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business
intermediate financial management

Questions and Answers of Intermediate Financial Management

c. May size be ignored?
b. Ignoring size, do you find some projects clearly dominated by others?
a. Determine the coefficient of variation for each of these projects. (Use cost plus net present value in the denominator of the coefficient.)
Use of IT; Analytical reasoning) pg93
show. What competitive advantage does the show pg93 have over existing shows? How many and which differences would you promote? (AACSB: Communication;Reflective thinking) pg93
7-4 Explain how a company differentiates its products from competitors’ products. (AACSB: Communication) pg93
7-3 Explain how companies segment international markets.(AACSB: Communication) pg93
7-2 Compare and contrast consumer and business market segmentation. (AACSB: Communication) pg93
7-1 Name and describe the four major steps in designing a customer-driven marketing strategy. (AACSB:Communication) pg93
6-13 How would other company employees interpret your acceptance of this invitation? pg93
6-12 Do you think the supplier will expect ‘special’ treatment in the next buying situation? pg93
6-10 Do you accept or decline the invitation? pg93
6-3 Discuss the major influences on business buyers.(AACSB: Communication) pg93
➤ Objective 3 List and define the steps in the business buying decision process. pg93 pg93E-procurement and online purchasing (pp. 179–180) pg93
5. What role does the Porsche brand play in the self-concept of its buyers? pg93
3. Which concepts from the chapter explain why Porsche sold so many lower-priced models in the 1970s and 1980s? pg93
1. Analyse the buyer decision process of a traditional Porsche customer. pg93
5. The Hume Corporation is faced with several possible investment projects. For each, the total cash outflow required will occur in the initial period. The cash outflows, expected net present values,
c. What is the risk of the project?
b. Calculate a net present value for each three-year possibility, using a risk-free rate of 5 percent.
a. Set up a probability tree to depict the foregoing cash-flow possibilities.
Management attaches a 40 percent probability to this occurrence, given the fact that the new technology "bombs out" in the first year. If the technology proves itself, second-year cash flows may be
4. Xonics Graphics is evaluating a new technology for its reproduction equipment.The technology will have a 3-year life and cost $1,000. Its impact on cash flows is subject to risk. Management
c. Assuming a normal distribution, what is the probability the actual net present value will be less than zero?
b. If the risk-free rate is 10 percent, what are the mean and standard deviation of the probability distribution of possible net present values?
a. What are the joint probabilities of occurrence of the various branches?
3. Ponape Lumber Company is evaluating a new saw with a life of 2 years. The saw costs $3,000, and future after-tax cash flows depend on demand for company's products
e. What is the probability that the profitability index will be 1.00 or less?f. What is the probability that the profitability index will be greater than 2.00?
d. What is the probability that the net present value will be greater than zero?
c. If the total distribution is approximately normal and assumed continuous, what is the probability of the net present value being zero or less?
b. Determine the standard deviation about the mean.
a. Assume that probability distributions of cash flows for future periods are independent. Also, assume that the risk-free rate is 7 percent. If the proposal will require an initial outlay of 55,000,
2. The Dewitt Corporation has determined the following discrete probability distributions for net cash flows generated by a contemplated project
1. The probability distribution of possible net present values for project X has an expected value of $20,000 and a standard deviation of $10,000. Assuming a normal distribution, calculate the
b. What is the worth of the project if we take account of the option to expand?Is the project acceptable?
a. What is the net present value of the initial project? Is it acceptable?
3. Feldstein Drug Company is considering a new drug, which would be sold over the counter without a prescription. To develop the drug and to market it on a regional basis will cost $12 million over
b. Compute the expected value and standard deviation for a combination consisting of existing products plus pudding. Compare your results in parts a andb. What can you say about the pudding line?
a. Compute the expected value and the standard deviation of the probability distribution of possible net present values for a combination consisting of existing products.
c. Is the standard deviation calculated larger or smaller than it would be under an assumption of independence of cash flows over time?
b. Assuming a normal distribution, what is the probability of the project providing a net present value of (1) zero or less? (2) $300,000 or more?(3) $1,000,000 or more?
a. Assuming that the risk-free rate is 8 percent and that it is used as the discount rate, calculate the expected value and standard deviation of the probability distribution of possible net present
3. The option to postpone, also known as an investment timing option. For some projects there is the option to wait, thereby obtaining new information.
2. The option to abandon. If a project has abandonment value, this effectively represents a put option to the project's owner.
1. The option to vary output. An important option is to expand production if conditions turn favorable and to contract production if conditions turn bad. The former is sometimes called a growth
10. An investment has an outlay of $800 today, an inflow of $5,000 at the end of 1 year, and an outflow of $5,000 at the end of 2 years. What is its internal rate
. Is this an optimal strategy?
a. With strict capital rationing, which of these investments should be undertaken?
8. The Lake Tahoe Ski Resort is studying a half-dozen capital improvement projects. It has allocated $1 million for capital budgeting purposes. The following proposals and associated profitability
b. If the working capital requirement of $10,000 were required in addition to the cost of the equipment and this additional investment were needed over the life ofA& project, what would be the effect
a. If the required rate of return is still 15 percent, what is the net present value of the project? Is it acceptable?
7. In Problem 6, suppose 6 percent inflation in labor cost savings is expected over the last 4 years, so that savings in the first year are $20,000, savings in the second year are $21,200, and so
b. If its required rate of return is 18 percent, what is the maximum price Insell should pay?
a. What expected annual cash flows would Insell realize from this acquisition?
4. Insell Corporation is considering the acquisition of Fourier-Fox, Inc., which is in a related line of business. Fourier-Fox presently has a cash flow of $2 million per year. With a merger,
(1) produce a new line of aluminum skillets, (2) expand its existing cooker line to include several new sizes
3. The Platte River Perfect Cooker Company is evaluating three investment situations:
b. What is the project's net present value if the required rate of return is 14 percent?
a. What are the incremental cash inflows over the 8 years and what is the incremental cash outflow at time O?
2. Carbide Chemical Company is considering the replacement of two old machines with a new, more efficient machine. The old machines could be sold for $70,000 in the secondary market. Their
c. What would be the case if the required rate of return were 10 percent?d. What is the project's payback period?
b. What is its internal rate of return?
a. If the required rate of return is 15 percent, what is the net present value of the project? Is it acceptable?
1. Briarcliff Stove Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investments of $700,000 at time 0 and $1.0
5. Continual reevaluation of investment projects after their acceptance
4. Selection of projects based on an acceptance criterion
3. Evaluation of cash flows
2. Estimation of cash flows for the proposals
1. Generation of investment proposals
c. If the call has a market value of $5 and market price of the stock is $12 per share, what is the value of the put?
b. If the put has a market price of $1 and the call $4, what is the value of the stock per share?
a. If the put has a market price of $2 and stock is worth $9 per share, what is the value of the call?
1. A put and a call option each have an expiration date 6 months hence and an exercise price of $10. The interest rate for the 6-month period is 3 percent.
c. Suppose now that the original conditions hold, but we do not know the standard deviation. If the option price is $2, what is the implied standard deviation?
b. What would be the value if the current share price were $30? $35?How do these premiums over lower boundary theoretical values compare with that when share price is $25? Why the differences?
a. What is the value of the option according to the Black-Scholes formula?
9. A 6-month call option on the stock of Costello Equipment Company permits the holder to acquire one share at $30. Presently, share price is $25, and the ex-, - ) pected standard deviation of its
c. The standard deviation is .10 instead of .50.
b. The short-term interest rate is 8 percent instead of 6 percent.
a. The length of time to expiration is 1 year instead of 3 months.
8. For Zilcon Laboratories, Inc., in Problem 7, determine the value of the option with the following changes, holding all else constant, and explain why the change in the value of the option occurs.
b. If you believe in these numbers, what should you do?
7. Zilcon Laboratories, Inc., is a new high-technology company whose common stock sells for $23 per share. A call option exists on this stock with 3 months to expiration. It has an exercise price of
6. In Problem 5, what will be the market price of the option at the beginning of the period if financial markets are efficient and rational? What would happen if the actual market price of the option
b. Show how the value of your position will be the same regardless of the stock price outcome.
a. How would you establish a perfectly hedged position, using the stock and the option?
5. Shinto Carbon Steel Company's stock price at the beginning of a 6-month period is $40 per share. At the end of the period, there is a 50 percent chance that the stock will increase in value to $50
c. Reconcile your answers to parts a and b.
b. What is the expected value of option price for the two options at expiration, assuming the options are held to this time?
a. What is the expected value of market price per share 6 months hence for the two companies?
3. Julia Malone is considering writing a 30-day option on Video Sonics Corporation, which is currently trading at $60 per share. The exercise price will also be$60 per share, and the premium received
2. The X-Gamma Company and the X-Theta Company have actively traded options on their stocks with the same exercise price, $30. The current market prices of the two stocks are the same, $27 per share,
b. What is the appropriate hedge ratio, and how does it work?
a. On the basis of this information, what is the proper value of the option using the Black-Scholes option pricing model? (The calculations can be made with a reasonably sophisticated calculator or
3. A call option enables the holder to acquire one share of stock at $45 a share for each option held. The option has 6 months until its expiration. The market price of the stock is currently $40 a
c. What is the expected value of option price at the end of the period?
b. Under each of the two possibilities, what will be the value of your hedged position?
a. If you wished to establish a perfectly hedged position, what would you do on the basis of the facts just presented?
2. Prudencio Jiiinez Company's share price is now $60. Six months from now, it will be either $75 with probability .70 or $50 with probability .30. A call option exists on the stock that can be
c. Presently, what is the theoretical value of the option? Why does it have a positive value?

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