...You have been asked by the President of your company to evaluate the proposed acquisition of a new spectrometer for the firm's R&D department. The equipment's basic price is $70,000, and it would cost another $10,750 to modify it for special use by your firm. The spectrometer, which falls into the MARCS 3-year class, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. a. What is the net cost of the spectrometer (i.e., the Year-0 Net Cash Flow) Price ($70,000) Modification (15,000) Change in NWC (4,000) Net Cost ($89,000) b. What are the net operating cash flows in Years 1, 2 and 3? Year 1 Year 2 Year 3 *After-tax savings $15,000 $15,000 $15,000 **Depreciation shield 11,220 15,300 5,100 Operating cash flow $26,220 $30,300 $20,100 The after-tax cost savings is $25,000(1 – T) = $25,000(0.6) = = $15,000. The depreciation expense in each year is the depreciable basis, $85,000, times the MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3, respectively...
Words: 411 - Pages: 2
...Mini Case (p. 45) * a. Why is corporate finance important to all managers? Corporate finance enables managers to choose different ways and choose specific projects that will increase company profitability as well as identify ways to acquire needed funding. With proper management of corporate finances companies are able to maximize their shareholder wealth. * b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. A company may start out as a sole proprietorship or partnership and work its way towards becoming a corporation. * c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance? Agency problems occur when managers act in a way that benefits themselves and acts in ways that are not in the best interests of the stockholders or owners of the company. Corporate governance is the set of rules that are used to direct the company’s actions towards its employees, “shareholders, creditors, customers, competitors, and community” and is a means by which agency problems are addressed (Brigham, Eugene F. . Financial Management: Theory & Practice, 13th Edition. South Western Educational Publishing, 03/2010. p. 8). Corporations go public through an initial public offering (IPO) which is when the company’s stock is sold to the public at large. After an IPO, corporate growth is supported by taking out loans...
Words: 2221 - Pages: 9
...Week 1 – Homework 1 Mini Case A) I think that corporate finance is important to all managers because it is the basic component of how the business is run. It provides the managers with skills to identify corporate strategies and forecast the funding requirements for their company. It helps them understand how the company is running. B) There are 3 forms a business : a. A proprietorship is what most businesses are when then start because they are fairly easy to start. They usually are the only people involved in starting and running the business. A disadvantage is that they are responsible for all of the business’ debt and the government can come after them personally. b. A partnership is where you may have 2 people invested n a company. This business form is similar to a proprietorship in regards to liability and capital for making the business grow. Both parties are equally responsible for the debt of the business. These limited partnerships are either a LLP, which stands for limited liability partnership or the more common one a limited liability company, also known as LLC. c. A corporation is the last of the business forms. This is not as easy as the previous two. Corporations have to go through the state and adhere to the guidelines given to them. A corporation can keep living in the business world even once the owners die. They also have shares to sell to the stakeholders. This can help bring in more capital to the company. ...
Words: 2212 - Pages: 9
...(13-10) Corporate Valuation The financial statements of Lioi Steel Fabricators are shown below—both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted average cost of capital is 11%. • a. If operating capital as of 12/31/2010 is $502.2 million, what is the free cash flow for 12/31/2011? • b. What is the horizon value as of 12/31/2011? • c. What is the value of operations as of 12/31/2010? • d. What is the total value of the company as of 12/31/2010? • e. What is the intrinsic price per share for 12/31/2010? Income Statements for the Year Ending December 31 (Millions of Dollars Except for Per Share Data) Actual 2010 Projected 2011 ________________________________________ Net sales $ 500.0 $ 530.0 Costs (except depreciation) 360.0 381.6 Depreciation 37.5 39.8 Total operating costs $ 397.5 $ 421.4 Earnings before interest and taxes $ 102.5 $ 108.6 Less interest 13.9 16.0 Earnings before taxes $ 88.6 $ 92.6 Taxes (40%) 35.4 37.0 Net income before preferred dividends $ 53.2 $ 55.6 Preferred dividends 6.0 7.4 Net income available for common dividends $ 47.2 $ 48.2 Common dividends $ 40.8 $ 29.7 Addition to retained earnings $ 6.4 $ 18.5 Number of shares 10 10 Dividends per share $ 4.08 $ 2.97 Balance Sheets for December 31 (Millions of Dollars) Actual 2010 Projected 2011...
Words: 368 - Pages: 2
...1. (TCO A) Which of the following statements is NOT correct? (Points : 5) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. The corporate valuation model discounts free cash flows by the required return on equity. The corporate valuation model can be used to find the value of a division. An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. | 2. (TCO F) Which of the following statements is correct? (Points : 5) If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV. If Project A's IRR exceeds Project B’s, then A must have the higher NPV. A project’s MIRR can never exceed its IRR. If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV. If the NPV is negative, the IRR must also be negative. | 3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last...
Words: 1001 - Pages: 5
...Final Exam Page 1 1. (TCO A) Which of the following is NOT normally regarded as being a barrier to hostile takeovers? (Points : 5) Abnormally high executive compensation Targeted share repurchases Shareholder rights provisions Restricted voting rights Poison pills 2. (TCO F) Which of the following statements is correct? (Points : 5) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years. The percentage difference between the MIRR and the IRR is equal to the project’s WACC. 3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend...
Words: 527 - Pages: 3
...A. Corporate finance is important to all managers because they must generate enough cash to compensate the investors who provide necessary capital to help company by evaluating any proposal, whether it relates to marketing, production, strategy, or any other area, and implement only products that will add value to company investors. B. The organizational forms of a company is proprietorship, partnership, and corporation: Proprietorship is an unincorporated business owned by one individual. The three advantages are easily and inexpensively form, subject to few government regulations, and income is not subject to corporate taxation but taxed as part of the proprietor’s personal income. The three disadvantages are difficult for a proprietorship to obtain capital for growth, proprietor has unlimited personal liability for business’s debts, which can result in losses that may exceed money invested in company, and life of proprietorship is limited to life of its founder. Partnership two or more persons or entities associate to conduct a non-corporate business for profit. It may operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of state in which the partnership formed. The disadvantages of partnership is the liability were partners can potentially lose all of their personal assets, even assets not invested in the business due to partnership law stating that each partner is liable for the...
Words: 1308 - Pages: 6
...Time Remaining: [pic] [pic][pic][pic][pic] |1. (TCO C) | |On its 1999 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million. On its 2000 balance sheet, the | |balance of retained earnings was also equal to $510 million. Which of the following statements is most correct? Show your calculations. | |a. The company must have had net income equal to zero in 2000. | |b. The company had a profit in 2000 but did not pay a dividend in 2000. | |c. the company’s net income in 2000 was $200 million. | |d. If the company lost money in 2000, they must have paid a dividend. | |e. None of the statements above is correct. | |(Points: 20) | | | |[pic] ...
Words: 917 - Pages: 4
...Mini Case (p. 45) a. Why is corporate finance important to all managers? It is important because successful companies must not only be able to obtain high valued product and satisfy customers; they must be able to generate enough cash to compensate investors who provide the capital. Corporate finance helps to do this by giving managers tools to evaluate any proposal, such as marketing, production, and strategy and be able to implement only the projects that add value for the investors. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. Companies can have three organizational forms which are proprietorships, partnerships and corporations. Companies usually start as a proprietorship which is owned by one individual. It is generally easy and inexpensive to startup; it has fewer regulations than other organizational forms; and the income is not subjected to corporate taxation but is taxed as part of the proprietor’s personal income. However, the disadvantages of a proprietorship are that it may be difficult for a sole owner to generate needed capital for growth; personal liabilities are unlimited for the business debt, which can have implications on the owner’s personal assets such as property; and the life of the company is limited to the life of the founder. A general partnership is the same as a sole proprietorship in that it is a business that conducts...
Words: 2004 - Pages: 9
...3-1 DSO = 20 days; ADS = $20,000; AR = ? 3-2 A/E = 2.5; D/A = ? = 1 – 0.40 = 0.60 = 60% 3-3 TA = $10,000,000,000; CL = $1,000,000,000; LT debt = $3,000,000,000; CE = $6,000,000,000; Shares outstanding = 800,000,000; P0 = $32; M/B = ? Book value = = $7.50. M/B = = 10. 3-4 EPS = $1.50; CFPS = $3.00; P/CF = 8.0; P/E = ? P/CF = 8.0 P/$3.00 = 8.0 P = $24.00. P/E = $24.00/$1.50 = 16.0. 3-5 PM = 3%; EM = 2.0; Sales = $100,000,000; Assets = $50,000,000; ROE = ? ROE = PM TATO EM = NI/S S/TA A/E = 3% $100,000,00/$50,000,000 2 = 12%. 3-6 ROA = 10%; PM = 2%; ROE = 15%; S/TA = ?; A/E = ? ROA = NI/A; PM = NI/S; ROE = NI/E ROA = PM S/TA NI/A = NI/S S/TA 10% = 2% S/TA S/TA = 5. ROE = PM S/TA TA/E NI/E = NI/S S/TA TA/E 15% = 2% 5 TA/E 15% = 10% TA/E TA/E = 1.5. 3-7 CA = $3,000,000; = 1.5; = 1.0; CL = ?; I = ? 10% 4-1 0 1 2 3 4 5 | | | | | | PV = 10,000 FV5 = ? FV5 = $10,000(1.10)5 = $10,000(1.61051) = $16,105.10. Alternatively, with a financial calculator enter the following: N = 5, I/YR = 10, PV...
Words: 771 - Pages: 4
...jean,7 ------------------------------------------------- Top of Form Grading Summary These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. | Date Taken: | 10/14/2013 | Time Spent: | 03 min , 40 secs | Points Received: | 18 / 30 (60%) | | Question Type: | # Of Questions: | # Correct: | Multiple Choice | 5 | 3 | | | Grade Details - All Questions | 1. | Question : | You work for Athens Inc. and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow? Sales revenues: $15,000 Depreciation: $4,000 Other operating costs: $6,000 Tax rate: 35% | | | Student Answer: | | $7,250 | | | | $7,431 | | | | $7,617 | | | | $7,807 | | | | $8,003 | | | | Points Received: | 6 of 6 | | Comments: | | | | 2. | Question : | Which of the following is not a cash flow and thus should not be reflected in the analysis of a capital budgeting project? | | | Student Answer: | | Changes in net operating working capital | | | | Shipping and installation costs | | | | Cannibalization effects | | | | Opportunity costs | | | | Sunk costs that have been expensed for tax purposes | | | | Points Received: | 6 of 6 | | Comments: | | | | 3. | Question : | Which of the following is...
Words: 389 - Pages: 2
.... Question : (TCO A) Which of the following statements is CORRECT? Student Answer: One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. Sole proprietorships are subject to more regulations than corporations. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. Corporations of all types are subject to the corporate income tax. Instructor Explanation: Chapter 1 Explanation: Ch 1: d is correct, all others are incorrect a: incorporating provides owners limited liability b: sole proprietorship has less regulation than corporation c: In limited partnerships certain partners can be designated general partners and others limited partners with differences in control and liability d. sole proprietorships and partnerships are taxed just once at owner level (pass-through of income to owners) whereas corporation earnings can be double or triple taxed depending on individual or corporate ownership of stock e. S-corps can elect to be taxed as proprietorship or partnership Points Received: 10 of 10 Comments: 2. Question : (TCO G) Aubey Aircraft recently announced that its net income increased sharply from the previous...
Words: 1251 - Pages: 6
...* 1. Which of the following does not always increase a company market value * a. Increase the expected growth weight of sales * b. Increasing the expected operating profitability (NOPAT/SALES) * c. Decreasing the capital requirements (Capital /sales0 * d. Decreasing the weighted average cost of capital * e. Increasing the expected rate of return on invested capital * 2. Which of the following statement is correct * a. The MIRR and MPV decision could never conflict * b. The IRR method can never be subject to the multiple IRR problems, while the MIRR method can be * c. One reason people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable re-investment rate assumption. * d. The higher the WACC , the shorter the discounted payback period. * e. The MIRR method assumes that cash flow are reinvested at the cross over rate •3. The Ackert company's last dividend was a $1.55 , the dividend growth rate is expected to be constant at 1.5% for two years, after which dividends are expected to grow a rate of 8.0% for ever. The firm required return the (rs) is 12.0% what is the best estimate of the current stock price. a.$37.05 b. 38.16 c.39.30 c. 40.48 d.41.7 Last dividend (D0) $1.55 Short-run growth rate 1.50% Long-run growth rate 8.00% Required return 12.00% Year 0 1 2 3 1.50% 1.50% 8.00% Dividend $1.5500 $1...
Words: 781 - Pages: 4
...Week 1 assignments FI515 Mini case A-Why is corporate finance important to all managers? Corporate finance provides managers with the skills to identify and select the corporate strategies and individual projects that add value to the company. It helps them to forecast the funding requirements of their company and the necessary strategies to acquire those funds. B- Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. The three main forms of business organizations are: Sole proprietorship, Partnerships and corporations. The main advantages of a Proprietorship are: it is easily and inexpensively formed, it is subject to few government regulations, and the business pays no corporate income taxes. Its disadvantages are: it is difficult for a proprietorship to obtain large sums of capital, the proprietor has unlimited personal liability for the business debts, and the life of the business is limited to the life of the owner. The major advantage of a partnership is its low cost and ease of formation. The disadvantages are similar to those associated with proprietorships: unlimited liability, limited life of the organization, difficulty of transferring ownership, and difficulty of raising large amounts of capital. The tax treatment of a partnership is similar to that for proprietorships, which is often an advantage. The corporate form of business has three major advantages:...
Words: 2193 - Pages: 9
...3-1 Days Sales Outstanding Accounts Receivable Average Credit Sales Solution: ? = 20,000x20 = $400,000 (Accounts Receivable) 400,000 = 20 20,000 3-2 Debt Ratio Total Liabilities / Total Assets Solution: 60% 3-3 Market/Book Ratio Market price per share / Book value per share Book value per share = Common equity / shares outstanding Book value per share = $6,000,000,000 / 800,000,000 = 7.5 Solution: $75 / 7.5 = 10 3-4 PE Ratio Price/Earnings Ratio = Price per share / Earnings per share 8*3.00 = 24 24/$1.50 = 16 3-5 ROE ROE = ROA x Equity Multiplier ROA = Profit Margin x Total assets turnover ROA = .03 x 2 = .06 ROE = .06 x 2.0 = .12 = 12% 3-6 Du Pont Analysis Total Assets Turnover = 5 ROA = Profit Margin x Total Assets Turnover 10% = 2% x ? 10% / 2% = 5 Equity Multiplier = 1.5 ROE = Profit Margin x Total Assets Turnover x Equity Multiplier 15% = 2% x 5 x ? 15% / .1 = 1.5 3-7 Current and Quick Ratios Quick Ratio = Current Assets – Inventories / Current Liabilities Current Liabilities = $3,000,000 / 1.5 Current Liabilities = $2,000,000 1.0 = $3,000,000 - ? / $2,000,000 Inventories = $1,000,000 4-1 FV of Single Amount FV = PV (1+ I)^N FV = $10,000 (1+.10)^5 FV = $10,000 (1.10)^5 FV = $16,105.10 4-2 PV of Single Amount 1292.10 PV = FVn / (1+I)^N PV = $5,000 / (1+ .07)^20 PV = $5,000 / (1.07)^20 PV = $1292.10 4-6 FV of Ordinary Annuity FVAn = PMT { (1+I)^n / I – 1/I } FVAn = $300 [ (1+.07)^5 / .07 – 1/.07] FVAn = $300 [...
Words: 503 - Pages: 3
