Question 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?
Question 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?
Question 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.
Question 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?
Question 5. A small sales company is committed to supplying three sales representatives with new cars. The company has two alternatives. It can buy the three cars and sell them after two years, or it can lease the cars for two years. The company uses a 16% discount rate. The information for each alternative is as follows:
Alternative 1: Buy
Cost $36,000
Annual service costs 3,000
Anticipated repairs during the 1st year 700
Anticipated repairs during the 2nd year 1,500
Salvage value at the end of 2 years 10,000
Alternative 2: Lease
To lease the cars, the company would simply pay $20,000 a year for the two years.
Required:
Assuming the lease is paid at the end of each year, determine the better alternative.
Question 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?
Question 7. 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/£?
b. What if the exchange rate is $1.70/£?
c. What if the exchange rate is $1.50/£?