Question: A Japanese importer owes an American exporter $

> Roper Metals Inc. is in negotiations to acquire the Hanson Sheet Metal Company. Hanson’s after-tax earnings have averaged $19 million per year for the last four years without much variation around that average figure. So far discussions have been about

> How long will it take a payment of $500 per quarter to amortize a loan of $8,000 at 16% compounded quarterly? Approximate your answer in terms of years and months. How much less time will it take if loan payments are made at the beginning of each month

> Lansing Inc., a profitable food products manufacturer, has undertaken a major expansion that will be financed by new debt and equity issues as well as earnings. During the last year the company borrowed $5 million for a term of 30 years to finance a new

> Your friend Charlie is excited about a newly issued stock. You've looked at the company's prospectus and feel it's a very risky venture. You told Charlie your opinion, and he said he wasn't worried because the stock has been approved by the SEC and ther

> Harrison Conway is choosing between a fix rate and an adjustable rate mortgage (ARM) for $300,000. Both are 30-year mortgages with monthly payments and compounding. The fixed rate is offered at 8% while the initial rate on the ARM is 6%. Harrison is c

> Adam Wilson just purchased a home and took out a $250,000 mortgage for 30 years at 8%, compounded monthly. a. How much is Adam’s monthly mortgage payment? b. How much sooner would Adam pay off his mortgage if he made an additional $100 payment each mont

> What are the payments to interest and principal during the twenty-fifth year of the loan?

> How soon would the loan be paid off if the borrower made a single additional payment of $33,000 to reduce principal at the end of the fifth year?

> The Haverly Company expects to finish the current year with the following financial results, and is developing its Annual Plan for next year. The following facts are available 1. Payables are almost entirely due to inventory purchases, and can be est

> Assume we’re at the end of “this year” planning “next year’s” financial statements. Calculate the following using indirect planning assumptions as indicated. (To keep the calculations simple formulate ratios using ending balance sheet figures only.) a.

> Ryan and Laurie Middleton just purchased their first home with a traditional (monthly compounding and payments) 6% 30-year mortgage loan of $178,000. a. How much is their monthly payment? b. How much interest will they pay the first month? c. If they ma

> Calculate all of the ratios discussed in the chapter for the Axtel Company of problem 5. Assume Axtel had leasing costs of $7,267,000 and amortization of $1,416,000 in 20X1, and had 1,268,000 shares of stock outstanding that were valued at $28.75 per sh

> Linden Corp. has a 10% market share in its industry. Below are income statements ($M) for Linden and for the industry. a. Develop common sized income statements for Linden and the industry as a whole. b. What areas should management focus on to impr

> The Bubar Building Co. has the following current financial results ($000). On the average, other building companies pay about one quarter of their earnings in dividends, earn about six cents on the sales dollar, carry assets worth about six months of s

> Describe the nature and purpose of dark pools. Who runs dark pools for whose benefit?

> The Seymour Corp attempted to increase sales rapidly in 20X1 by offering a new, low cost product line designed to appeal to credit customers in relatively poor financial condition. The company sold no new stock during the year but paid dividends of $3,0

> Paxton Sheet Metal Works Inc. is about to acquire a new stamping press that costs $400,000. It is considering purchasing the asset with money it can borrow at 10% repayable in annual, year-end installments over six years. It has also been offered an op

> Problem 22 in Chapter 8 concerned the Rollins Metal Company, which is engaged in long-term planning. The firm is trying to choose among several strategic options that imply different future growth rates and risk levels. Reread that problem now. The CAP

> The Picante Corp's beta is .7. Treasury bills yield 5% and an average stock yields 10%. a. Write and sketch the SML, and locate Picante on it. Calculate Picante's required rate of return and show it on the graph. b. Assume the yield on Treasury bills s

> The Griffin Company is launching a maritime project by purchasing a small, previously owned cargo ship for $2M which will be used to ferry iron ore across the Great Lakes The ship will be depreciated over four years straight line. Freight revenue and ex

> EverFit Inc. manufactures commercial grade fitness equipment used in spas and health clubs. The firm produces complex resistance exercise machines designed to strengthen specific muscles. EverFit’s engineering department designs the equipment and then

> Griffin-Kornberg is reviewing the following projects for next year’s capital program. Projects A and B are mutually exclusive and so are Projects D and E. Griffin-Kornberg has a 9% cost of capital and a maximum of $14 million to spen

> Smithson Hydraulics Inc. carries an inventory of valves that cost $25 each. The firm's inventory carrying cost is approximately 18% of the value of the inventory. It costs $38 to place, process, and receive an order. The firm uses 20,000 valves a year

> Sharon’s Sweater Shop orders 5,000 sweaters per year from a supplier at a wholesale cost of $65 each. Carrying costs are 22% of cost, and it costs $52 to place and receive an order. How many orders should Sharon place with the supplier each year and ho

> The Kranberry Kids Klothing Kompany is in the volatile garment business. The firm has annual revenues of $250 million and operates with a 30% gross margin on sales. Bad debt losses average 3% of revenues. Kranberry is contemplating an easing of its cr

> Financial planning is no longer a problem in business because of the advent of personal computers. Armed with a computer and the appropriate software, anyone can do a plan for even the largest and most complicated company. Evaluate this statement.

> Over the past few years, the marketing department at Goldston & Co has convinced the finance department to permit credit sales to increasingly marginal customers. Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested

> The Bailey Machine Tool Company thinks it can increase sales by $10M by loosening its credit standards somewhat. The firm normally experiences bad debts of about 2% of sales, but marketing estimates that the incremental business would be from financially

> Bozarth Business Machines (BBM) has analyzed the value of implementing a lock box system. The firm anticipates revenues of $630 million with an average invoice of $1,500. BBM borrows at 12% and has made an arrangement with Old Second Bank to manage a l

> Colburn Inc. is considering a lock box system. The firm has analyzed its credit receipts and determined the following: Average time checks are in mail – 3 days Average internal check processing time – 3 days Average to clear the banking system – 2 days T

> The Hadley Motor Company is located in Florida but has a number of customers in the Pacific Northwest. Sales to those customers are $30 million a year paid in checks that average about $1,500. The checks take an average of nine days to clear into Hadle

> Tambourines Inc. collects $12M per year from customers in a remote location. The average remittance check is $1,200. A lock box system would shorten the overall float on these receipts from 8 days to 7 days, but would cost $2,500 per year plus $.20 per

> The Shamrock Company has a raw materials inventory of $20M, which is completely replaced approximately 10 times a year. The Bridgewater Bank is willing to advance financing of 75% of the value of Shamrock's inventory at an interest rate of 12%. However

> Central City Bank will lend Williams Inc. 60% of the value of its inventory at 12% if Williams will pledge the inventory as collateral for the loan. The bank also insists that Williams employ a warehousing company to monitor and control the inventoried

> The Hamilton Corp has 35,000 shares of common stock outstanding with a book value of $20 per share. It owes creditors $1.5 million at an interest rate of 12%. Selected financial results are as follows. Restructure the financial line items shown assum

> Garwood Industries has filed for bankruptcy and will probably be liquidated. The firm’s balance sheet is shown below: ($M) The administrative costs of bankruptcy total $1.6 million. Current assets can be sold for 60% of book value,

> Contrast planning cash requirements, especially borrowing, using the statement of cash flows derived from forecast financial statements with a cash budget. Which is likely to be more useful in running a finance department?

> Lee & Long, a clothing manufacturer, is considering filing for bankruptcy. The firm has EBIT of $1.4 million, and long-term debt of $40 million on which it pays interest at an average rate of 8.5%. It also has fixed assets (gross) totaling $60 million.

> Hanover Inc. spent £11.5 million building a factory in England several years ago when the British Pound cost $1.5500. The plant operation was set up as a British subsidiary to manufacture Hanover’s product for sale and distribution in the U.K. and Europe

> The Latimore Company invested $8.5 million in a new plant in Italy when the exchange rate was 1.1500 euros to the dollar. At the end of the year, the rate was 1.2000 euros to the dollar (indirect quotes). a. Did Latimore make or lose money on the exchan

> In the last problem, assume that the cash flow from the Downhill acquisition grows at 10% from its initial value for one year and then grows at 5% indefinitely (starting in the third year). Calculate the value of the firm and the implied stock price und

> Frozen North Outfitters Inc. makes thermal clothing for winter sports and outdoor work, and is considering acquiring Downhill Fashions Corp. which manufactures and sells ski clothing. Downhill is about one quarter of Frozen's size and manufactures its e

> Benson's Markets is a five-store regional supermarket chain that has done very well by using modern management and distribution techniques. Benson competes with Foodland Inc., a larger chain with 10 stores. However, Foodland has not kept pace with tech

> Hirschler Motors is considering making a takeover bid for the chain of Richard’s Auto Superstores. Richard’s has 800,000 shares of stock outstanding that is trading at $18 per share. Richard’s generated $2.5 million in cash last year, and cash flows ar

> Steve Harris, CFO of Alston Concrete Products, is currently evaluating the purchase of an innovative machine that tests the strength of concrete. The machine is sold only in England and Alston has a price quote at £52,500 from the manufacturer that’s go

> The Johnson Machine Tool Company is thinking of acquiring Lansing Gear Works Inc. Lansing’s is a stable company that produces cash flows of $525,000 per year. That figure isn’t expected to change in the near future, and no synergies are expected from t

> Harrison Ltd. is considering acquiring Pugs International Inc. Pugs had cash flows of $15 million last year and has 2.5 million shares outstanding which are currently selling at $29 per share. The discount rate for analysis has been correctly estimated

> What is a yield curve? Briefly outline three theories that purport to explain its shape. How does the yield curve influence the behavior of lenders?

> The Langley Corporation is in a seasonal business. It requires a permanent base of net working capital of $10 million all year long, but that requirement temporarily increases to $20 million during a four-month period each year. Langley has three finan

> The target of an acquisition generates cash flows of $8M per year with a risk level consistent with a return on equity of 16%. a. How much should an acquirer be willing to pay if it won’t consider more than five years of future earnings in setting a pr

> The Appleridge Company is a large manufacturer of capital goods. (The demand for capital goods typically swings up and down a great deal between good and bad economic times.) Business has been good lately and is expected to remain so in the foreseeable

> The Revere Company currently has good earnings and a capital structure that's 20% debt. Its EPS is in the upper quarter of firms in its industry. Top management's compensation is in large part based on the year-end price of the company's stock. It's n

> You're the CFO of Axelrod Trucking, a privately held firm whose owner, Joe Axelrod, is interested in selling the company and retiring. He therefore wants to pump up its value by any means possible. Joe read an article about leverage in a business magaz

> You're the CFO of a small company that is considering a new venture. The president and several other members of management are very excited about the idea for reasons related to engineering and marketing rather than profitability. You've analyzed the p

> The Armageddon Corp is in big trouble. Sales are down and profits are off. On top of that, the firm's credit rating has been reduced so it's facing very high interest rates on anything it borrows in the future. Current long-term borrowing represents 60

> Wilson Petroleum is a local distributor of home heating oil. The firm also installs and services furnaces and heating systems in homes and small commercial buildings. The customer service department maintains sales and service records on current custom

> The Capricorn Company is launching a new venture in a field related to, but separate from, its present business. Management is proposing that financing for the new enterprise be supplied by a local bank that it has approached for a loan. Capricorn's fi

> Comment on the value of the formula (EFR) approach to estimating funding requirements. Could it create more problems than it solves?

> Whitefish Inc. operates a fleet of 15 fishing boats in the North Atlantic Ocean. Fishing has been good in the last few years, as has the market for product, so the firm can sell all the fish it can catch. Charlie Bass, the vice president for operations

> The engineering department at Digitech Inc. wants to buy a new, state-of-the-art computer. The proposed machine is faster than the one now being used, but whether the extra speed is worth the expense is questionable, given the nature of the firm's appli

> You're the newly hired CFO of a small construction company. The privately held firm is capitalized with $2 million in owner's equity and $3 million in variable rate bank loans. The construction business is quite risky, so returns of 20% to 25% are norma

> You’ve just joined Sea Craft Inc., a manufacturer of fiberglass boats, as its CFO. When you took the job, you knew that the company was not in the best of financial condition. Profits are adequate, but the firm is carrying substantial debt. To make mat

> You're the CFO of the Wachusett Window Company, which sells windows to residential builders. The firm's customers tend to be small, thinly capitalized construction companies that are frequently short of cash. Over the past year, there's been a slump in

> You and your friend Harry have started a business. Harry is a technical whiz, but doesn't know much about business or finance. After several months you've been approved for a $100,000 bank loan at what seems to be a rather high interest rate, 12%. Har

> Things tend to run more smoothly and efficiently with more working capital. With respect to receivables and inventory, explain why this statement isn't absolutely true. In other words, why might a very large inventory or receivables balance not do much

> Paliflex Corp. needs new capital, but is having difficulty raising it. The firm’s stock price is at a ten-year low, so selling new equity means giving up an interest in the company for a very low price. The debt market is tight and interest rates are u

> You're the CFO of Nildorf Inc., a maker of luxury consumer goods that, because of its product, is especially sensitive to economic ups and downs. (People cut back on luxury items during recessionary times.) In an executive staff meeting this morning, Ch

> The Everglo Corp., a manufacturer of cosmetics, is financed with a 50-50 mix of debt and equity. The debt is in the form of debentures, which have a relatively weak indenture. Susan Moremoney, the firm's president and principal stockholder, has propose

> Do all loans have default, liquidity, and maturity risk more or less equally? Are some types of loans relatively free of some risks? Is the debt of a particular organization free of certain risks? If so, explain who, what, and why.

> Define vertical, horizontal, congeneric, and conglomerate mergers and describe the economic effects of each.

> You're an analyst in the finance department of Flyover Corp., a new firm in a profitable but risky high-tech business. Several growth opportunities have presented themselves recently, but the company doesn't have enough capital to undertake them. Stock

> Wildebrant Inc runs out of inventory all the time both in the factory and at the point of sale. However, the company is profitable, and no one worries about it much. Is this ok? What's probably going on that management doesn't see? Why don't they see i

> Harry, a friend of yours, is taking a course in economics, and has become confused by some of the terminology because of the way people commonly use the same words. The economics professor says investment occurs when companies buy equipment and build fa

> Your Aunt Sally has a large portfolio of corporate bonds of different maturities. She has asked your advice on whether to buy more or get rid of some. You anticipate an increase in interest rates in the near future. How would you advise her? Would yo

> Does the so-called risk-free rate actually have some risk? (This is a tough question that isn't discussed in the chapter. Think about what makes up the risk-free rate and what among those pieces is an estimate of the future.)

> Sharon Jacobs is CEO of Henderson Industries Inc, a public company. Henderson makes heavy construction equipment like bulldozers and cranes which it sells to small construction companies. These customers are generally in poor financial condition and mu

> Brokers and mutual funds do the same thing, invest your money for you. Is that statement true or false? Explain. What kind of financial institution is a mutual fund? What is its distinguishing feature? Describe how savings banks and insurance compan

> Your cousin Charlie came into a large inheritance last year and invested the entire amount in the common stock of IBD Inc., a large computer company. Subsequently he's been very interested in the company and watches it closely. Recently the newspaper c

> A business can be valued by capitalizing its earnings stream (see example 6.15). How might you use the same idea to value securities, especially the stock of large publicly held companies? Is there a way to calculate a value that could be compared to th

> Speculate on the nature of the relationship between the credit and collections department and the sales department at Wachusett Window in the last two questions.

> Explain the nature of the potential lending losses associated with each of the following: default risk, liquidity risk, maturity risk.

> You're the CFO of the Littleton Lighting Company. Joan Brightway, the president, has approached you and the firm's other senior executives with a proposal to take the company private through an LBO. She says that this is a good time to do it because the

> The Phlanders Flange Co. has been doing quite well lately and would like to accelerate its growth within the flange industry. Harry Flatiron, the firm's CEO, has become interested in growth through acquisition because of some exciting articles in the bu

> The Blue Tag Company and the Pink Label Corporation both make packaging and labeling equipment. The following facts are relevant. a. Both firms use similar production and sales methods. b. Pink Label has been losing money for years, while Blue Tag has b

> You're a seasoned financial executive who's recently been hired as the CFO of the Pilaster Corporation. The firm has just finished two years in which its financial performance has been clearly subpar. The company isn't in danger of failing, but it's clea

> You're a supervisor in the treasury department of Big Corp. Recently there's been increasing concern about the firm's rising interest costs. Fred Eyeshade is an analyst in your group who transferred from the accounting department a short time ago. He

> In evaluating the situation presented in the last problem, you've found a pure play company in the proposed industry whose beta is 2.5. The rate of return on short-term treasury bills is currently 8% and a typical stock investment returns 14%. Explain h

> Charlie Henderson, a senior manager in the Bartok Company, is known for taking risks. He recently proposed that the company expand its operations into a new and untried field. He put together a set of cash flow projections and calculated an IRR of 25%

> Might Ed’s case in the preceding problem be helped by a real option? If so What kind? How would it help?

> Ed Draycutt is the engineering manager of Airway Technologies, a firm that makes computer systems for air traffic control installations at airports. He has proposed a new device the success of which depends on two separate events. First the Federal Avi

> Webley Motors, a manufacturer of small gas engines, has been working on a new design for several years. It's now considering going into the market with the new product, and has projected future sales and cash flows. The marketing and finance departments

> How are planning assumptions reflected in projected financial statements? Is there a standard computational procedure for incorporating assumptions into planned numbers? What's the difference between simple, estimated plans and more complex precise pla

> Creighton Inc. is preparing a bid to sell a large telephone communications system to a major business customer. It is characteristic of the telephone business that the vendor selling a system gets substantial follow-on business in later years by making

> Most top executives are graded primarily on their results in terms of net income rather than net cash flow. Why then, is capital budgeting done with incremental cash flows rather than with incremental net income?

> You are a new financial analyst at Belvedere Corp, a large manufacturing firm that is currently looking into diversification opportunities. The vice president of marketing is particularly interested in a venture that is only marginally connected with wh

> You've just begun work at the brokerage firm of Dewey, Cheatam, and Howe as a stock analyst. This morning you read an article in the paper that said a large-scale reduction in defense spending is eminent. Fred Fastbuck, a broker at the firm, has severa

> The Wycombe Company is doing well and is interested in diversifying, so it's been looking around for an acquisition target. The Albe Company has been found with the help of an investment banker. Albe is quite profitable, and about half the size of Wyco

> Blazingame Mill Works recently sold a tract of land it owned for 30 years. All expenses and taxes have been paid, and the company has $10 million sitting in the bank as a result of the sale. As there aren't any pressing investment opportunities availab

> Your friend James is an exchange student from an underdeveloped country. He comes from a privileged family that’s influential in the government, but the bulk of the nation’s population is very poor despite the fact that the people are frugal and hardwor

> You're the CFO of the Kraknee Roller Skate Company, which sells roller skates worldwide and also builds and operates roller rinks. Some time ago Archie Speedo, the head of international marketing proposed selling skates in Russia. Everyone thought he w