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1 Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $370,000 is estimated to result in $140,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $62,000. The press also requires an initial investment in spare parts inventory of $10,000, along with an additional $1,500 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 10 percent. MACRS scheduleCalculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPV$ [removed]2You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.5 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1.6 million on an aftertax basis. In four years, the land could be sold for $1.7 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $135,000. An excerpt of the marketing report is as follows:The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 4,800, 5,700, 6,300, and 5,200 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued.PUTZ believes that fixed costs for the project will be $475,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $4.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $450,000. Net working capital of $135,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 14 percent. MACRS ScheduleWhat is the NPV of the project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)3Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:YearUnit Sales176,000289,0003103,000498,000579,000Production of the implants will require $1,550,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,450,000 per year, variable production costs are $240 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $20,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 18 percent. MACRS scheduleWhat is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPV$ [removed]What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)IRR$ [removed]
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A stakeholder is[removed]all of these.[removed]any governmental agancy.[removed]anyone geographically close to the firm’s headquarters.[removed]anyone with a claim on the cash flows of the firm.Current liabilities are liabilities that[removed]will be converted to equity within a year.[removed]will be converted to cash within a year.[removed]must be paid within a year.[removed]none of these.Which of the following reports directly to the owners of the firm (assume the firm is a public corporation)[removed]CEO[removed]board of directors[removed]audit committee[removed]CFOThe generally accepted accounting principles (GAAP) are[removed]rules for how a company can issue stock to raise money.[removed]rules that outline how a firm can operate ethically.[removed]rules on how the firm will be valued in the event of a merger.[removed]rules and procedures that define how companies are to maintain financial records and prepare financial reports.Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle’s agent. This transaction is an example of[removed]the assumption of arm’s-length transactions.[removed]the realization principle.[removed]the matching principle.[removed]the going-concern assumption.[removed]the cost principle.Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on[removed]the realization principle.[removed]the matching principle.[removed]the going-concern assumption.[removed]the assumption of arm’s-length transactions.Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced in the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm’s accountant should associate[removed]Neither of these dates is valid because the products were sold in July.[removed]none of these.[removed]the inventory acquired on April 23 with the products sold.[removed]the inventory acquired on July 2 with the products sold.The time value of money refers to the issue of[removed]what the value of the stream of future cash flows is today.[removed]none of these.[removed]why a dollar received tomorrow is worth the same as a dollar received today.[removed]why a dollar received tomorrow is worth more than a dollar received today.Using higher discount rates will[removed]not affect the present value of the future cash flow.[removed]increase the present value of any future cash flow.[removed]decrease the present value of any future cash flow.[removed]none of these.Your aunt is looking to invest a certain amount today. Which of the following choices should she opt for?[removed]three-year CD at 7% annual rate[removed]three-year CD at 6.5% annual rate[removed]three-year CD at 6.75% annual rate[removed]three-year CD at 6.25% annual rateWhich ONE of the following statements is true about amortization?[removed]A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal.[removed]With an amortized loan, each loan payment contains some payment of principal and an interest payment.[removed]Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan.[removed]All of these are true.Which ONE of the following statements is true about amortization?[removed]A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal.[removed]With an amortized loan, each loan payment contains some payment of principal and an interest payment.[removed]Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan.[removed]All of these are true.The true cost of lending is the[removed]annual percentage rate.[removed]quoted interest rate.[removed]effective annual rate.[removed]none of these.Which one of the following statements is NOT true?[removed]You can find the interest rate per period by dividing the quoted annual rate by the number of compounding periods.[removed]The APR is the annualized interest rate using simple interest.[removed]The correct way to annualize an interest rate is to compute the annual percentage rate (APR).[removed]The correct way to annualize an interest rate is to compute the effective annual interest rate (EAR).If you are dealing with percentage returns, then which of the following is generally true?[removed]None of these is generally true.[removed]The variance of the return distribution is generally smaller than the standard deviation.[removed]The variance of the return distribution is measured in the same units as expected return.[removed]The variance of the return distribution is generally larger than the standard deviation.The return distribution for an asset is as shown in the following table. What are the missing values if the expected return is 10 percent?ReturnProbability0.10.25X0.5X0.25[removed]None of these[removed]0.20[removed]0.10[removed]0.15Moshe purchased a stock for $30 last year. He found out today that he had a –100 percent return on his investment. Which of the following must be true?[removed]a) The stock is worth $30 today.[removed]b) The stock is worth $0 today.[removed]c) The stock paid no dividends during the year.[removed]d) Both b and c must be true.Moshe purchased a stock for $30 last year. He found out today that he had a –100 percent return on his investment. Which of the following must be true?[removed]a) The stock is worth $30 today.[removed]b) The stock is worth $0 today.[removed]c) The stock paid no dividends during the year.[removed]d) Both b and c must be true.Moshe purchased a stock for $30 last year. He found out today that he had a –100 percent return on his investment. Which of the following must be true?[removed]a) The stock is worth $30 today.[removed]b) The stock is worth $0 today.[removed]c) The stock paid no dividends during the year.[removed]d) Both b and c must be true.Bonds sell at a discount off the par value when market rates for similar bonds are[removed]less than the bond’s coupon rate.[removed]Market rates are irrelevant in determining a bond’s price.[removed]greater than the bond’s coupon rate.[removed]equal to the bond’s coupon rate.Which of the following statements is most true about zero coupon bonds?[removed]They typically sell at a premium over par when they are first issued.[removed]They are always convertible to common stock.[removed]They typically sell for a higher price than similar coupon bonds.[removed]They typically sell at a deep discount below par when they are first issued.The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi’s beta?[removed]1.26[removed]3.15[removed]2.10[removed]2.80Payback: Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project?[removed]3.00 years[removed]1.88 years[removed]2.12 years[removed]4.00 yearsPayback: Elmer Sporting Goods is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project?[removed]More than 3 years[removed]1.57 years[removed]2.43 years[removed]3 yearsPayback: Elmer Sporting Goods is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project?[removed]More than 3 years[removed]1.57 years[removed]2.43 years[removed]3 yearsPayback: Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. What is the payback period for this project? If their acceptance period is five years, will this project be accepted?[removed]3.83 years; no[removed]4.17 years; no[removed]3.83 years; yes[removed]4.17 years; yesDiscounted payback: Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm’s cost of capital is 12 percent. What is the discounted payback period for this project? If the firm’s acceptance period is five years, will this project be accepted?[removed]6.1 years; no[removed]5.4 years; no[removed]4.6 years; yes[removed]4.2 years; yesStillwater Drinks is trying to determine when to harvest the water from the fountain of youth that it currently owns. If it harvests the water in year 1, the NPV of the project would increase over an immediate harvest by 18 percent. A year 2 harvest would create an NPV increase of 12 percent over that of year 1 and year 3 would create an NPV increase of 8 percent over that of year 2. If the cost of capital is 17 percent for Stillwater, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.[removed]Harvest in year 1.[removed]Harvest immediately.[removed]Harvest in year 2.[removed]Harvest in year 3.The proper time to harvest an asset is when[removed]the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is greater than the cost of capital.[removed]the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is less than the cost of capital.[removed]the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is greater than the cost of capital.[removed]None of the above.Norman, Inc., is considering two mutually exclusive projects. Project A is a six-year project with a NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equivalent annual cash flow of $730 and Project B has an equivalent annual cash flow of $750. Which project should the firm select?[removed]Choose Project B because it has the higher equivalent annual cash flow.[removed]Choose Project A because it has the lower equivalent annual cash flow.[removed]Choose Project A because it has the higher NPV.[removed]Choose Project B because it has the lower NPV.Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent.Free cash flow: What are Champagne’s cash flows associated with investments for 2008?[removed]$500,000[removed]$700,000[removed]$1,200,000[removed]None of theseCalculating operating leverage. Swan’s Bicycle Boats had a degree of accounting operating leverage equal to 1.50 during the most recent period. If the firm’s EBITDA was $5,000 and its fixed costs were equal to $1,750, then what was Swan’s depreciation and amortization expense during the same period?[removed]$1,500[removed]$2,833[removed]$500[removed]$1,000Break-even analysis. IronVerks Ribshack has total fixed costs of $8,500 per month. It sells rib plates for $15 each, and the variable cost of providing each plate is $10. What is the pretax operating cash flow break-even point for IronVerks?[removed]567 plates.[removed]1,700 plates.[removed]None of these.[removed]8,500 plates.Break-even analysis. Monochrome Sun Glasses has found that its pretax operating cash flow basis break-even number of glasses sold is 770,000 pairs. If each pair is sold for $25 and the variable cost per unit is $15, then what is the amount of Monochrome’s fixed costs?[removed]$77,000[removed]$1,155,000[removed]$7,700,000[removed]$11,550,000Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project?[removed]0.09[removed]2.09[removed]2.18[removed]1.09Overall cost of capital: If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?[removed]10.0%[removed]12.0%[removed]8.0%[removed]16.0%How firms estimate their cost of capital: The Diverse Co. has invested 40 percent of the firm’s assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm?[removed]1.24[removed]1.28[removed]0.96[removed]None of theseThe cost of equity: Oasis, Inc., has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis?[removed]16%[removed]13%[removed]15%[removed]14%The cost of preferred equity: Billy’s Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm’s cost of preferred equity?[removed]7%[removed]9%[removed]8%[removed]10%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.How much is Dynamo worth today?[removed]None of these.[removed]$1,500[removed]$2,143[removed]$1,765M&M Proposition 2: Swirlpool, Inc., has a WACC of 11%, a cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be?[removed]None of these.[removed]1/4[removed]1/2[removed]1/6M&M Proposition 2: Melba’s Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is the appropriate WACC?[removed]6.35%[removed]8.80%[removed]7.44%[removed]8.17%The pecking order theory: A firm wishes to undertake a project that costs $150mm. It currently has $10mm in cash on hand and believes that it can raise $75mm in debt and $100mm in equity if needed. According to the pecking order theory of the capital structure, what percent of the project will be financed by debt?[removed]None of these[removed]0%[removed]26.67%[removed]50%Break-even analysis: Jackson Electronics makes circuit boards and markets them to electronic goods manufacturers. The firm has nonsalary fixed costs of $212,000 and salary costs of $134,250. Each circuit board is sold at a price of $111.50 and involves variable costs of $81.73 per unit. What is the break-even point for Jackson?[removed]3,714[removed]4,237[removed]3,105[removed]11,631Multiple 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.[removed]$1,315 million[removed]$1,334 million[removed]$453.6 million[removed]$1,787 millionMultiple 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 value of Turnbull Corp’s debt? Round to the nearest million dollars.[removed]$121 million[removed]$165 million[removed]$59 million[removed]$97 millionIncome approaches: Quicksilver Software Co. is expected to grow rapidly in the next three years and then have no growth for the foreseeable future. The firm expects free cash flows of $9.1 million, $11.4 million, and $17.7 million over the next three years, and thereafter its cash flows will stay constant. The company has no nonoperating assets. If the appropriate WACC is 12 percent and debt of 44.5 million, what is the equity value of this business? Round to the nearest million.[removed]$135 million[removed]$105 million[removed]$45 million[removed]$90 millionSpot rate: Tantrix, Inc., purchased its inventory from an Indian manufacturer at a cost of Rs.5,325,000. The dollar cost of this payable is $125,634.07 at today’s spot rate. What is the spot rate today?[removed]$42.3850/Rs[removed]$4.2385/Rs[removed]Rs.42.3850/$[removed]Rs. 4.2385/$Spot rate: If the spot rate is quoted as $0.009369/¥, what is the exchange rate in terms of yen per dollar?[removed]¥0.009369/$[removed]¥106.7350/$[removed]¥16.7350/$[removed]¥0.936900/$Spot rate: Given that the spot rate is $1.5136/€ and the 90-day forward quote is $1.4974/€, we can say that[removed]the dollar is at neither a premium nor a discount against the euro.[removed]the euro is at a forward premium against the U.S. dollar.[removed]the U.S. dollar is at a forward premium against the euro.[removed]the U.S. dollar is at a forward discount against the euro.
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You are the PR intern at a large public relations agency, and team members often ask for you to review media alerts for clients as a fresh set of eyes. Using Associated Press (AP) Stylebook chapters A, C, and N, locate and correct using tracked changes, the 10 Associated Press (AP) style errors from these three chapters in the Media Alert Word Document. Submit the corrected media alert.When you are revising this document, pay special attention to the dates, numbers, and titles. The format of the document is correct and does not need to be changed.