method?
6. Assume a $40,000 investment and the following cash flows for two alternatives.Which of the alternatives would you select under the payback method? Year 1 Investment X Investment Y $6,000 $15,000
5. Assume a $100,000 investment and the following cash flows for two alternatives.Which of the two alternatives would you select under the payback method? Year Investment A Investment B 1.. $30,000
4. Bob Cole, the president of a New York Stock Exchange-listed firm, is very shortterm oriented and interested in the immediate consequences of his decisions.Assume he is considering a project that
3. Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.a. Compute its cash flow.b. Assume it has $200,000 in depreciation.
2.a. In problem 1, how much would cash flow be if there were only $10,000 in depreciation? All other factors are the same.b. How much cashflow is lost due to the reduced depreciation between problems
1. Assume a corporation has earnings before depreciation and taxes of $90,000, and depreciation of $40,000, and that it has a 30 percent tax bracket. Compute its cash flow using the format
2. Archer Chemical Corp. is considering purchasing new equipment that falls under the three-year MACRS category. The cost is $200,000. Earnings before depreciation and taxes for the next four years
1. Systems Software has earnings before depreciation and taxes of $ 180,000, depreciation of $60,000, and a tax rate of 35 percent. Compute its cash flow.
9. How does an asset’s ADR (asset depreciation range) relate to its MACRS category? (L02)
8. What is the net present value profile? What three points should be determined to graph the profile? (L04)
7. If a corporation has projects that will earn more than the cost of capital, should it ration capital? (L05)
6. How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods? (L04)
5. What does the term mutually exclusive investments mean? (L04)
4. What is normally used as the discount rate in the net present value method? (L05)
3. What are the weaknesses of the payback method? (L03)
2. Why does capital budgeting rely on analysis of cash flows rather than on net income? (L02)
1. What are the important administrative considerations in the capital budgeting process? (LOl)
5. Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the following betas, using Formula 11 A-2.a. 0.6b. 1.3c. 1.9 6. In the preceding problem, assume an increase in interest rates
4. How does the SML react to changes in the rate of interest, changes in the rate of inflation, and changing investor expectations? (L02)
3. How does the capital asset pricing model help explain changing costs of capital? (L01)
2. What are the weights for debt and equity for the last five years? Have they remained stable? Comment on the stability or lack of stability and how it would affect the company’s cost of
1. Calculate the weights between debt and equity that you would use in a weighted average cost of capital calculation.Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on
4. In general, how has the change in interest rates and common stock prices affected the overall cost of capital?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on
3. Consider the impact of the change in stock prices on the dividend yield. Will the dividend yield go up or down with the change in the stock price? Considering only the impact of the dividend yield
2. Find the graph for the “S&P 500 Stock Price Index.” What has happened to common stock prices during this time period?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight.
1. What has happened to interest rates on government securities during this time period and how will this affect the cost of debt capital for the average U.S. company?Log onto the S&P Market Insight
30. Masco Oil and Gas Company is a very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond
29. Medical Research Corporation is expanding its research and production capacity to introduce a new line of products. Current plans call for the expenditure of $100 million on four projects of

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