Identify the advantages and disadvantages of monetary-unit sampling.

Q20: Dow Jones Industrial Index has reached historical high recently. What factors in the stock valuation model have driven the stock market index to the historical high level?

1.   A manufacturing firm has the following estimates for its inventory:
   • 100,000 oz. of silver (D) is required for production each month
   • Ordering Costs are $50.00/order (OC)
   • Holding Costs are $1/oz. (HC)

1. Calculate the EQQ based on the information;
2. What’s the total cost at this EQQ units

2. What are some major considerations in extending trade credit?

What’s the five C’s of credit approval?

3. A firm has made a credit sales with the following credit terms:

• $2,000,000 order, 30-day credit terms
• VCR (0.30) = Variable cost ratio/$ of sales
• EXP (0.05/CP) = Expenses for credit administration and collection/$ of sales
• i (0.10/365) = Daily interest rate
• CP (45 days) = Collection period for sale

1. Calculate the variable cost of this sales
2. Calculate the present value of this sales
3. Calculate the NPV of this sales

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision?

• Project A; because it pays back faster

• Project A; because it has the higher profitability index

  Incorrect

• Project B; because it has the higher profitability index

• Project B; because it has the higher net present value

• Project A; because it has the higher net present value

3. Bond valuation

The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future.

There is a consistent and predictable relationship between a bond’s coupon rate, its par value, a bondholder’s required return, and the bond’s resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond’s intrinsic value and its par value. This also results from the relationship between a bond’s coupon rate and a bondholder’s required rate of return.

Remember, a bond’s coupon rate partially determines the interest-based return that a bond   pay, and a bondholder’s required return reflects the return that a bondholder   to receive from a given investment.

The mathematics of bond valuation imply a predictable relationship between the bond’s coupon rate, the bondholder’s required return, the bond’s par value, and its intrinsic value. These relationships can be summarized as follows:

For example, assume Amelia wants to earn a return of 9.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 9.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond’s intrinsic value:

Complete the following table by identifying the appropriate corresponding variables used in the equation.

Based on this equation and the data, it is   to expect that Amelia’s potential bond investment is currently exhibiting an intrinsic value equal to $1,000.

Now, consider the situation in which Amelia wants to earn a return of 12%, but the bond being considered for purchase offers a coupon rate of 9.00%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond’s intrinsic value to the nearest whole dollar, then its intrinsic value of    (rounded to the nearest whole dollar) is   its par value, so that the bond is   .

Given your computation and conclusions, which of the following statements is true?

When the coupon rate is less than Amelia’s required return, the bond should trade at a discount.

A bond should trade at par when the coupon rate is less than Amelia’s required return.

When the coupon rate is less than Amelia’s required return, the intrinsic value will be greater than its par value.

When the coupon rate is less than Amelia’s required return, the bond should trade at a premium.

Robert and Rebecca Richardson have just signed a 30-year, 5% fixed-rate mortgage for $280,000 to buy their house. Find out this couple's monthly mortgage payment by preparing a loan amortization schedule for the Richardson’s for the first 2 months; find out how much of their payments applied to interest; and after 2 payments, how much of their principal will be reduced.

(Please construct a loan amortization schedule and show your calculations).

You must evaluate a proposal to buy a new milling machine. The base price is $138,000, and shipping and installation costs would add another $10,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $82,800. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $56,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. The cost of research is an incremental cash flow and should be included in the analysis.
   3. Only the tax effect of the research expenses should be included in the analysis.
   4. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   5. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $300,000, and it would cost another $60,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $150,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $60,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

3. If the WACC is 14%, should the spectrometer be purchased?

A project has an initial outlay of $2,378. The project will generate annual cash flows of $660 over the 4-year life of the project and terminal cash flows of $202 in the last year of the project. If the required rate of return on the project is 13%, what is the net present value (NPV) of the project?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box.

Some reasons firms internationalize are ___________

I. Narcissistic CEOs
II. Trade barriers
III. Imperfect Labor Markets
IV. Intangible Assets
V. Vertical Integration
VI. Product Life Cycle
VII. Ethnocentrism

Group of answer choices

A)I, II, III, V, VI

B)II, III, IV, V, VI

C)I, II, III, IV, V, VI, VII

D)II, III, IV, V, VI, VII

E)I, II, III, IV only

A project will generate sales of $46,347 each. The variable costs are $19,519 and the fixed costs are $19,215. The project will use an equipment worth $119,505 that will be depreciated on a straight-line basis to a zero book value over a 11-year life of the project. If the tax rate is 13%, what is the operating cash flow

The cost of external equity capital raised by issuing new common stock (r_e) is defined as follows, in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r_s), divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)."

Group of answer choices

True

False

Suppose the company president asks you to determine the target capital structure for the firm and tells you that your compensation for next year will be related to the performance of the stock price over the next six months. Discuss what methods you will use to determine the target debt-equity ratio.

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $23,700, and the company expects to sell 1,540 per year. The company currently sells 1,890 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,560 units per year. The old board retails for $22,100. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,635,000 per year, and fixed costs are $3,000,000 per year. If the tax rate is 24 percent, what is the annual OCF for the project?

Mom’s Cookies, Inc., is considering the purchase of new cookie oven. The original cost of the old oven was $30,000; it is now five years old; and has a current market value of $5,000. The old oven is being depreciated over a 10 year life towards a zero estimated salvage value on a straight line basis, resulting in a current book value of $15,000 and an annual depreciation expense of $3,000. Management is contemplating the purchase of a new oven whose cost is $25,000 and whose estimated salvage value is zero. Expected before-tax cash saving from the new oven are $2,000 a year. Depreciation is computed using MACRS 5 year life, and cost of capital is 12 percent. Assume 40 percent tax rate. What is the net present value of the new oven?