Pens Inc Has Projected A Sales Volume

ones.

Key Equations Called out in the text, key equations are identified by a blue equation number. The list in Appendix B shows the key equations by chapter, providing students with a convenient reference. For examples, see Chapter 5, page 131; Chapter 10, page 332.

Highlighted Concepts Throughout the text, important ideas are pulled out and presented in a highlighted box—signaling to students that this material is particularly relevant and critical for their understanding. See Chapter 4, page 114; Chapter 7, page 214.

The sustainable growth rate is a very useful planning number. What it illustrates is the explicit relationship between the firm's four major areas of concern: its operating efficiency as measured by profit margin, its asset use efficiency as measured by total asset turnover, its dividend policy as measured by the retention ratio, and its financial policy as measured by the debt-equity ratio.

Given values for all four of these, there is only one growth rate that can be achieved. This is an important point, so it bears restating:

If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy, and total asset turnover (or capital intensity) are all fixed, then there is only one possible growth rate.

As we described early in this chapter, one of the primary benefits of financial planning is that it ensures internal consistency among the firm's various goals. The concept of the sustainable growth rate captures this element nicely. Also, we now see how a financial planning model can be used to test the feasibility of a planned growth rate. If

Chapter Summary and Conclusions Every chapter ends with a concise, but thorough, summary of the important ideas—helping students review the key points and providing closure to the chapter. See Chapter 1, page 20; Chapter 5, page 150.

Chapter Review and Self-Test Problems Appearing after the Summary and Conclusion, each chapter includes a Chapter Review and Self-Test Problem section. These questions and answers allow students to test their abilities in solving key problems related to the chapter content and provide instant reinforcement. See Chapter 6, page 187; Chapter 10, page 340.

Chapter Review and Self-Test Problems i

Capital Budgeting for Project X Based on the following information for Project X, should we undertake the venture? To answer, first prepare a pro forma income statement for each year. Next, calculate operating cash flow. Finish the problem by determining total cash flow and then calculating NPV assuming a 28 percent required return. Use a 34 percent tax rate throughout. For help, look back at our shark attractant and power mulcher examples.

Project X involves a new type of graphite composite in-line skate wheel. We think we can sell 6,000 units per year at a price of $1,000 each. Variable costs will run about $400 per unit, and the product should have a four-year life.

Fixed costs for the project will run $450,000 per year. Further, we will need to invest a total of $1,250,000 in manufacturing equipment. This equipment is seven-year MACRS property for tax purposes. In four years, the equipment will be worth about half of what we paid for it. We will have to invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25 percent of sales.

Calculating Operating Cash Flow Mont Blanc Livestock Pens, Inc., has projected a sales volume of $1,650 for the second year of a proposed expansion project. Costs normally run 60 percent of sales, or about $990 in this case. The depreciation expense will be $100, and the tax rate is 35 percent. What is the operating cash flow? Calculate your answer using all of the approaches (including the top-down, bottom-up, and tax shield approaches) described in the chapter.

Concepts Review and Critical Thinking Questions This successful end-of-chapter section facilitates your students' knowledge of key principles, as well as intuitive understanding of the chapter concepts. A number of the questions relate to the chapter-opening vignette—reinforcing student critical-thinking skills and the learning of chapter material. For examples, see Chapter 1, page 20; Chapter 3, page 86.

Concepts Review and Critical Thinking Questions

1. Current Ratio What effect would the following actions have on a firm's current ratio? Assume that net working capital is positive.

a. Inventory is purchased.

b. Asupplier is paid.

c. A short-term bank loan is repaid.

d. A long-term debt is paid off early.

e. A customer pays off a credit account.

f. Inventory is sold at cost.

g. Inventory is sold for a profit.

2. Current Ratio and Quick Ratio In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?

3. Current Ratio Explain what it means for a firm to have a current ratio equal to .50. Would the firm be better off if the current ratio were 1.50? What if it were 15.0? Explain your answers.

4. Financial Ratios Fully explain the kind of information the following financial ratios provide about a firm:

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

Front Matter

Preface

© The McGraw-Hill Companies, 2002

End-of-Chapter Questions and Problems

We have found that many students learn better when they have plenty of opportunity to practice; therefore, we provide extensive end-of-chapter questions and problems. The end-of-chapter support greatly exceeds typical introductory textbooks. The questions and problems are segregated into three learning levels: Basic, Intermediate, and Challenge. All problems are fully annotated so that students and instructors can readily identify particular types. Answers to selected end-of-chapter material appear in Appendix C. See Chapter 6, page 191; Chapter 9, page 305.

Basic

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