John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $45,000. John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors in 6 months. First Carolina Bank offers John two financing options for the $45,000 loan: a fixed-rate loan at 2.5% above prime rate or a variable-rate loan at 1.5% above prime. Currently, the prime rate of interest is 6.5%, and the consensus interest rate forecast of a group of economists is as follows: Sixty days from today the prime rate will rise by 0.5%; 90 days from today the prime rate will rise another 1%; 180 days from today the prime rate will drop by 0.5%. Using the forecast prime rate changes, answer the following questions. a. Calculate the total interest cost over 180 days for a fixed-rate loan. b. Calculate the total interest cost over 180 days for a variable-rate loan. c. Which is the lower-interest-cost loan for the next 180 days?
> Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and O’Brien Public Accountants and started Track Software Inc. In the 2 years preceding his de
> In corporate settings, it is not unusual for firms to assess the financial viability of a business unit and decide whether to retain it within the corporation or divest it. The selling of units that do not seem to “fit” should bring about greater synergy
> Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and
> Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining assets would be sold to net $65,000. As a result of acq
> Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capit
> Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for $1.6 million, their book value. Trapani expects its earn
> Icy Treats Inc. is a seasonal business that sells frozen desserts. At the peak of its summer selling season, the firm has $35,000 in cash, $125,000 in inventory, $70,000 in accounts receivable, and $65,000 in accounts payable. During the slow winter peri
> Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change
> What is the conversion ratio for each of the following bonds? a. A $1,000-par-value bond that is convertible into common stock at $43.75 per share. b. A $1,000-par-value bond that is convertible into common stock at $25 per share. c. A $600-par-value bon
> Calculate the conversion price for each of the following convertible bonds: a. A $1,000-par-value bond that is convertible into 40 shares of common stock. b. A $1,000-par-value bond that is convertible into 25 shares of common stock. c. A $1,000-par-valu
> Given the lease payments, terms remaining until the leases expire, and discount rates shown in the following table, calculate the capitalized value of each lease, assuming that lease payments are made annually at the end of each year. Lease payment
> Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease that requires a capital payment of $3,300 ($3,000 down p
> Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease a
> JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: Annual end-of-year
> Schuyler Company wishes to purchase an asset costing $117,000. The full amount needed to finance the asset can be borrowed at 14% interest. The terms of the loan require equal end-of-year payments for the next 6 years. Determine the total annual loan pay
> For each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year over the term of the loan, assuming that the payments are made at the end of each year. Loan Amo
> Kent Hotels has warrants that allow the purchase of three shares of its outstanding common stock at $50 per share. The common stock price per share and the market value of the warrant associated with that stock price are shown in the table. a. For each
> Everdeen Inc. has a 90-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its cash conversion cycle? Place all this information on a timeline simil
> Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing’s bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.5%-interest-rate bond pays annual interest and has 10 wa
> Calculate the implied price of each warrant for each of the bonds shown in the following table. Price of bond Number of warrants attached to bond Interest rate with warrants attached Coupon rate (paid annually) on equal-risk straight bond Years to B
> Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have an 8% annual coupon rate, whereas the interest rate on straight bonds of similar ris
> Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon rate and a 20-year maturity. The interest rate on a straight bond of si
> Calculate the straight bond value for each of the bonds shown in the table below. Interest rate on equal-risk straight bond Years to Coupon rate (paid annually) Bond Par value maturity A $1,000 6% 7.0% 20 B 1,000 7 8.5 14 C 1,000 8 10.0 30 D 1,000 9
> Find the conversion (or stock) value for each of the $1,000-par-value convertible bonds described in the following table. Current market price of stock Conversion Convertible ratio A 22.50 $42.25 B 18 50.00 C 20 44.00 D 45 19.50
> What is the conversion (or stock) value of each of the following convertible bonds? a. A $1,000-par-value bond that is convertible into 25 shares of common stock. The common stock is currently selling for $50 per share. b. A $1,000-par-value bond that is
> Given the lease payments and terms shown in the following table, determine the yearly after-tax cash outflows for each firm, assuming that lease payments are made at the end of each year and that the firm is in the 40% tax bracket. Assume that no purchas
> Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365day year.) a. How much interest (in dollars) will the firm pay on the 90-day loan? b. Find the 90-day rate on the loa
> When Waverly Wear Inc. merged with Southerly Inc., Waverly’s employees were switched from a weekly to a biweekly pay period. Waverly’s weekly payroll amounted to $389,500. The annual cost of funds for the combined firms is 8.76%. What annual savings, if
> The current stockholders’ equity account for Hilo Farms is as follows: Hilo has announced plans to issue an additional 5,000 shares of common stock as part of its stock dividend plan. The current market price of Hilo’
> On accepting the position of chief executive officer and chairman of Muse Inc., Dominic Howard changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s weekly payroll was $100 million, and the cost of short-ter
> Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the fo
> Mark and Stacy McCoy are set to move into their first apartment. They visited Levin Furniture, looking for a dining room table and buffet. Dining room sets are typically one of the more expensive home furnishing items, and the store offers financing arra
> Joanne Germano works in an accounts payable department of a major retailer. She has attempted to convince her boss to take the discount on the 1/15 net 65 credit terms most suppliers offer, but her boss argues that giving up the 1% discount is less costl
> Purchases made on credit are due in full by the end of the billing period. Many firms extend a discount for payment made in the first part of the billing period. The original invoice contains a type of shorthand notation that explains the credit terms th
> Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate. a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding th
> Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and findin
> Rancco Inc. reported total sales of $73 million last year, including $13 million in revenue (labor, sales to tax-exempt entities) exempt from sales tax. The company collects sales tax at a rate of 5%. In reviewing its information as part of its loan appl
> Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firm’s accounts receivable are quite low, but its inventory i
> Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.) a. 2/10 net 30. b. 1/10 net 30. c. 1/10 net 45. d. 3/10 net 90. e. 1/10 net 60. f. 3/10 net 30. g. 4/10 net 180.
> The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as shown in the following table. Based on Kopiâ
> Finance factors the accounts of the Holder Company. All eight factored accounts are shown in the following table, with the amount factored, the date due, and the status on May 30. Indicate the amounts that Blair should have remitted to Holder as of May 3
> Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime plus 3% and a 2% commission charge
> Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit peri
> Kansas City Castings (KCC) is attempting to obtain the maximum loan possible using accounts receivable as collateral. The firm extends net-30-day credit. The amounts that are owed KCC by its 12 credit customers, the average age of each account, and the c
> Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (Note: Assume a 365-day year.) a. What effective annual
> Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an
> Weathers Catering Supply Inc. needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. h
> Lincoln Industries has a line of credit at Bank Two that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borrowed $800,000 during the year under the agreement. a. C
> A financial institution made a $4 million, 1-year discount loan at 6% interest, requiring a compensating balance equal to 5% of the face value of the loan. Determine the effective annual rate associated with this loan. (Note: Assume that the firm current
> Ashkenazi Companies has the following stockholders’ equity account: Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend can Ashkenazi pay? If legal capital were more
> As chief financial officer, you are responsible for weighing the financial pros and cons of the many investment opportunities developed by your company’s research and development division. You are currently evaluating two competing 15-year projects that
> Determine the date when a firm must pay for purchases made and invoices dated on June 19 under each of the following credit terms: a. Net 30 date of invoice. b. Net 30 EOM. c. Net 45 date of invoice. d. Net 60 EOM.
> A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sale
> Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts re
> Â Jimmy Johnson is interested in buying a new Jeep SUV. Two options are available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and then sell it. Assume that the trade-in value of the tw
> Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes t
> Tiger Corporation purchases 1,400,000 units per year of one component. The fixed cost per order is $55. The annual carrying cost of the item is 27% of its $10 cost. a. Determine the EOQ if (1) the conditions stated above hold, (2) the order cost is $1 ra
> Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the mont
> Garrett Industries turns over its inventory 6 times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million. Assume there is no difference in the investment per dollar of
> Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share, as shown in the following table. a. Estimate the optimal debt ratio on the basis of the relationship between
> Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. The firm has fixed operating costs of $75,000 and variable operating costs equal to 70% of the sales level. The company p
> Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments that require financing of $950,000 and $1.75 million, respectively. Chancellor uses a target capital structure with 60% debt and 40% equity. App
> Camp Manufacturing turns over its inventory 5 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm has annual sales of $3.5 million and cost of goods sold of $2.4 million. a. Calculate the f
> Charter Enterprises currently has $1 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the f
> A group of angry shareholders has placed a corporate resolution before all shareholders at a company’s annual stockholders’ meeting. The resolution demands that the company stretch its accounts payable because these shareholders have determined that all
> Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is $4,200. Alexis has a “target
> Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaining the zero-balance account, the firm will have to pay
> Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. T
> Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 3.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it
> Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has $345,000 in variable costs. The change in credit terms is expected to inc
> A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The
> Gardner Company currently makes all sales on credit and offers no discount. The firm is considering offering a 2% discount for payment within 15 days. The firm’s current average collection period is 60 days, sales are 40,000 units, selling price is $45 p
> Bristol’s Bistro, Inc., has declared a dividend of $1.25 per share for shareholders of record on Tuesday, December 3. The firm has 350,000 shares outstanding and will pay the dividend on December 28. How much cash will be needed to pay the dividend? When
> Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collecti
> American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales
> Columbia Paper has the following stockholders’ equity account. The firm’s common stock has a current market price of $30 per share. a. Show the effects on Columbia of a 5% stock dividend. b. Show the effects of (1) a
> Given the earnings per share over the period 2012– 2019 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d. a. Pay out 50% of earnings in all years with posi
> Over the past 10 years, a firm has had the earnings per share shown in the following table. a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what woul
> Bennett Farm Equipment Sales Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm&acir
> A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders. a. What is
> The Howe Company’s stockholders’ equity account follows: The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 milli
> As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockholder has asked you to estimate the amount of the divide
> Kathy Snow wishes to purchase shares of Countdown Computing Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12. a. What is the last day that Kathy can purchase the stock (trade
> Cobalt Industries had sales of 150,000 units at a price of $10 per unit. It faced fixed operating costs of $250,000 and variable operating costs of $5 per unit. The company is subject to a tax rate of 38% and has a weighted average cost of capital of 8.5
> Harte Textiles Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclical downturn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a
> The following financial data on the Bond Recording Company are available: The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase stock at $21 per share. a. Approximately h
> The board of Wicker Home Health Care Inc. is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appealing to investors. The options under consideration are a
> Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders’ equity position as shown. The current stock price is $120 per share. The most recent period’s earnings available for common s
> Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $122 per share. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 3-for-1. Just before the stock sp
> Growth Industries’ current stockholders’ equity account is as follows: a. Indicate the change, if any, expected if the firm declares a 2-for-1 stock split. b. Indicate the change, if any, expected if the firm declare
> Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common stockholders of $120,000, but it has decided to retain these funds and is considering either
> Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain
> Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share. a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.
> At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10. The firm has 300,000 shares of common stock outstanding and has set a payment date of July 31. Prior to the dividend decla
> Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base level of EBIT of $20,000?
> Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, r
> Stewart Industries sells its finished product for $9 per unit. Its fixed operating costs are $20,000, and the variable operating cost per unit is $5. a. Calculate the firm’s earnings before interest and taxes (EBIT) for sales of 10,000 units. b. Calculat
> Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a
> JWG Company publishes Creative Crosswords. Last year, the book of puzzles sold for $10, with a variable operating cost of $8 per book and a fixed operating cost of $40,000. a. How many books must JWG sell this year to achieve the breakeven point for the
> Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his car requires a flat fee of $500, and the service prov
