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Caledonia Products Calculating Free Cash Flow and Project Valuation It’s been two months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows: To: Financial Analyst From: Mr. V. Morrison, CEO, Caledonia Products Re: Cash Flow Analysis and Capital Rationing We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This

1. An HMO has a Point of Service (POS) option for its members, but will pay only 80 percent of approved charges. If a member goes out of network for a medical procedure with a charge of $2,000, of which $1,200 is approved, how much must the member pay? (Points : 10)  2. A not-for profit nursing home has total expenses of $20 million. Sales tax in the state is 7%. Expenses are broken down into salaries ($12 million), supplies ($6 million), and pharmacy ($2 million). The benefit received by the nursing home from the sales tax exemption assuming that pharmacy items are exempt from state sales tax is? (Points : 10) AFTER PAYMENT ENTER PASSWORD : "SHIV" TO UNLOCK THE SOLUTION

1._______________ planning is done on a short-term basis to implement and control day-to-day operations. 1. Strategic 2. Operational 3. Tactical 4. Scenario 2.The _______________ component of the business/IT planning process involves developing strategic plans for managing or outsourcing a company's IT resources. 1. resource management 2. technology architecture 3. strategic development 4. All of the choices are correct. 3.A situation where previously regulated markets are opening is a _______________ trend that is shaping strategic business/IT planning. 1. technology 2. competitive imperatives 3. deregulation 4. customer sophistication/expectations 4._______________ planning involves the setting of objectives and the development of procedures, rules, schedules, and budgets. 1. Strategic 2. Operational 3. Tactical 4. All of the choices are correct. 5._______________ are the potential for new business markets or innovative breakthroughs that might expand present markets. 1. Weakne

Compute the cost of capital for the firm for the following: A bond that has $1000 par value (face value) and a contract or coupon interest rate 0f 10.2%. The bonds have a current market value of $1,130 and will mature in 10 years. The firms marginal tax rate is 34%. a. The cost of capital from this bond debt is ___ %? (round to two decimal places) b. A new common stock issue that paid $1.83 last year. The firms dividends are expected to continue to grow at 7.7 % per year forever. The price of the firms common stock is now $27.11 c. A preferred stock paying 9.1% dividend on a $137 par value. d. A bond selling to yield 12.2% where the firms tax rate is 37% AFTER PAYMENT ENTER PASSWORD : "SHIV" TO UNLOCK THE SOLUTION

1) The goal of the firm should be 2) An example of a primary market transaction is 3) According to the agency problem, _________ represent the principals of a corporation. 4) Which of the following is a principle of basic financial management? 5) Another name for the acid test ratio is the 6) The accounting rate of return on stockholders’ investments is measured by 7) If you are an investor, which of the following would you prefer? 8) The primary purpose of a cash budget is to 9) Which of the following is a non-cash expense? 10) The break-even model enables the manager of a firm to 11) A zero-coupon bond A. pays no interest B. pays interest at a rate less than the market rate C. is a junk bond D. is sold at a deep discount at less than the par value 12) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years? A. $3,525.62 B. $5,008.76 C. $3,408.88 D. $2,465.

1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT?  (a) The tax shields should be discounted at the unlevered cost of equity. (b) The value of a growing tax shield is greater than the value of a constant tax shield. (c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. (d) For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm increases with the amount of debt. (Points : 20) 2. (TCO D) Which of the following is generally NOT true and an advantage of going public?  (a) Facilitates stockholder diversification. (b) Increases the liquidity of the firm's stock. (c) Makes it easier to obtain new equity capital. (d) Establishes a market value for the firm. (e) Makes it easier for owner-managers to engage in profitable self-dealings. (Points : 20) 3. (TCO E) Dakota

1) Although the U.S. has had a longstanding agreement with _____ after the passage of NAFTA, _____ became the United States' second largest trading partner. A.   Mexico, Venezuela B.   Canada, Venezuela C.   Great Britain, Paraguay D.   Mexico, Canada E.   Canada, Mexico 2) "Generally accepted" in the phrase generally accepted accounting principles means that the principles __________. A.   have been approved for use by the managements of business firms B.   have been approved by the Internal Revenue Service C.   have substantial authoritative support D.   are proven theories of accounting 30) Building a dynamic organization is another way of describing which function of management? A.   Staffing B.   Organizing C.   Leading D.   Controlling E.   Planning 4) Sam's Used Cars uses the specific identification method of costing inventory. During March, Sam purchased three cars for $6,000, $7,500, and $9,750, respectively. Duri