Question: Assuming that KMS’s market share will

> The Needy Corporation borrowed $10,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $400 in interest every three months for the three-year life of the loan, with the principal to be repaid at the maturity of the loan. What

> Which of the following one-year, $1000 bank loans offers the lowest effective annual rate? a. A loan with an APR of 6%, compounded monthly b. A loan with an APR of 6%, compounded annually, with a compensating balance requirement of 10% (on which no inte

> Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective annual rate of the paper to Magna?

> Consider two loans with one-year maturities and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate? Why?

> The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which of three alternatives to use: Alternative A: Forgo the discount on its trade credit agreement that offers terms of 2/10, net 30. Alternative B: Borrow the m

> If you want to limit your maximum short-term borrowing to $500, how much excess cash must you carry? Quarter ($000) 2 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100 600 Inventory 200 500 900 50 Accounts Payable 100 100 100 100

> NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is 9% and its corporate tax rate is 35%

> Assume the credit terms offered to your firm by your suppliers are 3/5, net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.

> Your firm currently has net working capital of $100,000 that it expects to grow at a rate of 4% per year forever. You are considering some suggestions that could slow that growth to 3% per year. If your discount rate is 12%, how would these changes impac

> Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will last ten years, at which point the full investment in net

> Westerly Industries has the following financial information. What is its cash conversion cycle? Sales 100,000 Cost of Goods Sold 80,000 Accounts Receivable 30,000 Inventory 15,000 Accounts Payable 40,000

> Use the following income statement and balance sheet for Global Corp.: Global expects sales to grow by 8% next year. Using the percent of sales method, forecast: a. Costs except depreciation b. Depreciation c. Net income d. Cash e. Accounts receivable f.

> Use the following income statement and balance sheet for Jim’s Espresso: If Jim’s adjusts its payout policy to 70% of net income, how will the net new financing change? Income Statement Balance Sheet Sales 200,000

> The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?

> You are long both a call and a put on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $45. Plot the value of this combination as a function of the stock price on the exercise

> Assume that you have shorted the put option in Problem 4. a. If the stock is trading at $8 in three months, what will you owe? b. If the stock is trading at $23 in three months, what will you owe? c. Draw a payoff diagram showing the amount you owe at ex

> If you choose to enter the year with $400 total in cash, what is your maximum short-term borrowing? Quarter ($000) 2 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100 600 Inventory 200 500 900 50 Accounts Payable 100 100 100 100

> If you hold only $100 in cash at any time, what is your maximum short-term borrowing and when? Quarter ($000) 2 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100 600 Inventory 200 500 900 50 Accounts Payable 100 100 100 100

> If you chose to use only long-term financing, what total amount of borrowing would you need to have on a permanent basis? Forecast your excess cash levels under this scenario. Quarter ($000) 2 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100

> What are the permanent working capital needs of your company? What are the temporary needs? Quarter ($000) 2 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100 600 Inventory 200 500 900 50 Accounts Payable 100 100 100 100

> Use the following income statement and balance sheet for Jim’s Espresso: What is the amount of net new financing needed for Jim’s? Income Statement Balance Sheet Sales 200,000 Assets Costs Except Depreciation (100,

> Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so its sales are fairly level across the year. However, it is branching out to other markets where it expects demand to be much more variable across the year. It expects sales in its new ma

> FastChips Semiconductors has inventory days of 75, accounts receivable days of 30, and accounts payable days of 90. What is its cash conversion cycle?

> Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. a. During which month are the firm’s

> Use the following income statement and balance sheet for Jim’s Espresso: Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to forecast: a. Stockholders’ equity b. Accou

> Happy Valley Homecare Suppliers, Inc. (HVHS), had $20 million in sales in 2010. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000. a. Calculate the average number of day’s inventory outstanding ratios for HVHS. b. T

> Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 40%, and it pays 7% interest on its debt. By what amount does the interest tax shield from its debt lower Summit’s WACC?

> Your company had $10 million in sales last year. Its cost of goods sold was $7 million and its average inventory balance was $1,200,000. What was its average days of inventory?

> Use the financial statements supplied below and on the next page for International Motor Corporation (IMC) to answer the following questions: a. Calculate the cash conversion cycle for IMC for both 2009 and 2010. What change has occurred, if any? All els

> Your firm purchases goods from its supplier on terms of 3/15, net 40. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40? b. What is the effective annual cost to your firm if it choose

> Simple Simon’s Bakery purchases supplies on terms of 1/10, net 25. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted Simple Simon’s owner an interest rate of

> The Mighty Power Tool Company has the following accounts on its books: The firm extends credit on terms of 1/15, net 30. Develop an aging schedule using 15-day increments through 60 days, and then indicate any accounts that have been outstanding for more

> The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?

> Milton Industries expects free cash flows of $5 million each year. Milton’s corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanent

> The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system would decrease its collection float by as much as five days.

> The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the desirability of employing a billing firm to do her billing and collections. Because the billing firm specializes in t

> Your supplier offers terms of 1/10, net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?

> Use the following income statement and balance sheet for Jim’s Espresso: Jim’s expects sales to grow by 10% next year. Using the percent of sales method, forecast: a. Costs b. Depreciation c. Net income d. Cash e. Acco

> Assume your beginning debt in Problem 2 is $100,000. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity ratio constant? Data from Problem 2: For the next fiscal year, yo

> For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 10%. Your beginning stockholders’ equity is $300,000 and your beginning total liabilities are $120,000. Your non-debt liabilities such

> Your company has sales of $100,000 this year and cost of goods sold of $72,000. You forecast sales to increase to $110,000 next year. Using the percent of sales method, forecast next year’s cost of goods sold.

> Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.

> Calculate the continuation value of KMS using your reproduction of Table 18.8 from Problem 14, and assuming an EBITDA multiple of 8.5. In Problem 14 Year 2010 2011 2012 2013 2014 2015 Depreciation 5,492 5,443 7,398 7,459 7,513 7,561

> Forecast KMS’s free cash flows (reproduce Table 18.13), assuming KMS’s market share will increase by 0.25% per year; investment, financing, and depreciation will be adjusted accordingly; and working capital will be as you projected in Problem 15.

> IZAX, Co. had the following items on its balance sheet at the beginning of the year: Its net income this year is $20,000 and it pays dividends of $5,000. If its assets grew at its internal growth rate, what is its new D/E ratio? Assets Liabilities an

> Your firm has an ROE of 12%, a payout ratio of 25%, $600,000 of stockholders’ equity, and $400,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you need to issue?

> Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?

> Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost of capital is 10%, and its debt cost of capital is 5%. a.

> Using the information in the table below, calculate this company’s: a. Internal growth rate. b. Sustainable growth rate. c. Sustainable growth rate if it pays out 40% of its net income as a dividend. Net Income 50,000 Beginning Tota

> Under the assumption that KMS’s market share will increase by 0.25% per year, you project the following depreciation: Using this information, project net income through 2015 (that is, reproduce Table 18.8 under the new assumptions).

> Under the assumption that KMS’s market share will increase by 0.25% per year, you determine that the plant will require an expansion in 2012. The expansion will cost $20 million. Assuming that the financing of the expansion will be delayed accordingly, c

> Assume that KMS’s market share will increase by 0.25% per year rather than the 1% used in the chapter (see Table 18.5) and that its prices remain as in the chapter. What production capacity will KMS require each year? When will an expansion become necess

> Use the following income statement and balance sheet for Global Corp.: If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy? Figures in $ millions Net sales 186.7 Assets Costs E

> Use the following income statement and balance sheet for Global Corp.: What is the amount of net new financing needed for Global? Figures in $ millions Net sales 186.7 Assets Costs Except Depreciation -175.1 Cash 23.2 EBITDA 11.6 Accounts Receivable

> Use the following income statement and balance sheet for Global Corp.: Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ equity. Figures in $ millions Net sales 186.7 Assets

> Suppose the board of Natsam Corporation decided to do the share repurchase in Problem 7(b), but you as an investor would have preferred to receive a dividend payment. How can you leave yourself in the same position as if the board had elected to make the

> Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. a. What is the ex-dividend p

> Rogot Instruments makes fine violins, violas, and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at a rate of 35%. Its cost of equity is 12% and its cost of debt is 7%. a. What is Rogot’s pretax

> EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital markets: a. What will the price per share of EJH be right before the

> Suppose that KMS in Problem 4 decides to initiate a dividend instead, but it wants the present value of the payout to be the same $20 million. If its cost of equity capital is 10%, to what amount per year in perpetuity should it commit (assuming perfect

> KMS corporation has assets of $500 million, $50 million of which are cash. It has debt of $200 million. If KMS repurchases $20 million of its stock: a. What changes will occur on its balance sheet? b. What will its new leverage ratio be?

> ECB Co. has 1 million shares outstanding selling at $20 per share. It plans to repurchase 100,000 shares at the market price. What will its market capitalization be after the repurchase? What will its stock price be?

> RFC Corp. has announced a $1 dividend. If RFC’s last price while trading cum dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?

> ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days after a purchase for the new owners of a share of stock to be registered. a. What was the date of the ex-divide

> After the market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1646 share of Roxio stock per share of Adaptec stock owned. At the time, Adapte

> If Berkshire Hathaway’s A shares are trading at $120,000, what split ratio would it need to bring its stock price down to $50?

> Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share. a. If Host issues a 20% stock dividend, what would its new share price be? b. If Host does a 3:2 stock split, what would its new share price be?

> FCF Co. has 20,000 shares outstanding and a total market value of $1 million, $300 thousand of which is debt and the other $700 thousand is equity. It is planning a 10% stock dividend. a. What is the stock price before the dividend and what will it be af

> Arnell Industries has $10 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future. a. Suppose Arnell pays interest of 6% per year on its debt. What i

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> Redo Problem 11, but assume that investors pay a 15% tax on dividends but no capital gains taxes, and that Kay does not pay corporate taxes. Data from Problem 11: Assume perfect capital markets. Kay Industries currently has $100 million invested in shor

> Redo Problem 11, but assume that Kay must pay a corporate tax rate of 35%, and that investors pay no taxes. Data from Problem 11: Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying

> Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities as a dividend. The board is considering selling the Treasury securit

> You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend. a. Assuming 2010 tax rates, if you sell the stock or wait and receive the dividend, will you have different after-tax income? b

> Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both

> Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shield

> Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NPV investments. Unfortunately, Empireâ€&#153

> You own a firm, and you want to raise $30 million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $30 million solely through equity, you will need to sell two-thirds of the firm. However, you wou

> Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after taxes) and their likelihood for each strategy are shown below. The risk of each project is diversifiable. a. Which p

> Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternatively, the firm can develop the land at an upfront cost of

> The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in HNH stock is 12%. a. What is the price

> Assume that Microsoft has a total market value of $300 billion and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its current market value, what is the present value of the ta

> Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 35%. a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its

> Pelamed Pharmaceuticals had EBIT of $325 million in 2010. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 40%. a. What was Pelamed’s 2010 net income? b. What was the total of Pelamed’s 2010 net income and interest p

> Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6%?

> Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage. a. Suppose Hardmon borrows to the point that its debt-equity rati

> Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1000 each year. After paying any interest on deb

> Marpor Industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of financial distress may cause it to lose some customers and rece

> Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current risk-free rate is 5%, and Acort’s assets have a cost of

> You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors

> Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project’s cost of capital is 20%. The risk-free interest rate is 10%

> Covan, Inc., is expected to have the following free cash flows: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should its stock price be? b. Covan reinvests all its FCF and ha

> Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted

> Portage Bay Enterprises has $1 million in excess cash, no debt and is expected to have free cash flow of $10 million next year. Its FCF is then expected to grow at a rate of 3% per year forever. If Portage Bay’s equity cost of capital is 11% and it has 5

> The present value of JECK Co.’s expected free cash flows is $100 million. If JECK has $30 million in debt, $6 million in cash, and 2 million shares outstanding, what is its share price?

> Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $1 million. Its depreciation and capital expenditures will both be $300,000, and it expects its capital expenditures to always equal its depreciation. Its working capital