In: Finance
How do options apply to capital budgeting? Explain and give an example.
In: Finance
In: Finance
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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 8%, 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.
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In: Finance
In: Finance
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Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.95 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $410,000. The project is expected to generate $2.75 million in annual sales, with annual expenses of $925,000. The project will require an initial investment of $460,000 in NWC that will be returned at the end of the project. The corporate tax rate is 21 and the project has a required return of 13 percent. |
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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.) |
| NPV | $ |
In: Finance
Brenda Borrow is considering a loan so that she can finance
the
purchase of Real Estate. Brenda has researched the fact that a
Fully
Amortized Mortgage real estate loan for a period of 30 years
will
obligate her to pay $1400 per month over the life of the
loan.
Brenda cannot afford the $1400 per month payment - not yet
anyway. Perhaps later - when her job begins paying her more
salary - she could afford the $1400 per month payment. Now
Brenda can only afford to pay $1100 per month. Brenda has
been
told of an arrangement called a "Graduated Payment
Mortgage."
Discuss the concept of a "Graduated Payment Mortgage."
Discuss
the mechanics of the loan and discuss the pitfalls of the
loan.
Compare the "Graduated Payment Mortgage" with the "Fully
Amortized Mortgage." Advise Brenda regarding the selection of
the
mortgage type.
In: Finance
Analysis of an expansion project
Companies invest in expansion projects with the expectation of increasing the earnings of its business.
Consider the case of Garida Co.:
Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
|---|---|---|---|---|
| Unit sales | 3,500 | 4,000 | 4,200 | 4,250 |
| Sales price | $38.50 | $39.88 | $40.15 | $41.55 |
| Variable cost per unit | $22.34 | $22.85 | $23.67 | $23.87 |
| Fixed operating costs except depreciation | $37,000 | $37,500 | $38,120 | $39,560 |
| Accelerated depreciation rate | 33% | 45% | 15% | 7% |
This project will require an investment of $15,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Garida pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation. (Note: Round your answer to the nearest whole dollar.)
$49,564
$43,099
$51,719
$34,479
Now determine what the project’s NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.)
The depreciation method will result in the highest NPV for the project.
No other firm would take on this project if Garida turns it down. How much should Garida reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $600 for each year of the four-year project? (Note: Round your answer to the nearest whole dollar.)
$1,861
$2,047
$1,582
$1,117
Garida spent $2,750 on a marketing study to estimate the number of units that it can sell each year. What should Garida do to take this information into account?
Increase the amount of the initial investment by $2,750.
The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.
Increase the NPV of the project $2,750.
In: Finance
The current spot rate between the euro and dollar is €1.1017/$. The annual inflation rate in the U.S is expected to be 1.99 percent and the annual inflation rate in euroland is expected to be 2.83 percent. Assuming relative purchasing power parity holds, what will the exchange rate be in two years?
In: Finance
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):
| Cash | $ 3.5 | Accounts payable | $ 9.0 | |
| Receivables | 26.0 | Notes payable | 18.0 | |
| Inventories | 58.0 | Line of credit | 0 | |
| Total current assets | $ 87.5 | Accruals | 8.5 | |
| Net fixed assets | 35.0 | Total current liabilities | $ 35.5 | |
| Mortgage loan | 6.0 | |||
| Common stock | 15.0 | |||
| Retained earnings | 66.0 | |||
|
Total assets |
$122.5 | Total liabilities and equity | $122.5 |
Sales for 2016 were $500 million and net income for the year was $15 million, so the firm's profit margin was 3.0%. Upton paid dividends of $6 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.
b. 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.
c. 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 | $ | |
In: Finance
Henry and Bob are both 35 years old but have been investing different amounts of money for different lengths of time.
a) Determine the total value of each of the above investments. Complete the tables or show your formula calculations as part of your solution.
In: Finance
Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain's 2016 sales (all on credit) were $248000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $7440. It turned over its inventory 7 times during the year, and its DSO was 34 days. The firm had fixed assets totaling $25000. Chastain's payables deferral period is 45 days.
Assume 365 days in year for your calculations. Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations.
Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places. Do not round intermediate calculations.
Suppose Chastain's managers believe that the inventory turnover can be raised to 8.4 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.4 for 2016? Round your answers to two decimal places. Do not round intermediate calculations.
In: Finance
An office building is purchased with the following projected cash flows: NOI is expected to be $180,000 in year 1 with 2 percent annual increa The purchase price of the property is $910,000. 100% equity financing is used to purchase the property The property is sold at the end of year 4 for $970,000 with selling cost 8 %
Calculate the unlevered internal rate of return (IRR).
A. 19.9%
B. 20.7%
C. 21.5%
D. 22.3%
E. 23.1%
In: Finance
Evaluating Walter's Health Care Coverage
Walter Burton was a self-employed window washer earning approximately $700 per week. One day, while cleaning windows on the eighth floor of the Commercial Bank Building, he tripped and fell from the scaffolding to the pavement below. He sustained severe multiple injuries but miraculously survived the accident. He was immediately rushed to the local hospital for surgery. He remained there for 58 days of treatment, after which he was allowed to go home for further recuperation. During his hospital stay, he incurred the following expenses: surgeon, $2,300; physician, $900; hospital bill for room and board, $250 per day; nursing services, $1,200; anesthetics, $600; wheelchair rental, $100; ambulance, $150; and drugs, $350. Walter has a major medical policy that has a $3,500 deductible clause, an 80 percent co-insurance clause, internal limits of $170 per day on hospital room and board, and $1,600 as a maximum surgical fee. The policy provides no disability income benefits.
In: Finance
An office building is purchased with the following projected cash flows: NOI is expected to be $180,000 in year 1 with 2 percent annual increa The purchase price of the property is $910,000. 100% equity financing is used to purchase the property The property is sold at the end of year 4 for $970,000 with selling cost 8 %
Calculate the unlevered internal rate of return (IRR).
A. 19.9%
B. 20.7%
C. 21.5%
D. 22.3%
E. 23.1%
In: Finance