1. Allegan Manufacturing Company manufactures one product, which it sells for $200 per unit. Total dollar sales are $10 million and variable costs are $75 per unit. The company's fixed cost is $3 million. What is the firm's breakeven output?
2. Assume that you purchased a 7-year, 8 percent savings certificate for $1,000.00. If interest is compounded annually, what will be the value of the certificate when it matures?
3. A savings certificate similar to the one in the previous problem is available with the exception that interest is compounded semiannually. What is the difference between the ending value of the savings certificate compounded semiannually and the one compounded annually?
a. The semiannual is worth $17.86 more than the annual
b. The semiannual is worth $17.86 less than the annual
c. The semiannual is worth $33.60 more than the annual
d. The semiannual is worth $33.60 less than the annual
e. The semiannual is worth the same as the annual.
4. In exchange for a $20,000 payment today, a well known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.
Alternative Lump-sum Amount
A $28,500 at end of 3 years
B $54,000 at end of 9 years
C $160,000 at end of 20 years
a. Find today's preset value of each alternative.
b. Are the alternatives acceptable, i.e., worth $20,000 today?
c. Which alternative, if any, would you take?
6. A firm's profit margin is 10 percent and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?
7. Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8 percent.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the NPV of the acquisition under the cash offer?
8. An American investor buys 100 shares of London Enterprises at a price of £50 when the exchange rate is $1.60/£. A year later the shares are selling at £52. No dividends have been paid.
a. What is the rate of return to an American investor if the exchange rate is still $1.60/£?
(See attached file for full problem description)
b. What if the exchange rate is $1.70/£?
c. What if the exchange rate is $1.50/£?
Answers to 7 questions
1) calculates breakeven output
2) Future value of a lump sum amount
3) Frequency of compounding- difference between the ending value of the savings certificate compounded semiannually and the one compounded annually
4) Present value of alternatives
5) calculates sustainable growth rate for a company
6) Acquisition- calculates gain from merger, cost of the cash offer, NPV of the acquisition under the cash offer
7) Rate of return involving exchamge rate