Management - This Year Your Assessment Answer

This year, your company plans to spend $6 million on HPRA advertising in North America and $7.5 million on EPRA advertising in North America, which is the only market region where you are currently selling. You plan to invest $4 million on R&D for the HPRA, $5 million on R&D for the EPRA, and $8 million on R&D for the CPRA. You are also investing $9 million in process improvement. Your pro forma income statement shows a projection for sales office and sales reps expenses of $5.5 million. Shipping and warehouse expenses are projected to be $11.5 million and administration expense are projected at $4 million. Your cost per unit available is $49.20 for HPRA and $77.40 for EPRA. You are forecasting sales of 2,139,000 units for HPRA and 713,000 units for EPRA. You will sell your HPRA for $73 per unit and your EPRA for $105 per unit. What is the contribution per unit (in dollars) for each HPRA and each EPRA that you sell? A) $ 23.80 for HPRA and $ 27.60 for EPRA B) $ 6.74 for HPRA and - $ 6.06 C) $ 8.61 for HPRA and - $ .45 for EPRA D) $ 21.60 for HPRA and $ 22.40 for EPRA Your company has $10,000,000 in “excess cash” – more than you need to provide a cushion on your balance sheet to protect against risk. Jane, your crack financial analyst, has prepared a set of options for you to consider. They are: Keep the $10,000,000 on the balance sheet and earn a 3.0% after-tax return from the bank for the next 15 years. B) You have $10m in non-amortizing bonds outstanding, with 15 years left, 12% annual interest coupon, and the total principal repayment due at the end of the term. Your bondholders have offered to sell the bond back to you at par value. Assume a tax rate of 35%. C) Expand your plant for a cost of 165,000 units per shift for a total capital cost of $10,000,000. You can expect an $11 after-tax contribution margin per unit and that you can run this new portion of the plant for 2 shifts for the next 15 years, at which point the equipment will need to be scrapped. D) Spend the $10,000,000 this year and another $10,000,000 next year on inventing the CPRA product. Jane says you will yield zero incremental after-tax contribution margin the following year, but $2.5m the year after that, $5m the year after that, and $10m per year thereafter until year 15, at which point Jane says it’s reasonable to assume that the CPRA product will have been supplanted by other technologies. Jane has prepared a worksheet where she has laid out for you the cash flows associated with these decisions from the shareholders’ perspective. ** Jane tells you that your tax-effected cost of capital (the appropriate discount rate to use) is 20%. What is the value of option A to current shareholders? A) -7,948,303 B) 2,537,987 C) $-9,966,354 D) 6,623,586 At the same cost of capital of 20%, what is the value of option B to current shareholders? A) -3,556,583 B) - 4,924,077 C) $4,103,397 D) 212,978 Continue to assume that the cost of capital is 20%, what is the value of option C to current shareholders? A) -1,765,556 B) 5,981,356 C) 5,809,971 D) 6,971,966 At a discount rate of 20%, what is the value of option D to current shareholders? A) -1,765,556 B) 5,981,356 C) 6,392,072 D) 6,971,966 What if your cost of capital was 12% instead of 20%? Which option (A, B, C, or D) creates the most value to current shareholders? A) Save capital B) Retire Debt C) Expand Capacity D) Develop CPRA Continue to assume that your cost of capital is 12%. Jane now says that an alternative is to issue the $10m to shareholders in the form of an immediate dividend. Which of the options will create more value for current shareholders than issuing a dividend? A) None of them B) All of them C) B, C and D D) C and D E) Just C F) Just D