1. 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. 
 
    

 

  2. Jay Linoleum Company has fixed costs of $70,000. Its product
currently sells for $4 per unit and has variable costs per unit of
$2.60. Mr. Thomas, the head of manufacturing, proposes to buy new
equipment that will cost $300,000 and drive up fixed costs to
$105,000. Although the price will remain at $4 per unit, the increased
automation will reduce variable costs per unit to $2.25. As a result
of Thomas's suggestion, will the break-even point go up or down?
Compute and show the necessary numbers.
 
    

 

 

3. Medco Corporation can sell preferred stock for $80 with an
estimated flotation cost of $3. It is anticipated that the preferred
stock will pay $6 per share in dividends.

a. Compute the cost of preferred stock for Medco Corp. 
 

 

 

 

4. Royal Jewelers, Inc. has an aftertax cost of debt of 6 percent.
With a tax rate of 40 percent, what can you assume the yield on the
debt is?
 
  

 

5. King's Department Store is contemplating the purchase of a new
machine at a cost of $13,869. The machine will provide $3,000 per year
in cash flow for six years. King's has a cost of capital of 12
percent. Using the internal rate of return method, evaluate this
project and indicate whether it should be undertaken.
 
  

 

 

 

6. The Pan American Bottling Co. is considering the purchase of a new
machine that would increase the speed of bottling and save money. The
net cost of this machine is $45,000. The annual cash flows have the
following projections:

                  Year-- Cash Flow 

                       1-- $15,000 

                       2 --$20,000 

                       3 --$25,000 

                       4 --$10,000 

                       5 ---$5,000 

a. If the cost of capital is 10 percent, what is the net present value
of selecting the new machine?

b. Should the project be accepted? Why? 
 

 

 

7.  You require $700 in five years. If you earn 5% interest on your
funds, how much do you need to invest today to reach your goals?

 


8.  You are offered an annuity of $10,000 for 10 years starting four
years from now. With interest rates at 5%, how much should you be
willing to pay for this today?

 

9.  You take out a 30 year, 100,000 home mortgage at an APR of 6% and
monthly payments.  In 12 years you decide to sell your house and pay
off the mortgage. How much do you owe?

1. a. $20000/($13-$8)= 4000 units
b. 3000 additional bats beyond the 4000 breakeven bats, yielding 7000 bats total.

2. Old machine has $1.40 profit/unit.  50000 units for breakeven.
New machine has $1.75 profit/unit.  60,000 units for breakeven.  New
machine has a higher breakeven.

3. PV of a perpetuity is 1/r.  r=$6/$80 = 0.075.  Therefore, the cost
= $3 float/sh. plus PV of dividends per share (1/0.075 or $13.33) =
$16.33/sh.

4. 6% = Pretax interest rate (1-0.40).  Therefore, Pretax interest rate = 10%.

5. Using IRR formula in Excel, the result is 8%.  This is less than
the cost of capital, so do not accept project.

6. The NPV formula in Excel yields an NPV of $12620.82.  Since this is
positive, accept the project.

7. Initial amount * (1.05)^5 = $700.  Initial amount = $548.47.

8.  P = $10000 [(1.05)^10-1/0.05(1+0.05^10]/(1+0.05)^4 = $63526.90. 
The bracketed part of the formula calculates the value of the annuity
as of year 4.  The lower part converts it into its present value.

9.  Here is an amortization schedule from the calculator at "Step 3
Mortgage APR" Maxham Consumer Strategies (2005)
http://www.maxham.us/consumer-strategies/mortgages-loans-3.htm

Payment schedule

--------------------------------------------------------------------------------


Year Total Payments Principal Paid Interest Paid Ending Principal Balance 
                               $100,000.00 
1 $7,194.60 $1,228.00 $5,966.60 $98,772.00 
2 $7,194.60 $1,303.75 $5,890.85 $97,468.25 
3 $7,194.60 $1,384.17 $5,810.43 $96,084.08 
4 $7,194.60 $1,469.54 $5,725.06 $94,614.54 
5 $7,194.60 $1,560.18 $5,634.42 $93,054.36 
6 $7,194.60 $1,656.39 $5,538.21 $91,397.97 
7 $7,194.60 $1,758.56 $5,436.04 $89,639.41 
8 $7,194.60 $1,867.00 $5,327.60 $87,772.41 
9 $7,194.60 $1,982.20 $5,212.40 $85,790.21 
10 $7,194.60 $2,104.43 $5,090.17 $83,685.78 
11 $7,194.60 $2,234.23 $4,960.37 $81,451.55 
12 $7,194.60 $2,372.03 $4,822.57 $79,079.52 

After 12 years, you owe $79079.52.

Sincerely,

Wonko