1)Briarcrest Condiments is a spicemaking firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,513,148. have a life of five years, and would produce the cash flows shown in the following table.
Year Cash Flow
1 $403,744
2 298,832
3 662,643
4 841,267
5 588,072
What is the NPV if the discount rate is 16.40 percent? (Enter negative amounts using negative sign e.g. 45.25. Round answer to 2 decimal places, e.g. 15.25.)
2.Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.20 million. This investment will consist of $2.80 million for land and $9.40 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.00 million, $2.44 million above book value. The farm is expected to produce revenue of $2.04 million each year, and annual cash flow from operations equals $1.87 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)
NPV $
The project should be
.
3. Bell Mountain Vineyards is considering updating its current manual accounting system with a highend electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 11.0 percent, and the costs and values of investments made at different times in the future are as follows:
Year Cost Value of Future Savings
(at time of purchase)
0 $5,000 $7,000
1 4,150 7,000
2 3,300 7,000
3 2,450 7,000
4 1,600 7,000
5 750 7,000
Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)
The NPV of each choice is:
NPV0 = $
NPV1 = $
NPV2 = $
NPV3 = $
NPV4 = $
NPV5 = $
Suggest when should Bell Mountain buy the new accounting system?
Bell Mountain should purchase the system in .
4. Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of SnakeBite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 88 percent as high if the price is raised 13 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)
At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $ .
5. Capital Co. has a capital structure, based on current market values, that consists of 28 percent debt, 19 percent preferred stock, and 53 percent common stock. If the returns required by investors are 11 percent, 12 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s aftertax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
After tax WACC =
%
Which of the following is considered a hybrid organizational form?
limited liability partnership
sole proprietorship
corporation
partnership
Which of the following is a principal within the agency relationship?
a shareholder
the board of directors
a company engineer
the CEO of the firm
Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much longterm debt does the firm have?
$1,844,022
$2,123,612
$2,303,010
$803,010
Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?
The statement of net worth.
The statement of working capital.
The statement of cash flows.
The statement of retained earnings.
Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?
65.2 days
61.7 days
57.9 days
64.3 days
Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debttoequity ratio?
1.74
0
1.47
0.60
Which of the following is not a method of “benchmarking”?
Utilize the DuPont system to analyze a firm’s performance.
Conduct an industry group analysis.
Evaluating a single firm’s performance over time.
Identify a group of firms that compete with the company being analyzed.
Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)
PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)
PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000, $112,000, $164,000, $84,000, and $242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)
Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)
Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)
Bond price: Regatta, Inc., has sixyear bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)
PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?
Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?
What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
The internal rate of return. 
The modified internal rate of return. 
How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?
The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?
If a company’s weighted average cost of capital is less than the required return on equity, then the firm:
Has debt in its capital structure 
Must have preferred stock in its capital structure 
Is financed with more than 50% debt 
A firm’s capital structure is the mix of financial securities used to finance its activities and can include all of the following except
M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.
If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?
Multiple Analysis: Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.
What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.
External financing needed: Jockey Company has total assets worth $4,417,665. At yearend it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?
Which of the following cannot be engaged in managing the business?
Which of the following does maximizing shareholder wealth not usually account for?
The timing of cash flows. 
The strategic plan does NOT identify
the lines of business a firm will compete in. 
major areas of investment in real assets. 
future mergers, alliances, and divestitures. 
working capital strategies. 
Firms that achieve higher growth rates without seeking external financing
have less equity and/or are able to generate high net income leading to a high ROE. 
have a low plowback ratio. 
Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.
The cash conversion cycle
estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance. 
shows how long the firm keeps its inventory before selling it. 
begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. 
begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. 
You are provided the following working capital information for the Ridge Company:
Ridge Company 

Account 
$ 
Inventory 
$12,890 
Accounts receivable 
12,800 
Accounts payable 
12,670 
Net sales 
$124,589 
Cost of goods sold 
99,630 
Cash conversion cycle: What is the cash conversion cycle for Ridge Company?
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