Toledo Corp owns construction equipment worth $1.5M and has $500M in cash. Toledo Corp takes out a 5-year loan for $1M. Toledo Corp finances the construction of a new building entirely with cash. The cost of the construction is $1.5M. Please fill out Toledo Corp’s balance sheets shown below. The first balance sheet is before developing the new building and the second balance sheet is after developing the new building.

ANSWER

Toledo Corp’s balance sheets after taking the loan Before constructing the new building:

After constructing the new building:

Toledo Corp sells the building to Bechtel for 20,000 Bechtel shares @ $100/share. Please fill out Toledo Corp’s balance sheet after proceeds from the sale of the new building to Bechtel:

Your company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine that costs $300,000 and has an estimated useful life of five years and a salvage value of 10% of its original cost. All sales will end up being for cash and all costs are out-of-pocket costs except for depreciation on the new machine. Additional information includes the following:

Required:

1. What is the payback period for this product?
2. Briefly describe the 2 major limitations of the payback method.
3. Prepare a net present value (NPV) analysis for the proposed product.
4. What is the internal rate of return (IRR) for the proposed product?
5. Based on the above findings, should the new product be approved? Why or why not?

The human resources department of a consulting firm gives a standard creativity test to a randomly selected group of new hires every year. This year, 80 new hires took the test and scored a mean of 112.9 points with a standard deviation of 13.8. Last year, 60 new hires took the test and scored a mean of 117.1 points with a standard deviation of . 15.3 Assume that the population standard deviations of the test scores of all new hires in the current year and the test scores of all new hires last year can be estimated by the sample standard deviations, as the samples used were quite large. Construct a 95% confidence interval for µ1-µ2 , the difference between the mean test score µ1 of new hires from the current year and the mean test score µ2 of new hires from last year. Then complete the table below.

Carry your intermediate computations to at least three decimal places. Round your answers to at least two decimal places.

1) HSB Co. manufactures construction materials and has decided to expand operations.
     The new operation is expected to increase EBIT from the current level of $750 000
     to $1 million per annum. HSB Co. has a capital structure that utilizes bonds,
     ordinary equity and preference shares. The $500 000 of issued bonds pay 7% per
     annum. Preference shares pay an annual fixed dividend of $75 000. The company
     has 1 000 000 ordinary shares that are trading at $5 per share. Corporate tax rate is

18.5%.

a) HSB Co needs to raise $800 000 to fund the expansion. Assuming the company
      can issue new shares at the current market price, what is the impact on EPS if new
      shares are issued to fund the expansion?

b) If new debt can be raised at 9% interest rate, what is the impact on EPS of using
      debt rather than a new equity issue?

c) Calculate the EPS indifference point of New Equity plan and New Debt Plan.

Pooh Industries is contemplating purchasing a new machine that will significantly improve the efficiency of their operations. To date the company has spent $15,000 evaluating the machine to better determine annual operating savings from using the machine. The new machine would cost $800,000 and would be depreciated over an expected life of 8 years to a $40,000 salvage value using the straight-line method. Pooh forecasts that the new machine would reduce operating expenses by $200,000 per year. The firm's marginal tax rate is 40% and its WACC (which is the appropriate rate to use for evaluating this machine) is 15%. Pooh estimates that the new machine could be sold at the end of its life (i.e., in 8 years) for salvage value (i.e., $40,000). The new machine would require additional net working capital of $90,000 which will be recovered at the end of the project. The company will hire a new mechanic for maintenance of the machine as well as for other duties related to this project. This new employee will cost the company $75,000 per year (this amount is not included in the operating cost change listed above). What is this project’s NPV?

Your company's new portable phone/music player/PDA/bottle washer, the RunMan, will compete against the established market leader, the iNod, in a saturated market. (Thus, for each device you sell, one fewer iNod is sold.) You are planning to launch the RunMan with a traveling road show, concentrating on two cities, New York and Boston. The makers of the iNod will do the same to try to maintain their sales. If, on a given day, you both go to New York, you will lose 900 units in sales to the iNod. If you both go to Boston, you will lose 650 units in sales. On the other hand, if you go to New York and your competitor to Boston, you will gain 1,600 units in sales from them. If you go to Boston and they to New York, you will gain 600 units in sales. What fraction of time should you spend in New York and what fraction in Boston?

You should spend  of your time in New York and  in Boston.

How do you expect your sales to be affected?

ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200 000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40 000 per year before tax and unadjusted for inflation (in today’s dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60 000 per year (in today’s dollars). If ACME invests in the new line, a one-time investment of $10 000 in additional working capital will be required. The tax rate is 30 per cent, the opportunity cost of capital is 10 per cent, and the annual rate of inflation is 3 per cent. What is the NPV of the new production line?

Pooh Industries is contemplating purchasing a new machine that will significantly improve the efficiency of their operations. To date the company has spent $15,000 evaluating the machine to better determine annual operating savings from using the machine.

The new machine would cost $800,000 and would be depreciated over an expected life of 8 years to a $40,000 salvage value using the straight-line method. Pooh forecasts that the new machine would reduce operating expenses by $200,000 per year. The firm's marginal tax rate is 40% and its WACC (which is the appropriate rate to use for evaluating this machine) is 15%. Pooh estimates that the new machine could be sold at the end of its life (i.e., in 8 years) for salvage value (i.e., $40,000).

The new machine would require additional net working capital of $90,000 which will be recovered at the end of the project. The company will hire a new mechanic for maintenance of the machine as well as for other duties related to this project. This new employee will cost the company $75,000 per year (this amount is not included in the operating cost change listed above).

What is this project’s NPV?

Use Worksheet 9.2. Ben West, a 35-year-old computer programmer, earns $57,000 a year. His monthly take-home pay is $3,000. His wife, Ashley, works part-time at their children's elementary school but receives no benefits. Under state law, Ashley's employer contributes to a workers' compensation insurance fund that would provide $2,050 per month for six months if Ben were disabled and unable to work.

1. Use Worksheet 9.2 to calculate Ben's disability insurance needs assuming that he won't qualify for Medicare under his Social Security benefits. Round your answer to the nearest whole.
   $
2. Based on your answer in part a, what would you advise Ben about his need for additional disability income insurance? Discuss the type and size of disability income insurance coverage he should consider, including possible provisions he might want to include. What other factors should he take into account if he decides to purchase a policy?