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 changes and alterations to that system. The marketing department wants to take an incremental approach to the bid, basically treating it as a capital budgeting project. They propose selling the system at or below its direct cost in labor and materials (the incremental cost) to ensure getting the follow-on business. They've projected the value of that business by treating future sales less direct costs as cash inflows. They maintain that the initial outlay is the direct cost to install the system, which is almost immediately paid back by the price. Future cash flows are then the net inflows from the follow-on sales. These calculations have led to an enormous NPV and IRR for the sale viewed as a project. Both support and criticize this approach. (Hint: what would happen if Creighton did most of its business this way?)
> 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
> A Japanese importer owes an American exporter $450,520. a. What is her bill in yen if she pays immediately? b. What would the bill be if the importer wanted to lock in an exchange rate today but pay in 3 months? The dollar is expected to strengthen by
> 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
> 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
> You're the CFO of the Overseas Sprocket Company, which imports a great deal of product from Europe and the Far East and is continually faced with exchange rate exposure on unfilled contracts. Harry Byrite, the head of purchasing, has a plan to avoid exc
> You're the Treasurer of Warm Wear Inc., which imports wool sweaters from around the world. Kreploc, a company in the country of Slobodia, has a product your marketing department would like to carry, and doesn't require payment until 90 days after delive
> Briefly explain the idea of representing an interest rate as a collection of components. What is represented by the base rate? What is the risk premium for? Explain the idea of risk in lending.
> Your pal, Fred Flinderbinder, came into class this morning grinning from ear to ear. It seems a stock in which he advised his parents to invest is doing fabulously well. Fred said the firm usually pays a dividend of $2.00 a share, which is about 4% of
> You're a bank officer considering making a loan to small family-owned company. The firm's principal owner is a hard-working, conservative woman who has built up the company over a number of years. However, two of her grown children are now active in the
> The Tanglefern Corporation has traditionally paid out 60% of its earnings in dividends. Recently some marvelous growth opportunities have arisen that involve only a little risk but require a lot of cash. Most of the executive team thinks the firm shoul
> You're the treasurer of SuperTech Inc., a high technology firm in the fast-growing computer business. The management team has recently been trying to decide on a long-term dividend policy. Earnings are good, but the firm has far more investment opportun
> You've just been hired as CFO of the Gatsby Corp., a new company in the hi-tech computer business. Shortly after your arrival you were amazed to find that the firm does virtually no planning. An extensive business plan was put together when it was starte
> You're the CFO of the Ramkin Company, which makes and sells electronic equipment. The firm was originally an independent business, but was acquired by the larger Big Tech Inc. ten years ago, and is now operated as a division. Big Tech has an elaborate
> Ed Perez has always wanted to run his own restaurant. He worked part-time in the food service business during high school and college and has worked for a large restaurant chain since graduating from college four years ago. He's now ready to open a fra
> Webley Corp. has a capital budget limited to $20M. Five relatively high IRR projects are available that have initial investments totaling $15M. They are all roughly the same size. A sixth project has an IRR only slightly lower than those of the first
> The Budwell & Son Oil Company is looking at two drilling proposals. One project lasts for three years, costs $20M to start, pays back quickly, and has an NPV of $15M. The other project also costs about $20M to start, but has an expected life of seven y
> Charlie Brown is thinking about starting Wing-It Airlines to fly a commuter route in and out of a major city. Four planes are on the market that will do the job, but each has different flight, load, and operating characteristics. Charlie is unsure of th
> Discuss the similarities and differences between supply and demand for a good (product or service) and supply and demand in a money (debt) market.
> Risk in capital projects is the probability that a project will earn less than expected. Make up and describe one hypothetical project in each of the replacement, expansion and new venture categories, and list a few ways that each might go wrong and cau
> You are a financial analyst for the Ajax Company, which uses about $1M of inventory per month. The purchasing manager has come to you for help with a buying decision. He can get a big discount on $15M of inventory by buying it all at once. However, the
> Sourdough Mills has considered acquiring Mrs. Baird’s Bakery as an expansion strategy. Mrs. Baird’s Bakery generated positive cash flows of $5.3 million last year, and cash flows are expected to increase by 4% per year for the foreseeable future. Mrs.
> Randal Flapjack is a retired short-order cook living on a fixed income in the state of Utopia where all financial markets are perfectly efficient. Randal has 20,000 shares of the Sugarcooky Corp., which pays an annualized dividend of $1.00 per share. Su
> Integrity Group, an association of venture capitalists, is considering using a leveraged buyout to purchase Schrag Co., a well-established hi-tech firm. Schrag has long-term debt with a book value of $15 million and a debt to equity ratio of 1:10. The f
> Lattig Corp. had a $2.0 million cash flow last year, and projects that figure to increase by $200,000 per year for the next five years (to $3.0 million). After that, Lattig expects an annual growth rate of 6% forever. If the discount rate is 12%, a. W
> Bridgeport Inc has a $30 million revolving credit agreement with its bank at prime plus 3.2% based on a calendar year. Prior to the month of April, it had taken down $15 million that was outstanding for the entire month. On April 10, it took down anoth
> You own 1,000 shares of Jennings Corp. stock, which is currently selling for $88.00. Calculate the number of shares you would own and the stock’s market price after each of the following stock splits. a. A two-for-one stock split b. A three-for-one s
> The Conejo Corp. borrows from its bank under an $8 million revolving credit arrangement. It pays a base rate of 9% on its outstanding loan plus a ¼% commitment fee on the unused balance. The firm had borrowed $2 million going into April and borrowed an
> Thompson Inc. has a $10M revolving credit agreement with its bank. It pays interest on borrowing at 2% over prime and a ¼% commitment fee on available but unused funds. Last month Thompson had borrowings of $5M for the first half of the month and $10M fo
> The Philipps Lighting Company manufactures decorative light fixtures. Its revenues are about $100 million a year. It purchases inputs from approximately 20 suppliers most of which are much larger companies located in various parts of the country. Sam
> Rocky Inc. can buy its inventory from any of four suppliers all of which offer essentially the same pricing and quality. Their credit terms, however, vary considerably as follows: a. Calculate the implied interest rate associated with each policy. b
> The Holderall Rope and Yarn Co. has 2 million common shares outstanding. Its capital structure is two-thirds equity. The firm expects earnings of $10 million next year, and anticipates capital spending of $12 million on projects. How much will the per-
> Southern Fabrics Inc factors all of its receivables. The firm does $150 million in business each year, and would have an ACP of 36.5 days if it collected its own receivables. The firm's gross margin is 35%. The factor operates without recourse and pays
> Parnell Bolts Inc. has 20 million common shares outstanding, and net income of $30 million. The stock sells at a P/E of 15. The company has $5 million available to pay the next quarterly dividend, but is considering a repurchase instead. a. If Parnell
> DeSquam Inc. pledges receivables of $250M per year to the Sharkskin Finance Company which advances cash equal to 80% of the face value of the accounts pledged. DeSquam’s receivables are usually collected in about 36 days, so 10% of the annual amount adv
> BWP projects sales of 100,000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and fixed costs will be $2.4 million. BWP has $1 million in bonds outstanding on which it pays 8%, and its marginal tax r
> Wysoski Enterprises is considering a stock dividend. The firm’s capital includes 3 million shares of $1 par value stock issued at an average price of $8. Retained earnings total $20 million. State the equity accounts now and after each of the followin
> Seinway Corp. just declared a 10% stock dividend. Before the dividend the stock sold for $34 per share and the equity section of the firm’s balance sheet was as follows: Restate the equity accounts and estimate the stockâ€
> The Argo Pamphlet Company’s dividend payout ratio is 35%. It is currently paying an annual dividend of $1.30. a. What is Argo’s EPS? b. What is the market price of Argo’s stock if its P/E ratio is 14? c. How much current income per share will stockholde
> The Addington Book Company has the following equity position. The stock is currently selling for $3 per share. a. What was the average price at which the company originally sold its stock? b. Reconstruct the equity statement above to reflect a four-
> Does the EOQ model properly applied prevent stockouts? Does it address stockouts at all? Do you think the EOQ model solves very many of management's inventory problems?
> Harrison Hardware anticipates $2 million in net income next year and a 20% participation in the firm’s dividend reinvestment plan. Management expects to spend $2.375 million on new capital projects, and maintain the current capital structure which is 64
> The Canterbury Coach Corporation has EBIT of $3.62 million, and total capital of $20 million, which is 15% debt. There are 425,000 shares of stock outstanding which sell at book value. The firm pays 12% interest on its debt and is subject to a combined
> The Tanenbaum Tea Company wants to show the stock market an EPS of $3 per share, but doesn't expect to be able to improve profitability over what is reflected in the financial plan for next year. The plan is partially reproduced as follows. Tanenbaum'
> Biltmore Industries has grown at an average of 6% per year over its long history. Its stock price is currently $40 and its most recent dividend was $2.50. Biltmore just announced that it plans to discontinue dividends for several years to take advantag
> Find the MIRR and the IRR for the following capital budgeting project and comment on the difference between the two. The cost of capital is 12%. Year: 1 2 3 ($8bo) $550 ($150) $700
> Newrock Manufacturing Inc. has the following target capital structure Investment bankers have advised the CFO that the company could raise up to $5 million in new debt financing by issuing bonds at a 6.0% coupon rate, beyond that amount new debt would
> Taunton Construction Inc.'s capital situation is described as follows: Debt: The firm issued 10,000 25-year bonds10 years ago at their par value of $1,000. The bonds carry a coupon rate of 14% and are now selling to yield 10%. Preferred Stock: 30,000
> The Maritime Engineering Corp sold 1,500 convertible bonds two years ago at their $1,000 par value. The 20-year bonds carried a coupon rate of 8% and were convertible into stock at $20 per share. At the time, the firm’s stock was selling for $15, and s
