FUND. OF CORPORATE FINANCE (LL)
11th Edition
ISBN: 9781260377811
Author: Ross
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 3M
Summary Introduction
Case summary:
Person M and T are the owners of the company S. They made little planning for their investment needs. However, lack of planning resulted in missed sales and outstanding salaries to their employees. Therefore, they approached person C, the employee of Company S to make financial plans for the next year.
Characters in the case:
Company S: The firm in need of financial plans
Person M and T: The S company’s founders
Person C: The S Company’s employee
Adequate information:
The company-faced problems based on cash flows due to improper planning which resulted in missed sales. The net income of the company is $2,029,766, the total assets are $19,986,170, the additional
To determine: External financing needed and projected capital utilization.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Earleton Manufacturing Company has $3 billion in sales and $661,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.
a. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answers completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar.$ ____
b. What is Earleton's target fixed assets/sales ratio? Do not round intermediate calculations. Round your answer to two decimal places. % ____
c. If Earleton's sales increase 30%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest dollar.$ ____
1)
Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier?
2)
Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $200,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier?
The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,000. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,000. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow
in year 5?
$553,080
$582,080
$589,080
$618,740
None of the above.
Chapter 4 Solutions
FUND. OF CORPORATE FINANCE (LL)
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
Knowledge Booster
Similar questions
- Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of 1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 900 per unit. a. If a transfer price of 1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Divisions current sales, how much would Ziegler Inc.s total operating income increase? b. How much would the Instrument Divisions operating income increase? c. How much would the Components Divisions operating income increase?arrow_forwardA firm that plans to expand its product line must decide whether to build a small or a large facilityto produce the new products. If it builds a small facility and demand is low, the net present valueafter deducting for building costs will be $400,000. If demand is high, the firm can either maintainthe small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000.If a large facility is built and demand is high, the estimated net present value is $800,000. If demandturns out to be low, the net present value will be – $10,000.The probability that demand will be high is estimated to be .60, and the probability of low demandis estimated to be .40.a. Analyze using a tree diagram.b. Compute the EVPI. How could this information be used?c. Determine the range over which each alternative would be best in terms of the value of P(demand low).arrow_forwardThe RV company, engaged in the fabrication of automobile engine part withproduction capacity of 700,000 units per year, is only operating at 65% capacity due to unavailability of the necessary foreign currency to finance the importation of their raw materials. The current annual income is P450,000; annual fixed costs are P190,000 and variable cost are P0.35 per unit. A) What is the current profit/loss? B) What is the breakeven point in units and in pesos? C) Draw the breakeven chart.arrow_forward
- Kolenda Technology Group has a contract to build a network for a customer for a total sales price of $10 million. Th is network will take an estimated three years to build, but considerable uncertainty surrounds total building costs because new technologies are involved. In other words, the outcome cannot be reliably measured, but it is probable that the costs up to the agreed upon price will be recovered. Assuming the following expenditures, how much revenue, expense (cost of construction), and income would the company recognize each year under IFRS and using the completed contract method under US GAAP? Th e amounts periodically billed to the customer and received from the customer are not necessarily equivalent to the amount of revenue being recognized in the period. For simplicity, assume Kolenda pays cash for all expenditures. 1 . At the end of Year 1, Kolenda has spent $3 million. 2 . At the end of Year 2, Kolenda has spent a total of $5.4 million. 3 . At the end of Year 3, the…arrow_forwardAny one of these different product lines can be produced by Bubble Mills, Inc., with the present equipment in one of the divisions. The annual depreciation of the equipment is P6,400; and the annual cost to operate the equipment, regardless of product line manufactured, is P4,600.Product A is expected to yield sales revenue of P71,000 a year with increased costs of production amounting to P42,000. Product B should yield sales revenue of P46,000 a year with increased costs of P15,000. Product C should yield sales revenue of P117,000 with increased costs of P96,000.How much is the sunk costs of the company? a• P19,600 b• P21,400 c• P26,000 d• P11,000arrow_forwardAny one of these different product lines can be produced by Bubble Mills, Inc., with the present equipment in one of the divisions. The annual depreciation of the equipment is P6,400; and the annual cost to operate the equipment, regardless of product line manufactured, is P4,600.Product A is expected to yield sales revenue of P71,000 a year with increased costs of production amounting to P42,000. Product B should yield sales revenue of P46,000 a year with increased costs of P15,000. Product C should yield sales revenue of P117,000 with increased costs of P96,000.How much is the sunk costs of the company? choices: P19,600 • P26,000 • P21,400 • P11,000arrow_forward
- The Plastics Division of Minock Manufacturing currently earns $2.53 million and has divisional assets of $22 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,514,000 and will have a yearly cash flow of $1,470,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company’s cost of capital is 7 percent. Ignore taxes. Required: What is the divisional ROI before acquisition of the new asset? What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).arrow_forwardAssume that a company is considering purchasing a machine for $100,000 that will have a seven-year useful life and a $16,500 salvage value. The machine will lower operating costs by $18,000 per year and increase sales volume by 1,000 units per year. The company earns a contribution margin of $3.00 per unit. The company also expects this investment to provide qualitative benefits that it is struggling to incorporate into its financial analysis. Assuming the company’s required rate of return is 17%, the minimum dollar value per year that must be provided by the machine’s qualitative benefits to justify the $100,000 investment is closest to: Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.arrow_forwardLast year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its Fixed Assets/Sales ratio was 40%. However, its fixed assets were used at only 40% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level, it would have had, had it been operating at full capacity. What target Fixed Assets/Sales ratio should the company set? Please explain the process and show calculations.arrow_forward
- Two different manufacturing processes are being consideredfor making a new product. The first process is less capitalintensive, with fixed costs of only $50,000 per year andvariable costs of $700 per unit. The second process has fixedcosts of $400,000 but has variable costs of only $200 per unit.a. What is the break-even quantity beyond which the secondprocess becomes more attractive than the first?b. If the expected annual sales for the product is 800 units,which process would you choose?arrow_forwardBanyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of Capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000.000. A. Calculate the EVA for each of Banyans divisions. B. Calculate the RI for each of Banyans division. C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? D. If Banyan uses RI, which division has the better project and by how much? E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?arrow_forwardThe J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning