Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 4, Problem 17QP
Fixed Assets and Capacity Usage [LO1] For the company in the previous problem, suppose fixed assets are $520,000 and sales are projected to grow to $790,000. How much in new fixed assets are required to support this growth in sales? Assume the company maintains its current operating capacity.
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Last year Wei Guan Inc. had $275 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets?
Question options:
$137.71
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use excel/show all excel formulas answering the following
LO3 20. Sensitivity Analysis We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. b. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.
LO3 21. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to…
Calculating Flotation Costs [LO4] Suppose your company needs $24 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.a. What do you think about the rationale behind borrowing the entire amount?b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
Chapter 4 Solutions
Fundamentals of Corporate Finance
Ch. 4.1 - What are the two dimensions of the financial...Ch. 4.1 - Prob. 4.1BCQCh. 4.2 - Prob. 4.2ACQCh. 4.2 - Prob. 4.2BCQCh. 4.3 - Prob. 4.3ACQCh. 4.3 - Prob. 4.3BCQCh. 4.4 - How is a firms sustainable growth related to its...Ch. 4.4 - What are the determinants of growth?Ch. 4.5 - What are some important elements that are often...Ch. 4.5 - Why do we say planning is an iterative process?
Ch. 4 - Prob. 4.1CTFCh. 4 - Prob. 4.2CTFCh. 4 - A firm has current sales of 272,600 with total...Ch. 4 - Prob. 4.4CTFCh. 4 - What is generally considered when compiling a...Ch. 4 - Sales Forecast [LO1] Why do you think most...Ch. 4 - Sustainable Growth [LO3] In the chapter, we used...Ch. 4 - External Financing Needed [LO2] Testaburger, Inc.,...Ch. 4 - EFN and Growth Rates [LO2, 3] Broslofski Co....Ch. 4 - Prob. 5CRCTCh. 4 - Prob. 6CRCTCh. 4 - Prob. 7CRCTCh. 4 - Prob. 8CRCTCh. 4 - Cash Flow [LO4] Which was the biggest culprit...Ch. 4 - Prob. 10CRCTCh. 4 - Pro Forma Statements [LO1] Consider the following...Ch. 4 - Pro Forma Statements and EFN [LO1, 2] In the...Ch. 4 - Prob. 3QPCh. 4 - EFN [LO2] The most recent financial statements for...Ch. 4 - EFN [LO2] The most recent financial statements for...Ch. 4 - Calculating Internal Growth [LO3] The most recent...Ch. 4 - Calculating Sustainable Growth [LO3] For the...Ch. 4 - Sales and Growth [LO2] The most recent financial...Ch. 4 - Calculating Retained Earnings from Pro Forma...Ch. 4 - Prob. 10QPCh. 4 - EFN and Sales [LO2] From the previous two...Ch. 4 - Internal Growth [LO3] If Stone Sour Co. has an ROA...Ch. 4 - Sustainable Growth [LO3] If Gold Corp. has an ROE...Ch. 4 - Sustainable Growth [L03] Based on the following...Ch. 4 - Sustainable Growth [LO3] Assuming the following...Ch. 4 - Full-Capacity Sales [LO1] Southern Mfg., Inc., is...Ch. 4 - Fixed Assets and Capacity Usage [LO1] For the...Ch. 4 - Growth and Profit Margin [LO3] Dante Co. wishes to...Ch. 4 - Growth and Assets [LO3] A firm wishes to maintain...Ch. 4 - Sustainable Growth [LO3] Based on the following...Ch. 4 - Sustainable Growth and Outside Financing [LO3]...Ch. 4 - Sustainable Growth Rate [LO3] Gilmore, Inc., had...Ch. 4 - Internal Growth Rates [LO3] Calculate the internal...Ch. 4 - Prob. 24QPCh. 4 - Prob. 25QPCh. 4 - Calculating EFN [LO2] In Problem 24, suppose the...Ch. 4 - EFN and Internal Growth [LO2, 3] Redo Problem 24...Ch. 4 - EFN and Sustainable Growth [LO2, 3] Redo Problem...Ch. 4 - Constraints on Growth [LO3] Volbeat, Inc., wishes...Ch. 4 - EFN [LO2] Define the following:...Ch. 4 - Growth Rates [LO3] Based on the result in Problem...Ch. 4 - Sustainable Growth Rate [LO3] In the chapter, we...Ch. 4 - Calculate the internal growth rate and sustainable...Ch. 4 - SS Air is planning for a growth rate of 12 percent...Ch. 4 - Prob. 3M
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- Cash Flows and NPV (LO2) We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows Year Unit Sales 1 93,000 2 105,000 3 128,000 4 134,000 5 87, 000 The new system will be priced to sell at $380 each. The cockroach eradicator project will require $1, 800, 000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $265, and total fixed costs are $1, 200, 000 per year. The equipment necessary to begin production will cost a total of $24 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost. The relevant tax rate is 35%, and the required retum is 18%. Based on these preliminary estimates, what is the NPV of the project?arrow_forwardLast year Baron Enterprises had $250 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? Select the correct answer. a. $127.6 b. $134.6 c. $148.6 d. $141.6 e. $155.6arrow_forwardLazzy Manufacturing Company has P2.5 billion in sales and P0.80 billion in fixed . Currently, the company’s fixed assets are operating at 80% of If Lazzy’s sales increased by 35 percent, how large is the increase in fixed assets will the company need to meet its target fixed asset to sales ratio?arrow_forward
- 4. A project capitalized for ₱150,000 invested in depreciable assets will earn a uniform, annual income of ₱59, 547 in 10 years. The costs for operation and maintenance total ₱27,000a year, and taxes and insurance will cost 4% of the first cost each year. If the company expects its capital to earn12% before income taxes, is the investment worthwhile? Show by: Rate of return Solve and show the solution.arrow_forward2 Net Present Value (NPV) Example 1 (Ross et al., 2023, pp. 299-300): We want to establish a new fertilizer business. The project costs $30,000 to launch. The project can generate cash revenues of $20,000 per year. The project will incur cash costs (including taxes) of $14,000 per year. The project will be terminated in 8 years and the project's assets can be sold for $2,000 at that time. A 15% discount rate is appropriate for this project. a. Should we undertake this project? b. If there are 1,000 shares of stock outstanding, what will be the effect on the price per share from taking the project?arrow_forward3. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of McFann Co.: McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,800 5,100 5,000 5,120 Sales price $22.33 $23.45 $23.85 $24.45 Variable cost per unit $9.45 $10.85 $11.95 $12.00 Fixed operating costs $32,500 $33,450 $34,950 $34,875 This project will require an investment of $25,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. McFann pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be…arrow_forward
- 2. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,800 5,100 5,000 5,120 Sales price $22.33 $23.45 $23.85 $24.45 Variable cost per unit $9.45 $10.85 $11.95 $12.00 Fixed operating costs except depreciation $32,500 $33,450 $34,950 $34,875 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Fox pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation. Determine what the project’s net present…arrow_forward5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? a. The company has spent and expensed $1 million on R&D associated with the new project b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year c. The new project is expected to reduce sales of one of the company's existing products by 5%arrow_forward1. Incremental costs - Initial and terminal cash flow Consider the case of Alexander Industries: Alexander Industries is considering a project that requires an investment in new equipment of $3,400,000, with an additional $170,000 in shipping and installation costs. Alexander estimates that its accounts receivable and inventories need to increase by $680,000 to support the new project, some of which is financed by a $272,000 increase in spontaneous liabilities (accounts payable and accruals). The total cost of Alexander’s new equipment is and consists of the price of the new equipment plus the . In contrast, Alexander’s initial net investment outlay is . Suppose Alexander’s new equipment is expected to sell for $400,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the…arrow_forward
- (6.1) A firm is considering a new project. If the project goes ahead, it will require the use of an existing warehouse owned by the company. If the project does not go ahead, the warehouse could be immediately rented out for $5000 per month. In relation to the use of the warehouse, what is the incremental free cash flow (i.e. how many dollars is the firm better or worse off) from proceeding with the project? a. $5000 per month b. $60000 per year c. -$5000 per month d. $0 per month Clear my choicearrow_forward4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,600,000. Expected annual net cash inflows are $1,525,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,100,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $980,000. Division D uses straight-line depreciation and requires an annual return of 10%. Compute the payback, the ARR, the NPV, and the profitability index for both plans. Compute the estimated IRR of Plan A. Use Excel to verify the NPV calculations in Requirement 4(a) and the actual IRR for the two plans. How does the IRR of each plan compare with the company’s required rate of return? Division D must rank the plans and make a recommendation to Dillard’s top management team for the best plan. Which…arrow_forward2. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,200 4,100 4,300 4,400 Sales price $29.82 $30.00 $30.31 $33.19 Variable cost per unit $12.15 $13.45 $14.02 $14.55 Fixed operating costs except depreciation $41,000 $41,670 $41,890 $40,100 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $15,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Garida pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation. Determine what the project’s net…arrow_forward
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