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# Financial Management Concepts

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1. Discuss the limitations of financial leverage.

2. The Hartnett Corporation manufactures baseball bats with Sammy Sosa's autograph stamped on. Each bat sells for \$13 and has a variable cost of \$8. There is \$20,000 in fixed costs involved in the production process.

a. Compute the break-even point in units.
b. Find the sales (in units) needed to earn a profit of \$15,000.

3. Bond Yields. An AT&T bond has 10 years until maturity, a coupon rate of 8 percent, and sells for \$1,100.

a. What is the current yield on the bond?

b. What is the yield to maturity?

4 Profitability Index. What is the profitability index of a project that costs \$10,000 and provides cash flows of \$3,000 in Years 1 and 2 and \$5,000 in Years 3 and 4? The discount rate is 9 percent.
Problems 5 - 8 refer to two projects with the following cash flows:

Year Project A Project B

0 -\$200 -\$200

1 80 100

2 80 100

3 80 100

4 80

Cash Flows, Dollars

Project C0 C1 C2 NPV at 10%

A -30,000 21,000 21,000 +\$6, 446

B -50,000 33,000 33,000 +\$7, 273

5. IRR/NPV. If the opportunity cost of capital is 11 percent, which of these projects is worth pursuing?

6. Mutually Exclusive Investments. Suppose that you can choose only one of these projects. Which would you choose? The discount rate is still 11 percent.

7. IRR/NPV. Which project would you choose if the opportunity cost of capital were 16 percent?

8. IRR. What are the internal rates of return on projects A and B?

9. Cash Flows. We've emphasized that the firm should pay attention only to cash flows when assessing the net present value of proposed projects. Depreciation is a noncash expense. Why then does it matter whether we assume straight-line or MACRS depreciation when we assess project NPV?

10. Shock Electronics sells portable heaters for \$25 per unit, and the variable cost to produce them is \$17. Mr. Amps estimates that the fixed costs are \$96,000. What is the BEP?

#### Solution Preview

The Hartnett Corporation manufactures baseball bats with Sammy Sosa's autograph stamped on. Each bat sells for \$13
and has a variable cost of \$8. There is \$20,000 in fixed costs involved in the production process.
a. Compute the break-even point in units.

BEP= FIXED COSTS/CONTRIBUTION PER UNIT
CONTRIBUTION= SALES -VARIABLE COST 5
FIXED COSTS 20000
BEP= 4000 UNITS

b. Find the sales (in units) needed to earn a profit of \$15,000.

DESIRED SALES= FIXED COSTS+DESIREDPROFIT/CONTRIBUTION PER UNIT
FC+DESIRED PR.= 35000
DESIRED SALES= 7000

3. Bond Yields. An AT&T bond has 10 years until maturity, a coupon rate of 8 percent, and sells for \$1,100.

a. What is the current yield on the bond?
ANNUAL INTEREST/CURRENT SELLING PRICE
INTEREST= 8% OF FACE VALUE ASSUMED RS. 1000
80
SELLING PRICE 1100
CURRENT YIELD 7.27%
b. What is the yield to ...

#### Solution Summary

This explains various concepts of financial mangement including IRR, Leverage, NPV, PI through practical illustrations.

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