FINA 3313 Chapter 9, 10, 11, 12 Anh Nguyen

results from the use of fixed - cost assets or funds to magnify returns to a firm's owners.

Leverage

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

Mutually Exclusive

The "gold standard" of investment criteria refers to:

NPV

Which of the following statements is correct?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.

The primary purpose of capital budgeting is to:

Maximize Shareholders Wealth

Hammond Supplies expects sales of 188,429 units per year with carrying costs of $2.35 per unit and ordering cost of $7 per order. Assuming the level of inventory is stable, what is the optimal average number of units in inventory?

(2x188429x7/2.35)^(1/2) =product product/2= answer

Davis Supply maintains an average inventory of 2,000 dinosaur skulls for sale to filmmakers. The carrying cost per skull per year is estimated to be $150.00 and the fixed order cost is $59. What is the economic order quantity (EOQ)? (Round to the nearest whole number.)

(2x2000x59/150)^(1/2)

What is the profitability index for Project A with a cost of capital of 8%?

1.33

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format with 2 number after the decimal point

103.67

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $475 at the end of the next three years and then $1,987 per year for the three years after that. If the discount rate is 4% then what is the NPV?

1220.19 https://www.calculatestuff.com/financial/npv-calculator

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%.

14.23 Tutor: https://www.chegg.com/homework-help/questions-and-answers/considering-following-three-mutually-exclusive-projects-required-rate-return-three-project-q54389695

Compute the payback period for a project that requires an initial outlay of $248,607 that is expected to generate $40,000 per year for 9 years.

6.22

What is the net effect on a firm's working capital if a new project requires: $38,991 increase in inventory, $31,869 increase in accounts receivable, $35,000.00 increase in machinery, and a $41,802 increase in accounts payable? Round to nearest dollar amount.

29058 Inventory+AR-AP

What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 6.78%?

31745.0136 Returns/(1+Cost of Capital %)^1 Returns/(1+Cost of Capital %)^2 Returns/(1+Cost of Capital %)^3 Sum of All Answers - Costs. Ex: 50,000/(1+.0678)^1 + 50,000/(1+.0678)^2 50,000/(1+.0678)^3 -100,000

Libscomb Technologies' annual sales are $6,467,890 and all sales are made on credit, it purchases $4,009,844 of materials each year (and this is its cost of goods sold). Libscomb also has $576,656 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Period (in days)?

365/Recievables Turnover

What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?

5.47% Formula:

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

A decrease in the fixed costs

Carlisle Transport had $4,601 cash at the beginning of the period. During the period, the firm collected $1,736 in receivables, paid $2,108 to supplier, had credit sales of $5,516, and incurred cash expenses of $500. What was the cash balance at the end of the period?

Add or subtract everything as required except anything that includes the word credit

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

Any Opportunity Costs related to the project

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 44.77% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,171,567. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places.

Breakeven sales = Fixed costs/CM ratio (decimal format) = 450000/(1-10%)

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $583,829. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.

CM: Sales*(1-variable costs (decimal format) CM-Fixed Costs=EBIT EBIT-Interest expense=EBT DFL=EBIT/EBT

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $505,821 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places.

CM: Sales*(1-variable costs (decimal format) CM-Fixed Costs=EBIT EBIT-Interest expense=EBT DTL=CM/EBT

Libscomb Technologies' annual sales are $5,743,433 and all sales are made on credit, it purchases $3,264,231 of materials each year (and this is its cost of goods sold). Libscomb also has $530,170 of inventory, $511,409 of accounts receivable, and $477,077 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Turnover?

COGS/Inventory

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $436,330. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places.

DOL = (Sales - Variable cost) / (Sales - variable cost - fixed cost)

What types of analyses do the BNSF strategic studies team conduct?

Discounted Cash Flow Sensitivity

What types of projects does the BNSF strategic studies team evaluate?

Discretionary

What are advantages of payback period?

Does not require discount rate Does not require complex calculations Measures Liquidity, Easy to communicate

Mavericks Cosmetics buys $4,100,531 of product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year?

Effective cost of trade credit = [(1+(Discount rate/(1-Discount rate)))^(Total days/(Net days-Discount days)) -1]

T/F: It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent

False

T/F: NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital

False

T/F: Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.

False

The financing decision

Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations

Capital Budgeting Process

Five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up

The Dividend Decision

If you can't find investments that make your minimum acceptable rate, return cash to the owners of the business

According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?

Increase Bank Executive Turnover

Generally, increases in leverage result in

Increased and Increased

Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount.

Initial Investment in the Product = Plant and Equipment Cost + Investment in Working Capital = 40000 + 40000(first year revenues)*.2 = 57000 Plug https://www.calculatestuff.com/financial/irr-calculator

Libscomb Technologies' annual sales are $6,283,181 and all sales are made on credit, it purchases $4,321,249 of materials each year (and this is its cost of goods sold). Libscomb also has $532,433 of inventory, $538,208 of accounts receivable, and $499,704 of accounts payable. Assume a 365 day year. What is Libscomb's Operating Cycle (in days)?

Inv Turnover= COG/Inventory Recievable Turnover= Credit Sales/ Recievables Days of Inventory on Hand= #of days/inv turnover Days of Sales Outstanding= 365/recievable turnover Operating Cycle= Days of Inv+ Days of Sales Oustanding

Libscomb Technologies' annual sales are $5,273,466 and all sales are made on credit, it purchases $3,544,247 of materials each year (and this is its cost of goods sold). Libscomb also has $588,508 of inventory, $569,267 of accounts receivable, and beginning and ending of year $486,987 and $454,375 accounts payables (respectively). Assume a 365 day year. What is Libscomb's Cash Cycle (in days)?

Inventory Turnover= COGs/Inventory Days Of Inventory= #of days/inv turnover Receivables = Credit Sales/ Recievables Day of Sales= #of days/ Receivable turnover Accts Payable= Purchase/Payables Days of Payables=#of days/ ACCTS payable Operating Cycle= Days of Inventory+Day of Sales Cash Cycle= Operating Cycle- Days of Payable Outstanding

The disadvantages of the IRR period method is that it

Only works for normal cash flows Requires a lot of data (estimates of all CFs) Requires complex calculations

What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?

PV of Outflows= Annual Cost+Annual Expense/capital^year+annual expense/capital^year+annual expense Capital In Outflows is denoted as 10%=1.1, 20%=1.2 EAC= PV outflow*Capital/[1-(1+cost of capital)^-time Capital in EAC is denoted as 10%=.1, 20%=1.2

Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as

Regulatory Compliance a balancing act that requires careful evaluation of the costs and benefits of each project

Which of the following statements is correct for a project with a negative NPV?

The cost of capital exceeds the IRR

All sales are credit sales with 40% collected in the month of sale, 50% collected the following month, and the remainder collected in the second month after the sale. Credit purchases are paid in 30 days and all other items require immediate payment. Compute the net cash inflow for March.

Sales collected = 40% of March sales + 50% of February sales + remain percent (10%) of January Cash out flows in March: Purchases on Trade credit for Feb = $240,000 + Cash Expenses MAR = $94,000 + Taxes, interest and dividends MAR = $41,000 + Capital expenditures MAR = $25,000 Net Cash outflows MAR = $400,000 Net Cash inflows (sales-cash outflows) = 393120.8 - 400,000 = -$10,439.6

T/F: The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0

True

T/F: The multiple IRR problem occurs when the signs of a project's cash flows change more than once.

True

Mahrouq Technologies buys $13,431,550 of materials (net of discounts) on terms of 4/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit.

[ Discount% / (1 - Discount%) ] * [ 365 / (Total period - Discount period)]

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

deemphasizing that variable as a critical factor.

The degree of operating leverage has which of the following characteristics?

he DOL relates the change in sales to the change in net operating income.

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs.

The investment decision

invest in assets that earn a return greater than the minimum acceptable hurdle rate

Identify which of these are the relevant cash flows when considering a capital budgeting project.

lost rent from retail facility remodeling expenses for new store increase in inventory expected salvage value of manufacturing equipment

In theory, a firm should maintain financial leverage consistent with a capital structure tha

maximizes the owner's wealth

What is the amount of the operating cash flow for a firm with $378,840 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

profit*(1-marginal tax rate decimal format)+depreciation expense