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Meredith and James Kennedy own a business, Office Products, Inc. (OPI), which is a wholesale distributor of office equipment. Sales have grown about 5% per year over the past 5 years and are expected to grow at the same rate in the future. This past year, sales reached $800,000. A computer manufacturer recently approached OPI about becoming the exclusive distributor for one of its laptop computers. Sales are projected to be $400,000 from this product in the 1st year and to grow at 20% for 2 years before settling down to a 5% growth rate over the longer run. It is possible, however, that sales from this product could be as high as $800,000 in the 1st year. OPI has been earning a before-tax profit of 6% of sales. Variable operating costs are expected to remain the same percentage of sales, even with the added laptop sales. Fixed operating costs would be unchanged. Meredith and James are aware that increased sales will mean they need to maintain additional inventory and accounts receivable. They will also need to purchase additional equipment. OPI currently has no debt, but it can acquire additional short-term financing from a bank. It could borrow up to $50,000 at 10%. Above $50,000, the interest rate would increase to 12%. It is not possible to raise more equity, so any external financing would have to come from bank financing.
The Kennedys have asked your help in determining whether taking on the new product line would be in their best interests. Since they are content for the most part with their present business, they feel that to take on the additional product line, the financial rewards would have to be significant and the added debt load not too stressful. Make recommendations supported with reasoning.
A corporation is trying to decide whether to open a new factory outlet store. What is the expected NPW of the best alternative?
In my company I could apply this to our potential projects by thinking of our variable costs as the hours charged by consultants to the projects they are working on, each additional billable hour that is produced will add incrementally to our cost so..
Cash in the process of collection is. For a bank with a positive duration gap, an increase in interest rates will.
Determine the total discount or premium for each issue.- Determine the annual amount of discount or premium amortized for each bond.
X shares are expected to pay a dividend of €1.2 at the end of each of the next two years, respectively. The analyst estimates: the required rate of return to be 7%; the expected price at the end of this 2-year holding period to be €28.00. The current..
Colby contracts in writing to sell his 2005 Dodge-brand pick-up truck to Efrem for $10,500. Colby agrees to deliver the truck on Friday, and Efrem promises to pay the $10,500 on the following Monday. Colby contends that Efrem’s repudiation released h..
You purchase 100 shares of stock for $50 a share. The stock pays a $4 per share dividend at year-end. What is the rate of return on your investment if the end-of-year stock price is (i) $46; (ii) $50; (iii) $55? What is your real (inflation-adjusted)..
Fama's Llamas has a weighted average cost of capital of 9.5 percent. The company's cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?
Adidas produces swimming trunks. The average selling price of one of the company's swimming trunks is $65.74. The variable cost per unit is $25.61, and Adidas has average fixed costs per year of $7087. Assume that the current level of sales is 479 un..
RAK Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 28,400 1 10,600 2 13,300 3 15,200 4 12,300 5 – 8,800. The company uses an interest rate of 8 percent on all of its projects. Calculate the MIRR of the project using ..
Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $962,000. Without new projects, both firms will continue to generate earnings of $962,000 in perpetuity. What is the current PE ratio for each company? Pacif..
Estes Park Corp. pays a constant $8.15 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share pr..
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