Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers.Although these customers will provide $180,000 in additional credit sales, 12 percentare likely to be uncollectible. The company will also incur $16,200 in additionalcollection expense. Production and marketing costs represent 72 percent of sales. Thefirm is in a 34 percent tax bracket. No other asset buildup will be required to service thenew customers. The firm has a 10 percent desired return. Assume the averagecollection period is 120 days.a. Compute the return on incremental investmentb. Should credit be extended?1i B IF T111

When referring to investments that raise the overall outstanding aggregate invested amount under…

Answered: Slow Roll Drum Co. is evaluating the…

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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Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that,its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently anunlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel ofprofessional financial experts indicates that the company can enjoy a tax shield benefit of $20million in firm value if the company changes its capital structure by allowing a certain amountof debt. What would be the value of Southern Timber Company if it decides to undertake thecapital structure suggested by these financial experts? handwrite please
Cousins Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $80,000,000. Fixed assets are $40,000,000. The debt ratio is 40 percent. EBIT is $8,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 70 percent of sales. With an aggressive financing policy, short-term debt will be 40 percent of the total debt; with a conservative financing policy, short-term debt will be 15 percent of the total debt. Interest rate for short-term debt is 10 percent. Interest rate for long-term debt is 14 percent. Required: Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.
A new electronic process monitor costs $7,000,000. This cost could be depreciated at 30% peryear (CCA Class 10). The monitor could be sold for $1,428,595 at the end of five years. The newmonitor would save the firm $2,400,000 before taxes in annual operating costs for the five years.There would be no impact on net working capital. The firm’s weighted average cost of capital is15% and the corporate tax rate is 40% What would be the NPV of purchasing this system?
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?
Subject:- finance
The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This product is expected to last 5 years and then, because it is somewhat of a fad product, it will be terminated. Cost of new plant and equipment:$380,000,000 Shipping and installation costs: 20,000,000 Unit sales: YearUnits Sold 1 2,000,000 2 2,000,000 3 2,000,000 4 1,500,000 5 1,500,000 Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5 Variable cost per unit: $400/unit throughout the five years Annual fixed costs: $250,000,000 There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for $100,000,000. The plant and equipment will be depreciated over five years on a straight-line basis to a zero-salvage value. Required: a)…
You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. The new equipment falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's CCA tax savings in the first year of operation? a) $2,100 b) $14,000 c) $4,200 d) $12,000
Rad Power Bikes faces a corporate tax rate of 40%. Its CEO, Mike Radenbaugh is adding an “e-bike” product line that will boost annual sales by $287,000 and expenses by $192,000. According to Radenbaugh’s estimates, the e-bike project entails $101,000 in fixed assets that will be fully depreciated straight-line to a zero book value over the project’s 8-year life. The depreciation tax shield is: a. $12,800 b. $14,350 c. $10,100 d. $5,050 e. $38,000

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