1.Calculating OCF Ranney, Inc., has sales of $14,900, costs of $5,800, depreciation expense of $1,300, and interest expense of $780. If the tax rate is 40 percent, what is the operating cash flow, or OCF?

2. Net Income and OCF During 2010, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $105,000, and $140,000, respectively. In addition, the company had an interest expense of $70,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) 1. What is Raines?s net income for 2010? 2. What is its operating cash flow? 3. Explain your results in (a) and (b).

3. Equity Multiplier and Return on Equity Thomsen Company has a debt?equity ratio of .90. Return on assets is 10.1 percent, and total equity is $645,000. What is the equity multiplier? Return on equity? Net income?

4. .EFN The most recent financial statements for Martin, Inc., are shown here:

Income Statement

Sales $25,800

Costs 16.500

Taxable income $ 9,300

Taxes (34%) 3,162

Net income $ 6,138

Balance Sheet

Assets $113,000 Debt $ 20,500

Equity 92,500

Total $113,000 Total $113,000

Assets and costs are proportional to sales. Debt and equity are not. A dividend of

$1,841.40 was paid, and Martin wishes to maintain a constant payout ratio. Next

year's sales are projected to be $30,960. What external financing is needed?

5. Sales and Growth: The most recent financial statements for Fontenot Co. are shown

here:

Income Statement

Sales $67,000 Current assets $ 31,000 Long-term debt $ 68,000

Costs 43,800 Fixed assets 118,000 Equity 81,000

Taxable income $23,200 Total $149,000 Total $149,000

Taxes (34%) 7,888

Net income $15,312

Balance Sheet

Assets and costs are proportional to sales. The company maintains a constant 30 percent

dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained assuming no new equity is issued?

6. Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover = 1.90 Profit margin = 8.1% Equity multiplier = 1.25 Payout ratio = 30%

7. Ratios and Fixed Assets The Le Bleu Company has a ratio of long-term debt to total assets of .40 and a current ratio of 1.30. Current liabilities are $900, sales are $5,320, profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firm?s net fixed assets?

8. Calculating the Number of Periods At 9 percent interest, how long does it take to double your money? To quadruple it?

9. Calculating Present Values Imprudential, Inc., has an unfunded pension liability of $750 million that must be paid in 20 years. To assess the value of the firm?s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.2 percent, what is the present value of this liability?

10. Calculating Rates of Return Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby?s sold the Edgar Degas bronze sculpture Petite Danseuse de Quartorze Ans at auction for a price of $10,311,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of $12,377,500. What was his annual rate of return on this sculpture?

11. Calculating Annuity Present Value An investment offers $4,300 per year for 15 years, with the first payment occurring one year from now. If the required return is 9 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?

19. Calculating Number of Periods One of your customers is delinquent on his accounts payable balance. You?ve mutually agreed to a repayment schedule of $600 per month. You will charge .9 percent per month interest on the overdue balance. If the current balance is $18,400, how long will it take for the account to be paid off?

20. Calculating EAR Friendly?s Quick Loans, Inc., offers you ?three for four or I knock on your door.? This means you get $3 today and repay $4 when you get your paycheck in one week (or

else). What?s the effective annual return Friendly?s earns on this lending business? If you were brave enough to ask, what APR would Friendly?s say you were paying

23. Calculating Annuities You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25-year withdrawal period?

26. Growing Perpetuities Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $215,000, received two years from today. Subsequent annual cash flows will grow at 4 percent in perpetuity. What is the present value of the technology if the discount rate is 10 percent?

44. Variable Interest Rates A 15-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 13 percent compounded monthly for the first seven years, and 9 percent compounded monthly thereafter, what is the present value of the annuity?

50.Calculating Annuities Due You want to buy a new sports car from Muscle Motors for $65,000. The contract is in the form of a 48-month annuity due at a 6.45 percent APR. What will your monthly payment be?

1. Payback Period and Net Present Value If a project with conventional cash flows has a payback period less than the project?s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project?s life, what can you say about the NPV? Explain.

3.Comparing Investment Criteria Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. 1. Payback period. 2. Internal rate of return. 3. Profitability index. 4. Net present value.

5. International Investment Projects In January 2008, automobile manufacturer Volkswagen announced plans to build an automatic transmission and engine plant in South Carolina. Volkswagen apparently felt that it would be better able to compete and create value with U.S.based facilities. Other companies such as Fuji Film and Swiss chemical company Lonza have reached similar conclusions and taken similar actions. What are some of the reasons that foreign manufacturers of products as diverse as automobiles, film, and chemicals might arrive at this same conclusion?

8. Net Present Value The investment in project A is $1 million, and the investment in project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false?

11. Net Present Value You are evaluating project A and project B . Project A has a short period of future cash flows, while project B has relatively long future cash flows. Which project will be more sensitive to changes in the required return? Why?

13. Net Present Value It is sometimes stated that ?the net present value approach assumes reinvestment of the intermediate cash flows at the required return.? Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do the following:

a. Calculate the future value (as of the end of the project) of all the cash flows other than the initial outlay assuming they are reinvested at the required return, producing a single future value figure for the project.

b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will get the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.

14. Opportunity Cost In the context of capital budgeting, what is an opportunity cost?

7. Equivalent Annual Cost When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain.

8. Cash Flow and Depreciation ?When evaluating projects, we?re only concerned with the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.? Critically evaluate this statement.

10. Erosion In evaluating the Cayenne, would you consider the possible damage to Porsche?s reputation as erosion?

12. Capital Budgeting In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the Cayenne?

7. Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of $420,000. This cost will be depreciated straight-line to zero over the project?s five-year life, at the end of which the sausage system can be scrapped for $60,000. The sausage system will save the firm $135,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?

8. Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $8,400,000 and will be sold for $1,900,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

10. Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs $270,000, has a three-year life, and has pretax operating costs of $45,000 per year. The Techron II costs $370,000, has a five-year life, and has pretax operating costs of $48,000 per year. For both milling machines, use straight-line depreciation to zero over the project?s life and assume a salvage value of $20,000. If your tax rate is 35 percent and your discount rate is 12 percent, compute the EAC for both machines. Which do you prefer? Why?

12. Comparing Mutually Exclusive Projects Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $360,000, has a four-year life, and requires $105,000 in pretax annual operating costs. System B costs $480,000, has a six year life, and requires $65,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. If the tax rate is 34 percent and the discount rate is 11 percent, which system should the firm choose?

1.Calculating OCF Ranney, Inc., has sales of $14,900, costs of $5,800, depreciation expense of $1,300, and interest expense of $780. If the tax rate is 40 percent, what is the operating cash flow, or OCF? 2. Net Income and OCF During 2010, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $105,000, and $140,000, respectively. In addition, the company had an interest expense of $70,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) 1. What is Raines's net income for 2010? 2. What is its operating cash flow? 3. Explain your results in (a) and (b). 3. Equity Multiplier and Return on Equity Thomsen Company has a debt-equity ratio of .90. Return on assets is 10.1 percent, and total equity is $645,000. What is the equity multiplier? Return on equity? Net income? 4. .EFN The most recent financial statements for Martin, Inc., are shown here: Income Statement Sales $25,800 Costs 16.500 Taxable income $ 9,300 Taxes (34%) 3,162 Net income $ 6,138 Balance Sheet Assets $113,000 Debt $ 20,500 Equity 92,500 Total $113,000 Total $113,000 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,841.40 was paid, and Martin wishes to maintain a constant payout ratio. Next year's sales are projected to be $30,960. What external financing is needed? 5. Sales and Growth: The most recent financial statements for Fontenot Co. are shown here: Income Statement Sales $67,000 Current assets $ 31,000 Long-term debt $ 68,000 Costs 43,800 Fixed assets 118,000 Equity 81,000 Taxable income $23,200 Total $149,000 Total $149,000 Taxes (34%) 7,888 Net income $15,312 Balance Sheet Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained assuming no new equity is issued? 6. Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover = 1.90 Profit margin = 8.1% Equity multiplier = 1.25 Payout ratio = 30% 7. Ratios and Fixed Assets The Le Bleu Company has a ratio of long-term debt to total assets of .40 and a current ratio of 1.30. Current liabilities are $900, sales are $5,320, profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firm's net fixed assets? 8. Calculating the Number of Periods At 9 percent interest, how long does it take to double your money? To quadruple it? 9. Calculating Present Values Imprudential, Inc., has an unfunded pension liability of $750 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.2 percent, what is the present value of this liability? 10. Calculating Rates of Return Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby's sold the Edgar Degas bronze sculpture Petite Danseuse de Quartorze Ans at auction for a price of $10,311,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of $12,377,500. What was his annual rate of return on this sculpture? 11. Calculating Annuity Present Value An investment offers $4,300 per year for 15 years, with the first payment occurring one year from now. If the required return is 9 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever? 19. Calculating Number of Periods One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $600 per month. You will charge .9 percent per month interest on the overdue balance. If the current balance is $18,400, how long will it take for the account to be paid off? 20. Calculating EAR Friendly's Quick Loans, Inc., offers you \"three for four or I knock on your door.\" This means you get $3 today and repay $4 when you get your paycheck in one week (or else). What's the effective annual return Friendly's earns on this lending business? If you were brave enough to ask, what APR would Friendly's say you were paying 23. Calculating Annuities You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25-year withdrawal period? 26. Growing Perpetuities Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $215,000, received two years from today. Subsequent annual cash flows will grow at 4 percent in perpetuity. What is the present value of the technology if the discount rate is 10 percent? 44. Variable Interest Rates A 15-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 13 percent compounded monthly for the first seven years, and 9 percent compounded monthly thereafter, what is the present value of the annuity? 50.Calculating Annuities Due You want to buy a new sports car from Muscle Motors for $65,000. The contract is in the form of a 48-month annuity due at a 6.45 percent APR. What will your monthly payment be? 1. Payback Period and Net Present Value If a project with conventional cash flows has a payback period less than the project's life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project's life, what can you say about the NPV? Explain. 3.Comparing Investment Criteria Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. 1. Payback period. 2. Internal rate of return. 3. Profitability index. 4. Net present value. 5. International Investment Projects In January 2008, automobile manufacturer Volkswagen announced plans to build an automatic transmission and engine plant in South Carolina. Volkswagen apparently felt that it would be better able to compete and create value with U.S.based facilities. Other companies such as Fuji Film and Swiss chemical company Lonza have reached similar conclusions and taken similar actions. What are some of the reasons that foreign manufacturers of products as diverse as automobiles, film, and chemicals might arrive at this same conclusion? 8. Net Present Value The investment in project A is $1 million, and the investment in project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? 11. Net Present Value You are evaluating project A and project B . Project A has a short period of future cash flows, while project B has relatively long future cash flows. Which project will be more sensitive to changes in the required return? Why? 13. Net Present Value It is sometimes stated that \"the net present value approach assumes reinvestment of the intermediate cash flows at the required return.\" Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do the following: a. Calculate the future value (as of the end of the project) of all the cash flows other than the initial outlay assuming they are reinvested at the required return, producing a single future value figure for the project. b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will get the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step. 14. Opportunity Cost In the context of capital budgeting, what is an opportunity cost? 7. Equivalent Annual Cost When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain. 8. Cash Flow and Depreciation \"When evaluating projects, we're only concerned with the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.\" Critically evaluate this statement. 10. Erosion In evaluating the Cayenne, would you consider the possible damage to Porsche's reputation as erosion? 12. Capital Budgeting In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the Cayenne? 7. Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of $420,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $60,000. The sausage system will save the firm $135,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? 8. Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $8,400,000 and will be sold for $1,900,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset? 10. Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs $270,000, has a three-year life, and has pretax operating costs of $45,000 per year. The Techron II costs $370,000, has a five-year life, and has pretax operating costs of $48,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $20,000. If your tax rate is 35 percent and your discount rate is 12 percent, compute the EAC for both machines. Which do you prefer? Why? 12. Comparing Mutually Exclusive Projects Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $360,000, has a four-year life, and requires $105,000 in pretax annual operating costs. System B costs $480,000, has a six year life, and requires $65,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. If the tax rate is 34 percent and the discount rate is 11 percent, which system should the firm choose