2023年公司财务管理题库

PARTIII

TheFlemingCompany,afooddistributor,isconsideringreplacingafillinglineatitsOklahomaCitywarehouse.Theexistinglinewaspurchasedseveralyearsagofor$600,000.Theline’sbookvalueis$200,000,andFlemingmanagementfeelsitcouldbesoldatthistimefor$150,000.Anew,increasedcapacitylinecanbepurchasedfor$1,200,000.Deliveryandinstallationofthenewlineareexpectedtocostanadditional$100,000.AssumingFleming’smarginalrateis40percent,calculatethenetinvestmentforthenewline.

InternationalFoodsCorporation(IFC)currentlyprocessesseafoodwithaunititpurchasedseveralyearsago.Theunit,whichoriginallycost$500,000,currentlyhasabookvalueof$250,000.IFCisconsideringreplacingtheexistingunitwithanewer,moreefficientone.Thenewunitwillcost$700,000andwillrequireanadditional$50,000fordeliveryandinstallation.ThenewunitalsowillrequireIFCtoincreaseitsinvestmentininitialnewworkingcapitalby$40,000.Thenewunitwillbedepreciatedonastraight-linebasisover5yearstoazerobalance.IFCexpectstoselltheexistingunitfor$275,000.IFC’smarginaltaxrateis40percent.

IfIFCpurchasethenewunit,annualrevenuesareexpectedtoincreaseby$100,000(duetoincreasedprocessingcapacity),andannualoperatingcosts(exclusiveofdepreciation)ateexpectedtodecreaseby$20,000.Annualrevenuesandoperatingcostsareexpectedtoremainconstantatthisnewleveloverthe5-yearlifeoftheproject.IFCestimatesthatitsnetworkingcapitalinvestmentwillincreaseby$10,000peryearoverthelifeoftheproject.After5years,thenewunitwillbecompletelydepreciatedandisexpectedtobesoldfor$70,000.(Assumethattheexistingunitisbeingdepreciatedatarateof$50,000peryear.)

Calculatetheproject’snetinvestment.

Calculatetheannualnetcashflowsfortheproject.

Nguyen,Inc.isconsideringthepurchaseofanewcomputersystem(ICX)for$130,000.Thesystemwillrequireanadditional$30,000forinstallation.Ifthenewcomputerispurchaseditwillreplaceanoldsystemthathasbeenfullydepreciated.Thenewsystemwillbedepreciatedoveraperiodof10yearsusingstraight-linedepreciation.IftheICXispurchased,theoldsystemwillbesolefor$20,000.TheICXsystem,whichhasausefullifeof10years,isexpectedtoincreaserevenuesby$32,000peryearoveritsusefullife.Operatingcostsareexpectedtodecreaseby$2,000peryearoverthelifeofthesystem.Thefirmistaxedata40percentmarginalrate.

WhatnetinvestmentisrequiredtoacquiretheICXsystemandreplacetheoldsystem?

ComputetheannualnetcashflowsassociatedwiththepurchaseoftheICXsystem.

Benford,Inc.isplanningtoopenanewsportinggoodsstoreinasuburbanmall.Benfordwillleasetheneededspaceinthemall.Equpmentandfixtureforthestorewillcost$200,000andbedepreciatedovera5-yearperiodonastraight-linebasisto$0.ThenewstorewillrequireBenfordtoincreaseitsnetworkingcapitalby$200,000attime0.First-yearsalesareexpectedtobe$1millionandtoincreaseatanannualrateof8percentovertheexpected10-yearlifeofthestore.Operatingexpenses(includingleasepaymentsandexcludingdepreciation)areprojectedtobe$700,000duringthefirstyearandincreaseata7percentannualrate.Thesalvagevalueofthestore’sequipmentandfixtureisanticipatedtobe$10,000attheendof10Years.Benford’smarginaltaxrateis40percent.

ComputethenetinvestmentrequiredforBenford.

Computetheannualnetcashflowsforthe10-yearprojectedlifeofthestore.

Calculatethenetpresentvalueofaprojectwithanetinvestmentof$20,000forequipmentandanadditionalnetworkingcapitalinvestmentof$5,000attime0.Theprojectisexpectedtogeneratenetcashflowsof$7,000peryearovera10-yearestimatedeconomiclife.Inaddition,thenetworkingcapitalwillberecoveredattheendoftheproject.Therequiredreturnontheprojectis11percentandthecompanyhasamarginaltaxrateof40percent.Whatisthemeaningofthecomputednetpresentvaluefigure?

Calculatetheinternalrateofreturnandprofitabilityindexforaprojectthatisexpectedtogenerate8yearsofannualnetcashflowsof$75,000.Theprojecthasanetinvestmentof$360,000andtherequiredreturnontheprojectis12percent.

Twomutuallyexclusiveprojectshavethefollowingexpectedcashflow:

Year

G

H

0

1

2

3

-$10,000

5,000

5,000

5,000

-$10,000

0

0

17,000

Calculatetheinternalrateofreturnforeachproject.

Calculatethenetpresentvalueforeachproject,assumingthefirm’sweightedcostofcapitalis12percent.

Whichprojectshouldbeadopted?Why?

JeffersonProducts,Inc.,isconsideringpurchasinganewautomaticpressbrake,whichcosts#300,000includinginstallationandshipping.Themachineisexpectedtogeneratenetcashinflowsof$80,000peryearfor10years.Attheendof10years,thebookvalueifthemachinewillbe$0,anditisanticipatedthatthemachinewillbesolefor$100,000.Ifthepressbrakeprojectisundertaken,Jeffersonwillhavetoincreaseitsnetworkingcapitalby75,000.Whentheprojectisterminatedin10years,therenolongerwillbeaneedforthisincrementalworkingcapital,anditcanbeliquidatedandmadeavailabletoJeffersonforotheruses.Jeffersonrequiresa12percentannualreturnonthistypeofprojectanditsmarginaltaxrateis40percent.

Calculatethepressbrake’snetpresentvalue.

Istheprojectacceptable?

Whatisthemeaningofthecomputednetpresentvaluefigure?

Whatistheproject’sinternalrateofreturn?

Forthepressbrakeproject,atwhatannualratesofreturndothenetpresentvalueandinternalrateofreturnmethodsassumethatthenetcashinflowsarebeingreinvested?

TheTaylorMountainUraniumCompanycurrentlyhasannualrevenuesof$1.2millionandannualexpensesexclusiveofdepreciationof$700,000.Depreciationamountsto$200,000peryear.Thesefiguresareexpectedtoremainconstantfortheforeseeablefuture(atleast15years).Thefirm’smarginaltaxrateis40percent.

Anewhigh-speedprocessingunitcosting$1.2millionisbeingconsideredasapotentialinvestmentdesignedtoincreasethefirm’soutputcapacity.Thisnewpieceofequipmentwillhaveanestimatedusablelifeof10yearsanda$0estimatedsalvagevalue.Iftheprocessingunitisbought,Taylor’sannualrevenuesareexpectedtoincreaseto$1.6million,andannualexpensesexclusiveofdepreciationwillincreaseto$900,000.Annualdepreciationwillincreaseto$320,000.Assumethatmoincreaseinnetworkingcapitalwillberequiredasaresultofthisproject.

Calculatetheprocessingunit’snetpresentvalue,usinga12percentrequiredreturn.

ShouldTayloraccepttheproject?

Howmanyinternalratesofreturndoestheprocessingunitprojecthave?Why?

Calculatetheprocessingunit’sinternalrateofreturn.

TurbomachineryParts,Inc.isconsideringtwomutuallyexclusiveequipmentinvestmentsthatwouldincreaseitsproductioncapacity.Thefirmusesa14percentrequiredrateofreturntoevaluatecapitalexpenditureprojects,Thetwoinvestmentshavethefollowingcostsandexpectedcashflowstreams;

Year

InvestmentD

InvestmentE

Year

InvestmentD

InvestmentE

0

1

2

3

-$50,000

24,000

24,000

24,000

-$50,000

15,000

15,000

15,000

4

5

6

-

-

-

15,000

15,000

15,000

CalculatethenetpresentvalueforInvestmentDandE,usingtheabovedata.

CreateareplacementchainforInvestmentD.Assumethatthecostofreplacinginflowsof$24,000foryears4through6.Usingthesesfigures,recomputedthenetpresentvalueforInvestmentD.

Whichofthetwoinvestmentsshouldbechosen,DorE?Why?

Usetheequivalentannualannuitymethodtosolvetheproblem.HowdoesyouranswercomparewiththeoneobtainedinPartb?

Cases

Instructions:Youmayworkonandsubmitthisassignmentinagroupcomposedofuptofivestudents.Yourgroupmustworkindependentlyofothergroups;youmaynotshareorborrowyouranswerswithstudentsoutsideyourgroup.Pleasekeepyouranswerstothepointandwellwritten.TheentireassignmentmustbetypedandyoumustsubmitBOTHaprintedcopytome,ANDanelectronictomymailbox.Toreceivecredit,yournamemustbeontheassignmentatthetimeofsubmission.Youalsomustanswerallpartsofthequestionandshowfullworktoreceivecreditforaproblem.

Problem#1:AvoidingtheYakuza(ThePoisonFistofthePacificRim)

EagertocompetewithherformerInvestmentClubcolleagues,MargeSimpsonwantstoopenupaPretzelWagonfranchisetofurtherfillAmerica’salreadybloatedsnackhole.Theoneminorobstaclethatstandsinherwayisthatshehasnomoneyofherowntodoso.Therefore,shewillhavetoborrowallofthe$50,000requiredtostarthernewbusiness.Margedecidesthatbestwaytoborrowthismoneyistotapintovariousfinancialmarkets.

Toallowforfinancialflexibilityandpossibleearlyoperatinglosses,Margewantstofundmostofherbusinessusingcommonequity.Shedecidesthatshewillobtain$35,000byissuing1750sharesofcommonstock.Shewillpayadividendnextyearof$1.62andsheexpectsthatshewillbeabletoincreasetheannualdividendby6%peryear.

Margealsowantstoobtain$5,000byissuing250sharesofpreferredequity.Margewillpayaconstantdividendof$1.50pershareonpreferredequity.

Finally,Margeisgoingtoobtaintheremainingnecessaryfundsthroughabondissue.Shewillissuetwelve$1000parbondsatapriceof$833.33perbond.Thebondswillhaveanannualcouponrateof5%and10yearsuntilmaturity(butthebondspaysemi-annualcoupons).

AssumingMarge’smarginaltaxrateis35%,answerthefollowingquestions:

(a) WhatisMarge’scomponentcostofpreferredequity?

(b) WhatisMarge’scomponentcostofcommonequity?

(c) WhatisMarge’sbefore-taxcomponentcostofdebt?

(d) WhatisMarge’safter-taxcomponentcostofdebt?

(e) WhatisMarge’sweightedaveragecostofcapital(WACC)?

(f) IfMargeexpectsthatherPretzelWagonfranchisewillyieldannualprofitsof10%,shouldshehoponthePretzelWagon(shouldshemaketheinvestment)?Whyorwhynot?

Problem#2:Hi,I’m…

YoumayrememberTroyMcClurefromsuchfeaturefilmsas"Make-OutofMontana","TheRevengeofAbeLincoln",and"TheBoatjackingofSupership79".Comingoutofforcedretirement,Troyproposeshislatestsoon-to-behit,“TheContrabulousFabtraptionofProfessorHoratioHufnagel",inwhichhewillplaytheleadroleandactasdirector.InordertogettheHollywoodbigwigstofundproduction,Troyhastoconvincethemthatthefilmisagoodinvestment.

TroyestimatesthatticketandDVDsaleswillbe$5,000,000inthefirstyear,andthenwilldeclineby5%eachyearforthenextfiveyears.Attheendofsixyears,themoviewillnotgenerateanyrevenues.Thecostofproducingthemoviewillbe$4,000,000inthefirstyearandthenamere$250,000ineachofthefollowingfiveyears.Inadditiontothiscost,Troyneedstobuyvideocamerasandeditingequipmentthatcost$600,000andwillbedepreciatedusingthestraight-linemethodoverthesixyearsthatfilmgeneratesrevenues.Attheendofsixyears,Troycansellhiscamerasandvideoeditingequipmentfor$200,000.Topaysuppliers,Troyneedstokeepanadditional$75,000ofcashinaproductionaccount;attheendofsixyears,thisaccountcanbeclosedandthecashcanbereclaimedbythestudio.

TheHollywoodbigwigsmustpay$50,000peryearininterestexpenseonabankloanthatwillfundpreliminaryproductioniftheyaccepttheproject.Theyalsofacesa30%marginaltaxrateanduse9%astheirdiscountrate.

Estimatingthecashflows

(a) Whatrevenueswillthefilmgenerateineachofthesixyears?

(b) WhatisTroyMcClure’sEBITinYear1?

(c) WhatisTroyMcClure’sEBITeachyearInYears2-6?

(d) WhatisTroyMcClure’sdepreciationexpenseineachyear?

(e) WhatisTroyMcClure’staxliabilityinYear1?

(f) WhatisTroyMcClure’staxliabilityeachyearinYears2-6?

(g) WhatisTroyMcClure’soperatingcashflowinYear1?Besuretoshowhowyoucalculatedthisnumber.

(h) WhatisTroyMcClure’soperatingcashfloweachyearinYears2-6?Besuretoshowhowyoucalculatedthisnumber.

(i) WhatisTroyMcClure’snon-operatingterminalcashflowinYear6?

(j) WhatisTroyMcClure’stotalfreecashflowfromassetsinYear1?InYears2-5?

InYear6?

Evaluatingtheinvestment

(k) Ifthe