PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 9, Problem 13PS
Asset betas Which of these projects is likely to have the higher asset beta, other things equal? Why?
- a. The sales force for project A is paid a fixed annual salary. Project B’s sales force is paid by commissions only.
- b. Project C is a first-class-only airline. Project D is a well-established line of breakfast cereals.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:Year 0123 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flow (P2) -$16,000 9,100 9,100 9,100a. If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?b. If the firm applies the Net Present Value (NPV) decision rule, which project should it take?c. Are your answers in (a) and (b) different? Explain why?
The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:
Year
0
1
2
3
Cash flows (P1)
-$53,000
27,000
27,000
27,000
Cash flow (P2)
-$16,000
9,100
9,100
9,100
If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?
If the firm applies the Net Present Value (NPV) decision rule, which project should it take?
Are your answers in (a) and (b) different? Explain why?
All parts are under one question, per your policy all parts can be answered.
3. Analysis of an expansion project
Companies invest in expansion projects with the expectation of increasing the earnings of its business.
Consider the case of Yeatman Co.:
Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:
Year 1
Year 2
Year 3
Year 4
Unit sales
3,000
3,250
3,300
3,400
Sales price
$17.25
$17.33
$17.45
$18.24
Variable cost per unit
$8.88
$8.92
$9.03
$9.06
Fixed operating costs
$12,500
$13,000
$13,220
$13,250
This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of…
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 5. Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do? **round to two decimal places**arrow_forwardA company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for the sales price for the motor scooter is $2,480. What does this mean? O If the motor scooter is sold for $2,480, then the project will make a profit. O If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero. O The predicted selling price of the motor scooter is $2,480. O The maximum that the motor scooter can sell for and still make the project have a positive net present value (NPV) is $2,480.arrow_forwardIn today's fast-paced business environment, decision making is a critical task for managers. Making the right decisions is vital to the success of a company, and it requires access to relevant information. Cari Pump (CP) Company manufactures water pumps. An important part of the pump is its electronic component (EC). Cari Pump collects data with the following cost information about the costs of making ECs in 2019 and the expected costs in 2020: Current Costs (2019) Expected Costs (2020) Fixed manufacturing cost Fixed manufacturing overhead costs that can be avoided if ECs are not made Fixed manufacturing overhead costs of plant depreciation, insurance, and administration that cannot be avoided even if ECs are not made Variable manufacturing costs Direct material cost per EC Direct manufacturing labor cost per EC Variable manufacturing cost per batch for setups, Materials handling, and quality control 360,000 850,000 $ 200 60 2,000 360,000 850,000 $ 190 55 1,800arrow_forward
- Q1. Below is the projected financial information provided by Altaf Hussain Manufacturing LLC. The company wants to introduce two new products into the market, Zandu and Eundu. The company provides the following forecasted information of sales and costs. Sales in units Product/Year Year 1 Year 2 Year 3 Year 4 Zandu 60,000 110,000 100,000 30,000 Eundu 75,000 137,000 125,000 37,500 Product Zandu Eundu Direct material costs 14 11 Selling price 31 23 Selling price inflation (per year). 3% Direct material cost inflation (per year) 3% Advertisement cost (First Year) 500,000 Advertisement cost (2nd and 3rd Year) 200,000 Investment 1,000,000 Machinery 1,000,000 Fixed costs 1,000,000 Таx 25% Residual value 1.2million Required: Calculate NPV and IRR of this proposal project using MS Excel. Hint: Calculate expected revenue 2. Expected costs 3. Expected cashflows 1. to calculate NPV and IRR MTEESarrow_forward1. Calculating Payback Period and NPV Greystone, Inc., has the following mutually exclusive projects. Year Project A Project B -$30,600 $21,400 10,600 15,400 15,600 6,200 8,600 3. 9,600 a. Suppose the company's payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose the company uses the NPV rule to rank these.two projects. Which project should be chosen if the appropriate discount rate is 15 percent?arrow_forwardSuppose the following two independent investment opportunities are available to a company. The appropriate discount rate is 8 percent. Year O 1 2 3 Project Alpha -$4,500 b. 2,300 2,200 1,450 a. Compute the profitability index for each of the two projects. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Project Alpha Project Beta Project Beta -$ 6,100 1,350 4,500 4,000 Profitability Index Which project(s), if either, should the company accept based on the profitability index rule? Project Alpha O Project Beta Neither project O Both projectsarrow_forward
- SnowDelight operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. (Click the icon to view the information.) Read the requirements. C Requirement 1. If SnowDelight cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level? Complete the following table to calculate SnowDelight's projected income. Revenue at market price Less: Total costs 63075000 6075000 8.3 Operating income (Round the percentage to the nearest hundredth percent, X.XX%.) %. SnowDelight's projected operating income (profit) as a percent of assets amounts to Will investors be happy with this profit level? More info *** O a 6 9 K tab CAK je Q A W S tt 3 E D 4 C R % TI F 5 T G & 7 H U 8 J Oarrow_forwardRequirement 1. If SnowDreams cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level? Complete the following table to calculate SnowDreams' projected income. Revenue at market price Less: Total costs Operating incomearrow_forwardCompanies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs $37,000 $37,500 $38,120 $39,560 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Garida pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. Which of the following most closely approximates what…arrow_forward
- Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 3,000 3,250 3,300 3,400 Sales price $17.25 $17.33 $17.45 $18.24 Variable cost per unit $8.88 $8.92 $9.03 $9.06 Fixed operating costs $12,500 $13,000 $13,220 $13,250 This project will require an investment of $10,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. Garida pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law. Which of the…arrow_forward3. CVP: Atlas Corp, has been asked to submit a bid on supplying underwater masks to Pandora. The company's current cost structure per mask is as follows: DM DL var. MOH var. SGA $9.00 $8.00 $7.50 $4.00 a. Assume that there would be no variable sales commission on this special order. Determine the lowest unit price that Atlas can bid without reducing its current level of operating income. b. Assume the company desires a 38 percent contribution margin ratio from this sale and that a special sales commission of 4 percent of the bid price will be applied to the order instead of its normal $4 variable sales commission. Determine the bid price per unit given these unique circumstances. c. Assume the product fixed costs are $180,000. How many units need to be sold to attain a profit of $249,000?arrow_forwardCompanies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Blue Llama Mining: Blue Llama Mining is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales (units) 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Blue Llama Mining pays a constant tax rate of 40%, and it has a required rate of return of 11%. When using accelerated depreciation, the project’s net present value (NPV) is $____________ . (Hint: Round each element in your…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Financial Planning & Forecasting - Spreadsheet Modeling; Author: Pat Obi;https://www.youtube.com/watch?v=dn8vTk0eaBg;License: Standard Youtube License