ch 13 excersises #7

Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The company’s current assets, current liabilities, and sales have been reported as follows over the last five years (Year 5 is the most recent year):

Variable Costing and Over/Under Producing

Cathy's Mats produces and sells artistic placemats for dining room tables. These placemats are manufactured out of recycled plastics. For last year and this year each mat has a variable manufacturing cost of $3, and fixed manufacturing overhead is $150,000 per year (both Last Year and This Year). Cathy's Mats incurs no other costs. The following table summarizes the selling price and the number of mats produced and sold Last Year and This Year:

Cathy's Mats uses FIFO (First-in First Out) to value its ending inventory. Last Year Cathy's Mats had no beginning inventory.

Required:

a. Prepare income statements for Last Year and This Year using absorption costing.
b. Prepare income statements for Last Year and This Year using variable costing.

c. What is the value of the ending inventory using the FIFO method?

d. What is the value of the ending inventory using the LIFO method?

Problem 1 (In order to get credit, show your work and you can copy the tables below into the answer box to fill in.)

Sugar Land Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space in Sugar Land’ main plant. Total cost of the machine is $260,000. The machinery has an economic life of 4 years, and MACRS will be used for depreciation. The machine will have a salvage value of 40,000 after 4 years.


The new line will generate Sales of 1,350 units per year for 4 years and the variable cost per unit is $100 in the first year. Each unit can be sold for $200 in the first year. The sales price and variable cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by $30,000 at time zero (The NWC will be recouped in year 4). The firm’s tax rate is 40% and its weighted average cost of capital is 10%.

1. What are the annual depreciation expenses for years 1 through 4? (10 Points)

2. Calculate the annual sales revenues and costs (other than depreciation), years 1 through 4. (10 points)

3. Estimate annual (Year 1 through 4) operating cash flows (40 points)

4. Estimate the after tax salvage cash flow (10 points)
5. Estimate the cash flow of this project (10 Points)

6. Estimate the NPV, IRR, MIRR, and profitability Index of the project. (20 points)

$7000 is invested for a period of 10 years at 15% interest. Payments of $300 are added at year 1, $400 at year 2, $500 at year 3, etc. increasing until year 10. You also make lump sum payments of $2500 at year 3 and year 7. What is the future worth?

EXPECTATIONS THEORY Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is %5 and a 2-year Treasury bond yields 7%, what is the 1-year interest rate that is expected for Year 2? Calculate this yield using a geometric average. What inflation rate is expected during Year 2? Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2.

Your firm is considering introducing a new product for which returns are expected to be as follows:

Year 1 to Year 3 (Inclusive): $2,000 per year

Year 4 to Year 8 (Inclusive): $5,000 per year

Year 9 to Year12 (Inclusive): $3,000 per year

The introduction of the product requires an immediate outlay (expenditure) of $15,000 for equipment estimated to have a salvage value of $2,000 after 12 years. Compute the Internal Rate of Return (IRR) for the launch of this product. Write your answer to two decimal places.

(a) Explain what is meant by the terms “horizon (terminal) date” and “horizon (terminal) value”. (b)Suppose D0 = RM5.00 and rs = 10%. The expected growth rate from Year 0 to Year 1 (g0 to 1) = 20%, the expected growth rate from Year 1 to Year 2 (g1 to 2) = 10%, and the constant rate beyond Year 2 is gn = 5%. What are the expected dividends for Year 1 and Year 2? What is the expected horizon value price at Year 2? What is the expected P0

Kafue Fisheries paid a dividend of K0.58 per share this year. Dividends at the end of each of the next five years are expected to be as follows:

Year 1 K0.70

Year 2 K0.83

Year 3 K0.96

Year 4 K1.09

Year 5 K1.22

After year 5, dividends are expected to grow indefinitely at 10 percent a year. If your required rate of return for Kafue Fisheries’ common stock is 12 percent, what is the most that you would pay per share for Kafue Fisheries today?

Michelangelo Inc., a software development firm, has stock outstanding as follows: 10,000 shares of cumulative 3%, preferred stock of $20 par, and 13,000 shares of $50 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $2,300; second year, $3,200; third year, $23,030; fourth year, $41,750. 1st Year 2nd Year 3rd Year 4th Year Preferred stock (dividend per share) $ $ $ $ Common stock (dividend per share) $ $ $ $