How sensitive is the npv to changes in the quantity sold

Question

Assignment: FINANCE FOR MANAGERS

Part 1

Answer these essay questions:

1. Go to the sec website and find the filings for General Electric (GE). What is the date of the oldest 10-K available on the website for GE. 10-K is the annual report filed with the SEC. Look up the 10-K forms for IBM & Apple and compare the dates of first electronic filing with that of GE. Find out when the following forms are used: Form DEF-14A, Form 8-K, and Form 6-K. Why should investors know about these reports? What is a 10-Q report?

2. Visit Alcoa. Find the most recent annual report and locate the balance sheets for the last two years. Use these balance sheets to calculate the change in networking capital. How do you interpret this number?

3. Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning, and to evaluate the company's performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then. Friends Mark Sexton and Todd Story founded S&S Air 10 years ago. The company has manufactured and sold light airplanes over this period, and the company's products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models, the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000. While the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company is able to complete the manufacture of an airplane in only five Parts. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take 18 months - two years to manufacture once the order is placed. Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry.

SAS Air, Inc. 2014 Income Statement
Sales	$24,092,400
Sales Cost of goods sold	17,982,000
Other expenses	2,878,800
Depreciation	786,000
EBIT	$ 2,445,600
Interest	434,400
Taxable income	$ 2,011,200
Taxes (40%)	804,480
Net income	$ 1,206,720
Dividends	$246,000
Add. to retained earnings	$960,720

SAS Air, Inc. 2014 Balance Sheet
Assets		Liabilities & Equity
Current assets		Current liabilities
Cash	$ 438,048	Accounts payable	$ 858,816
Accounts receivable	1,841,616	Notes payable	1,735,680
Inventory	1,486,200	Total current liabilities	$ 2,594,496
Total current assets	$ 3,765,864	Long-term debt	$ 4,590,000
Fixed assets		Shareholder equity
Net plant and equipment	$14,778,816	Common stock	$ 180,000
		Retained earnings	$11,180,184
		Total equity	$11,360,184
Total assets	$18,544,680	Total liabilities & equity	$18,544,680

Light Airplane Industry Ratios
	Lower Quartile	Median	Upper Quartile
Current ratio	0.50	1.43	1.89
Quick ratio	0.64	0.84	1.05
Cash ratio	0.08	0.21	0.39
Total asset turnover	0.68	0.85	1.28
Inventory turnover	4.89	6.15	10.89
Receivables turnover	6.27	9.82	11.51
Total debt ratio	0.31	0.52	0.61
Debt-equity ratio	0.58	1.08	1.56
Equity multiplier	1.58	2.08	2.56
Times interest earned	5.18	8.06	9.83
Cash coverage ratio	5.84	8.43	10.27
Profit margin	4.05%	5.15%	6.47%
Return on assets	6.05%	10.53%	13.21%
Return on equity	9.93%	16.54%	26.15%

QUESTIONS:

a. Calculate the ratios for S&S Air that are shown for the industry.

b. Mark and Todd agree that a ratio analysis can provide a measure of the company's performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or why not?

c. Compare the performance of S&S Air to the industry. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated by inventory divided by current liabilities. How do you think S&S Air's ratio would compare to the industry average?

d. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?

4. Cooper Tire and Rubber Company provides financial information for investors on its website. Follow the "Investors" link and find the most recent annual report. Using the consolidated statements of cash flows, calculate the cash flow to stockholders and the cash flow to creditors, and use this data as you write your report.

Part 3

Answer these essay questions:

1. Calculating Future Values - You have $20,000 you want to invest for the next 40 years. You are offered an investment plan that will pay you 7 percent per year for the first 20 years and 11 percent per year for the last 20 years. How much will you have at the end of the 40 years? Does it matter if the investment plan pays you 11 percent per year for the first 20 years and 7 percent per year for the next 20 years? Why or why not?

2. Finding the time necessary until you pay off a loan is simple if you make equal payments each month. However, when paying off credit cards many individuals only make the minimum monthly payment, which is generally 2% to 3% of the balance or $10 whichever is greater. Locate the credit card calculator at www.fincalc.com and work out this exercise:

You currently owe $10,000 on a credit card with a 17% interest rate and a minimum payment of $10 or 2% of your balance.

- How soon will you pay off this debt if you make the minimum payment each month?

- How much total interest will you pay using that method?

- Calculate how soon you would pay off this debt if you paid $100 per monthly payment.

3. Find the retirement calculator at www.moneychimp.com to answer the following questions. Suppose you have $1,500,000 when you retire and want to withdraw an equal amount each year for the next 30 years.

- How much can you withdraw each year if you earn 7%

- What if you can earn 9%?

- What if the market failed and your earnings dropped to -.5%. How long would it take to drain your account if you did nothing about this loss pattern?

This is a classic retirement problem. A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending goals:

- Years until retirement: 30

- Amount to withdraw each year: $90,000

- Years to withdraw in retirement: 20

- Interest rate: 8%

Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund.

a. If she starts making these deposits in one year and makes her last deposit on the day she retires, what amount must she deposit annually to be able to make the desired withdrawals at retirement?

b. Suppose your friend just inherited a large sum of money. Rather than making equal annual payments, she decided to make one lump-sum deposit today to cover her retirement needs. What amount does she have to deposit today?

c. Suppose your friend's employer will contribute to the account each year as part of the company's profit-sharing plan. In addition, your friend expects a distribution from a family trust several years from now. What amount must she deposit annually now to be able to make the desired withdrawals at retirement?

- Employer's annual contribution: $1,500

- Years until trust fund distribution: 20

- Amount of trust fund distribution: $25,000

4. Time value of money. In our opening case study, why would the Toyota Motor Credit Corporation (TMCC) be willing to accept such a small amount today ($1,163) in exchange for a promise to repay about 9 times that amount ($10,000) in the future (30 years)?

- Would you-why or why not? Outline the considerations you used in making your answer.

- Would your answer depend on who is making the promise to repay? Explain your conclusions.

Part 4

Answer these essay questions:

1. Mark Sexton and Todd Story, the owners of S&S Air introduced in Module 3, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

Although Chris is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isn't clear on how each feature would affect the coupon rate of the bond issue. You are Renata's assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.

a. The security of the bond, that is, whether the bond has collateral.

b. The seniority of the bond.

c. The presence of a sinking fund.

d. A call provision with specified call dates and call prices.

e. A deferred call accompanying the above call provision.

f. A make-whole call provision.

g. Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider.

h. Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider.

i. A conversion feature (note that S&S Air is not a publicly traded company).

j. A floating rate coupon.

2. Holding Period Yield. The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a. Suppose that today you buy an annual coupon bond with a coupon rate of 7 percent for $875. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment?

b. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different?

3. According to the Value Line Investment Survey, the growth rate in dividends for Duke Energy for the previous 10 years has been 1.5%. If investors feel this growth rate will continue, what is the required return for Duke Energy stock?

4. Stock Valuation. Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders.

a. Suppose a company currently pays an annual dividend of $3.20 on its common stock in a single annual installment, and management plans on raising this dividend by 6 percent per year indefinitely. If the required return on this stock is 12 percent, what is the current share price?

b. Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a dividend of $.80 per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think this model of stock valuation is appropriate.

Part 5

Answer these essay questions:

1. Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, during which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Year	Cash Flow
0	-$650,000,000
1	$80,000,000
2	$121,000,000
3	$162,000,000
4	$221,000,000
5	$210,000,000
6	$154,000,000
7	$108,000,000
8	$86,000,000
9	-$72,000,000

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $650 million today, and it will have a cash outflow of $72 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table on this page. Bullock Mining has a 12 percent required return on all of its gold mines.

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.

2. Based on your analysis, should the company open the mine?

3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

2. McKeekin Corp. has a project with the following cash flows:

Year	Cash Flow
0	$20,000
1	-$26,000
2	$13,000

a. What is the IRR of this project?

b. Explain what is happening here.

3. Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. The company hired Jay McCanless, a recent MBA graduate, in its finance department. One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market and sales have been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models.

Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features such as wifi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial out-lay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch Republic has a 35 percent corporate tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answers the following questions:

a. What is the payback period of the project?

b. What is the profitability index of the project?

c. What is the IRR of the project?

d. What is the NPV of the project?

e. How sensitive is the NPV to changes in the price of the new smart phone?

f. How sensitive is the NPV to changes in the quantity sold?

g. Should Conch Republic produce the new smart phone?

h. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?

i. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why? Provide examples to support your case.

4. Project Evaluation. Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Year	Unit Sales
1	$87,500
2	$105,000
3	$119,000
4	$108,000
5	$92,000

Production of the implants will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year Total fixed costs are $1,450,000 per year variable production costs are $230 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $24,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?

Format your assignment according to the following formatting requirements:

1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.

2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.

3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.