FINA 355 Final Exam

You have just started a new job and plan to save $4,450 per year for 39 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 10.59 percent?

FV = $4,450[1.105939 − 1)/.1059] = $2,087,993.51 N=39 I/Y=10.59 PV=0 PMT= -4450 FV=?

You have just started a new job and plan to save $5,250 per year for 35 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 9.47 percent?

FV = $5,250[1.094735 − 1)/.0947] = $1,260,205.98 Enter359.47% −$5,250 N 35 I/Y 9.47 PV 0 PMT -5250 Solve for FV = $1,260,205.9835

Footsteps Co. has a bond outstanding with a coupon rate of 5.5 percent and annual payments. The bond currently sells for $919.81, matures in 11 years, and has a par value of $1,000. What is the YTM of the bond?

YTM = .0655, or 6.55% N= 11 I/Y= ? PV= 919.81 PMT= 55 FV= 1000

Gateway Communications is considering a project with an initial fixed assets cost of $1.47 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $248,000. The project will not change sales but will reduce operating costs by $415,000 per year. The tax rate is 40 percent and the required return is 12.3 percent. The project will require $56,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Year 0 CF = −$1,470,000 − 56,000 Year 0 CF = −$1,526,000 OCF = $415,000(1 − .40) + .40($1,470,000/9) OCF = $314,333 Year 9 CF (w/o OCF) = $56,000 + 248,000(1 − .40) Year 9 CF (w/o OCF) = $204,800 NPV = −$1,526,000 + 314,333(PVIFA12.3%,9) + 204,800/1.1239 NPV = $202,014

Gateway Communications is considering a project with an initial fixed assets cost of $1.49 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $246,000. The project will not change sales but will reduce operating costs by $411,000 per year. The tax rate is 34 percent and the required return is 12.1 percent. The project will require $55,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Year 0 CF = −$1,490,000 − 55,000 Year 0 CF = −$1,545,000 OCF = $411,000(1 − .34) + .34($1,490,000/9) OCF = $327,549 Year 9 CF (w/o OCF) = $55,000 + 246,000(1 − .34) Year 9 CF (w/o OCF) = $217,360 NPV = −$1,545,000 + 327,549(PVIFA12.1%,9) + 217,360/1.1219 NPV = $271,403

Gateway Communications is considering a project with an initial fixed assets cost of $1.58 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $237,000. The project will not change sales but will reduce operating costs by $393,000 per year. The tax rate is 34 percent and the required return is 11.2 percent. The project will require $50,500 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Year 0 CF = −$1,580,000 − 50,500 Year 0 CF = −$1,630,500 OCF = $393,000(1 − .34) + .34($1,580,000/9) OCF = $319,069 Year 9 CF (w/o OCF) = $50,500 + 237,000(1 − .34) Year 9 CF (w/o OCF) = $206,920 NPV = −$1,630,500 + 319,069(PVIFA11.2%,9) + 206,920/1.1129 NPV = $202,140

Which one of these represents the best means of increasing current shareholder value?

Increasing the current value of the overall firm

Mario's Home Systems has sales of $2,780, costs of goods sold of $2,120, inventory of $496, and accounts receivable of $426. How many days, on average, does it take Mario's to sell its inventory?

Inventory turnover = $2,120/$496 = 4.2742 Days' sales in inventory = 365 days/4.2742 = 85.40 days

Mario's Home Systems has sales of $2,790, costs of goods sold of $2,130, inventory of $498, and accounts receivable of $427. How many days, on average, does it take Mario's to sell its inventory?

Inventory turnover = $2,130/$498 = 4.2771 Days' sales in inventory = 365 days/4.2771 = 85.34 days

Mario's Home Systems has sales of $2,800, costs of goods sold of $2,140, inventory of $500, and accounts receivable of $428. How many days, on average, does it take Mario's to sell its inventory?

Inventory turnover = $2,140/$500 = 4.2800 Days' sales in inventory = 365 days/4.2800 = 85.28 days

If a project has a net present value equal to zero, then:

any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

Sensitivity analysis is primarily designed to determine the:

degree to which the net present value reacts to changes in a single variable.

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

depreciation tax shield.

An annuity stream of cash flow payments is a set of:

equal cash flows occurring at equal periods of time over a fixed length of time.

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as:

erosion costs.

An investor purchases a zero coupon bond with 19 years to maturity at a price of $357.74. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

first 19 x 2 n, 357.74 pv, 0 pmt, -1000 fv, Solve for I/Y= 2.74% second: 19 x 2 - 2 n, 2.74% I/Y, 0 pmt, -1000 fv, Solve for PV =$377.63 then: $377.63 − 357.74 = $19.89 (answer)

A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n):

growing perpetuity.

Assume you use all available methods to evaluate projects. If there is a conflict in the indicated accept/reject decision between two mutually exclusive projects due to the IRR-based indicator, you should:

ignore the IRR and rely on the decision indicated by the NPV method.

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

incremental

The Sarbanes-Oxley Act requires public corporations to:

list any deficiencies in internal controls.

Ratios that measure a firm's financial leverage are known as ________ ratios.

long-term solvency

An upward-sloping term structure of interest rates indicates that:

longer-term rates are higher than shorter-term rates.

Financial managers should primarily strive to:

maximize the current value per share of existing stock.

As the degree of sensitivity of a project to a single variable rises, the:

more attention management should place on accurately forecasting that variable.

The long-term debt ratio is probably of most interest to a firm's:

mortgage holder.

Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either project, you should rely most heavily on the _____ method of analysis.

net present value

One intent of the Sarbanes Oxley Act of 2002 is to:

protect investors from corporate abuses.

The net present value method of capital budgeting analysis does all of the following except:

provide a specific anticipated rate of return.

Net present value:

provides the means for considering the risks associated with a specific project.

The term structure of interest rates reflects the:

pure time value of money.

A cost that has already been paid, or a liability to pay that has already been incurred, is classified as a(n):

sunk cost.

All else constant, the net present value of a typical investment project increases when:

the required rate of return decreases.

When a firm commences a positive net present value project, you know:

the stockholders' value in the firm is expected to increase.

If a project is assigned a required rate of return of zero, then:

the timing of the project's cash flows has no bearing on the value of the project.

A financial manager should make decisions based on:

the welfare of the current shareholders.

Which form of business structure typically has the greatest potential for agency problems?

Corporation

Footsteps Co. has a bond outstanding with a coupon rate of 5.4 percent and annual payments. The bond currently sells for $1,007.49, matures in 18 years, and has a par value of $1,000. What is the YTM of the bond?

$1,007.49 = $54{[1 − 1/(1 + YTM)18]/YTM} + $1,000/(1 + YTM)18 YTM = .0533, or 5.33% N=18 I/Y=? PV=-1007.49 PMT=54 FV=1000

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.1 percent. The bond sells for $1,008.82 and matures in 17 years. The par value is $1,000. What is the YTM of the bond?

$1,008.82 = $30.50{[1 − 1/(1 + r)34]/r} + $1,000/(1 + r)34 r = .0301, or 3.01% YTM = 3.01% × 2 = 6.02% N=17x2 I/Y=? 3.01 PV=-1008.82 PMT=30.50 FV=1000

Footsteps Co. has a bond outstanding with a coupon rate of 5.5 percent and annual payments. The bond currently sells for $1,043.27, matures in 19 years, and has a par value of $1,000. What is the YTM of the bond?

$1,043.27 = $55{[1 − 1/(1 + YTM)19]/YTM} + $1,000/(1 + YTM)19 YTM = .0514, or 5.14% N=19 I/y=? 5.14 PV= -1,043.27 PMT=55 FV=1000

Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and semiannual payments. The bond currently sells for $1,856 and matures in 22 years. The par value is $2,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?

$1,856 = $66.00{1 − [1/(1 + R)44]}/R + $2,000/R44 R = .0363, or 3.63% YTM = 3.630% × 2 YTM = 7.26% RD = 7.26%(1 − .39) RD = 4.43% Calculator: 44 N −$1,856 PV $66.00 PMT $2,000 FV Solve for I/Y; 3.63% 3.630% × 2 = 7.26% 7.26%(1 − .39) RD = 4.43%

Galvatron Metals has a bond outstanding with a coupon rate of 6.8 percent and semiannual payments. The bond currently sells for $1,884 and matures in 18 years. The par value is $2,000 and the company's tax rate is 40 percent. What is the company's aftertax cost of debt?

$1,884 = $68.00{1 − [1/(1 + R)36]}/R + $2,000/R36 R = .0369, or 3.69% YTM = 3.690% × 2 YTM = 7.39% RD = 7.39%(1 − .40) RD = 4.43%

Galvatron Metals has a bond outstanding with a coupon rate of 6.8 percent and semiannual payments. The bond currently sells for $1,884 and matures in 18 years. The par value is $2,000 and the company's tax rate is 40 percent. What is the company's aftertax cost of debt?

$1,884 = $68.00{1 − [1/(1 + R)36]}/R + $2,000/R36 R = .0369, or 3.69% YTM = 3.690% × 2 YTM = 7.39% RD = 7.39%(1 − .40) RD = 4.43% N=36 I/Y=? 3.69 PV=-1884 PMT=68 FV=2000

Galvatron Metals has a bond outstanding with a coupon rate of 5.8 percent and semiannual payments. The bond currently sells for $1,954 and matures in 22 years. The par value is $2,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt?

$1,954 = $58.00{1 − [1/(1 + R)44]}/R + $2,000/R44 R = .0299, or 2.99% YTM = 2.990% × 2 YTM = 5.99% RD = 5.99%(1 − .35) RD = 3.89% N=44 I/Y=? 2.99 PV=-1,954 Pmt=58 fv=2000

An investor purchases a zero coupon bond with 15 years to maturity at a price of $434.26. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

$24.83

You have decided to buy a car that costs $25,800. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.01 percent compounded monthly for 6 years with the first monthly payment due today. What is the amount of your loan payment?

$25,800 = C(1 + .0601/12)[(1 −1/(1 + .0601/12)6)/(.0601/12)] C = $425.57 2nd BGN 2nd SET N=72 I/Y=6.01%/12 PV=-25,800 PMT=? =425.57 FV=0

You have decided to buy a car that costs $26,600. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.05 percent compounded monthly for 5 years with the first monthly payment due today. What is the amount of your loan payment?

$26,600 = C(1 + .0605/12) [(1 −1/(1 + .0605/12)^5)/(.0605/12)] C = $512.29 2nd BGN 2nd SET N=60 I/Y=6.05%/12 PV=-26,000 PMT=? 512.29 FV=0

You have decided to buy a car that costs $28,600. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.15 percent compounded monthly for 7 years with the first monthly payment due today. What is the amount of your loan payment?

$28,600 = C(1 + .0615/12)[(1 −1/(1 + .0615/12)7)/(.0615/12)] C = $417.72 2nd BGN 2nd SET N=84 I/Y=6.15/12 PV=-28,600 PMT= ? 417.72 FV=0

An investor purchases a zero coupon bond with 24 years to maturity at a price of $285.95. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

$285.95 = $1,000/(1 + r)48r = .0264, or 2.64% YTM = 2.64% × 2 = 5.29% PV = $1,000/(1 + .0264)46 = $301.26 Implicit interest = $301.26 − 285.95 = $15.31

You have decided to buy a car that costs $32,200. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.33 percent compounded monthly for 7 years with the first monthly payment due today. What is the amount of your loan payment?

$32,200 = C(1 + .0633/12)[(1 −1/(1 + .0633/12)7)/(.0633/12)] C = $473.01 2nd BGN 2nd SET N=84 I/Y=6.33/12 PV= -32,200 PMT=? 473.01 FV=0

An investor purchases a zero coupon bond with 14 years to maturity at a price of $456.75. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

$456.75 = $1,000/(1 + r)28 r = .0284, or 2.84% YTM = 2.84% × 2 = 5.68% PV = $1,000/(1 + .0284)26 = $483.04 Implicit interest = $483.04 − 456.75 = $26.29 Calculator: 28 N, 456.75 PV, 0 PMT, -1000 FV, SOLVE FOR I/Y = 2.84% 26 N, 2.84% I/Y, 0 PMT, -1000 FV, SOLVE FOR PV = $483.04 483.04-456.75 = $26.29

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 5.1 percent. The bond sells for $942.01 and matures in 15 years. The par value is $1,000. What is the YTM of the bond?

$942.01 = $25.50{[1 − 1/(1 + r)30]/r} + $1,000/(1 + r)30 r = .0284, or 2.84% YTM = 2.84% × 2 = 5.68% N=15x2 I/Y=? 2.84 PV=-942.01 PMT= 25.50 FV=1000

Galvatron Metals has a bond outstanding with a coupon rate of 5.7 percent and semiannual payments. The bond currently sells for $943 and matures in 19 years. The par value is $1,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?

$943 = $28.50{1 − [1/(1 + R)^38]}/R + $1,000/R^38 R = .0311, or 3.11% YTM = 3.110% × 2 YTM = 6.22% RD = 6.22%(1 − .39) RD = 3.79% N=38 I/Y=? 3.11 PV=-943 PMT=28.50 FV=1000

Galvatron Metals has a bond outstanding with a coupon rate of 5.8 percent and semiannual payments. The bond currently sells for $944 and matures in 20 years. The par value is $1,000 and the company's tax rate is 40 percent. What is the company's aftertax cost of debt?

$944 = $29.00{1 − [1/(1 + R)40]}/R + $1,000/R40 R = .0315, or 3.15% YTM = 3.150% × 2 YTM = 6.30% RD = 6.30%(1 − .40) RD = 3.78%

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 5.2 percent. The bond sells for $945.32 and matures in 16 years. The par value is $1,000. What is the YTM of the bond?

$945.32 = $26.00{[1 − 1/(1 + r)32]/r} + $1,000/(1 + r)32 r = .0286, or 2.86% YTM = 2.86% × 2 = 5.73% N=16x2 I/y=? 2.68 PV= -945.32 PMT= 26 FV= 1000

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.2 percent. The bond sells for $978.42 and matures in 24 years. The par value is $1,000. What is the YTM of the bond?

$978.42 = $31.00{[1 − 1/(1 + r)48]/r} + $1,000/(1 + r)48 r = .0319, or 3.19% YTM = 3.19% × 2 = 6.38% Calculator: 24 x 2 N −$978.42 PV $31.00 PMT 1000 FV Solve for I/Y = 3.19% 3.19% × 2 = 6.38%

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.20 Variable costs per abalone = $10.55 Fixed costs per year = $442,000 Depreciation per year = $132,000 Tax rate = 22% The discount rate for the company is 14 percent, the initial investment in equipment is $924,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

.a.Accounting break-even level 17,580.40units b.Financial break-even level 20,857.96units

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $743,600. What is the internal rate of return of this project?

0 = −$743,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1211, or 12.11%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $744,600. What is the internal rate of return of this project?

0 = −$744,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1204, or 12.04%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $745,600. What is the internal rate of return of this project?

0 = −$745,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1198, or 11.98%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $747,600. What is the internal rate of return of this project?

0 = −$747,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1186, or 11.86%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $749,600. What is the internal rate of return of this project?

0 = −$749,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1173, or 11.73%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $752,600. What is the internal rate of return of this project?

0 = −$752,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1155, or 11.55%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $759,600. What is the internal rate of return of this project?

0 = −$759,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)^2 + $237,600/(1 + IRR)^3 + $274,800/(1 + IRR)^4 IRR = .1112, or 11.12%

A project will generate annual cash flows of $237,500 for each of the next three years, and a cash flow of $274,300 during the fourth year. The initial cost of the project is $765,800. What is the internal rate of return of this project?

0 = −$765,800 + $237,500/(1 + IRR) + $237,500/(1 + IRR)^2 + $237,500/(1 + IRR)^3 + $274,300/(1 + IRR)^4 IRR = .1072, or 10.72%

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $746,600. What is the internal rate of return of this project?

11.92%

Your grandparents would like to establish a trust fund that will pay you and your heirs $200,000 per year forever with the first payment 11 years from today. If the trust fund earns an annual return of 3.9 percent, how much must your grandparents deposit today?

10 n 3.9 I/Y 0 pmt $200,000/.039 fv solve for pv = $3,497,920.33

Your grandparents would like to establish a trust fund that will pay you and your heirs $170,000 per year forever with the first payment 12 years from today. If the trust fund earns an annual return of 3.3 percent, how much must your grandparents deposit today?

11 N 3.3 I/Y 0 PMT $170,000/.033 FV Solve for PV = $3,604,387.25

An investor purchases a zero coupon bond with 22 years to maturity at a price of $311.99. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

16.96

Footsteps Co. has a bond outstanding with a coupon rate of 5.3 percent and annual payments. The bond currently sells for $1,008.47, matures in 17 years, and has a par value of $1,000. What is the YTM of the bond?

17 N −$1,008.47 PV $53 PMT 1000 FV Solve for I/Y = 5.22%

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.5 percent. The bond sells for $1,055.02 and matures in 21 years. The par value is $1,000. What is the YTM of the bond?

21 x 2 n −$1,055.02 pv $32.50 pmt $1,000 fv solve for i/y = 3.02% 3.02 x 2 = 6.03 (answer)

An investor purchases a zero coupon bond with 16 years to maturity at a price of $455.67. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

22.94

You have decided to buy a car that costs $28,200. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.13 percent compounded monthly for 6 years with the first monthly payment due today. What is the amount of your loan payment?

2nd BGN 2nd SET 6 x 12 = N 6.13/12 = I/Y -28200 = PV 0 = FV Solve for PMT = $466.70

Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $11,000 per month for the next 7 years with the first payment due today. If the APR is 6.12 percent compounded monthly, what is the value of the payments today?

2nd BGN 2nd SET 84 N .51% I/Y -11000 PMT Solve for PV = $753,851.54

Galvatron Metals has a bond outstanding with a coupon rate of 6.4 percent and semiannual payments. The bond currently sells for $1,912 and matures in 16 years. The par value is $2,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt?

32 N −$1,912 PV 64 PMT 2000 FV solve for I/Y = 3.43% next: YTM = 3.430% × 2 YTM = 6.86% RD = 6.86%(1 − .35) RD = 4.46%

Your parents are giving you $200 a month for 4 years while you are in college. At an interest rate of .47 percent per month, what are these payments worth to you when you first start college?

4 x 12 N .47% I/Y -200 PMT 0 FV Solve for PV = $8,576.21

Galvatron Metals has a bond outstanding with a coupon rate of 6.5 percent and semiannual payments. The bond currently sells for $951 and matures in 23 years. The par value is $1,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt?

4.50%

Whatever, Inc., has a bond outstanding with a coupon rate of 5.76 percent and semiannual payments. The yield to maturity is 6.3 percent and the bond matures in 21 years. What is the market price if the bond has a par value of $1,000?

42 N 6.3/2% I/Y -28.80 PMT -1000 FV Solve for PV = $937.59

Whatever, Inc., has a bond outstanding with a coupon rate of 5.84 percent and semiannual payments. The yield to maturity is 6.1 percent and the bond matures in 25 years. What is the market price if the bond has a par value of $1,000?

50 n 6.1/2 I/Y −$29.20 pmt -1000 fv Solve for pv = $966.87

During the past year, a company had cash flow to creditors, an operating cash flow, and net capital spending of $28,896, $63,663, and $25,360, respectively. The net working capital at the beginning of the year was $11,047 and it was $12,400 at the end of the year. What was the company's cash flow to stockholders during the year?

8,054 Change in NWC = $12,400 − 11,047 = $1,353 CFA = $63,663 − 25,360 − 1,353 = $36,950 Cash flow to stockholders = $36,950 − 28,896 = $8,054

Mario's Home Systems has sales of $2,870, costs of goods sold of $2,210, inventory of $514, and accounts receivable of $435. How many days, on average, does it take Mario's to sell its inventory?

84.89 days

Which one of the following actions by a financial manager creates an agency problem?

Agreeing to expand the company at the expense of stockholders' value

Guerilla Radio Broadcasting has a project available with the following cash flows : Year,Cash Flow: 0: −$13,600 1: 5,600 2: 6,900 3: 6,300 4: 4,700 What is the payback period?

Amount short after 2 years = $13,600 − 5,600 − 6,900 Amount short after 2 years = $1,100 Payback period = 2 + $1,100/$6,300 Payback period = 2.17 years

Guerilla Radio Broadcasting has a project available with the following cash flows : Year Cash Flow 0−$15,200 1-6,300 2-7,600 3-4,700 4-4,300 What is the payback period?

Amount short after 2 years = $15,200 − 6,300 − 7,600 Amount short after 2 years = $1,300 Payback period = 2 + $1,300/$4,700 Payback period = 2.28 years

Guerilla Radio Broadcasting has a project available with the following cash flows : Year, Cash Flow: 0: −$17,200 1: 7,100 2: 8,400 3: 3,100 4: 2,700 What is the payback period?

Amount short after 2 years = $17,200 − 7,100 − 8,400 Amount short after 2 years = $1,700 Payback period = 2 + $1,700/$3,100 Payback period = 2.55 years

Guerilla Radio Broadcasting has a project available with the following cash flows : YearCash Flow 0−$17,600 1-7,300 2-8,600 3-2,700 4-2,300 What is the payback period?

Amount short after 2 years = $17,600 − 7,300 − 8,600 Amount short after 2 years = $1,700 Payback period = 2 + $1,700/$2,700 Payback period = 2.63 years

There is a project with the following cash flows : Year Cash Flow 0−$23,500 1-6,900 2-7,650 3-7,050 4-5,000

Amount short after 3 years = $23,500 − 6,900 − 7,650 − 7,050 Amount short after 3 years = $1,900 Payback period = 3 + $1,900/$5,000 Payback period = 3.38 years

There is a project with the following cash flows : Year, Cash Flow 0: −$26,100 1: 7,700 2: 8,050 3: 7,450 4: 5,800 What is the payback period?

Amount short after 3 years = $26,100 − 7,700 − 8,050 − 7,450 Amount short after 3 years = $2,900 Payback period = 3 + $2,900/$5,800 Payback period = 3.50 years

Beatrice invests $1,300 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?

Balance Year 4 with simple interest = $1,300 + ($1,300 × 0.03 × 4) = $1,456.00 Balance Year 4 with compound interest = $1,300 × 1.03^4 = $1,463.16 Additional interest = $1,463.16 - 1,456.00 = $7.16

Beatrice invests $1,290 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

Balance Year 5 with simple interest = $1,290 + ($1,290 × 0.04 × 5) = $1,548.00 Balance Year 5 with compound interest = $1,290 × 1.04^5 = $1,569.48 Additional interest = $1,569.48 - 1,548.00 = $21.48

Beatrice invests $1,320 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

Balance Year 5 with simple interest = $1,320 + ($1,320 × 0.04 × 5) = $1,584.00 Balance Year 5 with compound interest = $1,320 × 1.04^5 = $1,605.98 Additional interest = $1,605.98 - $1,584.00 = $21.98

Beatrice invests $1,420 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

Balance Year 5 with simple interest = $1,420 + ($1,420 × 0.04 × 5) = $1,704.00 Balance Year 5 with compound interest = $1,420 × 1.04^5 = $1,727.65 Additional interest = $1,727.65 - 1,704.00 = $23.65

Beatrice invests $1,460 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,460 + ($1,460 × 0.05 × 6) = $1,898.00 Balance Year 6 with compound interest = $1,460 × 1.056 = $1,956.54 Additional interest = $1,956.54 - 1,898.00 = $58.54

Beatrice invests $1,280 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,280 + ($1,280 × 0.05 × 6) = $1,664.00 Balance Year 6 with compound interest = $1,280 × 1.05^6 = $1,715.32 Additional interest = $1,715.32 - 1,664.00 = $51.32

Beatrice invests $1,370 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,370 + ($1,370 × 0.05 × 6) = $1,781.00 Balance Year 6 with compound interest = $1,370 × 1.056 = $1,835.93 Additional interest = $1,835.93 - 1,781.00 = $54.93

Beatrice invests $1,400 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,400 + ($1,400 × 0.05 × 6) = $1,820.00 Balance Year 6 with compound interest = $1,400 × 1.05^6 = $1,876.13 Additional interest = $1,876.13 - $1,820.00 = $56.13

Beatrice invests $1,430 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,430 + ($1,430 × 0.05 × 6) = $1,859.00 Balance Year 6 with compound interest = $1,430 × 1.05^6 = $1,916.34 Additional interest = $1,916.34 - 1,859.00 = $57.34

Beatrice invests $1,460 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

Balance Year 6 with simple interest = $1,460 + ($1,460 × 0.05 × 6) = $1,898.00 Balance Year 6 with compound interest = $1,460 × 1.05^6 = $1,956.54 Additional interest = $1,956.54 - 1,898.00 = $58.54

Pear Orchards is evaluating a new project that will require equipment of $215,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $45,000. However, the company plans to keep the equipment for a different project in another state. The tax rate is 39 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $215,000 − 215,000(.2000 + .3200 + .1920 + .1152) Book value = $37,152 Tax refund (due) = ($37,152 − 45,000)(.39) Tax refund (due) = −$3,061 Aftertax salvage value = 45,000 − 3,061 Aftertax salvage value = $41,939

Pear Orchards is evaluating a new project that will require equipment of $223,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $50,200. However, the company plans to keep the equipment for a different project in another state. The tax rate is 35 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $223,000 − 223,000(.2000 + .3200 + .1920 + .1152) Book value = $38,534 Tax refund (due) = ($38,534 − 50,200)(.35) Tax refund (due) = −$4,083 Aftertax salvage value = 50,200 − 4,083 Aftertax salvage value = $46,117

Pear Orchards is evaluating a new project that will require equipment of $225,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $51,500. However, the company plans to keep the equipment for a different project in another state. The tax rate is 40 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $225,000 − 225,000(.2000 + .3200 + .1920 + .1152) Book value = $38,880 Tax refund (due) = ($38,880 − 51,500)(.40) Tax refund (due) = −$5,048 Aftertax salvage value = 51,500 − 5,048 Aftertax salvage value = $46,452

Pear Orchards is evaluating a new project that will require equipment of $251,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $68,400. However, the company plans to keep the equipment for a different project in another state. The tax rate is 34 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $251,000 − 251,000(.2000 + .3200 + .1920 + .1152) Book value = $43,373 Tax refund (due) = ($43,373 − 68,400)(.34) Tax refund (due) = −$8,509 Aftertax salvage value = 68,400 − 8,509 Aftertax salvage value = $59,891

Pear Orchards is evaluating a new project that will require equipment of $259,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $73,600. However, the company plans to keep the equipment for a different project in another state. The tax rate is 35 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $259,000 − 259,000(.2000 + .3200 + .1920 + .1152) Book value = $44,755 Tax refund (due) = ($44,755 − 73,600)(.35) Tax refund (due) = −$10,096 Aftertax salvage value = 73,600 − 10,096 Aftertax salvage value = $63,504

Pear Orchards is evaluating a new project that will require equipment of $263,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $76,200. However, the company plans to keep the equipment for a different project in another state. The tax rate is 35 percent. What aftertax salvage value should the company use when evaluating the current project?

Book value = $263,000 − 263,000(.2000 + .3200 + .1920 + .1152) Book value = $45,446 Tax refund (due) = ($45,446 − 76,200)(.35) Tax refund (due) = −$10,764 Aftertax salvage value = 76,200 − 10,764 Aftertax salvage value = $65,436

At the beginning of the year, long-term debt of a firm is $278 and total debt is $324. At the end of the year, long-term debt is $254 and total debt is $334. The interest paid is $20. What is the amount of the cash flow to creditors?

CFC = $20 - ($254 - 278) = $44

Peggy Grey's Cookies has net income of $320. The firm pays out 37 percent of the net income to its shareholders as dividends. During the year, the company sold $77 worth of common stock. What is the cash flow to stockholders?

CFS = (0.37 × $320) - $77 = $41.40

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?

Cash coverage ratio

Rousey, Inc., had a cash flow to creditors of $16,425 and a cash flow to stockholders of $6,803 over the past year. The company also had net fixed assets of $49,405 at the beginning of the year and $56,770 at the end of the year. Additionally, the company had a depreciation expense of $11,964 and an operating cash flow of $50,332. What was the change in net working capital during the year?

Cash flow from assets = $16,425 + 6,803 = $23,228 Net capital spending = $56,770 − 49,405 + 11,964 = $19,329 Change in net working capital = $50,332 − 19,329 − 23,228 = $7,775

Rousey, Inc., had a cash flow to creditors of $16,875 and a cash flow to stockholders of $7,433 over the past year. The company also had net fixed assets of $49,655 at the beginning of the year and $57,070 at the end of the year. Additionally, the company had a depreciation expense of $12,204 and an operating cash flow of $51,002. What was the change in net working capital during the year?

Cash flow from assets = $16,875 + 7,433 = $24,308 Net capital spending = $57,070 − 49,655 + 12,204 = $19,619 Change in net working capital = $51,002 − 19,619 − 24,308 = $7,075

Red Barchetta Co. paid $27,500 in dividends and $28,311 in interest over the past year. During the year, net working capital increased from $13,506 to $18,219. The company purchased $42,000 in fixed assets and had a depreciation expense of $16,805. During the year, the company issued $25,000 in new equity and paid off $21,000 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($28,311 + 21,000) + ($27,500 − 25,000) = $51,811

Red Barchetta Co. paid $27,680 in dividends and $28,563 in interest over the past year. During the year, net working capital increased from $13,602 to $18,319. The company purchased $42,440 in fixed assets and had a depreciation expense of $16,985. During the year, the company issued $25,100 in new equity and paid off $21,140 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($28,563 + 21,140) + ($27,680 − 25,100) = $52,283

Red Barchetta Co. paid $27,995 in dividends and $29,004 in interest over the past year. During the year, net working capital increased from $13,770 to $18,494. The company purchased $43,210 in fixed assets and had a depreciation expense of $17,300. During the year, the company issued $25,275 in new equity and paid off $21,385 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($29,004 + 21,385) + ($27,995 − 25,275) = $53,109

Red Barchetta Co. paid $28,085 in dividends and $29,130 in interest over the past year. During the year, net working capital increased from $13,818 to $18,544. The company purchased $43,430 in fixed assets and had a depreciation expense of $17,390. During the year, the company issued $25,325 in new equity and paid off $21,455 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($29,130 + 21,455) + ($28,085 − 25,325) = $53,345

At the beginning of the year, Nothing More, Corp., had a long-term debt balance of $36,429. During the year, the company repaid a long-term loan in the amount of $8,739. The company paid $3,095 in interest during the year, and opened a new long-term loan for $7,785. What was the cash flow to creditors during the year?

Cash flow to creditors = $8,739 + 3,095 − 7,785 = $4,049

Hurricane Industries had a net income of $129,650 and paid 40 percent of this amount to shareholders in dividends. During the year, the company sold $80,250 in new common stock. What was the company's cash flow to stockholders?

Cash flow to stockholders = $129,650(.40) − 80,250 = −$28,390

Hurricane Industries had a net income of $135,400 and paid 45 percent of this amount to shareholders in dividends. During the year, the company sold $84,000 in new common stock. What was the company's cash flow to stockholders?

Cash flow to stockholders = $135,400(.45) − 84,000 = −$23,070

Hurricane Industries had a net income of $138,850 and paid 40 percent of this amount to shareholders in dividends. During the year, the company sold $86,250 in new common stock. What was the company's cash flow to stockholders?

Cash flow to stockholders = $138,850(.40) − 86,250 = −$30,710

At the beginning of the year, Vendors, Inc., had owners' equity of $51,215. During the year, net income was $7,375 and the company paid dividends of $4,915. The company also repurchased $9,365 in equity. What was the cash flow to stockholders for the year?

Cash flow to stockholders = $4,915 + 9,365 = $14,280

At the beginning of the year, Vendors, Inc., had owners' equity of $51,800. During the year, net income was $7,900 and the company paid dividends of $5,200. The company also repurchased $9,800 in equity. What was the cash flow to stockholders for the year?

Cash flow to stockholders = $5,200 + 9,800 = $15,000

Muffy's Muffins had net income of $2,255. The firm retains 70 percent of net income. During the year, the company sold $235 in common stock. What was the cash flow to shareholders?

Cash flow to stockholders = (1 − .70) × $2,255 − 235 = $442

Muffy's Muffins had net income of $2,535. The firm retains 70 percent of net income. During the year, the company sold $475 in common stock. What was the cash flow to shareholders?

Cash flow to stockholders = (1 − .70) × $2,535 − 475 = $286

During the past year, a company had cash flow to creditors, an operating cash flow, and net capital spending of $29,461, $65,633, and $27,060, respectively. The net working capital at the beginning of the year was $11,482 and it was $13,150 at the end of the year. What was the company's cash flow to stockholders during the year?

Change in NWC = $13,150 − 11,482 = $1,668 CFA = $65,633 − 27,060 − 1,668 = $36,905 Cash flow to stockholders = $36,905 − 29,461 = $7,444

During the past year, a company had cash flow to stockholders, an operating cash flow, and net capital spending of $15,141, $35,288, and $14,740, respectively. The net working capital at the beginning of the year was $6,039 and it was $7,130 at the end of the year. What was the company's cash flow to creditors during the year?

Change in NWC = $7,130 − 6,039 = $1,091 CFA = $35,288 − 14,740 − 1,091 = $19,457 Cash flow to creditors = $19,457 − 15,141 = $4,316

During the past year, a company had cash flow to stockholders, an operating cash flow, and net capital spending of $15,480, $36,470, and $15,760, respectively. The net working capital at the beginning of the year was $6,300 and it was $7,580 at the end of the year. What was the company's cash flow to creditors during the year?

Change in NWC = $7,580 − 6,300 = $1,280 CFA = $36,470 − 15,760 − 1,280 = $19,430 Cash flow to creditors = $19,430 − 15,480 = $3,950

A firm has net working capital of $450, net fixed assets of $2,196, sales of $5,600, and current liabilities of $760. How many dollars worth of sales are generated from every $1 in total assets?

Current assets = $450 + 760 = $1,210 Total asset turnover = $5,600/($1,210 + 2,196) = 1.64 Sales generated by $1 in total assets = $1 × 1.64 = $1.64

Which one of these statements is correct concerning the time value of money?

Decreasing the PV decreases the FV.

The stock of Big Joe's has a beta of 1.30 and an expected return of 11.60 percent. The risk-free rate of return is 4.1 percent. What is the expected return on the market?

E(R) = .116 = .041 + 1.30[E(RM) − .041] .075 = 1.30[E(RM) − .041] E(RM) = .0987, or 9.87%

The stock of Big Joe's has a beta of 1.34 and an expected return of 11.80 percent. The risk-free rate of return is 4.3 percent. What is the expected return on the market?

E(R) = .118 = .043 + 1.34[E(RM) − .043] .075 = 1.34[E(RM) − .043] E(RM) = .0990, or 9.90%

The stock of Big Joe's has a beta of 1.40 and an expected return of 12.10 percent. The risk-free rate of return is 4.6 percent. What is the expected return on the market?

E(R) = .121 = .046 + 1.40[E(RM) − .046] .075 = 1.40[E(RM) − .046] E(RM) = .0996, or 9.96%

The stock of Big Joe's has a beta of 1.46 and an expected return of 12.40 percent. The risk-free rate of return is 4.9 percent. What is the expected return on the market?

E(R) = .124 = .049 + 1.46[E(RM) − .049] .075 = 1.46[E(RM) − .049] E(RM) = .1004, or 10.04%

The stock of Big Joe's has a beta of 1.52 and an expected return of 12.70 percent. The risk-free rate of return is 5.2 percent. What is the expected return on the market?

E(R) = .127 = .052 + 1.52[E(RM) − .052] .075 = 1.52[E(RM) − .052] E(RM) = .1013, or 10.13%

The stock of Big Joe's has a beta of 1.54 and an expected return of 12.80 percent. The risk-free rate of return is 5.3 percent. What is the expected return on the market?

E(R) = .128 = .053 + 1.54[E(RM) − .053] .075 = 1.54[E(RM) − .053] E(RM) = .1017, or 10.17%

The stock of Big Joe's has a beta of 1.58 and an expected return of 13.00 percent. The risk-free rate of return is 5.5 percent. What is the expected return on the market?

E(R) = .130 = .055 + 1.58[E(RM) − .055] .075 = 1.58[E(RM) − .055] E(RM) = .1025, or 10.25%

The stock of Big Joe's has a beta of 1.62 and an expected return of 13.20 percent. The risk-free rate of return is 5.7 percent. What is the expected return on the market?

E(R) = .132 = .057 + 1.62[E(RM) − .057] .075 = 1.62[E(RM) − .057] E(RM) = .1033, or 10.33%

A firm has sales of $4,790, costs of $2,590, interest paid of $174, and depreciation of $483. The tax rate is 30 percent. What is the cash coverage ratio?

EBIT = $4,790 - 2,590 - 483 = $1,717 Cash coverage ratio = ($1,717 + 483)/$174 = 12.64 times

A firm has sales of $4,840, costs of $2,640, interest paid of $179, and depreciation of $493. The tax rate is 34 percent. What is the cash coverage ratio?

EBIT = $4,840 - 2,640 - 493 = $1,707 Cash coverage ratio = ($1,707 + 493)/$179 = 12.29 times

A new project has estimated annual sales of 12,000 units, ± 3 percent; variable costs per unit of $11.24, ± 2 percent; annual fixed costs of $38,290, ± 2 percent; and a sales price of $19.65 per unit, ± 4 percent. The annual depreciation is $21,400 and the tax rate is 21 percent. What are the annual earnings before interest and taxes under the optimistic scenario?

EBITOptimistic = 12,000(1.03)[($19.65)(1.04) − ($11.24)(.98)] − ($38,290)(.98) − $21,400 EBITOptimistic = $57,516.89

Jupiter Explorers has $7,800 in sales. The profit margin is 4 percent. There are 6,100 shares of stock outstanding, with a price of $1.80 per share. What is the company's price-earnings ratio?

Earnings per share = ($7,800 × .04)/6,100 = $.05115 Price-earnings ratio = $1.80/$.05115 = 35.19 times

Jupiter Explorers has $8,800 in sales. The profit margin is 4 percent. There are 5,300 shares of stock outstanding, with a price of $1.60 per share. What is the company's price-earnings ratio?

Earnings per share = ($8,800 × .04)/5,300 = $.06642 Price-earnings ratio = $1.60/$.06642 = 24.09 times

Which one of these is most apt to be an agency problem?

Forsaking a profitable project because it involves some risk

Cirice Corp. is considering opening a branch in another state. The operating cash flow will be $164,600 a year. The project will require new equipment costing $610,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $189,000 at the end of the project. The project requires an initial investment of $44,000 in net working capital, which will be recovered at the end of the project. The tax rate is 40 percent. What is the project's IRR?

IRR = 0 = −$610,000 − 44,000 + $164,600(PVIFAIRR,6) + [$44,000 + (1 − .40)($189,000)]/(1 + IRR)6 IRR = 16.90%

An investor purchases a zero coupon bond with 20 years to maturity at a price of $362.94. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

N= 40 I/Y=? 2.57 PV=362.94 PMT=0 FV=-1000 N=38 I/Y=5.13/2 PV=? 381.81 PMT=0 FV=-1000

An investor purchases a zero coupon bond with 21 years to maturity at a price of $342.28. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.

N=42 I/Y=? 2.59% Pv=342.28 PMT=0 FV=-1000 Then N=40 I/Y=5.17%/2 PV=? 360.21 PMT=0 FV=-1000 Implicit interest = $360.21 − 342.28 = $17.93

Wine and Roses, Inc., offers a bond with a coupon of 7.0 percent with semiannual payments and a yield to maturity of 7.89 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?

N=9x2 I/Y=7.82/2 PV=? 943.41 PMT=35 FV=1000

Bruno's Lunch Counter is expanding and expects operating cash flows of $26,100 a year for 4 years as a result. This expansion requires $62,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $3,600 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 12 percent?

NPV = 0 = −$62,000 − 3,600 + 26,100(PVIFA12%,4) + 3,600/1.124NPV = $15,963

Bruno's Lunch Counter is expanding and expects operating cash flows of $25,600 a year for 5 years as a result. This expansion requires $69,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 13 percent?

NPV = 0 = −$69,000 − 5,800 + 25,600(PVIFA13%,5) + 5,800/1.135 NPV = $18,389

Bruno's Lunch Counter is expanding and expects operating cash flows of $24,600 a year for 6 years as a result. This expansion requires $76,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 10 percent?

NPV = 0 = −$76,000 − 6,000 + 24,600(PVIFA10%,6) + 6,000/1.106 NPV = $28,526

Bruno's Lunch Counter is expanding and expects operating cash flows of $25,300 a year for 6 years as a result. This expansion requires $77,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 11 percent?

NPV = 0 = −$77,000 − 6,200 + 25,300(PVIFA11%,6) + 6,200/1.11^6 NPV = $27,147

Bruno's Lunch Counter is expanding and expects operating cash flows of $26,100 a year for 6 years as a result. This expansion requires $91,600 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,400 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 12 percent?

NPV = 0 = −$91,600 − 6,400 + 26,100(PVIFA12%,6) + 6,400/1.126 NPV = $12,550

A firm has a return on equity of 18 percent. The total asset turnover is 1.7 and the profit margin is 6 percent. The total equity is $7,200. What is the net income?

Net income = .18 × $7,200 = $1,296

A firm has a return on equity of 18 percent. The total asset turnover is 2.6 and the profit margin is 5 percent. The total equity is $7,800. What is the net income?

Net income = .18 × $7,800 = $1,404

A firm has a return on equity of 19 percent. The total asset turnover is 1.8 and the profit margin is 7 percent. The total equity is $3,700. What is the net income?

Net income = .19 × $3,700 = $703

A firm has a return on equity of 20 percent. The total asset turnover is 1.9 and the profit margin is 8 percent. The total equity is $5,400. What is the net income?

Net income = .20 × $5,400 = $1,080

A firm has a return on equity of 22 percent. The total asset turnover is 2.1 and the profit margin is 5 percent. The total equity is $3,900. What is the net income?

Net income = .22 × $3,900 = $858

A firm has a return on equity of 22 percent. The total asset turnover is 3.0 and the profit margin is 9 percent. The total equity is $4,500. What is the net income?

Net income = .22 × $4,500 = $990

A firm has a return on equity of 24 percent. The total asset turnover is 2.3 and the profit margin is 7 percent. The total equity is $7,600. What is the net income?

Net income = .24 × $7,600 = $1,824

A firm has a return on equity of 24 percent. The total asset turnover is 3.2 and the profit margin is 6 percent. The total equity is $8,200. What is the net income?

Net income = .24 × $8,200 = $1,968

A firm has a return on equity of 25 percent. The total asset turnover is 2.4 and the profit margin is 8 percent. The total equity is $4,100. What is the net income?

Net income = .25 × $4,100 = $1,025

A project is expected to generate annual revenues of $123,300, with variable costs of $76,900, and fixed costs of $17,400. The annual depreciation is $4,200 and the tax rate is 40 percent. What is the annual operating cash flow?

OCF = ($123,300 − 76,900 − 17,400)(1 − .40) + .40($4,200) OCF = $19,080

A project is expected to generate annual revenues of $130,500, with variable costs of $79,600, and fixed costs of $20,100. The annual depreciation is $4,650 and the tax rate is 40 percent. What is the annual operating cash flow?

OCF = ($130,500 − 79,600 − 20,100)(1 − .40) + .40($4,650) OCF = $20,340

A project is expected to generate annual revenues of $131,300, with variable costs of $79,900, and fixed costs of $20,400. The annual depreciation is $4,700 and the tax rate is 34 percent. What is the annual operating cash flow?

OCF = ($131,300 − 79,900 − 20,400)(1 − .34) + .34($4,700) OCF = $22,058

King Nothing is evaluating a new 6-year project that will have annual sales of $425,000 and costs of $293,000. The project will require fixed assets of $525,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 35 percent. What is the operating cash flow for Year 3?

OCF = ($425,000 − 293,000)(1 − .35) + .35(.1920)($525,000) OCF = $121,080

King Nothing is evaluating a new 6-year project that will have annual sales of $455,000 and costs of $311,000. The project will require fixed assets of $555,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 35 percent. What is the operating cash flow for Year 3?

OCF = ($455,000 − 311,000)(1 − .35) + .35(.1920)($555,000) OCF = $130,896

King Nothing is evaluating a new 6-year project that will have annual sales of $475,000 and costs of $323,000. The project will require fixed assets of $575,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 40 percent. What is the operating cash flow for Year 3?

OCF = ($475,000 − 323,000)(1 − .40) + .40(.1920)($575,000)OCF = $135,360

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $1.80 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 15.60 percent on your equity investments?

P = $1.80/.1560 = $11.54

Rock Haven has a proposed project that will generate sales of 1,815 units annually at a selling price of $29 each. The fixed costs are $16,400 and the variable costs per unit are $8.75. The project requires $32,200 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $8,300 and the tax rate is 35 percent. What is the operating cash flow?

OCF = [1,815($29 − 8.75) − $16,400](1 − .35) + .35($32,200/4) OCF = $16,047

Rock Haven has a proposed project that will generate sales of 1,890 units annually at a selling price of $34 each. The fixed costs are $18,900 and the variable costs per unit are $10.75. The project requires $35,200 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $9,300 and the tax rate is 34 percent. What is the operating cash flow?

OCF = [1,890($34 − 10.75) − $18,900](1 − .34) + .34($35,200/4)OCF = $19,520

Rock Haven has a proposed project that will generate sales of 1,920 units annually at a selling price of $36 each. The fixed costs are $19,900 and the variable costs per unit are $11.55. The project requires $36,400 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $9,700 and the tax rate is 40 percent. What is the operating cash flow?

OCF = [1,920($36 − 11.55) − $19,900](1 − .40) + .40($36,400/4) OCF = $19,866

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 13.70 percent on your equity investments?

P = $2.00/.1370 = $14.60

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.60 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 13.80 percent on your equity investments?

P = $2.60/.1380 = $18.84

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.70 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 12.70 percent on your equity investments?

P = $2.70/.1270 = $21.26

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.80 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 10.40 percent on your equity investments?

P = $2.80/.1040 = $26.92

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.90 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 11.70 percent on your equity investments?

P = $2.90/.1170 = $24.79

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.40 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 10.50 percent on your equity investments?

P = $3.40/.1050 = $32.38

Stoneheart Group is expected to pay a dividend of $3.31 next year. The company's dividend growth rate is expected to be 3.2 percent indefinitely and investors require a return of 12.4 percent on the company's stock. What is the stock price?

P0 = $3.31/(.124 - .032) = $35.98

Stoneheart Group is expected to pay a dividend of $3.33 next year. The company's dividend growth rate is expected to be 3.1 percent indefinitely and investors require a return of 12.5 percent on the company's stock. What is the stock price?

P0 = $3.33/(.125 - .031) = $35.43

Symon's Suppers Co. has announced that it will pay a dividend of $4.23 per share one year from today. Additionally, the company expects to increase its dividend by 4.4 percent annually. The required return on the company's stock is 10.6 percent. What is the current share price?

P0 = $4.23/(.106 - .044) = $68.23

Symon's Suppers Co. has announced that it will pay a dividend of $4.53 per share one year from today. Additionally, the company expects to increase its dividend by 3.5 percent annually. The required return on the company's stock is 12.1 percent. What is the current share price?

P0 = $4.53/(.121 - .035) = $52.67

Symon's Suppers Co. has announced that it will pay a dividend of $4.57 per share one year from today. Additionally, the company expects to increase its dividend by 3.3 percent annually. The required return on the company's stock is 12.3 percent. What is the current share price?

P0 = $4.57/(.123 - .033) = $50.78

Railway Cabooses just paid its annual dividend of $1.70 per share. The company has been reducing the dividends by 11.3 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 12 percent?

P0 = [$1.70 × [1 + (- .113)]]/[.12 - (- .113)] = $6.47

Railway Cabooses just paid its annual dividend of $1.90 per share. The company has been reducing the dividends by 11.4 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 12 percent?

P0 = [$1.90 × [1 + (- .114)]]/[.12 - (- .114)] = $7.19

Michael's, Inc., just paid $2.00 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.4 percent. If you require a rate of return of 8.6 percent, how much are you willing to pay today to purchase one share of the company's stock?

P0 = [$2.00 × (1 + .044)]/(.086 - .044) = $49.71

Railway Cabooses just paid its annual dividend of $3.30 per share. The company has been reducing the dividends by 12.1 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$3.30 × [1 + (- .121)]]/[.14 - (- .121)] = $11.11

Railway Cabooses just paid its annual dividend of $3.50 per share. The company has been reducing the dividends by 12.2 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$3.50 × [1 + (- .122)]]/[.14 - (- .122)] = $11.73

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4 percent indefinitely. The company just paid a dividend of $3.59 and you feel that the required return on the stock is 11.6 percent. What is the price per share of the company's stock?

P0 = [$3.59 × (1 + .040)]/(.116 - .040) = $49.13

Railway Cabooses just paid its annual dividend of $3.70 per share. The company has been reducing the dividends by 12.3 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$3.70 × [1 + (- .123)]]/[.14 - (- .123)] = $12.34

Railway Cabooses just paid its annual dividend of $3.90 per share. The company has been reducing the dividends by 12.4 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$3.90 × [1 + (- .124)]]/[.14 - (- .124)] = $12.94

Railway Cabooses just paid its annual dividend of $4.10 per share. The company has been reducing the dividends by 12.5 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$4.10 × [1 + (- .125)]]/[.14 - (- .125)] = $13.54

Railway Cabooses just paid its annual dividend of $4.50 per share. The company has been reducing the dividends by 12.7 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

P0 = [$4.50 × [1 + (- .127)]]/[.14 - (- .127)] = $14.71

Railway Cabooses just paid its annual dividend of $5.10 per share. The company has been reducing the dividends by 13 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 15 percent?

P0 = [$5.10 × [1 + (- .130)]]/[.15 - (- .130)] = $15.85

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.27 a share. The following dividends will be $.32, $.47, and $.77 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.3 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?

P4 = ($.77 × 1.023)/(.12 - .023) = $8.12 P0 = $.27/1.12 + $.32/1.122 + $.47/1.123 + $.77/1.124 + $8.12/1.124 = $6.48

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.45 a share. The following dividends will be $.50, $.65, and $.95 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.2 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 13 percent?

P4 = ($.95 × 1.032)/(.13 - .032) = $10.00 P0 = $.45/1.13 + $.50/1.132 + $.65/1.133 + $.95/1.134 + $10.00/1.134 = $7.96

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.57 a share. The following dividends will be $.62, $.77, and $1.07 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.8 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?

P4 = ($1.07 × 1.038)/(.12 - .038) = $13.54 P0 = $.57/1.12 + $.62/1.122 + $.77/1.123 + $1.07/1.124 + $13.54/1.124 = $10.84

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.59 a share. The following dividends will be $.64, $.79, and $1.09 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.9 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 13 percent?

P4 = ($1.09 × 1.039)/(.13 - .039) = $12.45 P0 = $.59/1.13 + $.64/1.132 + $.79/1.133 + $1.09/1.134 + $12.45/1.134 = $9.87

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.67 a share. The following dividends will be $.72, $.87, and $1.17 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.7 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 11 percent?

P4 = ($1.17 × 1.037)/(.11 - .037) = $16.62 P0 = $.67/1.11 + $.72/1.11^2 + $.87/1.11^3 + $1.17/1.11^4 + $16.62/1.11^4 = $13.54

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent?

P4 = ($2.60 × 1.194 × 1.03)/(0.081 - 0.03) = $105.30 P0 = ($2.60 × 1.19)/1.081 + ($2.60 × 1.192)/1.0812 + ($2.60 × 1.193)/1.0813 + ($2.60 × 1.194)/1.0814 + $105.30/1.0814 = $90.41

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $2.80 per share. What is the current value of one share of this stock if the required rate of return is 8.30 percent?

P4 = ($2.80 × 1.21^4 × 1.05)/(0.083 - 0.05) = $190.97 P0 = ($2.80 × 1.21)/1.083 + ($2.80 × 1.21^2)/1.083^2 + ($2.80 × 1.21^3)/1.083^3 + ($2.80 × 1.21^4)/1.083^4 + $190.97/1.083^4 = $153.71

POD has a project with the following cash flows: Year Cash Flows 0−$279,000 1-145,600 2-163,100 3-128,200 The required return is 8.4 percent. What is the profitability index for this project?

PI = [$145,600/(1 + .084) + $163,100/(1 + .084)2 + $128,200/(1 + .084)3]/$279,000 PI = 1.340

POD has a project with the following cash flows: Year Cash Flows 0−$267,000 1-146,200 2-163,700 3-128,800 The required return is 9 percent. What is the profitability index for this project?

PI = [$146,200/(1 + .090) + $163,700/(1 + .090)2 + $128,800/(1 + .090)3]/$267,000 PI = 1.391

POD has a project with the following cash flows: Year Cash Flows 0−$259,000 1-146,600 2-164,100 3-129,200 The required return is 9.4 percent. What is the profitability index for this project?

PI = [$146,600/(1 + .094) + $164,100/(1 + .094)^2 + $129,200/(1 + .094)^3]/$259,000 PI = 1.428

POD has a project with the following cash flows: YearCash Flows 0−$253,000 1-146,900 2-164,400 3-129,500 The required return is 8.2 percent. What is the profitability index for this project?

PI = [$146,900/(1 + .082) + $164,400/(1 + .082)2 + $129,500/(1 + .082)3]/$253,000 PI = 1.496

POD has a project with the following cash flows: YearCash Flows 0−$243,000 1-147,400 2-164,900 3-130,000 The required return is 8.7 percent. What is the profitability index for this project?

PI = [$147,400/(1 + .087) + $164,900/(1 + .087)2 + $130,000/(1 + .087)3]/$243,000PI = 1.549

A project has the following cash flows: Year Cash Flows 0−$127,700 1-46,400 2-63,400 3-51,500 427,900 The required return is 8.2 percent. What is the profitability index for this project?

PI = [$46,400/(1 + .082) + $63,400/(1 + .082)2 + $51,500/(1 + .082)3 + $27,900/(1 + .082)4]/$127,700 PI = 1.238

A project has the following cash flows: YearCash Flows: 0: −$128,200 1: 49,400 2: 63,800 3: 51,600 4: 28,100 The required return is 8.7 percent. What is the profitability index for this project?

PI = [$49,400/(1 + .087) + $63,800/(1 + .087)2 + $51,600/(1 + .087)3 + $28,100/(1 + .087)4]/$128,200 PI = 1.246

A project has the following cash flows: Year Cash Flows 0−$129,400 1-56,600 2-63,800 3-51,600 4-28,100 The required return is 8.4 percent. What is the profitability index for this project?

PI = [$56,600/(1 + .084) + $63,800/(1 + .084)2 + $51,600/(1 + .084)3 + $28,100/(1 + .084)4]/$129,400 PI = 1.293

A project has the following cash flows: Year, Cash Flows 0: −$129,800 1: 59,000 2: 63,800 3: 51,600 4: 28,100 The required return is 8.8 percent. What is the profitability index for this project?

PI = [$59,000/(1 + .088) + $63,800/(1 + .088)^2 + $51,600/(1 + .088)^3 + $28,100/(1 + .088)^4]/$129,800 PI = 1.296

Your grandparents would like to establish a trust fund that will pay you and your heirs $110,000 per year forever with the first payment 7 years from today. If the trust fund earns an annual return of 2.1 percent, how much must your grandparents deposit today?

PV = $110,000/.021 = $5,238,095.24 PV = $5,238,095.24/(1.021)^6 = $4,624,011.84 N=6 I/Y=2.1 PV=? $4,624,011.84 PMT=0 FV=5,238,095.24

Gugenheim, Inc., has a bond outstanding with a coupon rate of 5.9 percent and annual payments. The yield to maturity is 7.1 percent and the bond matures in 15 years. What is the market price if the bond has a par value of $2,000?

PV = $118{[1 − (1/1.07115)]/.071} + $2,000/1.07115 PV = $1,782.78 N=15 i/y=7.1 PV=? 1,782.78 PMT=-118 FV=-2000

Your grandparents would like to establish a trust fund that will pay you and your heirs $120,000 per year forever with the first payment 9 years from today. If the trust fund earns an annual return of 2.3 percent, how much must your grandparents deposit today?

PV = $120,000/.023 = $5,217,391.30 PV = $5,217,391.30/(1.023)8 = $4,349,590.19

Gugenheim, Inc., has a bond outstanding with a coupon rate of 6.2 percent and annual payments. The yield to maturity is 7.4 percent and the bond matures in 18 years. What is the market price if the bond has a par value of $2,000?

PV = $124{[1 − (1/1.07418)]/.074} + $2,000/1.07418 PV = $1,765.40' N=18 I/y=7.4 PV=? 1,765.40 PMT=-124 FV=-2000

Your grandparents would like to establish a trust fund that will pay you and your heirs $135,000 per year forever with the first payment 12 years from today. If the trust fund earns an annual return of 2.6 percent, how much must your grandparents deposit today?

PV = $135,000/.026 = $5,192,307.69 PV = $5,192,307.69/(1.026)11 = $3,915,069.28 N=11 i/y=2.6 PV=? 3,915,069.28 PMT=0 FV=5,192,307.69

Your grandparents would like to establish a trust fund that will pay you and your heirs $140,000 per year forever with the first payment 13 years from today. If the trust fund earns an annual return of 2.7 percent, how much must your grandparents deposit today?

PV = $140,000/.027 = $5,185,185.19 PV = $5,185,185.19/(1.027)12 = $3,766,335.02 Calculator: 12 N 2.7% I/Y 0 PMT $5,185,185.19 FV Solve for PV = $3,766,335.02

Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $15,000 per month for the next 9 years with the first payment due today. If the APR is 7.08 percent compounded monthly, what is the value of the payments today?

PV = $15,000(1.0059)[(1 −1/1.0059108) / .0059] = $1,202,574.17

Gugenheim, Inc., has a bond outstanding with a coupon rate of 7.5 percent and annual payments. The yield to maturity is 8.7 percent and the bond matures in 19 years. What is the market price if the bond has a par value of $2,000?

PV = $150{[1 − (1/1.08719)]/.087} + $2,000/1.08719 PV = $1,780.67 N=19 I/Y=8.7 PV= ? 1,780.67 PMT=-150 FV=-2000

Gugenheim, Inc., has a bond outstanding with a coupon rate of 7.6 percent and annual payments. The yield to maturity is 8.8 percent and the bond matures in 18 years. What is the market price if the bond has a par value of $2,000?

PV = $152{[1 − (1/1.08818)]/.088} + $2,000/1.08818 PV = $1,787.03 N=18 I/Y=8.8 PV=? 1,787.03 PMT=-152 FV=-2000

Your grandparents would like to establish a trust fund that will pay you and your heirs $165,000 per year forever with the first payment 11 years from today. If the trust fund earns an annual return of 3.2 percent, how much must your grandparents deposit today?

PV = $165,000/.032 = $5,156,250.00 PV = $5,156,250.00/(1.032)10 = $3,763,024.04 N=10 I/Y=3.2 PV=? 3,763,024.04 PMT=0 FV= 5,156,250.00

Your parents are giving you $170 a month for 4 years while you are in college. At an interest rate of .41 percent per month, what are these payments worth to you when you first start college?

PV = $170[(1 −1/1.00414×12)/.0041] = $7,393.53

Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $18,000 per month for the next 9 years with the first payment due today. If the APR is 7.8 percent compounded monthly, what is the value of the payments today?

PV = $18,000(1.0065)[(1 −1/1.0065108) / .0065] = $1,402,756.87 CAlculator: 2nd BGN 2nd SET 108 N .65% I/Y -18000 PMT Solve for PV

Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $19,500 per month for the next 6 years with the first payment due today. If the APR is 8.16 percent compounded monthly, what is the value of the payments today?

PV = $19,500(1.0068)[(1 −1/1.006872) / .0068] = $1,114,762.29 2nd BGN 2nd SET N=72 I/Y=.68 PV=? PMT= -19,500 FV=0

Your parents are giving you $195 a month for 4 years while you are in college. At an interest rate of .46 percent per month, what are these payments worth to you when you first start college?

PV = $195[(1 −1/1.00464×12)/.0046] = $8,381.48 N=4x12 I/Y=.46% PV=? 8381.48 PMT=-195 FV=0

Your parents are giving you $205 a month for 4 years while you are in college. At an interest rate of .48 percent per month, what are these payments worth to you when you first start college?

PV = $205[(1 −1/1.00484×12)/.0048] = $8,770.00 N=4x12 I/Y=.48 PV=? 8,770.00 PMT=-205 FV=0

Your grandparents would like to establish a trust fund that will pay you and your heirs $220,000 per year forever with the first payment 8 years from today. If the trust fund earns an annual return of 4.3 percent, how much must your grandparents deposit today?

PV = $220,000/.043 = $5,116,279.07 PV = $5,116,279.07/(1.043)7 = $3,810,342.95 N=7 I/Y=4.3 PV= ? 3,810,342.95 PMT=0 FV=5,116,279.07

Your parents are giving you $220 a month for 4 years while you are in college. At an interest rate of .51 percent per month, what are these payments worth to you when you first start college?

PV = $220[(1 −1/1.00514×12)/.0051] = $9,345.76

Your grandparents would like to establish a trust fund that will pay you and your heirs $230,000 per year forever with the first payment 10 years from today. If the trust fund earns an annual return of 4.5 percent, how much must your grandparents deposit today?

PV = $230,000/.045 = $5,111,111.11 PV = $5,111,111.11/(1.045)9 = $3,439,289.30 N=9 I/Y=4.5 PV=? 3,439,289.30 PMT=0 FV=-5,111,111.11

Your parents are giving you $265 a month for 4 years while you are in college. At an interest rate of .33 percent per month, what are these payments worth to you when you first start college?

PV = $265[(1 −1/1.00334×12)/.0033] = $11,745.85 N=4x12 I/Y=.33 PV=? 11,745.85 PMT=-265 FV=0

Whatever, Inc., has a bond outstanding with a coupon rate of 5.74 percent and semiannual payments. The yield to maturity is 6.1 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $1,000?

PV = $28.70{[1 − (1/1.030540)]/.0305} + $1,000/1.030540 PV = $958.73 N=40 I/Y= 6.1/2% PV=? PMT= -28.70 FV= -1000

Whatever, Inc., has a bond outstanding with a coupon rate of 6.02 percent and semiannual payments. The yield to maturity is 5.9 percent and the bond matures in 16 years. What is the market price if the bond has a par value of $1,000?

PV = $30.10{[1 − (1/1.029532)]/.0295} + $1,000/1.029532 PV = $1,012.32 Calculator: 32 N 5.9/2% I/Y -30.10 PMT -1000 FV Solve for PV =$1,012.32

Whatever, Inc., has a bond outstanding with a coupon rate of 5.68 percent and semiannual payments. The yield to maturity is 6.5 percent and the bond matures in 17 years. What is the market price if the bond has a par value of $1,000?

PV = $916.37

A project that costs $20,500 today will generate cash flows of $6,900 per year for seven years. What is the project's payback period?

Payback period = $20,500/$6,900 Payback period = 2.97 years

A project that costs $21,500 today will generate cash flows of $7,700 per year for seven years. What is the project's payback period?

Payback period = $21,500/$7,700Payback period = 2.79 years

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $3,800 1.40 B $4,800 1.51 C $7,300 1.00

Portfolio value = $3,800 + 4,800 + 7,300 Portfolio value = $15,900 βPortfolio = 1.40($3,800/$15,900) + 1.51($4,800/$15,900) + 1.00($7,300/$15,900) βPortfolio = 1.250

What is the beta of a portfolio comprised of the following securities? Stock, Amount Invested, Security Beta A $4,000 1.44 B $5,000 1.55 C $7,500 1.00

Portfolio value = $4,000 + 5,000 + 7,500 Portfolio value = $16,500 βPortfolio = 1.44($4,000/$16,500) + 1.55($5,000/$16,500) + 1.00($7,500/$16,500) βPortfolio = 1.273

What is the beta of a portfolio comprised of the following securities? Stock, Amount Invested, Security Beta: A $4,300, 1.50 B $5,300, 1.61 C $7,800, 1.00

Portfolio value = $4,300 + 5,300 + 7,800 Portfolio value = $17,400 βPortfolio = 1.50($4,300/$17,400) + 1.61($5,300/$17,400) + 1.00($7,800/$17,400) βPortfolio = 1.309

What is the beta of a portfolio comprised of the following securities? Stock - Amount Invested - Security Beta A $4,700 1.58 B $5,700 1.69 C $8,200 1.00

Portfolio value = $4,700 + 5,700 + 8,200 Portfolio value = $18,600 βPortfolio = 1.58($4,700/$18,600) + 1.69($5,700/$18,600) + 1.00($8,200/$18,600) βPortfolio = 1.358

What is the beta of a portfolio comprised of the following securities? Stock, Amount Invested, Security Beta A: $4,900, 1.62 B: $5,900, 1.73 C: $8,400, 1.00

Portfolio value = $4,900 + 5,900 + 8,400 Portfolio value = $19,200 βPortfolio = 1.62($4,900/$19,200) + 1.73($5,900/$19,200) + 1.00($8,400/$19,200) βPortfolio = 1.383

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $5,300 1.70 B $6,300 1.81 C $8,800 1.00

Portfolio value = $5,300 + 6,300 + 8,800 Portfolio value = $20,400 βPortfolio = 1.70($5,300/$20,400) + 1.81($6,300/$20,400) + 1.00($8,800/$20,400) βPortfolio = 1.432

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $5,300 1.70 B $6,300 1.81 C $8,800 1.00 Multiple Choice

Portfolio value = $5,300 + 6,300 + 8,800 Portfolio value = $20,400 βPortfolio = 1.70($5,300/$20,400) + 1.81($6,300/$20,400) + 1.00($8,800/$20,400) βPortfolio = 1.432

What is the beta of a portfolio comprised of the following securities? StockAmount InvestedSecurity Beta A $5,400 1.72 B $6,400 1.83 C $8,900 1.00

Portfolio value = $5,400 + 6,400 + 8,900 Portfolio value = $20,700 βPortfolio = 1.72($5,400/$20,700) + 1.83($6,400/$20,700) + 1.00($8,900/$20,700) βPortfolio = 1.444

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $5,400 1.72 B $6,400 1.83 C $8,900 1.00

Portfolio value = $5,400 + 6,400 + 8,900 Portfolio value = $20,700 βPortfolio = 1.72($5,400/$20,700) + 1.83($6,400/$20,700) + 1.00($8,900/$20,700) βPortfolio = 1.444

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $5,600 1.76 B $6,600 1.87 C $9,100 1.00

Portfolio value = $5,600 + 6,600 + 9,100 Portfolio value = $21,300 βPortfolio = 1.76($5,600/$21,300) + 1.87($6,600/$21,300) + 1.00($9,100/$21,300) βPortfolio = 1.469

Judy's Boutique just paid an annual dividend of $2.41 on its common stock. The firm increases its dividend by 3.20 percent annually. What is the company's cost of equity if the current stock price is $38.68 per share?

RE = [($2.41(1.0320)/$38.68] + .0320 RE = .0963, or 9.63%

Judy's Boutique just paid an annual dividend of $2.53 on its common stock. The firm increases its dividend by 3.30 percent annually. What is the company's cost of equity if the current stock price is $39.16 per share?

RE = [($2.53(1.0330)/$39.16] + .0330RE = .0997, or 9.97%

Judy's Boutique just paid an annual dividend of $2.59 on its common stock. The firm increases its dividend by 3.35 percent annually. What is the company's cost of equity if the current stock price is $39.40 per share?

RE = [($2.59(1.0335)/$39.40] + .0335 RE = .1014, or 10.14%

Judy's Boutique just paid an annual dividend of $2.65 on its common stock. The firm increases its dividend by 3.40 percent annually. What is the company's cost of equity if the current stock price is $39.64 per share?

RE = [($2.65(1.0340)/$39.64] + .0340 RE = .1031, or 10.31%

Judy's Boutique just paid an annual dividend of $2.77 on its common stock. The firm increases its dividend by 3.50 percent annually. What is the company's cost of equity if the current stock price is $40.12 per share?

RE = [($2.77(1.0350)/$40.12] + .0350 RE = .1065, or 10.65%

Judy's Boutique just paid an annual dividend of $2.95 on its common stock. The firm increases its dividend by 3.65 percent annually. What is the company's cost of equity if the current stock price is $40.84 per share?

RE = [($2.95(1.0365)/$40.84] + .0365 RE = .1114, or 11.14%

Judy's Boutique just paid an annual dividend of $3.07 on its common stock. The firm increases its dividend by 3.75 percent annually. What is the company's cost of equity if the current stock price is $41.32 per share?

RE = [($3.07(1.0375)/$41.32] + .0375 RE = .1146, or 11.46%

Judy's Boutique just paid an annual dividend of $3.43 on its common stock. The firm increases its dividend by 3.65 percent annually. What is the company's cost of equity if the current stock price is $42.76 per share?

RE = [($3.43(1.0365)/$42.76] + .0365 RE = .1196, or 11.96%

The Green Giant has a 4 percent profit margin and a 30 percent dividend payout ratio. The total asset turnover is 1.2 times and the equity multiplier is 1.5 times. What is the sustainable rate of growth?

Return on equity = .04 × 1.20 × 1.50 = .072 Sustainable rate of growth = [.072 × (1 - .30)]/{1 - [.072 × (1 - .30)]} = .0531, or 5.31 percent

The Green Giant has a 5 percent profit margin and a 64 percent dividend payout ratio. The total asset turnover is 1.1 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth?

Return on equity = .05 × 1.10 × 1.60 = .088 Sustainable rate of growth = [.088 × (1 - .64)]/{1 - [.088 × (1 - .64)]} = .0327, or 3.27 percent

The Green Giant has a 6 percent profit margin and a 37 percent dividend payout ratio. The total asset turnover is 1.2 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth?

Return on equity = .06 × 1.20 × 1.40 = .101 Sustainable rate of growth = [.101 × (1 - .37)]/{1 - [.101 × (1 - .37)]} = .0678, or 6.78 percent

The Green Giant has a 6 percent profit margin and a 60 percent dividend payout ratio. The total asset turnover is 1.3 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth?

Return on equity = .06 × 1.30 × 1.60 = .125 Sustainable rate of growth = [.125 × (1 - .60)]/{1 - [.125 × (1 - .60)]} = .0525, or 5.25%

The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio. The total asset turnover is 1.5 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth?

Return on equity = .06 × 1.50 × 1.60 = .144 Sustainable rate of growth = [.144 × (1 - .65)]/{1 - [.144 × (1 - .65)]} = .0531, or 5.31 percent

Which one of the following is least apt to help convince managers to work in the best interest of the stockholders?

Salary raises based on length of service

Adept Co. is analyzing a proposed project with annual sales of 5,200 units, ± 6 percent; variable costs per unit of $11, ± 3 percent; fixed costs of $17,500 per year, ± 3 percent; and a sales price of $22 per unit, ± 2 percent. The annual depreciation expense is $4,200. What is the annual sales revenue under the optimistic case scenario?

Sales revenueOptimistic = 5,200(1.06)($22)(1.02) Sales revenueOptimistic = $123,689

The basic regulatory framework for the public trading of securities in the United States was provided by the:

Securities Act of 1933 and the Securities Exchange Act of 1934.

A firm wants a sustainable growth rate of 3.03 percent while maintaining a dividend payout ratio of 25 percent and a profit margin of 4 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0303 = [ROE × (1 - .25)]/{1 - [ROE × (1 - .25)]} ROE = .03921 ROE = .03921 = .04 × (1/2) × Equity multiplier Equity multiplier = 1.96 Debt-equity ratio = 1.96 - 1 = .96 times

A firm wants a sustainable growth rate of 3.13 percent while maintaining a dividend payout ratio of 27 percent and a profit margin of 6 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0313 = [ROE × (1 - .27)]/{1 - [ROE × (1 - .27)]} ROE = .04158 ROE = .04158 = .06 × (1/2) × Equity multiplier Equity multiplier = 1.39 Debt-equity ratio = 1.39 - 1 = .39 times

A firm wants a sustainable growth rate of 3.23 percent while maintaining a dividend payout ratio of 29 percent and a profit margin of 8 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0323 = [ROE × (1 - .29)]/{1 - [ROE × (1 - .29)]} ROE = .04407 ROE = .04407 = .08 × (1/2) × Equity multiplier Equity multiplier = 1.10 Debt-equity ratio = 1.10 - 1 = .10 times

A firm wants a sustainable growth rate of 3.68 percent while maintaining a dividend payout ratio of 38 percent and a profit margin of 7 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0368 = [ROE × (1 - .38)]/{1 - [ROE × (1 - .38)]} ROE = .05725 ROE = .05725 = .07 × (1/2) × Equity multiplier Equity multiplier = 1.64 Debt-equity ratio = 1.64 - 1 = .64 times

A firm wants a sustainable growth rate of 3.68 percent while maintaining a dividend payout ratio of 38 percent and a profit margin of 7 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0368 = [ROE × (1 - .38)]/{1 - [ROE × (1 - .38)]} ROE = .05725 ROE = .05725 = .07 × (1/2) × Equity multiplier Equity multiplier = 1.64 Debt-equity ratio = 1.64 - 1 = .64 times

What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

The PV will decrease.

Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.

Total expense per unitPessimistic = $27.20(1.02) + $32,500/[2,400(.97)] + $4,400/[2,400(.97)] Total expense per unitPessimistic = $43.59

Your parents are giving you $260 a month for 4 years while you are in college. At an interest rate of .59 percent per month, what are these payments worth to you when you first start college?

V = $260[(1 −1/1.00594×12)/.0059] = $10,840.84 4 x 12 N .59% I/Y -260 PMT no FV SOlve for PV = $10,840.84

The Two Dollar Store has a cost of equity of 10.5 percent, the YTM on the company's bonds is 5.1 percent, and the tax rate is 35 percent. If the company's debt-equity ratio is .40, what is the weighted average cost of capital?

WACC = (1/1.40)(10.5%) + (.40/1.40)(5.1%)(1 − .35) WACC = 8.45%

The Two Dollar Store has a cost of equity of 10.7 percent, the YTM on the company's bonds is 5.3 percent, and the tax rate is 40 percent. If the company's debt-equity ratio is .42, what is the weighted average cost of capital?

WACC = (1/1.42)(10.7%) + (.42/1.42)(5.3%)(1 − .40) WACC = 8.48%

The Two Dollar Store has a cost of equity of 10.8 percent, the YTM on the company's bonds is 5.4 percent, and the tax rate is 35 percent. If the company's debt-equity ratio is .43, what is the weighted average cost of capital?

WACC = (1/1.43)(10.8%) + (.43/1.43)(5.4%)(1 − .35) WACC = 8.61%

The Two Dollar Store has a cost of equity of 11.3 percent, the YTM on the company's bonds is 5.9 percent, and the tax rate is 40 percent. If the company's debt-equity ratio is .48, what is the weighted average cost of capital?

WACC = (1/1.48)(11.3%) + (.48/1.48)(5.9%)(1 − .40) WACC = 8.78%

The Two Dollar Store has a cost of equity of 11.4 percent, the YTM on the company's bonds is 6.1 percent, and the tax rate is 35 percent. If the company's debt-equity ratio is .49, what is the weighted average cost of capital?

WACC = (1/1.49)(11.4%) + (.49/1.49)(6.1%)(1 − .35) WACC = 8.95%

The Two Dollar Store has a cost of equity of 11.6 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 40 percent. If the company's debt-equity ratio is .51, what is the weighted average cost of capital?

WACC = (1/1.51)(11.6%) + (.51/1.51)(6.2%)(1 − .40) WACC = 8.94%

Alpha Industries is considering a project with an initial cost of $7.5 million. The project will produce cash inflows of $1.55 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.46 percent and a cost of equity of 11.17 percent. The debt-equity ratio is .55 and the tax rate is 39 percent. What is the net present value of the project?

WACC = (1/1.55)(11.17) + (.55/1.55)(5.46%)(1 − .39) WACC = 8.39% NPV = −$7,500,000 + $1,550,000(PVIFA8.39%,7) NPV = $463,811

The Two Dollar Store has a cost of equity of 12.2 percent, the YTM on the company's bonds is 5.9 percent, and the tax rate is 40 percent. If the company's debt-equity ratio is .57, what is the weighted average cost of capital?

WACC = (1/1.57)(12.2%) + (.57/1.57)(5.9%)(1 − .40) WACC = 9.06%

Alpha Industries is considering a project with an initial cost of $7.9 million. The project will produce cash inflows of $1.63 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.58 percent and a cost of equity of 11.25 percent. The debt-equity ratio is .59 and the tax rate is 40 percent. What is the net present value of the project?

WACC = (1/1.59)(11.25) + (.59/1.59)(5.58%)(1 − .40) WACC = 8.32% NPV = −$7,900,000 + $1,630,000(PVIFA8.32%,7) NPV = $494,918

The Two Dollar Store has a cost of equity of 12.5 percent, the YTM on the company's bonds is 5.6 percent, and the tax rate is 35 percent. If the company's debt-equity ratio is .60, what is the weighted average cost of capital?

WACC = (1/1.60)(12.5%) + (.60/1.60)(5.6%)(1 − .35) WACC = 9.18%

Alpha Industries is considering a project with an initial cost of $8.4 million. The project will produce cash inflows of $1.64 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.73 percent and a cost of equity of 11.35 percent. The debt-equity ratio is .64 and the tax rate is 39 percent. What is the net present value of the project?

WACC = (1/1.64)(11.35) + (.64/1.64)(5.73%)(1 − .39) WACC = 8.28% NPV = −$8,400,000 + $1,640,000(PVIFA8.28%,8) NPV = $923,493

Alpha Industries is considering a project with an initial cost of $8.6 million. The project will produce cash inflows of $2.04 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.79 percent and a cost of equity of 11.39 percent. The debt-equity ratio is .66 and the tax rate is 35 percent. What is the net present value of the project?

WACC = (1/1.66)(11.39) + (.66/1.66)(5.79%)(1 − .35) WACC = 8.36% NPV = −$8,600,000 + $2,040,000(PVIFA8.36%,6) NPV = $729,185

Alpha Industries is considering a project with an initial cost of $8.8 million. The project will produce cash inflows of $1.68 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.85 percent and a cost of equity of 11.43 percent. The debt-equity ratio is .68 and the tax rate is 40 percent. What is the net present value of the project?

WACC = (1/1.68)(11.43) + (.68/1.68)(5.85%)(1 − .40) WACC = 8.22% NPV = −$8,800,000 + $1,680,000(PVIFA8.22%,8) NPV = $772,720

Alpha Industries is considering a project with an initial cost of $9.6 million. The project will produce cash inflows of $1.79 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.09 percent and a cost of equity of 11.59 percent. The debt-equity ratio is .76 and the tax rate is 39 percent. What is the net present value of the project?

WACC = (1/1.76)(11.59) + (.76/1.76)(6.09%)(1 − .39) WACC = 8.19% NPV = −$9,600,000 + $1,790,000(PVIFA8.19%,8) NPV = $612,963

Alpha Industries is considering a project with an initial cost of $9.7 million. The project will produce cash inflows of $1.67 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.12 percent and a cost of equity of 11.61 percent. The debt-equity ratio is .77 and the tax rate is 40 percent. What is the net present value of the project?

WACC = (1/1.77)(11.61) + (.77/1.77)(6.12%)(1 − .40) WACC = 8.16% NPV = −$9,700,000 + $1,670,000(PVIFA8.16%,9) NPV = $664,645

Alpha Industries is considering a project with an initial cost of $9.1 million. The project will produce cash inflows of $2.13 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.15 percent and a cost of equity of 11.63 percent. The debt-equity ratio is .78 and the tax rate is 35 percent. What is the net present value of the project?

WACC = (1/1.78)(11.63) + (.78/1.78)(6.15%)(1 − .35) WACC = 8.29% NPV = −$9,100,000 + $2,130,000(PVIFA8.29%,6) NPV = $662,051

Gateway Communications is considering a project with an initial fixed assets cost of $1.59 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $236,000. The project will not change sales but will reduce operating costs by $385,500 per year. The tax rate is 40 percent and the required return is 11.1 percent. The project will require $50,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Year 0 CF = −$1,590,000 − 50,000 Year 0 CF = −$1,640,000 OCF = $385,500(1 − .40) + .40($1,590,000/10) OCF = $294,900 Year 10 CF (w/o OCF) = $50,000 + 236,000(1 − .40) Year 10 CF (w/o OCF) = $191,600 NPV = −$1,640,000 + 294,900(PVIFA11.1%,10) + 191,600/1.11110 NPV = $156,350

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $44.30 Variable costs per abalone = $11.10 Fixed costs per year = $486,000 Depreciation per year = $119,000 Tax rate = 23% The discount rate for the company is 15 percent, the initial investment in equipment is $952,000, and the project's economic life is 8 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. The accounting break-even is the aftertax sum of the fixed costs and depreciation charge divided by the aftertax contribution margin (selling price minus variable cost). So, the accounting break-even level of sales is: QA = [(FC + Depreciation)(1 - TC)]/[(P - VC)(1 - TC)] QA = [($486,000 + $952,000/8)(1 - .23)]/[($44.30 - 11.10)(1 - .23)] QA = 18,222.89, or about 18,223 units b. When calculating the financial break-even point, we express the initial investment as an equivalent annual cost (EAC). Dividing the initial investment by the 8-year annuity factor, discounted at 15 percent, the EAC of the initial investment is: EAC = Initial Investment/PVIFA15%,8 EAC = $952,000/4.48732 EAC = $212,153.29 Note that this calculation solves for the annuity payment with the initial investment as the present value of the annuity. In other words: PVA = C({1 - [1/(1 + R)]t]}/R) $952,000 = C{[1 - (1/1.158)]/.15} C = $212,153.29 Now we can calculate the financial break-even point. The financial break-even point for this project is: QF = [EAC + FC(1 - TC) - D(TC)]/[(P - VC)(1 - TC)] QF = [$212,153.29 + $486,000(.77) - ($952,000/8)(.23)]/[($44.30 - 11.10)(.77)] QF = 21,866.82, or about 21,867 units

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.20 Variable costs per abalone = $10.55 Fixed costs per year = $442,000 Depreciation per year = $132,000Tax rate = 22% The discount rate for the company is 14 percent, the initial investment in equipment is $924,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. The accounting break-even is the aftertax sum of the fixed costs and depreciation charge divided by the aftertax contribution margin (selling price minus variable cost). So, the accounting break-even level of sales is: QA = [(FC + Depreciation)(1 - TC)]/[(P - VC)(1 - TC)]QA = [($442,000 + $924,000/7)(1 - .22)]/[($43.20 - 10.55)(1 - .22)] QA = 17,580.40, or about 17,580 units b. When calculating the financial break-even point, we express the initial investment as an equivalent annual cost (EAC). Dividing the initial investment by the 7-year annuity factor, discounted at 14 percent, the EAC of the initial investment is: EAC = Initial Investment/PVIFA14%,7 EAC = $924,000/4.28830EAC = $215,469.76 Note that this calculation solves for the annuity payment with the initial investment as the present value of the annuity. In other words: PVA = C({1 - [1/(1 + R)]t]}/R)$924,000 = C{[1 - (1/1.147)]/.14} C = $215,469.76 Now we can calculate the financial break-even point. The financial break-even point for this project is: QF = [EAC + FC(1 - TC) - D(TC)]/[(P - VC)(1 - TC)] QF = [$215,469.76 + $442,000(.78) - ($924,000/7)(.22)]/[($43.20 - 10.55)(.78)] QF = 20,857.96, or about 20,858 units

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.60 Variable costs per abalone = $10.75 Fixed costs per year = $458,000 Depreciation per year = $136,000 Tax rate = 21% The discount rate for the company is 13 percent, the initial investment in equipment is $952,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.Accounting break-even 18,082.19units b.Financial break-even 21,136.25units

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.40 Variable costs per abalone = $10.65 Fixed costs per year = $450,000 Depreciation per year = $134,000' Tax rate = 24% The discount rate for the company is 16 percent, the initial investment in equipment is $938,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.Accounting break-even level 17,832.06units b.Financial break-even level 21,779.86units

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.70 Variable costs per abalone = $10.80 Fixed costs per year = $462,000 Depreciation per year = $137,000 Tax rate = 22% The discount rate for the company is 14 percent, the initial investment in equipment is $959,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.Accounting break-even level 18,206.69units b.Financial break-even level 21,582.55units

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $44.50Variable costs per abalone = $11.20Fixed costs per year = $494,000Depreciation per year = $121,000Tax rate = 25% The discount rate for the company is 17 percent, the initial investment in equipment is $968,000, and the project's economic life is 8 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.Accounting break-even level 18,468.47units b.Financial break-even level 22,836.19units

ou are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $43.60Variable costs per abalone = $10.75Fixed costs per year = $458,000Depreciation per year = $136,000Tax rate = 21% The discount rate for the company is 13 percent, the initial investment in equipment is $952,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.Accounting break-even level = 18,082.19 units b.Financial break-even leve = 21,136.25 unit

You would be making a wise decision if you chose to:

accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.

A conflict of interest between the stockholders and managers of a firm is referred to as the:

agency problem.

Sensitivity analysis:

can be conducted on any input value used in the computation of a project's NPV.

Free cash flow is:

cash that the firm can distribute to creditors and stockholders.

Sensitivity analysis is conducted by:

changing the value of a single variable and computing the resulting change in the project's NPV.

Proposed projects should be accepted when those projects:

create value for the owners of the firm.

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:

their equivalent annual costs.

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the:

timing and scale problems.

The equivalent annual cost method is most useful in determining:

which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced.