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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. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000…
Calculate the terminal value of the Canopy project in 2003 and the adjusted free cash flow value for 2003.
4
Which of the following statements is (are) FALSE? Select one or more alternatives: When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalisation. If the IRR of a project is equal to the cost of capital, the NPV will be zero. It is reasonable to assume that a business has a terminal growth rate higher than the long-term growth rate of the economy. The terminal growth rate is the growth rate used to estimate the terminal value of a business. Interest expenses from borrowing should be subtracted from EBIT to estimate free cash flow to firm.
You want to buy a new car. You can afford payments of $450 per month and can borrow the money at an interest rate of 3.1% compounded monthly for 5 years. How much are you able to borrow? $ How much interest do you pay? $
If the marginal propensity to consume is 0.80, and there is no investment accelerator or crowding out, a $100 billion increase in government expenditures would shift the aggregate demand curve right by O $500 billion, but the effect would be larger if there were an investment accelerator. O $600 billion, but the effect would be smaller if there were an investment accelerator. O $800 billion, but the effect would be larger if there were an investment accelerator. O $125 billion, but the effect would be smaller if there were an investment accelerator.
5) Which of the following will cause a movement from one point on an AD curve to another point on the same AD curve? a) a change in government expenditures b) a change in the price level c) a change in net exports d) all of the options provided 6) Here is a consumption function: C = CO + MPC(Yd). If MPC is 0.80, then we know that a) as Co rises by $0.80, Yd rises by $1. b) Yd rises by $0.80. c) as Yd rises by $1. Co rises by $0.80. d) as Yd rises by $1, C rises by $0.80. 7) An aggregate demand (AD) curve shows the a) none of the options provided is correct b) quantity of output that people are willing and can afford to buy at different price levels, ceteris paribus c) quantity of output that people are willing as well as able to produce and sell at different price levels, ceteris paribus. d) value of a particular good that people are willing and able to buy at a particular price, ceteris paribus. d) value of a particular good that people are willing and able to buy at a particular…
[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)?
None
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?

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