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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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.

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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.

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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.

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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