Macroeconomic causes of financial crisis in 2008 Answer
E4-18 Otto Dieffenbach & Sons, Inc. is a small manufacturing company in La Jolla Answer
E4-18 Otto Dieffenbach & Sons, Inc. is a small manufacturing company in La Jolla that
uses activity-based costing. Dieffenbach & Sons accumulates overhead in the following
activity cost pools.
1. Hiring personnel. 6. Setting up equipment.
2. Managing parts inventory. 7. Training employees.
3. Purchasing. 8. Inspecting machined parts.
4. Testing prototypes. 9. Machining.
5. Designing products. 10. Assembling.
For each activity cost pool, indicate whether the activity cost pool would be unit-level,
batch-level, product-level, or facility-level.
A firm wishes to bid on a contract that is expected to yield the following after-tax Answer
- Calculate the net present value and profitability index of a project with a net investment of $20,000 and expected net cash flows of $3,000 a year for 10 years. if the project’s required return is 12%. Is the project acceptable?
A firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year:
Year Net Cash Flow
To secure the contract, the firm must spend $30,000 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earns 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the table.
a. Compute the project’s net present value
- Should the project be adopted?
- What is the meaning of the computed net present value figure?
Two mutually exclusive investment projects have the following forecasted cash flows
Year A B
0 $-20,000 $-20,000
1 10,000 0
2 10,000 0
3 10,000 &nb sp; 0
4 10,000 &nb sp; 60,000
a. Compute the internal rate of return for each project,
- Compute the net present value for each project if the firm has a 10% cost of capital
- Which project should be adopted and why?
A junior executive is fed up with his boss's operating policies. Before leaving the office of his angered superior, the young man suggests that a well-trained monkey could handle the trivia assigned to him. Pausing a moment to consider the import of this closing statement, the boss is seized by the thought that this must have been in the back of her own mind ever since she hired the junior executive. She decides to consider replacing the executive with a bright young baboon. She figures that she could argue strongly to the board that such “capital deepening” is necessary for the cost-conscious firm. Two days later, a feasibility study is completed, and the following data are presented to the president:
* It would cost $12,000 to purchase and train a reasonably alert baboon with a life expectancy of 20 years.
* Annual expenses of feeding and housing the baboon would be $4,000.
*The junior executive's annual salary is $7,000 (a potential saving if the baboon is hired).
* The baboon will be depreciated on a straight-line basis over 20 years to a zero balance.
* The firm's marginal tax rate is 40 percent.
* The firm's current cost of capital is estimated to be 11 percent.
On the basis of the net present value criterion, should the monkey be hired (and the junior executive fired)?
Note the following information on two mutually exclusive projects under consideration by Wang Food Markets, Inc.
Year A B
0 $-30,000 $-60,000
1 10,000 20,000
2 10,000 &nb sp; 20,000
3 10,000 &nb sp; 20,000
4 10,000 20,000
5 10,000 &nb sp; 20,000
Wang requires a 14 percent rate of return on projects of this nature.
a. Compute the Net Present Value (NPV) for both projects.
Benford, Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated over a 5-year period on a straight-line basis to $0. The new store will require Benford to increase its net working capital by $200,000 at time 0; thereafter, net working capital balances are expected to equal 20 percent of the following year's sales. First-year sales are expected to be $1 million and to increase at an annual rate of 8 percent over the expected 10-year life of the store. Operating expenses (including lease payments and excluding depreciation) are projected to equal 70 percent of sales. The salvage value of the store's equipment and fixtures is anticipated to be $10,000 at the end of 10 years. Benford's marginal tax rate is 40 percent.
A. Calculate the store's net present value, using an 18 percent required return.
B. Should Benford accepts the project?
C. Calculate the store's internal rate of return
D. Calculate the store's profitability index.
Consider a 2-year project with the following information: initial fixed asset investment = $495,000; straight-line depreciation to zero over the 2-year life; zero salvage value; selling price =$39; variable costs = $20; fixed costs = $210,000; quantity sold = 150,000 units; tax rate = 31 percent. How sensitive is Operating Cash Flow (OCF) to changes in quantity sold? State your answer in terms of a dollar amount change (increase or decrease) in OCF for every additional unit sold.
Direct cash flow consequences to NACCO of lease financing an electric shovel Answer
TABLE 21-2 Direct cash flow consequences to NACCO of lease financing an electric shovel
(amounts in thousands).
YEAR 0 1 2 3 4 5 6 7 8 9 10
Benefits of Leasing:
Initial outlay (avoided) +10,000 (this is under year 0)
Costs of Leasing:
Lease payments: -1,745 (its the same from year 1 to 10)
Lease payment tax credit: +698 (year 1-10)
Depriciation tax credit fargone: -380 (year 1-10)
Salvage value fargone: -500 (only under year 10)
Net cash flow to lease:+10,000 -1,427 -1,427 -1,427 -1,427 -1,427 -1,427 -1,427 -1,427 -1,427 -1,927 This represents year 0 through 10
Which of the following is not a financial market ANSWER
____ 13. Which of the following is not a financial market?
a. bond market
b. a market in which small business owners buy and sell their companies
c. stock market
d. All of these are financial markets
____ 14. A financial market is:
a. a place where investors can buy and sell securities
b. the stock market
c. regulated by well-defined rules and regulations
d. All of the above
____ 18. Which of the following does not cause accounting profit and cash flow to differ
b. sales made on credit
c. payroll expense
d. inventory purchased, but not yet sold
____ 19. Differences between net income and cash flow come from:
a. accounts receivable
c. short term securities
d. a and b
____ 20. The accounting matching principle dictates that we
a. match expenses up with the employees that incur them
b. prorate the cost of an asset over it’s expected economic life
c. invoice the customer as soon as the merchandise is produced
d. all of the above
____ 22. Which of the following causes net income to differ from cash flow?
b. the purchase of inventory on credit
c. the sale of merchandise on credit
d. all of the above
____ 23. Managers whose bonuses are based on the income of the firm tend to overstate the value of accounts receivable and inventory with the following result:
a. the firm’s value is less than it is held out to be
b. profit is more than it is held out to be
c. the firm’s value is more than it is held out to be
d. liabilities are less than they are held out to be
____ 25. Holding all other variables constant, a increase in EAT can be caused by a decrease in:
a. Depreciation expense
b. The cost ratio
c. The tax rate
d. Both a and c
e. a, b, and c are correct.
29. Which of the following equations is correct?
a. Dividends = Net income – Change in Retained Earnings
b. Dividends = Net income + Change in Retained Earnings
c. Dividends = Change in Retained earnings – Net income
d. none of the above
____ 30. Net working capital can be referred to as:
a. total assets minus current liabilities
b. current assets minus total liabilities
c. cash minus current liabilities
d. current assets minus current liabilities
____ 31. When an account is determined to be uncollectible, “writing off” the bad debt usually involves:
a. reducing the receivables balance and the bad debt reserve by the amount of the account
b. writing a letter to the customer demanding payment
c. “expensing” the amount deemed uncollectible
d. all of the above
33. Three years ago a machine was purchased for $5,000. Assuming a ten-year life and straight line depreciation with a no salvage value, which of the following will appear on the income statement and balance sheet respectively after four years?
a. depreciation expense of $2,000, accumulated depreciation of $2,000.
b. depreciation expense of $500, accumulated depreciation of $2,000.
c. accumulated depreciation of $2,000, depreciation expense of $500.
d. accumulated depreciation of $500, depreciation expense of $2,000.
e. depreciation expense of $1,500, accumulated depreciation of $500.
64. Using an annual interest rate of 9%, how long will it take a deposit of $1,000 to grow to $3,000, assuming no additional deposits are made?
a. 8.04 years
b. 10.00 years
c. 11.11 years
d. 12.75 years
e. 13.50 years
65. If you invest the $10,000 you receive at graduation (age 22) in a mutual fund which averages a 12% annual return, how much will you have at retirement in 40 years?
66. Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%.
|Your company assembles fi ve different models of a motor scooter that is sold in specialty|
|stores in the United States. The company uses the same engine for all fi ve models. You|
|have been given the assignment of choosing a supplier for these engines for the coming|
|year. Due to the size of your warehouse and other administrative restrictions, you must|
|order the engines in lot sizes of 1,000 each. Because of the unique characteristics of the|
|engine, special tooling is needed during the manufacturing process for which you agree|
|to reimburse the supplier. Your assistant has obtained quotes from two reliable engine|
|suppliers and you need to decide which to use. The following data have been collected:||
|Jill’s Job Shop buys two parts (Tegdiws and Widgets) for use in its production system from|
|two different suppliers. The parts are needed throughout the entire 52-week year. Tegdiws are|
|used at a relatively constant rate and are ordered whenever the remaining quantity drops to the|
|reorder level. Widgets are ordered from a supplier who stops by every three weeks. Data for|
|both products are as follows:|
|Item X is a standard item stocked in a company’s inventory of component parts. Each year the|
|firm, on a random basis, uses about 2,000 of item X, which costs $25 each. Storage costs, which|
|include insurance and cost of capital, amount to $5 per unit of average inventory. Every time an|
|order is placed for more item X, it costs $10.|
A firm’s current balance sheet is as follows: Assets $100 Debt $10 Equity $90 a. What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Debt Asset After tax cost of debet Cost of equity Cost of Capital 0% 8% 12% ? 10% 8% 12% ? 20% 8% 12% ? 30% 8% 13% ? 40% 8% 14% ? 50% 10% 15% ? 60% 12% 16% ? b. Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Compare this balance sheet with the firm’s current balance sheet. What course of action should the firm take? Assets $100 Debt $? Equity $? c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why? d. If a firm uses too much debt financing, why does the cost of capital rise?
Zappo Skate Corporation manufacturers two models of skate boards: a standard and a deluxe model. The following activity and cost information has been complied Answer
14. The following information applies to Questions 14 through 15.
Zappo Skate Corporation manufacturers two models of skate boards: a standard and a deluxe model. The following activity and cost information has been complied.
Product # XXXXX setups # XXXXX components # XXXXX total ; direct labor hours
Standard 20 &nbs p; 10 375
Deluxe &n bsp; 30 15 225
Overhead costs $25,000 $35,000
Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model?
15. Number of setups and number of components are identified as activity-cost drivers for overhead costs. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?
Use midpoint method to calculate your price elasticity of demand as the price of compact discs increases from $8 to $10Answer
Price Quantity Demanded Quantity Demanded
(income= 10,000) (income =$12,00)
$8 40 50
10 32 45
12 24 30
14 16 20
16 8 12
a. Use midpoint method to calculate your price elasticity of demand as the price of compact discs increases from $8 to $10 if (i)your income is 10,000 (ii) your income is 12,000.
b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,00 if (i) the price is $12 and (ii) the price is $16.
Kim and Dan Bergholt are considering purchasing a home in the Washington D.C. area for about $280,000 Answer
Kim and Dan Bergholt are considering purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities- $220, maintenance-$100, property taxes- $380, and home insurance payments- $50. Their only debt consists of car loans requiring a monthly payment of $350.Kim’s gross income is $55,000/year and Dan’s is $38,000/year. They have saved about $60,000 in a money market fund on which they earned $5,840 last year. They plan to use most of this for a 20% down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 8% given a 20% down payment and closing costs equal to $1,000 plus 3 points.
The real estate agent tells the Bergholts that if they don’t care to purchase, they might consider renting. The rental option would cost $1,400/month plus utilities estimated at $220 and renter’s insurance of $25/month. Assuming they remain in the same place for the next five years, the Bergholts would like to know if it is better to buy or rent the home. They expect that the price of housing and rents will rise at an annual rate of 3% over the next five years. They expect to earn an annual rate of 5% on the money market fund. All other prices, including utilities, maintenance, and taxes are expected to increase at a 3% annual rate. After federal, state, and local taxes, they get to keep only 55% of a marginal dollar of earnings.