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There is a common phrase in business: “Cash is king.” “Cash flow is the life-blood of a company

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Question

 There is a common phrase in business: “Cash is king.” “Cash flow is the life-blood of a company. Without it, a

company will fail” (Hicks, 2012). Yet, companies often have to take risks that could potentially jeopardize their cash flow (e.g., new projects, growth, capital budgeting, etc.). Assume you are the CFO of a struggling company. While you do have a positive cash flow, it is minimal at best. If something does not change soon, the company will go under. Fortunately, your product development team has just created a new product that will not only save the company from financial demise but will also revolutionize how the industry does business. The problem is that the product is still 2 years away from being able to be sold to the public, and you will run out of cash within the next 6 months. How would you propose obtaining the funds needed to keep the company alive and thriving for the next 2 years until you are able to see a return on the product development? How would you keep the stakeholders happy?

 
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Olympic Sports has two issues of debt outstanding

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Question

Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with a face value of $22 million, a

maturity of 15 years, and a yield to maturity of 8%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 8%. The face value of the issue is $27 million, and the issue sells for 94% of par value. The firm’s tax rate is 35%.

a.What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  Before-tax cost of debt %  
b.What is Olympic’s after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  After-tax cost of debt %  
 
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If you insulate your office for $16,000

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Question

If you insulate your office for $16,000, you will save $1,600 a year in heating expenses. These savings will last

forever.

a. What is the NPV of the investment when the cost of capital is 5%? 10%?

b. What is the IRR of the investment? (Enter your answer as a whole percent.)

c. What is the payback period on this investment?

 
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A new computer system

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Question

A new computer system will require an initial outlay of $15,000, but it will increase the firm’s cash flows by

$3,000 a year for each of the next 6 years.

a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPV ?

WORTH INSTALLING ?

b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 13%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPV ?

WORTH INSTALLING ?

c. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

MAXIMUM DISCOUNT RATE ?%

 
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