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 time for customers from this region is currently 4 days. It is expected that the system will reduce this to 2.5 days. Check processing and clearing time would be reduced from 4 days to 1.5 days with the lockbox arrangement. Annual collections from this region are $200 million. The lockbox arrangement would reduce the compensating balance requirement at the firm’s Seguin bank by $400,000 and reduce annual payment processing costs at the Seguin office by $25,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 14 percent before taxes. a. The Chicago bank has agreed to process Jackson’s customer payments for an annual fee of $130,000. Determine the annual net pretax benefits to Jackson’s of establishing a lockbox system with the Chicago bank. b. The Chicago bank has agreed to process Jackson’s customer payments “free of charge” if the firm maintains a minimum compensating balance of $2 million in its account at the bank. Determine the annual net pretax benefits to Jackson’s of establishing the lockbox system under these conditions.
> How can a company effectively force conversion of a convertible security?
> What is the relationship between conversion value, bond value, and market value for a convertible security?
> Why do companies issue convertible securities?
> In what ways are convertible securities and warrants similar? Dissimilar?
> How does a stock’s expected price volatility affect the value of a call option on it?
> Will call option values generally be higher at a time when interest rates are relatively high, compared with a time when interest rates are relatively low, all other things being equal?
> Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Ad
> NPR MedTech Corporation is considering acquiring IV Pumps Inc. a relatively small company that manufactures intravenous pumps for use by hospitals. NPR MedTech believes it can grow IV Pumps’ sales by 30 percent per year for the first 5 years after it acq
> In Problem 11, assume Frank’s Superior Carworks has $1.5 million in debt and 500,000 shares outstanding. Based on your answer to Problem 11, how much would Jeff’s Powerwash be willing to pay for each share of Frank’s Superior Carworks?
> What variables are important in determining call option prices?
> Jeff’s Powerwash Inc. which operates in Texas, is considering acquiring Frank’s Superior Carworks chain of car washes in Maryland. The expected net cash flows from the acquisition for the first 3 years of the postmerge
> A financial analyst with MTC International has estimated the annual after-tax net cash flow from a proposed merger to be $1.5 million. This cash flow is expected to continue for 10 years. For the following 5 years, the net cash flow is estimated to be $0
> Consider Problem 8 again. Assume that there are immediate synergistic benefits of $4 million if Apex and Pinnacle merge. Answer Parts a, b, and c of Problem 8 under these conditions.
> Apex Corporation is considering the purchase of Pinnacle Company in a stockfor-stock exchange. Selected data on the two companies are shown in the following table: Assume that there are no synergistic benefits as the result of the merger. Determine EPS
> Wilson Industries is considering the acquisition of the Blanchard Company in a stock-for-stock exchange. Selected financial data for the two companies are shown next. An immediate synergistic earnings benefit of $1 million is expected in this merger, due
> Go-for-Broke Company is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance sheet was as follows: *All accrued wages must be paid out of the liquidation proceeds. **The bank loan is unsecured. ***Mortgag
> Consider Failures Galore Inc. (Tables 23.11 and 23.12). a. If total liquidation proceeds are $5.95 million, what is the distribution of these proceeds among the various creditors of Failures Galore? b. If total liquidation proceeds are $7.65 million, w
> Looking back at Tables 23.5 and 23.6, assume that Diversified Industries acquires High-Tech Products in a stock-for-stock transaction and no immediate synergistic benefits are expected. How long will it take the expected EPS of the combined companies to
> Ball Industries is considering acquiring the Keyes Corporation in a stock-for-stock exchange. Selected financial data on the two companies follow: Assume that no synergistic benefits are expected. a. What is the maximum exchange ratio Ball should agr
> The McPherson Company is considering acquiring the McAlester Company. Selected financial data for the two companies are shown here: Both companies have 40 percent marginal tax rates. Assume that no synergistic benefits are expected. a. Calculate the
> What are the similarities and differences between options and warrants?
> The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive 0.75 shares of Blue for each share of Grey held. Assume that no synergistic benefits are expected. a. Complete the following tabl
> A $10 million principal amount, 3-year, term loan carries an interest rate of 10 percent. All interest payments (which would normally be due at the end of each year) are deferred until the end of 3 years. The unpaid interest amount compounds at a 10 perc
> U.S. Fax has been granted a loan from a commercial finance company for $1 million at a stated interest rate of 10 percent. The loan requires that interest payments be made at the end of each of the next 5 years. At the end of 5 years, the entire loan bal
> A $1 million loan requires five end-of-year equal payments of $284,333. a. Calculate the effective interest rate on this loan. b. How much interest (in dollars) is paid over the life of this loan?
> The James Company has been offered a 4-year loan from its bank in the amount of $100,000 at a stated interest rate of 10 percent per year. The loan will require four equal end-of-year payments of principal and interest plus a $30,000 balloon payment at t
> Huskie Bank has provided the Mucklup Manufacturing Company with a 2-year term loan for $200,000 at a stated annual rate of interest of 10 percent. Interest for the entire 2-year period must be prepaid; that is, the loan’s total interest payments must be
> A $10 million, 5-year loan bears an interest rate of 7 percent. The loan repayment plan calls for five annual end-of-year payments. Each payment is to include an equal amount of principal repayment ($2 million per year) plus accrued interest. Set up the
> A firm receives a $1 million, 5-year loan at a 10 percent interest rate. The loan requires annual payments of $125,000 per year (at the end of each year) for years 1 to 4. a. What payment is required at the end of year 5? b. What would you call this ty
> 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
> 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.
> Determine the annual financing cost of forgoing the cash discount if the credit terms are “1/10, net 30” and the invoice is not paid until it is 20 days past due.
> 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
