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.

Question

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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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Students have asked these similar questions

Which of the following statements is FALSE? a) The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. b) Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. c) A common assumption is that a project has the same risk as the firm. d) To determine a project's cost of capital we need to estimate its beta.

Which statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptable

Consider the following two statements concerning risk analysis: 1. Sensitivity analysis provides clear decision rules concerning acceptance or rejection of an investment project. 2. The risk-adjusted discount rate adds a risk premium to the expected rate of inflation to derive a discount rate for investment projects. Which one of the following combinations (true/false) relating to the above statements is correct? Select one: a. Statement 1 is False & Statement 2 True b. Statement 1 is False & Statement 2 False c. Statement 1 is True & Statement 2 is False d. Statement 1 is True & Statement 2 is True e. None of these answers are correct

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