# Case study of Honda Motor Company

**Question description**

Honda Motor Company is considering offering a $3,000 rebate on its minivan, lowering the vehicle’s price from $32,000 to $29,000. The marketing group estimates that this rebate will increase sales over the next year from $42,000 to $58,000 vehicles. Honda’s profit margin with the rebate is $4,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs? Is it a good idea

**The benefits are $29.4 million. (round to 1 decimal)**

Profit if (a) Honda had not given the rebate, it would have earned a profit of $7000 per minivan. Sales= 42,000--------- Hence total profit= 42000 x 7000 =29.4 million

. With the rebate, its sales increase but profit decreases

Here profit= 4000PER VEHICLE X 16,000 ADDITIONAL VEHICLE SOLD= 64.0 MILLION

THE COSTS ARE$_________. MILLION. ( ROUND TO ONE DECIMAL PLACE.)

2. Suppose the current market price of corn is $4.48 per bushel, your firm has a technology that can convert, 1 bushel of corn 3 gallon of ethanol. If the cost of conversion is $ 1.71 per bushel, at what market price of ethanol does conversion become attractive?

**The price at which the con version becomes attractive is$
____________ per gallon. (round to nearest cent.). The breakeven point is $
______ /gallon of ethanol. Beyond that anything is acceptable to make a profit**

3. Suppose the risk-free interest rate is 4%

A. Having $200 today is equivalent to having what amount in one year?

It is equivalent to having $_______________ in one year.(round to the nearest cent.)

**5. Your firm has identified three potential investment
projects. The project and their cash flows are shown below:**

Project Cash Flow Today Millions Cash Flow in One Year Million

A. -$15.00 $15.00

B. $2.00 $2.00

C. $15.00 -$15.00

Supposed all cash flow are certain and the risk-free, interest rate is 5%.

A. What is the NPA of each project?

The NPV of project A *is$**______ *** million**. (round to 2 decimal places)

6. What is the present value of $8,000 received

A. 14 years from today when the interest rate is 10% per year.=

B. 23 years from today when the interest rate is 12% per year?=

c. 7 years from today when the interest rate 5% per year?=

a. The present value is $___________. (round to the nearest dollar.)

First Year _________A

Second Year ______B

Third Year =_______C

8. Suppose you receive $100 at the end of each year for the next three years

A. If the interest rate is 8%, what is the present value of these cash flows?

The present value of these cash flows is $ ____________(round to the nearest cent.)

9. You have just received a windfall from an
investment you made in a friend’s business. He will be paying you $11,000 at
the end of this year, $22,000 at the end of the following years, and $33,000 at
the end of the year. After that (three years from today). The interest rate is
6.0% per year**(round to the nearest
dollars.)**

A. What is the present value of your windfall?_______.** (round to the nearest dollars.)**

**Here is the
cash flow timeline for part(a):**

**Year ) 0 1 2 3**

**Cash Flow
PV=? 11,00 22,000
33,000**

**The present
value of your windfall is $____________.(round to the nearesr dollar.)**

**The present
value of your windfall is found by using this formula:**

** C1
+C2 +C3**

**PV=**

** (1+r)+ (1+r)2+(1+r)3**

**B. What is the
future value of your windfall in three years(round to the date of the last
payment)?**

**The future
value of your windfall in three years is $_______.(round to the nearest
dollar.)**

**Here is the
cash flow timeline for part (b):**

** 0 1 2 3**

**Years **

**Cash Flow 11,000 22,000 33,000**

**
FV=?**

**The future
value value of your windfall in three years is $_________.(round to the nearest
dollar.) **

Honda Motor Company is considering offering a $3,000
rebate on its minivan, lowering the vehicle’s price from $32,000 to $29,000.
The marketing group estimates that this rebate will increase sales over the
next year from $42,000 to $58,000 vehicles. Honda’s profit margin with the rebate
is $4,000 per vehicle. If the change in sales is the only consequence of
this decision, what are its benefits and costs? Is it a good idea__?( I don’t think
these $ units are correct. It should be in numbers)____…Pls delete the
shaded line after reading.__

**The benefits are $_-23.2 million. (round to 1 decimal)**

Profit if (a) Honda had not given the rebate, it would have earned a profit of $7000 per minivan. Sales= 42,000--------- Hence total profit= 42000 x 7000 =29.4 million

. With the rebate, its sales increase but profit decreases

Here profit= 4000x58,000=$232,000,000=23.2 million

Hence we keep it at the lower production point. There is also a non-monetary advantage which is

More market share will be captured.

2. Suppose the current market price of corn is $4.50 per bushel, your firm has a technology that can convert, bushel of corn 3 gallon of ethanol. If the cost of conversion is $ 1.92 per bushel, at what market price of ethanol does conversion become attractive?

**The price at which the con version becomes attractive is$
____________ per gallon. (round to nearest cent.). The breakeven point is $
2.14 /gallon of ethanol. Beyond that anything is acceptable to make a profit**

3. Suppose the risk-free interest rate is 2%

A. Having $100 today is equivalent to having what amount in one year?

It is equivalent to having $x in one year.(round to the nearest cent.)

Where , FV=PV (1+r^{n)} =100 (1+0.02^{1})=
100*(1.02)=$102

4. Your firm has a risk-free investment opportunity where it can invest $165,000 today and receive $180.000 in one year.

For what level of interest rate is this project attractive?

The project will be attractive when the interest rate
is any positive value less than or equal to **9.1%**round to 2ndecimal places.)

**5. Your firm has identified three potential investment
projects. The project and their cash flows are shown below:**

Project Cash Flow Today Millions Cash Flow in One Year Million

A. -$9.00 $21.00

$21 mill after 1 year will be worth PV= FV/(1+ r^n)

Or, PV=21/(1.38)=15.22 mill today

**NPV=15.22-9=$6.22**

B. 4.00 $4.00

After 1 year $4 mill= $4/1.38= $2.90

The interest is very high at 38% and it is making a loss after one year itself.

It is not advised to accept the contract for this project.

C. $21.00 -$9.00

After 1 year $9, today the value of $9 mill 9/1.38= 6.52

**NPV=21-6.52=$14.48 Million.**

**This should be pursued actively.**

Supposed all cash flow are certain and the risk-free, interest rate .38%

A. What is the NPA of each project?

The NPV of project A ** is $ 6.22 million**.
(round to 2 decimal places)

6. What is the present value of $9,000 received

A. 13 years from today when the interest rate is 8% per year.= 9000/(1.08)^13=$3,309

B. 22 years from today when the interest rate is 10% per year?= 9000/(1.10)^22=$1,106

C. 7 years from today when the rate is 4% per year? 9000/ (1.04)^7=$6,839

A. The present value is $ _given above individually____. (round to the nearest dollars.)

7. Your daughter is currently 7 years old. You anticipate that she will be going to college in 11 years. You would like to have $120,000., in a savings account to fund her education at that time. If the accounts promises to pay a fixed interest rate of 6% per year, how much money do you need to put into the account today to ensure that you will have $120,000 in 11 years?

Your deposit to should be $ ________. (round to dearest dollars.)=120000/(1.06)^11=$63,215.00

8. Suppose you receive $150 at the end of each year for the next three years

A. Interest rate is 7% what is he present value of these cash flows$ ____________.(round to the

nearest )

First Year =$150/1.07 = 140.18691----A

Second Year =150/1.07^2= 131.0158----B

Third Year =150/1.07^3= 122.4447----C

Hence Total present value =A+B+C=$393.65 is the value of the money which you gave in the example .

9. You have just received a windfall from an investment you made in a friend’s business. He will be paying you $11,000 at the end of this year, $22,000 at the end of the following years, and $33,000 at the end of the year. After that (three years from today). The interest rate is 6.0% per year

A. What is the present value of your windfall? (The same system is adopted and and the problem solved as shown above Sum =(1+2/6 +3/36)x11000=(36+12+3) =51/36*11000

The present value of your **windfall $ 15,583.00, (round to the nearest dollars.)**

10. You have an investment opportunity that requires an initial investment of $ 9,500 today and will pay $ 12,000 in one year. What is the IRR of this opportunity?

Internal rate **of return (IRR) is 26.5%.**approximately ( round to the nearest integer.)

By using this value, we came very close to the zero point.

1. You are a shareholder in a C corporation. The corporation earns $6.00 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 38%, and the personal tax rate on (both dividend and non-dividend) income is 28%. How much is left for you after all taxes are paid?

The amount that
remains **is $2.68** per share( round to nearest cent).

The actual amount per share which is payable to you is $6 less 38% corporate tax=

$6*(1-0.38)= 62% of $6= $3.72

From this amount, personal tax @28% is paid

Balance amount =(100-28)% of $3.72

**The amount that
remains is $ 2.68 per share.( round to the nearest cent).**

2. You are a shareholder in an S corporation. The corporation earns $10.00 per share before taxes. Once it has paid any applicable taxes it will distribute it earnings to you as a dividend. The corporation tax rate is 42% and the personal tax rate on (both dividend and non-dividend) income is 35%. How much is left for you after all taxes are paid?

**Post corporate tax, eps= 0.58 * $10= $ 5.80**

**Post personal tax applicable= (1.00 -0.35)x $5.80=$3.77**

3.Are hostile takeovers necessarily bad for the firms or their investors? Explain

Select one choice:

Hostile takeovers usually take place when the company management is in a bad shape but still

does not sell for fair prices and the price falls lower. Such companies usually have huge liabilities

If the taking over company takes responsibility for the liabilities etc. .of the other company so that

a fresh start is made, then the shareholder finds himself in a better position. This is not a

necessary condition or stipulation , however. Sometimes the management of the new company actually does good with the company.

A. Yes. They allow new
investors to profit at the expense of employees and existing investors.
If existing investors and employees were better off being taken over, there
would be no reason for the takeover to be hostile.[ **A is CORRECT 90% OF the TIME]**

B. No. They are a means of disciplining managers who are not working in the interests of shareholders.

C. Yes. They allow the entity taking over, the raider, somewhere. The only source of profit is existing shareholders and employees, so hostile takeovers must be bad for existing shareholders.

D. Both A and B are correct answer.

4. What firm financial statements can be found in a firm’s 10 K filing? What checks are there on the accuracy of these statements?

What firm financial statements can be found in a firm’s 10 K filing ( select best choice).

A. Balance sheet, income statement, statement of cash flows, and statement of stockholder’s equity.

**B. Balance sheet, asset and liability statement,
statements of cash flows, and statement of stockholder’s equity.**

C. Balance sheet, cash budget, earnings statement, and statement of stockholder’s equity.

D. Balance sheet, income statement of cash flows, and statement of income and expense.

5. In July 2007, Apple had cash of $7.15 billion, current assets of $18.80 billion, current liabilities of 7.05 billion, and inventories of $0.30 billion.

A. What was Apple’s current ratio? **(18.8/7.05=2.68)**

**B. What was Apple’s quick ratio?( 7.15/7.05)=1.01**

C. In July 2007, Dell had a quick ratio of 1.30 and a current ratio of 1.35. What can you say about the asset liquidity of Apple relative to Dell

A. Apple’s current ratio is. 2.68. Apple has a higher current ratio but a lower quick ratio.

**The results say that Apple is better for the long term
investor but the sort time investor should stick to Dell despite the risks.**

** (round to 2
decimal places). If we consider inventories too, than say at 50% of their value**

**Current assets= 18.8+0.15/7.05 = 26.88%**

6. In November 2007, Abercrombies and Fitch(ANF) had a book equity of $1,470 million, a price per share of $76.00, and 87.00 million shares outstanding. At the same time, The Gap(GPS) had a book equity of $5.200 million, a share price of $21.00, and 800.00 million share outstanding

A. What is the market-to-book ratio of each company?

ANF=(76*87* million)/1470 million= 4.59

GPS
market-to-book ratio **is 3.23** (round to 2 decimal
places)

7. You are analyzing the leverage of two firms and you note the following(All values in millions of dollars):

Debt Book Equity Market Equity Operation Income Interest Expense

Firm A: 497.0 297.0 398.0 99.0 49.0

Firm B 79.0 34.0 39.0 7.6 6.6

A. What is the market debt-to-equity ratio of each firm?

**The market debt-to-equity ratio of firm A is ______1.67_______(round
to 2 decimal places)**

**B. The market -debt-to-equity ratio of firm B is
___2.026____. (round to 2 decimal places)**

8. In January 2009, American Airlines(AMR) had a market capitalization of $1.7 billion, debt of $11.1 billion, and cash of $4.6 billion. American Airlines had revenue of $23.8 billion. British Airways(BABWF) had a market capitalization of $2.2 billion. Debt of $4.7 billion, cash of $2.6 billion, and revenue of W$13.1 billion.

A. Compare the market capitalization-to-revenue ratio (also called the price-to-sales ratio) for American Airlines and British Airways.

The market capitalization-to-revenue ratio for American Airlines=0.15.(round to 2 decimal places)

British airways=0.47

9. Supposed your firm receives a $7.0 million order on the last day of the year. You fill the order with $2.4 million worth of inventory. The customer picks up the entire order the same day and pays $1.6 million up front in cash; you also, issue a bill for the customer to pay the remaining balance of $5.4 million in 30 days. Suppose your firm’s tax rate is 0.0%(I,e, ignore taxes). Determine the consequences of this transaction for each of the following:

A. Revenues----------------+$7 million

B. Earnings ----------------- +$4.6 million

C. Receivables--------------- + $ 5.4 million

D. Inventory ----------------- (-) $ 2.4 million

E. Cash --------------+$1.6 million

A. Revenues change by $___+7.0____________million.(use a negative sign(-) for a decrease in value.(round to 1 decimal place10. Nokela Industries purchases a W$44.4 million cyclo-converter. The cyclo-converter will be depreciated by $11.0 million per year over 4 years, starting this year. Suppose Nokela’s tax rate is 35%.

A. What impact will the cost of the purchase have on earnings will be for each of the next 4 years?

The impact on earnings will be $+11.1million each year for 4 years.

(Express a decline in earnings as a negative number. (round to 1 decimal places)

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