PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 9, Problem 8PS
Asset betas Which of these projects is likely to have the higher asset beta, other things equal? Why?
- a. The sales force for project A is paid a fixed annual salary. Project B’s sales force is paid by commissions only.
- b. Project C is a first-class-only airline. Project D is a well-established line of breakfast cereals.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The Miramar Company is going to introduce one of three new products: a Widget, a Hummer, or a Nimnot. The market conditions (favourable, Stable, or unfavourable) will determine the profit or loss the company realizes, as shown In the following payoff table:
State of Nature
Favourable
Stable
Unfavourable
Product
0.2
0.7
0.1
$
$
$
Widget
120,000
70,000
-30,000
Hummer
60,000
40,000
20,000
Nimnot
35,000
30,000
30,000
Required:
1. Develop the opportunity loss table and compute the expected opportunity loss for each product.
2. Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.
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
3,000
3,250
3,300
3,400
Sales price
$17.25
$17.33
$17.45
$18.24
Variable cost per unit
$8.88
$8.92
$9.03
$9.06
Fixed operating costs
$12,500
$13,000
$13,220
$13,250
This project will require an investment of $10,000 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. Garida 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 under the new tax law.
Which of the…
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
3,000
3,250
3,300
3,400
Sales price
$17.25
$17.33
$17.45
$18.24
Variable cost per unit
$8.88
$8.92
$9.03
$9.06
Fixed operating costs
$12,500
$13,000
$13,220
$13,250
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 under the new tax law.
Determine what…
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Give typing answer with explanation and conclusion A company pursues a cost-cutting initiative that costs $21,000 to implement. Thereafter, however, the initiative reduces after-tax costs by $6,500 per year perpetually. The company relies on 64% debt financing at a 11.4% pretax interest rate. The company marginal tax rate is 31%. The company β is 1.41, short-term risk-free rate is 7.4%, and required risk premium for the market portfolio is 11.0%. Find the project’s net present value. -19,083 -23,090 -25,399 -27,939 -20,991arrow_forwardCalculating EAC Barry Boswell is a financial analyst for Dossman metal works, Inc and he is analyzing two alternative configurations for the firms new plasma cutter shop. The two alternatives, denoted A and B below, will perform the same task, but alternative A will cost $85,000 to purchase, while alternative B will cost only $65,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after tax costs for the two projects are as follows: year alternative a alternative b 0 $(85,000) $(65,000) 1. $(19,000) $(4,000) 2 $(19,000) $(4,000) 3 $(19,000) $(4,000) 4 $(19,000) 5 $(19,000) 6 $(19,000) 7 $(19,000) calculate each projects EAC, given a discount rate of 11 percent which of the alternatives do you think Barry should select? Why? Alternatives A EAC at a discount rate of 11% isarrow_forwardCompanies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Yeatman Co.: Yeatman 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 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed operating costs $66,750 $68,950 $69,690 $68,900 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. Yeatman 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 under the new tax law. Determine…arrow_forward
- Return on Investment for Multiple Investments, Residual IncomeThe manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $28.9 million and expected operating income of $4.335 million. The outlay required for eachinvestment and the expected operating incomes are as follows: Air conditioner Turbocharger Outlay $750,000 $540,000 Operating income 90,000 82,080 (Note: Round all numbers to two decimal places.)Required:1. Compute the ROI for each investment project.2. Compute the budgeted divisional ROI for each of the following four alternatives:a. The air conditioner investment is made.b. The turbocharger investment is made.c. Both investments are made.d. Neither additional investment is…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_forwarda. Assume that Carson has two choices to satisfy the increased demand for its products. It could increase production by 10 percent with its existing facilities by obtaining short-term financing to cover the extra production expense and then using a portion of the revenue received to finance this level of production in the future. Alternatively, it could issue bonds and use the proceeds to buy a larger facility that would allow for 50 percent more capacity. Which alternative should Carson select? b. Carson currently has a large amount of debt, and its assets have already been pledged to back up its existing debt. It does not have additional collateral. At this time, the credit risk premium it would pay is similar in the short-term and long-term debt markets. Does this imply that the cost of financing is the same in both markets? c. Should Carson consider using a call provision if it issues bonds? Why? Why might Carson decide not to include a call provision on the bonds? d. If Carson…arrow_forward
- A project has fixed costs of $400 per year, depreciation charges of $400 a year, annual revenue of $3,600, and variable costs equal to two-thirds of revenues. a. If sales increase by 17%, what will be the percentage increase in pretax profits? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is the degree of operating leverage of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardThe X Division of NUBD Products Co. is considering an investment in a new project. The project has an estimated cost of P1,000,000. If NUBD Products Co. has a target rate of return of 12%, how large does the return on investment on this project need to be to generate P170,000 of residual income?arrow_forwardA production machinery system may be purchased either from either Hillebrand Corporation or Lotux Corporation. The Hillebrand system has an IRR of 30.5 and the Lotux system has an IRR of 40.8. The two projects happen to have equal net present value at a discount rate of 22.25%. The firms cost of capital is 18 percent. Explain with a graph, which project creates more value and which project should be chosen.arrow_forward
- Return on Investment for Multiple Investments, Residual IncomeThe manager of a division that produces add-on products for theautomobile industry has just been presented the opportunity to invest intwo independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without theinvestments, the division will have average assets for the coming year of$28.9 million and expected operating income of $4.335 million. Theoutlay required for each investment and the expected operating incomesare as follows: Air Conditioner Turbocharger OutlayOperating income $750,00090,000 $540,00082,080 (Note: Round all numbers to two decimal places.) Required:1. Compute the ROI for each investment project.2. Compute the budgeted divisional ROI for each of the followingfour alternatives: a. The air conditioner investment is made.b. The turbocharger investment is made.c. Both investments are made.d. Neither additional investment is made. 3.…arrow_forwardEngineering Economics Bawal gumamit ng excel( Don't use Excel) A firm is considering the development of several new products. The products under consideration are listed here; the products in each project group are mutually exclusive. (Insert Table) At most one product from each group will be selected. The firm has MARR of 10% per year and a capital investment budget limitation on development costs of P2,100,000. the life of all products is assumed to be ten (10) years. Assume no market values at the end of 10 years. Show Cash Flow Diagram?arrow_forward1) 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?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
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial Planning & Forecasting - Spreadsheet Modeling; Author: Pat Obi;https://www.youtube.com/watch?v=dn8vTk0eaBg;License: Standard Youtube License