Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year. Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

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Answer 1

Question

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

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Scenario: Jim played football for a famous club but, due to a long term injury and on medical advice, he retired from the game in January 2007. The club, grateful for Jim’s contribution to their success over the years, held a testimonial match in Jim’s honour. Jim received €150,000 from this testimonial match and he decided to open a shop selling sporting goods with the proceeds. On 1 May 2007, Jim opened a business bank account into which he paid the €150,000. In the first year of trading, he undertook the following transactions: 2 May 2007: Jim signed a five year lease on a shop in the town centre and paid €50,000 to cover the lease for the whole five years 3 May 2007: Jim paid shop fitters €10,000 for shelves and racking and for the electronic till in which to record sales. Jim expects these assets will also have a useful life of 5 years. He hired a part time assistant at a cost of €250 per month paid monthly by cheque from the business bank account. While his main business is to…

Answer 2

Question

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Expert Solution & Answer

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Answer 3

Question

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Expert Solution & Answer

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Answer 4

Question

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Expert Solution & Answer

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Answer 5

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Answer 6

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

Answer 7

Chapter 13, Problem 13MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to increase by an amount equal to 12% of sales revenues.

To discuss: Whether Company S new line would be classified as high risk or low risk or average risk when its coefficient of variation ranges in between 0.2 to 0.4 and discuss the type of risk is being measured in this case.

Answer 8

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

Answer 9

b)

Summary Introduction

To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

Answer 10

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Answer 11

c)

Summary Introduction

To discuss: Whether any subjective risk factors should be considered before making final decision.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 13 - Define each of the following terms: Project cash...Ch. 13 - Prob. 2Q Ch. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4Q Ch. 13 - Prob. 5Q Ch. 13 - Prob. 6Q Ch. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8Q Ch. 13 - Prob. 9Q Ch. 13 - Distinguish among beta (or market) risk,...

Solution Summary: The author explains that Company S is considering adding a new line to its product mix and the production line would be set up in unused space in the main plant.

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To discuss: Whether the new line will be accepted or not, if Company S adds or subtracts 3% points to overall cost of capital to adjust for risk.

To discuss: Whether any subjective risk factors should be considered before making final decision.

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Chapter 13 Solutions