## Fundamentals of Corporate Finance Study Set 23

Business

## Quiz 11 :

Some Lessons From Recent Capital Market History

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Q35 Q35 Q35

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits.Which one of the following represents the price that should be charged for the additional units during this sale?

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Q44 Q44 Q44

Valerie just completed analyzing a project.Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000.Annual sales are estimated at $589,000 and the tax rate is 34 percent.The net present value is a negative $320,000.Based on this analysis, the project is expected to operate at the:

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Q56 Q56 Q56

Uptown Promotions has three divisions.As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year.These proposals represent positive net present value projects that fall within the long-range plans of the firm.The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively.For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year.This is an example of:

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Q57 Q57 Q57

Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions.All requests represent positive net present value projects.All projects are independent.Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests.Management is following a practice known as:

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Q58 Q58 Q58

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers.These requests are seeking funding for positive net present value projects.The CFO continues to deny all funding requests due to the financial situation of the company.Apparently, the company is:

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Q59 Q59 Q59

Precise Machinery is analyzing a proposed project.The company expects to sell 2,300 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, plus or minus 3 percent.What is the sales revenue under the worst case scenario?

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Q60 Q60 Q60

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.What is the contribution margin per unit under the best case scenario?

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Q61 Q61 Q61

Precise Machinery is analyzing a proposed project.The company expects to sell 2,250 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 3 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.What is the amount of the total costs per unit under the worst case scenario?

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Q62 Q62 Q62

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.The tax rate is 35 percent.The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755.What is the operating cash flow based on this analysis?

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Q63 Q63 Q63

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $775 per unit, give or take 2 percent.The tax rate is 34 percent.The company is conducting a sensitivity analysis with fixed costs of $590,000.What is the OCF given this analysis?

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Q64 Q64 Q64

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, plus or minus 3 percent.What is the earnings before interest and taxes under the base case scenario?

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Q65 Q65 Q65

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 4 percent.The expected variable cost per unit is $11 and the expected fixed costs are $290,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, give or take 3 percent.What is the operating cash flow under the best case scenario?

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Q66 Q66 Q66

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, give or take 3 percent.What is the net income under the worst case scenario?

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Q67 Q67 Q67

Stellar Plastics is analyzing a proposed project.The company expects to sell 12,000 units, plus or minus 5 percent.The expected variable cost per unit is $3.20 and the expected fixed costs are $30,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $24,000.The tax rate is 34 percent.The sales price is estimated at $7.50 a unit, plus or minus 4 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?

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Q68 Q68 Q68

Sunset United is analyzing a proposed project.The company expects to sell 15,000 units, plus or minus 4 percent.The expected variable cost per unit is $120 and the expected fixed costs are $311,000.The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range.The depreciation expense is $74,000.The tax rate is 35 percent.The sales price is estimated at $170 a unit, plus or minus 2 percent.What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?

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Q69 Q69 Q69

Your company is reviewing a project with estimated labor costs of $21.20 per unit, estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a month.Sales are projected at 42,000 units over the one-year life of the project.All estimates are accurate within a range of plus or minus 4 percent.What are the total variable costs for the worst-case scenario?

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Q70 Q70 Q70

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units.All estimates are accurate within a plus/minus range of 3 percent.Depreciation is $12,000.What is the base case variable cost per unit?

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Q71 Q71 Q71

At a production level of 4,500 units, a project has total costs of $107,000.The variable cost per unit is $12.50.Assume the firm can increase production by 1,000 units without increasing its fixed costs.What will the total costs be if 4,800 units are produced?

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Q73 Q73 Q73

At the accounting break-even point, Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each.At this level of production, the depreciation is $58,000 and the variable cost per unit is $4.What is the amount of the fixed costs at this production level?

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Q74 Q74 Q74

The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups.The sales price is $1.49 per cup while the variable cost per cup is $0.63.How many cups of coffee must it sell to break-even on a cash basis?

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Q75 Q75 Q75

The Metal Shop produces 1.8 million metal fasteners a year for industrial use.At this level of production, its total fixed costs are $320,000 and its total costs are $522,000.The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit.A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.10.Should the firm sell the additional units at the offered price? Why or why not?

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Q77 Q77 Q77

The accounting break-even production quantity for a project is 12,320 units.The fixed costs are $216,000 and the contribution margin per unit is $28.The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 5-year life.What is the amount of fixed assets required for this project?

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Q78 Q78 Q78

A project has an accounting break-even point of 15,329 units.The fixed costs are $382,000 and the projected variable cost per unit is $29.10.The project will require $780,000 for fixed assets which will be depreciated straight-line to zero over the project's 6-year life.What is the projected sales price per unit?

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Q80 Q80 Q80

Spencer Tools would like to offer a special product to its best customers.However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project.The fixed costs are estimated at $21,000, the depreciation expense is $11,000, and the contribution margin per unit is $12.50.What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

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Q81 Q81 Q81

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit.How many units must the firm sell to break-even on a cash basis?

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Q83 Q83 Q83

Cantor's has been busy analyzing a new product.Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance.The fixed costs are $329,000 and the contribution margin per unit is $211.The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product.The tax rate is 34 percent and the required rate of return is 11 percent.Should the company develop the new product? Why or why not?

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Q84 Q84 Q84

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life.The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000.The operating cash flow is $19,700.What is the break-even quantity?

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Q87 Q87 Q87

Steele Insulators is analyzing a new type of insulation for interior walls.Management has compiled the following information to determine whether or not this new insulation should be manufactured.The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project.Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000.What is the degree of operating leverage for this project?

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Q88 Q88 Q88

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent.Due to the current state of the economy, you expect sales to decrease by 7 percent next year.What change should you expect in the operating cash flows next year given your sales prediction?

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Q89 Q89 Q89

Cool Shades, Inc.(CSI) manufactures biotech sunglasses.The variable materials cost is $1.69 per unit, and the variable labor cost is $3.04 per unit.Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit.What is the cash break-even point?

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Q90 Q90 Q90

Mountain Gear can manufacture mountain climbing shoes for $15.25 per pair in variable raw material costs and $18.46 per paid in variable labor costs.The shoes sell for $135 per pair.Last year, production was 170,000 pairs and fixed costs were $830,000.What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs?

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Q91 Q91 Q91

We are evaluating a project that costs $854,000, has a 15-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 154,000 units per year.Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year.The tax rate is 33 percent, and we require a 14 percent return on this project.Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±14 percent.What is the worst-case NPV?

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Q93 Q93 Q93

A project has the following estimated data: price = $74 per unit; variable costs = $39.22 per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000; life = 4 years.Ignore the effect of taxes.What is the degree of operating leverage at the financial break-even level of output?

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Q94 Q94 Q94

Consider a project with the following data: accounting break-even quantity = 29,000 units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000; variable costs = $24 per unit; required return = 14 percent; depreciation = straight line.Ignoring the effect of taxes, what is the financial break-even quantity?

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Q97 Q97 Q97

Consider a 6-year project with the following information: initial fixed asset investment = $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units; tax rate = 32 percent.What is the sensitivity of OCF to changes in quantity sold?

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Q98 Q98 Q98

You are considering a new product launch.The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero.Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year.The required return is 12 percent and the relevant tax rate is 34 percent.Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent.What is the worst case NPV?

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Q99 Q99 Q99

McGilla Golf has decided to sell a new line of golf clubs.The clubs will sell for $500 per set and have a variable cost of $200 per set.The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years.The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs.The high-priced clubs sell at $700 and have variable costs of $300.The company will also increase sales of its cheap clubs by 9,000 sets.The cheap clubs sell for $200 and have variable costs of $100 per set.The fixed costs each year will be $7,559,000.The company has also spent $1,133,000 on research and development for the new clubs.The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project.The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project.The tax rate is 40 percent, and the cost of capital is 8 percent.What is the IRR?

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Q100 Q100 Q100

Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear.Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a traditional gasoline engine.Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model.The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model.Assume the appropriate interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years.What price per gallon would make the decision to buy they hybrid worthwhile?

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Q101 Q101 Q101

In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion developing its B490, which is capable of carrying 800 passengers.The plane has a list price of $275 million.In discussing the plane, Hiro Airplanes stated that the company would break-even when 246 B490s were sold.Assume the break-even sales figure given is the cash flow break-even.Suppose the sales of the B490 last for only 9 years.How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment?

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Q105 Q105 Q105

Mr.Bear, your boss, will only agree to accept a project that, as a minimum, provides a rate of return equal to the requirement he has set for the project.Given this, explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.

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