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Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,320,000 and will last for six years. Variable costs are 38 percent of sales and fixed costs are $460,000 per year. Machine B costs $5,598,000 and will last for nine years. Variable costs for this machine are 33 percent of sales and fixed costs are $295,000 per year. The sales for each machine will be $13.5 million per year. The required return is 8 percent and the tax rate is 25 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. |
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Calculate the EAC for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) |
System A:
System B:
In: Finance
EVALUATION OF PORTFOLIO BETA AND THE REQUIRED RETURN ON STOCK The tendency of a stock's price to move up and down with the market is reflected in its beta coefficient. Therefore, beta is a measure of an investment's market risk, and is a key element of the CAPM. In this part of the project, you get financial information using Yahoo!Finance (found athttp://finance.yahoo.com/ ) and www.money.cnn.com To find a company's beta, enter the desired stock symbol and request a basic quote. Once you have the basic quote, select the "Statistics". Scroll down this page to find the stock's beta. In your initial response to the topic you have to answer all 5 questions. You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor. From Yahoo!Finance obtain a report on any two companies. What are the betas listed for these companies? If you made an equal dollar investment in each stocks what would be the beta of your portfolio? Please how your work. If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Please how your work. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on both stock. Note that you will need the risk-free rate and the market return. a) To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s at www.finance.yahoo.com -click on Market Data - U.S. Treasury Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. b) Between 1926 and 2014, the compound annual rate of return of S&P 500 is estimated a 10.5%. We will use this number as the market return. c) Calculate the required return on both stock using the Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work. Find on the Internet the 52-weeks change of the stock price. Compare the required return on these stocks calculated using CAPM against their historical return over the last 52 weeks. Is there a difference between these returns? Are these stock overvalued, undervalued, or properly valued? Why? In accordance with your founding, is it reasonable for the investor to buy any of these stocks? Explain your answers. 9 0
In: Finance
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A proposed cost-saving device has an installed cost of $680,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $90,000, the marginal tax rate is 22 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $71,000. What level of pretax cost savings do we require for this project to be profitable? MACRS schedule. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
In: Finance
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Aday Acoustics, Inc., projects unit sales for a new 7-octave voice emulation implant as follows: |
| Year | Unit Sales | |||
| 1 | 72,600 | |||
| 2 | 78,000 | |||
| 3 | 83,000 | |||
| 4 | 80,900 | |||
| 5 | 67,100 | |||
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Production of the implants will require $1,420,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,500,000 per year, variable production costs are $137 per unit, and the units are priced at $319 each. The equipment needed to begin production has an installed cost of $17,900,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The company is in the 22 percent marginal tax bracket and has a required return on all its projects of 16 percent. MACRS schedule. |
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What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
US Auto Company would like to offer rebates to its customers in order to increase sales. If it lowers prices sales will increase. This will depend on the price elasticity of demand. Assume that the price elasticity of demand is 1.5. This firm is considering a $400 rebate on its cars. Also assume the following information on prices and costs before the rebates:
Average price per car $9,000 per car
Expected sales volume at $9,000) per car 1,000,000 cars
Average total costs per car $8,200 per car
Total variable cost $6,400,000,000
Please show the calculation. Thank you.
In: Finance
NBM has $2 million of extra cash. It has two choices to make use of the cash. One alternative is to invest the cash in financial assets. The resulted investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 7%, or an 11% preferred stock. The tax law says only 30% of the dividend from the preferred stock investment would be subject to the corporate income tax. Another alternative is to pay out the cash as dividends and let the share holders invest on their own in T-bills with the same yield. The corporate tax rate is 35%, and the individual tax rate is 31%. Should the cash be paid today or in three years? Which of the two options generates the highest after-tax income for share holders?
Please show the calculation. Thank you
In: Finance
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Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $445,000 is estimated to result in $181,000 in annual pretax cost savings. The press qualifies for 100 percent bonus depreciation, and it will have a salvage value at the end of the project of $73,000. The press also requires an initial investment in spare parts inventory of $32,000, along with an additional $3,700 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 11 percent. |
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Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
In: Finance
Some friends of yours have just had a child. Thinking ahead, and realizing the power of compound interest, they are considering investing for their child’s college education, which will begin in 18 years. Assume that the cost of a college education today is $150,000. Also assume there is no inflation and no tax on interest income used to pay college tuition and expenses.
Instructions: Enter your responses rounded to the nearest dollar.
a. If the interest rate is 3 percent, how much money will your friends need to put into their savings account today to have $150,000 in 18 years?
They would need to put $ into their savings account today.
b. What if the interest rate were 7 percent?
They would need to put $ into their savings account today.
c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 4 percent per year, and that today’s interest rate is 8 percent, what will your friends' investment need to be?
The amount of the investment would be $ .
d. Return to the case with a 3 percent interest rate and no inflation (part a). Assume that your friends don’t have enough financial resources to make the entire investment at the beginning. Instead, they think they will be able to split their investment into two equal parts, one invested immediately and the second invested in five years. What is the amount of each part?
The required size of the two investments would be $ .
In: Finance
Question:
a) Explain clearly why working capital management is very important in finance?
b) Discuss the statement that wealth maximization is a better corporate objective than profit maximization.
In: Finance
Camping World is an American corporation specializing in selling recreational vehicles, recreational vehicle parts, and recreational vehicle service. They also sell supplies for camping. The company has its headquarters in Lincolnshire, Illinois. Due to differing competitive conditions, the price that Camping World charges for their products varies in each city. The price they charge for a particular sleeping bag in each city (in dollars) is provided in the table below, along with the number of sleeping bags that Camping World sold last quarter in each city.
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City |
Price ($) |
Number Sold |
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Myrtle Beach |
46.99 |
609 |
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Savannah |
38.97 |
814 |
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Little Rock |
34.95 |
742 |
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Cleveland |
40.89 |
1150 |
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Pittsburgh |
54.98 |
925 |
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Harrisburg |
39.99 |
525 |
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Charleston |
47.57 |
464 |
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Cincinnati |
50.88 |
811 |
Calculate the average selling price per sleeping bag during the last quarter. (round your answer to 2 decimal places, using conventional rounding rules)
ANSWER: $ per sleeping bag
In: Finance
If You Want Small Business Success, Know How To Measure It... Name at least 5 things that you need to evaluate a business performance evaluation?
In: Finance
4.9
Broward Manufacturing recently reported the following information:
| Net income | $597,000 |
| ROA | 10% |
| Interest expense | $220,890 |
| Accounts payable and accruals | $1,050,000 |
Broward's tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, and 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Do not round intermediate calculations. Round your answers to two decimal places.
BEP: %
ROE: %
ROIC: %
In: Finance
What hurdle rate issue arises when evaluating leveraged buyouts.
What is the appropriate hurdle rate that the analyst should use?
When the acquirer and the target company operate in different industries, what hurdle rate issue arises?
In: Finance
4.13
Complete the balance sheet and sales information using the
following financial data:
Total assets turnover: 1.3×
Days sales outstanding: 36.5 daysa
Inventory turnover ratio: 4×
Fixed assets turnover: 3.0×
Current ratio: 2.0×
Gross profit margin on sales: (Sales - Cost of goods sold)/Sales =
35%
aCalculation is based on a 365-day year.
Do not round intermediate calculations. Round your answers to the nearest dollar.
| Balance Sheet | ||||
| Cash | $ | Current liabilities | $ | |
| Accounts receivable | Long-term debt | 40,500 | ||
| Inventories | Common stock | |||
| Fixed assets | Retained earnings | 94,500 | ||
| Total assets | $270,000 | Total liabilities and equity | $ | |
| Sales | $ | Cost of goods sold | $ | |
In: Finance
4.11
Assume the following relationships for the Caulder Corp.:
| Sales/Total assets | 1.9× |
| Return on assets (ROA) | 5.0% |
| Return on equity (ROE) | 9.0% |
Calculate Caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Do not round intermediate calculations. Round your answers to two decimal places.
Profit margin: %
Debt-to-capital ratio: %
In: Finance