Question:

(a) Calculate the free cash flow generated by a firm which has earnings before interest and taxes of £30m, has depreciated its fixed assets by £1m, has invested £10m in new fixed assets and £5m in working capital during 2019 when it paid corporate tax at 20%. Explain what you have assumed about the firm’s asset base.

(b) During 2019 the firm in (a) generated revenue of £60m, its cost of goods sold was £20m and its selling, general and administrative costs were £10m. You anticipate that over the next five years revenue will grow at 5% each year, the cost of goods sold will continue to be a fixed percentage of revenue, but due to managerial efficiencies administrative costs will not change. All forms of investment, together with depreciation will have a consistent relationship with revenue. At the end of this five-year period you believe that free cash flow will grow at 2% each year. What is the company worth at the end of 2019, assuming that its weighted average cost of capital is 5%?

(c) How would the company’s weighted average cost of capital and hence value change if it were to issue additional debt in order to repurchase equity?

(d) Explain how you could value this company using multiples, and what assumptions you would have to make.

Select your favorite drink or snack item manufactured by a publicly held company. For this product predict the following:

1. Where is the product manufactured?

2. Given the suggested retail price of the company and using a 50% markup on price at retail, determine the sell price to the distributor/merchandiser. Review the company’s overall gross margin. If the product is sold direct to the consumer, you may apply the gross margin as calculated. Applying the gross margin percentage to your product sales price, infer the cost of the product. Present your calculations in a supporting table.

3. Complete the same exercise for a competitor’s product of the same type. Present your calculations in a supporting table included in your paper.

4. Comment on the differences in cost between the two competitors, and assert the reason for this difference (e.g., does the company compete on cost or differentiation?)

5. Apply the concept of the value chain to this product. What types of costs would be relevant for each segment of the value chain for this product?

6. Research a single critical ingredient of your snack and its source. Do you expect significant increases in the cost of this ingredient over the next year? Support your response with input from the commodities market or other economic data.

7. What are the opportunities to offset this price increase, maintain gross margin, and offer the product to consumers at the same price currently? Present your calculations in a supporting table included in your paper.

ohnston Adhesives Company makes three widely used industrial adhesives: A101, A204, and B216. Sales and production information for each of the three adhesives are shown in the following table. Most of Johnston’s customers ask for a special blend of the three products, which improves heat-resistance. The additional separable processing requires additional time and materials, and the price is increased accordingly, as shown in the table. Assume that Johnston produces only for specific customer orders, so there is no beginning or ending inventory. Assume also that all of Johnston’s customers requested the heat-resistant version of the products so that all production required additional separable processing. Total joint cost for the three products is $3,425,000.

Required:

1. Calculate the unit product cost and total gross margin for each of the three product lines using the following methods: (a) physical measure method, (b) sales value at split-off method, (c) the net realizable value method, and (d) the constant gross margin percentage method. (Round intermediate calculations and cost per unit answers to 4 decimal places. Round your final answers to whole dollar amounts. Negative amounts should be indicated with a minus sign.)

13-22 Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business that has just finished building a 60-room motel. Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights). All rooms are similar and will rent for the same price. Brady estimates the following operating costs for next year:

Variable Operating Costs $3 per room-night

Fixed Costs

Salaries and Wages $177,000

Maintenance of building and pool $38,000

Other operating and administration costs $190,000

Total Fixed Costs $405,000

The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment.

1. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night?

2. Brady's market research indicates that if the price of a room-night determined in requirement 1 is reduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. Should Brady reduce prices by 10%? Show your calculations.

Please show all work for both. Thanks.

Benson Pharmaceuticals uses a process-costing system to compute the unit costs of the over-the-counter cold remedies that it produces. It has three departments: Picking, Encapsulating, and Bottling. In Picking, the ingredients for the cold capsules are measured, sifted, and blended. The mix is transferred out in litre containers. The encapsulating department takes the powdered mix and places it in capsules. One litre of powdered mix converts into 1,500 capsules. After the capsules are filled and polished, they are transferred to Bottling, where they are placed in bottles that are then affixed with a safety seal, lid, and label. Each bottle receives 50 capsules. During March, the following results are available for the first two departments: Picking Encapsulating Beginning inventories: Physical units 10 litres 4,000 Costs: Materials $252 $32 Labour $282 $20 Overhead ? ? Transferred in - $140 Current production: Transferred out 140 litres 208,000 Ending inventory 20 litres 6,000 Costs: Materials $3,636 $1,573 Transferred in Labour $4,618 $1,944 Overhead ? ? Percentage of completion: Beginning inventory 40% 50% Ending inventory 50% 40% Overhead in both departments is applied as a percentage of direct labour costs. In the picking department, overhead is 200 percent of direct labour. In the encapsulating department, the overhead rate is 150 percent of direct labour. Required:

1. Prepare a production report for the picking department using the weighted average method. Follow the five steps outlined in the chapter. Round to two decimal places for the unit cost.

2 Prepare a production report for the encapsulating department using the weighed average method Follow the five steps outlined in the chapter. Round to four decimal places for the unit cost.

3 Explain why the weighted average method is easier to use than FIFO Explain when weighted average will give about the same results as FIFO.

The table given below shows how, on average, the market value of a Boeing 737 has varied with its age and the cash flow needed in each year to provide a 11% return. (For example, if you bought a 737 for $19.89 million at the start of year 1 and sold it a year later, your total profit would be 18.09 + 3.99 − 19.89 = $2.19 million, 11% of the purchase cost.)

Assume airlines write off their aircraft straight-line over 15 years to a salvage value equal to 25% of the original cost.

a. Calculate economic depreciation, book depreciation, economic return, and book return for each year of the plane’s life. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions except for percentage values. Round your percentage answers to 1 decimal place and other answers to 2 decimal places.)

b-1. Suppose an airline invested in a fixed number of Boeing 737s each year. Calculate the steady-state book rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b-2. Would steady-state book return overstate or understate true return?

• Understate

• Overstate

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Contribution Margin, Break-Even Units, Break-Even Sales, Margin of Safety, Degree of Operating Leverage

Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is:

Required:

1. Compute the contribution margin per unit, and calculate the break-even point in units. Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four significant digits, and round the break-even sales revenue to the nearest dollar.)

2. The divisional manager has decided to increase the advertising budget by $250,000. This will increase sales revenues by $1 million. By how much will operating income increase or decrease as a result of this action? Use your answers from part 1 to determine the amount.
$  Increase

3. Suppose sales revenues exceed the estimated amount on the income statement by $1,500,000. Without preparing a new income statement, by how much are profits underestimated? Use your answers from part 1 to determine the amount.
$

4. Compute the margin of safety based on the original income statement. Round your answer to the nearest dollar.
$

5. Compute the degree of operating leverage based on the original income statement. Round your answer to two decimal places.

If sales revenues are 8% greater than expected, what is the percentage increase in operating income? Round your answer to four decimal places before converting to a percentage. For example, 0.88349 would be rounded to 0.8835 and entered as 88.35%.
% = ?

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

The company’s discount rate is 18%.

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product. (Round your answers to 2 decimal places.)

2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)

3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)

4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)

5. Calculate the simple rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, Lou Barlow would likely: