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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

17. Project NPV (S6.3) United Pigpen (UP) is considering a proposal to manufacture highprotein hog feed. The project would make use of an existing warehouse, which is currently rented out to a
18. Project NPV (S6.3) Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 4 billion. The plant will start production after one
19. Project NPV and IRR (S6.2, S6.3) A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 per year for five years. Company A has
b. What is the IRR of the after-tax cash flows for each company? Why are the IRRs for A and B the same?
20. Project analysis (S6.3) Go to the Excel spreadsheet versions of Table 6.3 and answer the following questions.a. New engineering estimates raise the possibility that capital investment will be
b. Continue with the assumed $15 million capital investment and the 11% cost of capital.What if sales, cost of goods sold, and net working capital are all 10% higher in each year?Recalculate NPV.
21. Equivalent annual cash flow (S6.4) When appraising mutually exclusive investments in plant and equipment, financial managers calculate the investments’ equivalent annual cash flows and rank the
22. Equivalent annual cash flow (S6.4) Air conditioning for a college dormitory will cost $1.5 million to install and $200,000 per year to operate at current prices. The system should last 25 years.
23. Equivalent annual cash flow (S6.4) In 2022, the California Air Resources Board (CARB)started planning its “Phase 3” requirements for reformulated gasoline (RFG). RFG is gasoline blended to
24. Equivalent annual cash flow (S6.4) Look at Problem 23 where you calculated the equivalent annual cost of producing reformulated gasoline in California. Capital investment was$400 million. Suppose
b. How much extra would retail gasoline customers have to pay to cover this equivalent annual cost? (Note: Extra income from higher retail prices would be taxed.)
25. Equivalent annual cash flow (S6.4) Deutsche Transport can lease a truck for four years at a cost of €30,000 annually. It can instead buy a truck at a cost of €80,000, with annual maintenance
26. Investment timing (S6.4) You can purchase a scanner today for $400. The scanner provides benefits worth $60 a year. The expected life of the scanner is 10 years. Scanners are expected to decrease
27. Mutually exclusive investments and project lives (S6.4) The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following
b. Which machine should Borstal buy?
c. Usually the rental payments you derived in part (a) are just hypothetical—a way of calculating and interpreting equivalent annual cost. Suppose you actually do buy one of the machines and rent
28. Mutually exclusive investments and project lives (S6.4) Look again at your calculations for Problem 27. Suppose that technological change is expected to reduce costs by 10% per year.There will be
29. Mutually exclusive investments and project lives. (S6.4) Econo-Cool air conditioners cost$300 to purchase, result in electricity bills of $150 per year, and last for five years. Luxury Air models
b. What is the equivalent annual cost of the Luxury Air model?
c. Which model is more cost-effective?
1. Calculate the NPV of the proposed overhaul of the Vital Spark, with and without the newengine and control system. To do the calculation, you will have to prepare a spreadsheet tableshowing all
How are risk and return linked?
30. Mutually exclusive investments and project lives (S6.4) As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines
31. Mutually exclusive investments and project lives (S6.4) Machines A and B are mutually exclusive and are expected to produce the following real cash flows:Cash Flows ($ thousands)Machine C0 C1 C2
32. Replacement decisions (S6.4) Machine C was purchased five years ago for $200,000 and produces an annual real cash flow of $80,000. It has no salvage value but is expected to last another five
33. Replacement decisions (S6.4) Hayden Inc. has a number of copiers that were bought four years ago for $20,000. Currently maintenance costs $2,000 a year, but the maintenance agreement expires at
34. Replacement decisions (S6.4) You are operating an old machine that is expected to produce a cash inflow of $5,000 in each of the next three years before it fails. You can replace it now with a
35. Replacement decisions. (S6.4) A forklift will last for only two more years. It costs $5,000 a year to maintain. For $20,000 you can buy a new forklift that can last for 10 years and should
b. What if the discount rate is 12% per year?
36. The cost of excess capacity (S6.4) The president’s executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $20,000 a year and
37. Effective tax rates (S6.2) One measure of the effective tax rate is the difference between the IRRs of pretax and after-tax cash flows, divided by the pretax IRR. Consider, for example, an
c. Consider a project where all of the up-front investment is treated as an expense for tax purposes. Does this definition of the effective tax rate make sense for such a project?
38. Equivalent annual costs (S6.4) We warned that equivalent annual costs should be calculated in real terms. We did not fully explain why. This problem will show you.Look back to the cash flows for
b. Suppose the inflation rate increases to 25%. The real interest rate stays at 6%. Recalculate the level nominal annuities. Note that the ranking of machines A and B appears to change.Why?
=2/Identify the sector to which each of the following types of company belongs: cement, luxury products, travel agency, stationery, telecom equipment.Company 1234 5 Sales 100 100 100 100 100 Cost of
=1/Identify the sector to which each of the following types of company belongs: electricity producer, supermarket, temporary employment agency, specialised retailer, construction and public
=12/In a growing company, would you expect margins to grow or to decrease?
=11/Why break down contributions made by associate companies into operating, financial and non-recurring items?
=10/Why analyse minority interests on the consolidated income statement?
=9/What is your view of a company which has seen a huge increase in sales due to a significant drop in prices and a strong volume effect?
=8/Van Poucke NV has positive EBITDA and growth, but negative operating profit. State your views.
=7/What does the stability of a company’s net profits depend on?
=6/Of the following companies, which would you define as making “a margin between the end market and an upstream market”?◦ temporary employment agency;◦ storage company (warehouse);◦
=5/What steps can be taken to help offset the impact of a negative scissors effect?
=4/Why can a direct link not be drawn between an increase in production costs and the corresponding drop in profits?
=3/The industrial group VAN DAM shows a net result, 80% of which is from its financial income. State your views.
=2/The industrial group HEEMS shows a net result, 80% of which is from extraordinary income. State your views.
=1/If you had to analyse the non-consolidated accounts of a holding company of several industrial participations, which profit level would you focus on? What are the important items on the income
8. Stocks A and B have the following returns (see for the data in Excel format):a. What are the expected returns of the two stocks?b. What are the standard deviations of the returns of the two
9. Using the data in the following table, estimate the average return and volatility for each stock (see for the data in Excel format). Realized Returns Year Stock A Stock B 2008 -10% 21% 2009 20%
11. The following spreadsheet contains monthly returns for Cola Co. and Gas Co. for 2013. Using these data, estimate the average monthly return and volatility for each stock (see for the data in
20. Suppose all possible investment opportunities in the world are limited to the five stocks listed in the following table. What are the market portfolio weights (see for the data in Excel format)?
22. Given $100,000 to invest, construct a value-weighted portfolio of the four stocks listed below (see for the data in Excel format). Stock Price/Share ($) Number of Shares Outstanding (millions)
*4. Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows
*35. Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):a. Which project has the highest expected payoff?b. Suppose Zymase has debt of $40 million due at
• Understand the goals of long-term financial planning
• Create pro forma income statements and balance sheets using the percent of sales method
• Develop financial models of the firm by directly forecasting capital expenditures, working capital needs, and financing events
• Distinguish between the concepts of sustainable growth and value-increasing growth
• Use pro forma analysis to model the value of the firm under different scenarios, such as expansion
1. What is the purpose of long-term forecasting?
4. Jim’s expects sales to grow by 10% next year. Using the percent of sales method, forecast (see for the data in Excel format):a. Costsb. Depreciationc. Net incomed. Cashe. Accounts receivablef.
5. Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to forecast (see for the data in Excel format):a. Stockholders’ equityb. Accounts payable
6. What is the amount of net new financing needed for Jim’s (see for the data in Excel format)?
8. Global expects sales to grow by 8% next year. Using the percent of sales method, forecast (see for the data in Excel format):a. Costs except depreciatione. Accounts receivableb. Depreciationf.
9. Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ equity (see for the data in Excel format).
10. What is the amount of net new financing needed for Global (see for the data in Excel format)?
11. If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy (see for the data in Excel format)?
17. Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?
22. Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.
• Understand the cash cycle of the firm and why managing working capital is important
• Use trade credit to the firm’s advantage
• Make decisions on extending credit and adjusting
• Manage accounts payable
• Know the costs and benefits of holding additional inventory
• Contrast the different instruments available to a financial manager for investing cash balances.
1. What does a firm’s cash cycle tell us?
4. Why is trade credit important?
8. What is meant by “stretching the accounts payable”?
9. What are the tradeoffs involved in reducing inventory?
10. What are the different ways you can invest your firm’s cash?
4. Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will
6. The Greek Connection had sales of $32 million in 2015, and a cost of goods sold of$20 million. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connection’s net
*15. Use the financial statements supplied below and on the next page for International Motor Corporation (IMC) to answer the following questions (see for the data in Excel format):a. Calculate the
22. Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.
17. Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?
11. If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy (see for the data in Excel format)?
10. What is the amount of net new financing needed for Global (see for the data in Excel format)?
9. Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ equity (see for the data in Excel format).
8. Global expects sales to grow by 8% next year. Using the percent of sales method, forecast (see for the data in Excel format):a. Costs except depreciatione. Accounts receivableb. Depreciationf.
6. What is the amount of net new financing needed for Jim’s (see for the data in Excel format)?
5. Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to forecast (see for the data in Excel format):a. Stockholders’ equityb. Accounts payable
4. Jim’s expects sales to grow by 10% next year. Using the percent of sales method, forecast (see for the data in Excel format):a. Costsb. Depreciationc. Net incomed. Cashe. Accounts receivablef.
1. What is the purpose of long-term forecasting?
• Use pro forma analysis to model the value of the firm under different scenarios, such as expansion
• Distinguish between the concepts of sustainable growth and value-increasing growth
• Develop financial models of the firm by directly forecasting capital expenditures, working capital needs, and financing events
• Create pro forma income statements and balance sheets using the percent of sales method
• Understand the goals of long-term financial planning
6. If Midco’s managers decide to issue the debt and distribute the tax shield as a special dividend instead of repurchasing shares, what will the dividend per share be?

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