15. Capacity Use and External Financing. If Growth Industries from Problem 13 is operatingat only 75% of capacity, how much can sales grow before the firm will need to raise any externalfunds? Assume that once fixed assets are operating at capacity, they will need to grow thereafterin direct proportion to sales. (LO18-2) 13. Using Percentage of Sales. The 2019 financial statements for Growth Industries are presentedbelow. Sales and costs are projected to grow at 20% a year for at least the next 4 years.Both current assets and accounts payable are projected to rise in proportion to sales. The firmis currently operating at full capacity, so it plans to increase fixed assets in proportion to sales.Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firmwill maintain a dividend payout ratio of 40. Construct a spreadsheet model for GrowthIndustries similar to the one in Spreadsheet 18.1. (LO18-2)INCOME STATEMENT, 2019Sales$200,000Costs150,000$ 50,000EBITInterest expense10,000Taxable income$ 40,000Taxes (at 21%)8,400Net income$ 31,600$12,640$18,960DividendsAddition to retained earningsBALANCE SHEET, YEAR-END, 2019AssetsLiabilitiesCurrent assetsCurrent liabilities$ 3,000$ 10,000$ 10,000CashAccounts payableAccounts receivable8,000Total current liabilitiesInventories29,000Long-term debt100,000Total current assets$ 40,000Stockholders' equityCommon stock plus additionalpaid-in capitalNet plant and equipment160,00015,000Retained earnings75,000Total liabilities plusstockholders' equityTotal assets$200,000$200,000

Given: Particulars Amount Liabilities $10,000 Net income $31,600 Sales $200,000 Total…

Capacity Use and External Financing. If Growth Industries from Problem 13 is operating at only 75% of capacity, how much can sales grow before the firm will need to raise any external funds? Assume that once fixed assets are operating at capacity, they will need to grow thereafter in direct proportion to sales. (LO18-2)

Capacity Use and External Financing. If Growth Industries from Problem 13 is operating at only 75% of capacity, how much can sales grow before the firm will need to raise any external funds? Assume that once fixed assets are operating at capacity, they will need to grow thereafter in direct proportion to sales. (LO18-2)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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[S1] A company has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be the WACC rather than the after tax cost of debt. [S2] The general rule for using the WACC in long term investment decisions is to accept all projects with rates of return greater than or equal to the WACC.a. both are trueb. both are falsec. S1 is trued. S2 is true
3. Company cost of capital (S9.1) Quark Productions ("Give your loved one a quark today.") uses its company cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk projects?
Liability Driven Investing (LDI) Strategies (Continued) Example: Market value of assets is $160 million and present value of liabilities is $200 million. The modified duration of assets is 3, and the modified duration of liabilities is 4. (1) Compute the funding gap and the funding gap ratio (2) What is the funding gap interest-rate risk? (3) What will be the funding gap and the funding gap ratio if yields increase by 100 basis points? (4) How do we relate answers from questions (1) to (3)?
Q.3 (x1=70000 x2=10%) The IPS company has installed a system to help reduce the number of defective products. The capital investment in the system is $X1, and the projected annual savings are tabled below. The system's market value at the EOY five is negligible, and the MARR is x2% per year A. What is the FW of this investment? Based on econonical deciston rule, is this a good investment. b. What is the IRR of the system? Based on economical decision rule, is this a good investmentr. C. What is the discounted pavback period for this investment.
Several factors affect a firm’s need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm’s need for external capital—that is, its AFN (additional funds needed). Check all that apply. -The firm previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. -The firm’s forecasted sales are unexpectedly increased. -The firm switches its supplier for the majority of its raw materials. The new supplier offers less favorable credit terms and thus reduces the trade credit available to the firm, resulting in a reduction in accounts payable. Dividends to common shareholders are paid out of after-tax earnings. Do these payouts affect a firm’s AFN? -Yes, dividends still affect a firm’s AFN even though they are paid out of after-tax earnings. -No, dividends do not affect a firm’s AFN, because they are paid…
Answer the following lettered questions on the basis of the information in this table: a. If the interest-rate cost of funds is 8 percent, what will be the optimal amount of R&D spending for this firm?b. Explain why $20 million of R&D spending will not be optimal.c. Why won’t $60 million be optimal either?
Project cash flow C0 C1 C2 C3 C4 A -5000 +1000 +1000 +3000 0 B -1000 0 +1000 +2000 +3000 C -5000 +1000 +1000 +3000 +5000 If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know? Please use the calculator. net for explanation. or any other free onling
Which one is most correct about AFN (additional fund needed) A. AFN > 0 happens when a firm exhausts internal funds to support its operations. B. Everything else remains unchanged, if a firm’s profit margin is expected to go up, then its AFN is more likely to increase as well. C. If everything else remains unchanged, when a firm increases its plowback ratio, its AFN will increase too. D. Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they must have a greater need for external financing.
2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Falcon Freight: Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight’s WACC is 7%, and project Sigma has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $400,000 Year 3 $500,000 Year 4 $400,000 Which of the following is the correct calculation of…
Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT? a. You should recommend Project S, because at the new WACC it will have the higher NPV. b. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. O c. You should recommend Project L because it will have the higher IRR at the new WACC. d.…
Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level. A. more; lower B. more; higher C. less; lower D. less; higher
A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: Time Cash Flow X Cash Flow Y 0 -$80,000 -$70,000 1 30,000 35,000 2 55,000 35,000 3 70,000 35,000 4 - 35,000 5 - 5,000 Projects X and Y are equally risky and may be repeated indefinitely. If the firm’s WACC is 7%, what is the EAA of the project that adds the most value to the firm? Do not round intermediate calculations. Round your answer to the nearest dollar. Choose Project , whose EAA = $

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