27. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

                        a.   10%

                        b.   16%

                        c.   20%

                        d. 24%

                        e.   30%

What would be your recommendations with respect to raising a huge additional funding of £50 million to enable the next stage of development of international projects to be carried out by a corporation?

a. Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beginning of Year Price of Bond Expected Price

1 $973.40

2 $913.47

3 $862.62

4 $778.66

b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Income Statement for December 31, 2016

Suppose that in 2017 sales increase by 5% over 2016 sales and that 2017 dividends will increase to $136,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 14%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Sales for 2016 were $475 million and net income for the year was $14.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $5.7 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

1. If sales are projected to increase by $60 million, or 12.63%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

   Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity	$

Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent.

a. What is the bond price at 11 percent?

b. What is the bond price at 8 percent?

c. What would be your percentage return on investment if you bought when rates were 11 percent and sold when rates were 8 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $6.3 million. The company expects a total annual operating cash flow of $1.2 million for the next 8 years. The relevant discount rate is 9 percent. Cash flows occur at year-end.

a. What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b. After one year, the estimate of remaining annual cash flows will be revised either upward to $2.1 million or downward to $275,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.5 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

a. NPV = $341,868

b. NPV = __?

Some people might consider Virgin's policy to be a sign of laissez faire leadership. Do you are? Why or why not?

​(Cash receipts acceleration system​) Peggy Pierce Designs Inc. is a vertically​ integrated, national manufacturer and retailer of​ women's clothing.​ Currently, the firm has no coordinated cash management system. A​ proposal, however, from the First Pennsylvania Bank aimed at speeding up cash collections is being examined by several of​ Pierce's corporate executives. The firm currently uses a centralized billing​ procedure, which requires that all checks be mailed to the Philadelphia head office for processing and eventual deposit. Under this​ arrangement, all the​ customers' remittance checks take an average of 4 business days to reach the head office. Once in​ Philadelphia, another 1 days are required to process the checks for ultimate deposit at the First Pennsylvania Bank. The​ firm's daily remittances average ​$2.0 million. The average check size is ​$2,500. Pierce Designs currently earns 11 percent annually on its​ marketable-securities portfolio. Under the proposed​ plan, First Pennsylvania said that they could reduce funds tied up by mail float to 2 ​days, and processing float will be eliminated. Funds would then be transferred twice each business day by means of automated depository transfer checks from local banks to the First Pennsylvania Bank. Each DTC costs ​$18. These transfers will occur all 270 business days of the year. Each check processed through the proposed cash collection system will cost ​$0.17.

a. What amount of cash balances will be freed up if Peggy Pierce Designs Inc. adopts the system suggested by First​ Pennsylvania?

b. What is the opportunity cost of maintaining the current banking​ setup?

c. What is the projected annual cost of operating the proposed​ system?

d. Should Pierce adopt the new​ system? Compute the net annual gain or loss associated with adopting the system.

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $130,000, and it would cost another $32,500 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 $52,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $76,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent. $ What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent. Year 1: $ Year 2: $ Year 3: $ If the WACC is 11%, should the spectrometer be purchased?

Problems with IRR  

White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.

a. Calculate the NPV at the following discount rates and plot an NPV profile for this​ investment:

0%,

5​%,

7.5​%,

10​%,

15%​,

20​%,

22.5​%,

25​%,

30​%.

b. What does the NPV profile tell you about this​ investment's IRR?

c. If the company follows the IRR decision rule and their cost of capital is

15​%,

should they accept or reject the​ opportunity? Why is it hard to make a decision on this investment based solely on the IRR​ rule?

d. If the​ company's cost of capital is

15​%,

should they reject or accept the investment based on its​ NPV?

Discuss the three main areas of concern in corporate finance.

16. Which of the following is true regarding the sensitivity of the Free Cash Flow valuation model to errors? a. The future terminal (continuation) cash flow is extremely sensitive to forecasting and growth rate errors. b. All else being equal, a terminal (continuation) value computed 10 years from today with a 3% overstatement in the growth rate will bias the intrinsic valuation more than if the terminal (continuation) value computation were made in 6 years with a 3% overstatement in growth. c. Financial statements after the year 2002 provide less accurate information regarding the market value of debt than financial statements prepared in the late 1980’s. d. Cash flow based statements provide more forward looking information than do accrual based statements and valuation methods. e. Free Cash Flow valuations are riddled with errors and do a poorer job of explaining and forecasting stock prices that the Discounted Dividends model.

which area of concern in corporate finance is the most difficult to address

(Accounts receivable collection policy​) The Cowboy Bottling Company will generate ​$16 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The​ firm's employees work 300 days a year.​ Currently, the​ firm's processing system ties up 6 ​days' worth of remittance checks. A recent report from a financial consultant indicated procedures that will enable Cowboy Bottling to reduce processing float by 1 full days. If Cowboy invests the released funds to earn 11 ​percent, what will be the annual​ savings?

The annual savings on the new processing system will be ​$