Question: Determine the annual financing cost of forgoing

> Set up the amortization schedule for a 5-year, $1 million, 9 percent bullet loan. How is the principal repaid in this type of loan? What is the effective interest cost of this loan?

> Set up the amortization schedule for a 5-year, $1 million, 9 percent loan that requires equal annual end-of-year principal payments plus interest on the unamortized loan balance. What is the effective interest cost of this loan?

> Define the following terms: a. Option b. Call c. Put d. Contingent claim

> Discuss the differences between the following types of mergers: a. Horizontal mergers b. Vertical mergers c. Conglomerate mergers

> Set up the amortization schedule for a 5-year, $1 million, 9 percent term loan that requires equal annual end-of-year payments. Be sure to distinguish between the interest and the principal portion of each payment. What is the effective interest cost of

> Lobo Banks normally provides term loans that require repayment in a series of equal annual installments. If a $10 million loan is made, what would be the annual endof-year payments, assuming the following? a. A 10 percent loan for 12 years b. A 10 per

> Darling Leasing is considering the lease to Major State University of a piece of equipment costing $100,000. The period of the lease will be 8 years. The equipment will be depreciated under MACRS rules for 7-year class assets. Darling’s marginal tax rate

> As a financial analyst for Muffin Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm. The equipment has a useful life of 8 years. If purchased, the equipment, which costs $700,000, w

> The First National Bank of Great Falls is considering a leveraged lease agreement involving some mining equipment with the Big Sky Mining Corporation. The bank (40 percent tax bracket) will be the lessor; the mining company, the lessee (0 percent tax bra

> The Jacobs Company desires to lease a numerically controlled milling machine costing $200,000. Jacobs has asked both First Manufacturers Bank Leasing Corporation and Commercial Associates, Inc. (a commercial finance company) to quote an annual lease rate

> The following stream of after-tax cash flows are available to you as a potential equity investor in a leveraged lease: The cash flow in year 0 represents the initial equity investment. The positive cash flows in years 1 to 5 result from the tax shield

> Jenkins Corporation wants to acquire a $200,000 computer. Jenkins has a 40 percent marginal tax rate. If owned, the computer would be depreciated on a straight-line basis to a book salvage value of $0. The actual cash salvage value is expected to be $20,

> The First National Bank of Springer has established a leasing subsidiary. A local firm, Allied Business Machines, has approached the bank to arrange lease financing for $10 million in new machinery. The economic life of the machinery is estimated to be 2

> Ajax Leasing Services has been approached by Gamma Tools to provide lease financing for a new automated screw machine. The machine will cost $220,000 and will be leased by Gamma for five years. Lease payments will be made at the beginning of each year. A

> One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now approaching $4 per mcf (1,000 cubic feet). Olde Virginia

> MacKenzie Corporation is considering leasing a new asset. The lease would run for eight years and require eight beginning-of-year payments of $100,000 each. If MacKenzie capitalizes this lease for financial reporting purposes at a 10 percent rate, what a

> Suppose that FedEx Kinko’s has decided to install personal computers and printers in its Pittsburgh store that will be rented to customers on an hourly basis. FedEx Kinko’s management has called in consultants from a number of computer suppliers to assis

> Tokyo Electric Company (TEC) sells most of its products in the United States through 50 large distributors and retail chains (for example, Sears, Kmart). Currently, TEC’s customers mail their payments, which are due monthly, to the company. The company i

> World Telephone & Telegraph (WTT) is considering the establishment of a zero balance system for its dividend payment account. The firm pays common stockholders quarterly dividends. Currently, WTT deposits the necessary funds to cover the dividend pay

> Two banks, First Fidelity Bank and First Union Bank, have offered to process Zack’s retail charge card payments. First Fidelity will process the payments for a fee of $0.15 per payment with no compensating balance required. First Union will process the p

> Jackson’s Thriftway currently processes all of its credit sales at its Seguin, Texas, headquarters. The firm is considering establishing a lockbox arrangement with a Chicago bank to process payments from customers in 12 midwestern states. Average mailing

> The High-Rise Construction Company, located in Houston, receives large remittances (that is, progress payments) from customers with whom it has contracts. These checks are frequently drawn on New York City banks. If the checks are deposited in High-Rise’

> Wisconsin Paper Company is considering establishing a zero-balance system for its payroll account. The firm pays its employees every 2 weeks on Friday (that is, 26 pay periods per year). Currently, the firm deposits the necessary funds in the payroll acc

> Peterson Electronics uses a decentralized collection system whereby customers mail their payments to one of six regional collection centers. The checks are deposited each working day in the collection center’s local bank, and a depository transfer check

> J-Mart, a nationwide department store chain, processes all its credit sales payments at its suburban Detroit headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from its

> Disher Cotton Farms is a large cotton producer located near Lubbock, Texas. Each year Disher plants its fields in cotton and then waits until the fall before the cotton is picked and sold. Disher knows that its cost of producing cotton is about $0.75 per

> Japanese Motors, a major importer of foreign automobiles, has a subsidiary (Japanese Motor Credit Company, or JMCC) that finances dealer inventories, as well as retail installment purchases of the company’s cars. With respect to the financing of retail p

> Great Lakes Oil Company currently processes all its credit card payments at its domestic headquarters in Chicago. The firm is considering establishing a lockbox arrangement with a Los Angeles bank to process its payments from 10 western states. Under the

> Exman Company performed a study of its billing and collection procedures and found that an average of 8 days elapses between the time when a customer’s payment is received and when the funds become usable by the firm. The firm’s annual sales are $540 mil

> Dexter Instrument Company’s sales average $3 million per day. a. If Dexter could reduce the time between customers’ mailing their payments and the funds becoming collected balances by 2.5 days, what would be the increase in the firm’s average cash balan

> The Clearfield Company would be permitted to borrow up to $750,000 secured by inventories under a field warehouse arrangement with a sales finance company. The annual interest rate would be 12 percent. The additional cost of establishing a field warehous

> DuBois Apparel Company is considering factoring its receivables. The company’s average level of receivables is $1.5 million, and its average collection period is 45 days. DuBois’s bad-debt losses average $8,000 per month, which it would not incur if it f

> Titusville Petroleum Company is considering pledging its receivables to finance an increase in working capital. Citizens National Bank will lend the company 80 percent of the pledged receivables at 2 percentage points above the prime rate (currently 10 p

> The Vandergrift Company has a revolving credit agreement with Commerce Bank under which the company can borrow up to $5 million at an annual interest rate of 1 percentage point above the prime rate (currently 9 percent). The company is required to mainta

> The Kittanning Company has a $2 million line of credit with First Interstate Bank under which it can borrow funds at 1.5 percentage points above the prime rate (currently 9 percent). The company plans to borrow $1.5 million and is required by First Inter

> Harpo Music Mart needs to raise $300,000 to increase its working capital. The bank, mindful of Harpo’s strained financial condition, has refused to loan the firm the needed funds. Harpo is considering stretching its accounts payable in order to raise the

> Jenkins Electronics has purchased a large quantity of electronic components from a Japanese firm for use in its new DVD players. The Japanese supplier has agreed to give Jenkins payment terms of net 90. The Japanese firm insists that payments be made in

> The Odessa Supply Company is considering obtaining a loan from a sales finance company secured by inventories under a field warehousing arrangement. Odessa would be permitted to borrow up to $300,000 under such an arrangement at an annual interest rate o

> Which of the following credit terms would you prefer as a customer? a. 2/10, net 30 b. 1/10, net 40 c. 2/10, net 40 d. 1/10, net 25 e. Indifferent among all options Explain your choice.

> The Eaton Company needs to raise $250,000 to expand its working capital and has been unsuccessful in attempting to obtain an unsecured line of credit with its bank. The firm is considering stretching its accounts payable. Eaton’s suppliers extend credit

> Designer Textiles Inc. is considering factoring its receivables. The company’s average collection period is 60 days, and its average level of receivables is $2.5 million. Designer’s bad-debt losses average $15,000 a month. If the company factors its rece

> Ranger Enterprises is considering pledging its receivables to finance a needed increase in working capital. Its commercial bank will lend 75 percent of the pledged receivables at 1.5 percentage points above the prime rate, which is currently 12 percent.

> The Brandt Company has been approached by two different commercial paper dealers offering to sell an issue of commercial paper for the company. Dealer A offered to market an $8 million issue maturing in 90 days at an interest cost of 8.5 percent per annu

> Wellsley Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of commercial paper for the firm. The dealer indicates that Wellsley could sell a $5 million issue maturing in 182 days at an interest rate of 8.5 p

> Pyramid Products Company has a revolving credit agreement with its bank. The company can borrow up to $1 million under the agreement at an annual interest rate of 9 percent. Pyramid is required to maintain a 10 percent compensating balance on any funds b

> Determine the annual financing cost of a 6-month (182-day) $20,000 discounted bank loan at a stated annual interest rate of 10 percent. Assume that no compensating balance is required.

> The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8 percent interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15 percent compensating balance. Determine the annual finan

> In February, Tech Components Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement with a major auto manufacturer to supply specialized electronic components for delivery in 6 months. One of the key inputs in

> Determine the annual financing cost of a 1-year (365 day), $10,000 discounted bank loan at a stated annual interest rate of 9.5 percent. Assume that no compensating balance is required.

> Calculate the annual percentage rate of forgoing the cash discount under each of the following credit terms: a. 2/10, net 60 b. 2/10, net 30

> Determine the annual financing cost of forgoing the cash discount under each of the following credit terms: a. 2/10, net 60 b. 1½/10, net 60 c. 2/30, net 60 d. 5/30, net four months (assume 122 days) e. 1/10, net 30

> Van Buren Resources Inc. is considering borrowing $100,000 for 182 days from its bank. Van Buren will pay $6,000 of interest at maturity, and it will repay the $100,000 of principal at maturity. a. Calculate the loan’s annual financing cost. b. Calcul

> The Milton Company currently purchases an average of $22,000 per day in raw materials on credit terms of “net 30.” The company expects sales to increase substantially next year and anticipates that its raw material purchases will increase to an average o

> The Butler-Huron Company’s balance sheet and income statement for last year are as follows: *Assume that all sales are credit sales and that average accounts receivable are the same as ending accounts receivable. **Assume that averag

> Brakenridge Industries is considering the following two alternative working capital investment and financing policies: Forecasted sales next year are $30 million. EBIT is projected at 25 percent of sales. Fixed assets are $30 million. The firmâ&#

> The Hopewell Pharmaceutical Company’s balance sheet and income statement for last year are as follows: *Assume that average accounts receivable are the same as ending accounts receivable. **Assume that average inventory over the year

> Nguyen Enterprises is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 65 percent of forecasted sales and to finance 70 percent of its debt requirements with long-term

> California Plastics uses crude oil as one of its major raw material inputs. The current price of crude oil is $95 per barrel. The company is concerned that significant increases in the price of crude oil could jeopardize its profits. Each $1 increase in

> Greenwich Industries has forecasted its monthly needs for working capital (net of spontaneous sources, such as accounts payable) for 2016 as follows: Short-term borrowing (that is, a bank line of credit) costs the company 10 percent, and long-term borr

> Educational Toys, Inc. (ETI) has highly seasonal sales and financing requirements. The company’s balance sheet on December 31, 2015, is as follows: ETI has made the following projections of its asset needs and net additions to retaine

> Superior Brands Inc. wishes to analyze the joint impact of its working capital investment and financing policies on shareholder return and risk. The company has $40 million in fixed assets. Also, the firm’s financial structure consists

> Reynolds Equipment Company is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has decided to employ $30 million in current assets, along with $35 million in fixed assets, in

> Wilson Electric Company, a manufacturer of various types of electrical equipment, is examining its working capital investment policy for next year. Projected fixed assets and current liabilities are $20 million and $18 million, respectively. Sales and EB

> The Garcia Industries balance sheet and income statement for the year ended 2015 are as follows: Balance Sheet (in Millions of Dollars) Assets Liabilities and Stockholders' Equity Cash $ 6.0 Accounts payable $10.0 Accounts receivable 14.0 Salaries

> Consider again the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm&ac

> The Fisher Apparel Company balance sheet for the year ended 2015 is as follows: December 31, 2015 (in Thousands of Dollars) Assets Cash………………………………….……………….………………………………………..$ 3,810 Marketable securities……………….…………….………………………………………..2,700 Accou

> Clynne Resources expects earnings this year to be $2 per share. Clynne plans to pay a dividend of $0.70 for the year. During the year, Clynne expects to borrow $10 million in addition to its already outstanding loan balances. Clynne has 10 million shares

> On Friday, August 6, the board of directors of Cisco Industries declares a $0.22 quarterly dividend payable on September 15 to stockholders of record on Tuesday, August 24. When is the ex-dividend date? If you purchase the stock on this date, are you ent

> Options can protect a firm against the downside risk of a business transaction while preserving the upside potential from the transaction. In contrast, forward and futures contracts normally protect against the downside risk but forfeit the upside potent

> Concave Systems presently has earnings before interest and taxes of $3 million. Its interest expenses are $500,000 a year, and it pays $600,000 in annual dividends to its shareholders. Concave has 300,000 common shares outstanding, and its tax rate is 40

> Striker’s Match Company reports the following financial data: Net earnings………………….……..$3,000,000 Shares outstanding………......……..1,000,000 Earnings per share……….….…………………..$3 Market price per share (ex-dividend)…..$40 Expected dividend per share…………………$2

> The Sweet Times Candy Company has the following equity accounts on its balance sheet: Common stock ($1 par, 500,000 shares)….…………..$ 500,000 Contributed capital in excess of par…………….……….2,000,000 Retained earnings……………………….……………………13,000,000 Total commo

> The Emco Steel Company has experienced a slow (3 percent per year) but steady increase in earnings per share. The firm has consistently paid out an average of 75 percent of each year’s earnings as dividends. The stock market evaluates Emco primarily on t

> Phoenix Tool Company and Denver Tool Company have had a very similar record of earnings performance over the past eight years. Both firms are in the same industry and, in fact, compete directly with each other. The two firms have nearly identical capital

> Lenberg Lens Company believes in the dividends-as-a-residual philosophy of dividend policy. This year’s earnings are expected to total $10 million. A very conservative company, Lenberg is financed solely with common stock. The required rate of return on

> Champoux Hair Factory Inc. has earnings before interest and taxes of $200,000. Annual interest amounts to $80,000, and annual depreciation is $80,000. Taxes are computed at a 40 percent rate. Existing bond obligations require the payment of $40,000 per y

> The Mori Egg Noodle Company has the following equity accounts on its balance sheet: Common stock ($10 par, 300,000 shares)……………….………………….$ 3,000,000 Contributed capital in excess of par…………………………….………………….1,500,000 Retained earnings………………………………………………………

> Tulia Dairy pays a $2.50 cash dividend and earns $5 per share. The cash dividend has recently been increased to $2.65 per share, and a 3 percent stock dividend has been declared. What is the effective rate of increase in the dividends for Tulia as a resu

> Wolverine Corporation plans to pay a $3 dividend per share on each of its 300,000 shares next year. Wolverine anticipates earnings of $6.25 per share over the year. If the company has a capital budget requiring an investment of $4 million over the year a

> What are the primary differences between forward contracts and futures contracts?

> Winkie Baking has just announced a 100 percent stock dividend. The annual cash dividend per share was $2.40 before the stock dividend. Winkie intends to pay $1.40 per share on each of the new shares. Compute the percentage increase in the cash dividend r

> Drew Financial Associates currently pays a quarterly dividend of 50 cents per share. This quarter’s dividend will be paid to stockholders of record on Friday, February 12, 2016. Drew has 200,000 common shares outstanding. The retained earnings account ha

> Jacobs Corporation earned $2 million after tax. The firm has 1.6 million shares of common stock outstanding. a. Compute the earnings per share of Jacobs. b. If Jacobs’ dividend policy calls for a 40 percent payout ratio, what are the dividends per share

> How do retained earnings differ from other sources of financing?

> Gandha’s Pharmaceutical Corporation’s beta is 1.5. The current risk-free rate is 4.5 percent and the market risk premium is 9 percent. Gandha currently (time 0) pays a dividend of $2 per share. This dividend is expected to grow at a rate of 20 percent fo

> Del Sarto’s Minuteman Novelties Inc. (DSMN) expects its earnings to grow from a current (time 0) level of $2 per share to $4 per share over the coming year. After that, earnings are expected to grow at 10 percent per year for 5 years. The current price o

> Highland Pet Supplies Company forecasts earnings per share of $2.50 during the coming year. Highland has always paid a dividend equal to 40 percent of its earnings, and it anticipates continuing this practice. Earnings are expected to increase at a rate

> Tucker Manufacturing Company has a beta estimated at 1.0. The risk-free rate is 6 percent and the expected market return is 12 percent. Tucker expects to pay a $4 dividend next year (D1 = $4). This dividend is expected to grow at 3 percent per year for t

> Globe Steel has decided to diversify into the home improvement field. As a result of this expansion, Globe’s beta value drops from 1.3 to 0.9, and the expected future long-term growth rate in the firm’s dividends drops from 8 to 7 percent. The expected m

> Caledonia Minerals has an estimated beta of 1.6. The company is considering the acquisition of another firm that has a beta of 1.2. Both companies are exactly the same size. a. What is the expected new beta value for the combined firm? b. The risk-fre

> How can patents, copyrights, and legal challenges be used to manage business risk?

> The current dividend, D0, of the stock of Sun Devil Corporation is $3 per share. Under present conditions, this dividend is expected to grow at a rate of 6 percent annually for the foreseeable future. The beta of Sun Devil stock is 1.5. The risk-free rat

> Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firm’s total assets: The risk-free rate is 7 percent, and the market risk premium is 8 percent. a. What is th

> Jenkins Resources Inc. has the following capital structure: Financing Source………….…..Proportion of Capital Structure Debentures (9% coupon, $1,000 par value, 12-year maturity)…………….……………………………………….27% Preferred stock ($2 dividend, $25 par val

> The Folske Fan Corporation has four divisions: Division……………………Proportion of Firm’s Assets Consumer products……………………………………50% Consulting……………………………………………………10 Industrial products……………………………………….30 Financial services………………………………………….10 The (leveraged) b

> Rolodex Inc. is in the process of determining its capital budget for the next fiscal year. The firm’s current capital structure, which it considers to be optimal, is contained in the following balance sheet: Discussions between the fi

> Matsumoto Limited (ML), a large conglomerate firm, has a capital structure that currently consists of 20 percent long-term debt, 10 percent preferred stock, and 70 percent common equity. ML has determined that it will raise funds in the future using 40 p

> Owens Enterprises is in the process of determining its capital budget for the next fiscal year. The firm’s current capital structure, which it considers to be optimal, is contained in the following balance sheet: Through discussions w

> The White Corporation makes small Bozo replicas for sale in the growing Austin market. The firm’s capital structure consists of 60 percent common equity, 10 percent preferred stock, and 30 percent long-term debt. This capital structure is believed to be

> Colbyco Industries has a target capital structure of 60 percent common equity, 30 percent debt, and 10 percent preferred stock. The cost of retained earnings is 15 percent, and the cost of new equity (external) is 16 percent. Colbyco anticipates having $