Central Grocers Inc. produces annual cash flows of $175,000, which are expected to continue indefinitely. The company is financed entirely with equity capital at an annual cost of 12 percent. Management is considering borrowing $400,000 at an annual interest rate of 6 percent to repurchase $400,000 of the company’s outstanding stock (You can assume that the debt will be outstanding into the indefinite future.). What is the total value of Central Grocers’ stock before the stock repurchase? Under Modigliani and Miller’s Proposition 1, what would be the value of the total claims on the company’s assets after the stock repurchase? What will be the rate of return on common stock required by investors after the repurchase?
> What are multinational corporations?
> What types of risks can options be used to manage?
> What are four different types of real options commonly found in business?
> What variables affect the value of a call option?
> What two factors determine the amount of EFN?
> What are lumpy assets, and how do these assets vary with sales?
> Why is it that some working capital accounts may not vary proportionately with sales?
> Why do companies engage in PIPE transactions?
> What is the difference between business risk and financial risk?
> Why might you expect accounts receivable to vary with sales?
> What is the plug factor in a financial model?
> What are pro forma financial statements, and why are they an important part of the financial planning process?
> Why is the sales forecast the key component of a financial model?
> How are the investment decision and financing decision related?
> What is the strategic plan?
> What are the components of the cost associated with an IPO?
> List the steps in the IPO process?
> What are the advantages and disadvantages of short-term financing?
> What is float?
> What are the disadvantages of a private placement sale compared with a public sale?
> What is the economic order quantity model?
> What is an aging schedule, and what is its purpose?
> What are the types of costs associated with each of these strategies?
> How do you calculate net working capital, and why is it important?
> What is the primary motivation for leasing?
> How can the three conditions specified by M&M help us understand how the capital structure of a firm affects its value?
> How can capital structure decisions affect the risk associated with net income?
> What is the trade-off theory of capital structure?
> What is the optimal capital structure for a firm?
> What is globalization?
> Explain the importance of shelf registration?
> What is a real option?
> Last year Perpetual Plastics Company took an average of 46 days to pay suppliers and 38 days to collect its receivables. The company’s average days’ sales in inventory was 52 days. What was Perpetual’s operating cycle and cash conversion cycle last year?
> The Whole Foods Market, Inc. balance sheet for the fiscal year ending September 25, 2016 included the following: total current assets of $1,975 million, total assets of $6,341 million, total current liabilities of $1,341 million, and total liabilities of
> Tass Co., Ltd, a Japanese electrical parts producer, is considering building a plant in the U.S. The cost of this plant will be $20 million and the current spot exchange rate between the yen and the U.S. dollar is ¥101.8/$. Tass management exp
> Technocorp has purchased industrial parts from a German company for a total cost of €1,225,000. The firm has 30 days to pay. A bank has given Technocorp a 30-day forward quote of $1.1278/€. Assume that on the day the payment is due, the spot rate is $1.1
> A bank in India has offered a spot rate quote on Indian rupees (Rs) of Rs62.2905/$. The Indian rupee is quoted at a 30-day forward premium of 5.22 percent against the dollar. What is the 30-day forward quote?
> Fuel costs are a significant fraction of total costs in the airline industry. How might airline managers use options to manage fuel costs? What is the downside of doing this?
> Why is it hard to account for real options in an NPV analysis?
> Assume that the current market price of Montrose Industrials stock is $28 per share and will either rise to $38 per share or fall to $21 per share in one month. The risk-free rate for one month is 1 percent. What is the value of a one-month call option w
> You own a call option on Pepsico stock with a strike price of $60 per share that expires in 60 days. The current market price of Pepsico stock is $63.50 per share. What are the limits on the value of the call option you own?
> Explain why firms generally sell their equity and complicated debt issues through negotiated sales?
> Edgefield Excavation Company has total assets of $4,976,456, sales of $1,225,700, and net income of $587,000. The company’s management expects sales to grow by 9 percent next year. All costs (including taxes) and assets vary directly with sales, and the
> Using the information in Sample Test Problem 19.3, what is Spurlock’s capital intensity ratio if the company has net sales of $3,557,100? What does this ratio tell us? Refer to the information in problem 19.3: Spurlock Inc. had net income of $266,778 in
> Spurlock Inc. had net income of $266,778 in its most recent fiscal year and total assets of $1,833,400 at the end of the year. The company’s total debt ratio (total debt to total assets) is 35 percent, and Spurlock retains 60 percent of its income every
> Lavaca Inc. management expects net sales to be $855,000, total costs to be $647,000, and to pay taxes at an average rate of 32 percent this year. If the Lavaca pays out 38 percent of its earnings as dividends, what is its retention ratio? How much will L
> Mars Company had net sales of $18 million in the year that just ended. Next year, the company’s management expects a 15 percent increase in sales. If cost of goods sold is 60 percent of sales and inventory is 25 percent of sales, what would you estimate
> What control implications do a firm’s capital structure decisions have?
> Southwest Airlines has substantial cash reserves and an investment-grade bond rating. How would the trade-off theory predict that managers of Southwest would raise capital and choose the company’s capital structure if they were planning an expansion into
> SMA Inc. is considering issuing the following securities. For which security would a competitive sale be less costly than a negotiated sale under stable market conditions? Why? (LO 5) a) Plain vanilla bonds. b) IPO of common stock. c) Secondary offering
> Hilton Worldwide Holdings Inc. completed an initial public offering on December 12, 2013. The offer price was $20.00 per share and the closing price at the end of the first day was $21.50. The firm issued 117.6 million shares. What was the loss to Hilton
> What is underpricing, and why is it a cost to the stockholders?
> Why are traditional sources of funding not usually available for new or emerging businesses?
> Sunny Way Landscaping has a formal line of credit of $500,000 with First Commerce Bank. The interest rate on the loan is 6 percent, and under the agreement, Sunny Skies must pay an annual fee of 75 basis points on the unused amount. The amount currently
> Management of Southern Parts Company has decided to sell 10-year bonds to finance expansion into the Pacific Northwest. The loan rate on these bonds is 8 percent and the 3-month Treasury bill rate is 2.1 percent. The firm’s credit rating is B, and the yi
> FRA Manufacturing Company purchases 9,000 units of Part 3BX each year. The cost of placing an order is $5 and the cost of carrying one part in inventory for a year is $1. What is the Economic Order Quantity (EOQ) for part 3BX if the company carries a saf
> Montrose, Inc. sells its products with terms of 3/15 EOM, net 30. What is the cost of the trade credit it provides its customers?
> Devon Automotive management estimates that it takes the company 62 days to collect cash from customers on finished goods from the day it receives raw materials, and it takes 65 days to pay its suppliers. What is the company’s cash conversion cycle? Inter
> What items in a business plan does a venture capitalist look for in deciding whether to provide initial financing?
> Wolfgang’s Masonry management estimates that it takes the company 27 days on average to pay its suppliers. Management also knows that the company has days’ sales in inventory of 64 days and days’ sales outstanding of 32 days. How does Wolfgang’s cash con
> One way to extend the binomial pricing model is by including multiple time periods. Suppose Splittime, Inc., is currently trading for $100 per share. In one month, the price will either increase by $10 (to $110) or decrease by $10 (to $90). The following
> Consider the payoff structures of the following two portfolios: a. Buying a one month call option on one share of stock at a strike price of $50 and saving the present value of $50 (so that at expiration it will have grown to $50 with interest). b. Buyin
> Explain the two ways a security issue can be underwritten?
> Consider the following payoff diagram. Find a combination of calls, puts, risk-free bonds, and stock that has this payoff. (You need not use all of these instruments, and there are many possible solutions.)
> A golden parachute is a part of a manager’s compensation package that makes a large lump-sum payment in the event that the manager is fired (or loses his or her job in a merger, for example). Providing such payouts to managers seems ill advised to most p
> You hold a European put option on Tubes, Inc., stock, with a strike price of $100. Things haven’t been going too well for Tubes. The current stock price is $2, and you think that it will either rise to $3 or fall to $1.50 at the expiration of your option
> You are considering buying a three-month put option on Wing and a Prayer Construction stock. The company’s stock currently trades for $10 per share and its price will either rise to $15 or fall to $7 in three months. The risk-free rate for three months i
> Assume that the stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month call option with a strike price of $25?
> The stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month call option with a strike price of $40?
> Explain how the payoff functions differ for the owner (buyer) and the seller:(1) of a call option; (2) of a put option?
> A convertible bond is a bond that can be exchanged for stock at the discretion of the bondholder. How would you go about finding the value of such a bond? Would the bond be worth more or less than an equivalent nonconvertible bond?
> Suppose that you own a call option and a put option on the same stock and that these options have the same exercise price. Explain how the relative values of these two options will change as the stock price increases or decreases?
> How are options related to the agency costs of debt and equity?
> What is a seasoned offering, and why are seasoned securities valued more highly than securities sold in an IPO?
> List and describe four different types of real options that are associated with investment projects?
> What is the value at expiration of a call option with a strike price of $65 if the stock price is $1? $50? $65? $100? $1,000?
> Goodwin Corp. has revenues of $12,112,659, costs of $9,080,545, interest payments of $412,375, and a tax rate of 34 percent. It paid dividends of $1,025,000 to its stockholders. What are the firm’s dividend payout ratio and retention ratio?
> Define the retention (plowback) ratio and the dividend payout ratio?
> Identify the steps in the financial planning process?
> Munson Communications Company has just reported earnings for the year ended June 30, 2017. Below are the firm’s income statement and balance sheet. The company had a 55 percent dividend payout ratio for the last 10 years and management
> Use the information for Morgan Construction Company from Problems 19.35 and 19.36. Assume that equity accounts do not vary directly with sales, but change when retained earnings change or new equity is issued. The company’s long-term debt-to-equity ratio
> Using the information for Morgan Construction Company in the preceding problem, calculate the firm’s internal growth rate and sustainable growth rate?
> Use the financial information for Morgan Construction Company from Problem 19.35. Assume now that equity accounts do not vary directly with sales but change when retained earnings change or new equity is issued. The company pays 75 percent of its income
> The financial statements for the year ended June 30, 2017, are given below for Morgan Construction Company. The firm’s sales are projected to grow at a rate of 25 percent next year, and all financial statement accounts will vary directl
> Explain the venture capital funding cycle?
> Rockville Consulting Group expects to add $271,898 to retained earnings this year. The company has total assets of $3,425,693 and wishes to add no new external funds for the coming year. If assets and costs vary directly with sales, how much sales growth
> Given the data for Capstone Marketing Group in Problem 19.32, what would Capstone’s payout ratio have to be for the firm’s EFN to be zero? Refer to the given data for Capstone Marketing Group in Problem 19.32 Capstone Marketing Group has total assets of
> Capstone Marketing Group has total assets of $5,568,000, sales of $3,008,725, and net income of $822,000. The company expects its sales to grow by 12 percent next year. All assets and costs (including taxes) vary directly with sales, and the firm expect
> Norton Group, Inc., expects to add $1,213,777 to retained earnings and currently has total assets of $23,159,852. If the company has the ability to borrow up to $1 million, how much growth can the firm support if it is willing to borrow to its maximum ca
> Ritchie Marble Company has total assets of $12,899,450, sales of $18,174,652, and net income of $4,589,774. Management expects sales to grow by 25 percent next year. All assets and costs (including taxes) vary directly with sales, and management expects
> What are the elements of a financing plan?
> Maryland Micro Brewers generated revenues of $12,125,800 with a 72 percent capital intensity ratio during the year ended September 30, 2017. Its net income was $873,058. With the introduction of a half dozen new specialty beers, management expects to gro
> Ellicott Textile Mills management has reported the following financial information for the year ended September 30, 2017. The company generated a net income of $915, 366 on a net profit margin of 6.4 percent. It has a dividend payout ratio of 50 percent,
> Rocky Sales, Inc., has current sales of $1,215,326 and net income of $211,253. It also has a debt ratio of 25 percent and a dividend payout ratio of 75 percent. The company’s total assets are $712,455. What is its sustainable growth rate?
> Refer to the information for Rowan Company in Problem 19.23. The firm’s management desires a sustainable growth rate (SGR) of 10 percent but does not wish to change the company’s level of debt or its payout ratio. What will the firm’s new profit margin h
> How do venture capitalists reduce the risk of their investments?
> Rowan Company has a net profit margin of 8.3 percent, debt ratio of 45 percent, total assets of $4,157,550, and sales of $6,852,654. If the company has a dividend payout ratio of 67 percent, what is its sustainable growth rate?
> Use the following pro forma information for Tomey Supply Company for next year: net income = $508,275; addition to retained earnings = $340,544; common equity = $848,171; net sales = $2,121,745. Assume that management does not want the ratio of long-term
> Tomey Supply Company’s financial statements for the most recent fiscal year are shown below. The company management projects that sales will increase by 20 percent next year. Assume that all costs and assets increase directly with sales
> Refer to Problem 19.7. Northwood expects to increase its sales by 15 percent next year. All costs vary directly with sales. If Northwood wants to retain $65,000 of earnings next year, will it have to change its dividend payout ratio? If so, what will be
