Corporate Finance
Use the table for the question(s) below.
Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year.
1) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. Considering the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to:
A) A decline of 1.5 million
B) A decline of 0.7 million
C) An increase of 0.7 million
D) An increase of 1.5 million
2) You are considering adding a microbrewery on to one of your firm’s existing restaurants. This will entail an investment of $40,000 in new equipment. This equipment will be depreciated straight line over five years. If your firm’s marginal corporate tax rate is 35%, then what is the value of the microbrewery’s depreciation tax shield in the first year of operation?
A) $2,800
B) $14,000
C) $5,200
D) $26,000
Use the table for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).
Year 1 2
Revenues 1200 1400
Operating Expense 450 525
Depreciation 240 280
Increase in working
capital 60 70
Capital expenditures 300 350
Marginal corporate tax
rate 30% 30%
3) The incremental EBIT for Shepard Industries in year one is closest to:
A) $360
B) $750
C) $595
D) $510
Revenues 1200 1400
– Expenses 450 525
– Depreciation 240 280
= EBIT 510 595
4) The incremental unlevered net income Shepard Industries in year two is closest to:
A) $355
B) $415
C) $600
D) $510
Revenues 1200 1400
– Expenses 450 525
– Depreciation 240 280
= EBIT 510 595
– Taxes (30%) 153 178.5
Incremental Net Income 357 416.5
5) The depreciation tax shield for Shepard Industries project in year two is closest to:
A) $84
B) $196
C) $72
D) $96
6) The free cash flow from Shepard Industries project in year one is closest to:
A) $240
B) $300
C) -$5
D) $390
Free Cash Flow
Revenues 1200 1400
– Expenses 450 525
– Depreciation 240 280
= EBIT 510 595
– Taxes (30%) 153 178.5
Incremental Net Income 357 416.5
+ Depreciation 240 280
– Capital expenditures 300 350
– Change in NWC 60 70
Free Cash Flow 237 276.5