Mid-West Marine Products currently sells its light-weight boat lifts for $3,500 each. The unit cost of each lift is $2,600. On average, the firm sells 2000 lifts a year on a cash basis. Consumer Credit Check is offering Mid-West a credit screening system at the rate of $25 per screen, and assures them that the system will be at least 99% accurate. Mid-West’s research indicates that if they offer credit terms, it will boost their sales by 40% per year. They have also learned that the typical default rate in their industry is around 3%. a) Should Mid-West start offering credit terms? b) If they do offer credit, should they do so with or without CCC’s credit screening services? Please explain.
> What are intellectual property rights? How have changes in technology impacted the ability to protect intellectual property rights?
> What effect can cultural differences have on the ownership structure of a foreign operation of a multinational business?
> Under what condition would a shareholder prefer a share repurchase over a cash dividend? Under what condition would a shareholder prefer a cash dividend over a share repurchase?
> Contrast a residual dividend program with a sticky dividend program.
> Thorpe and Company is currently an all equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85 and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds
> In a world of taxes when the capital gains tax and the ordinary income tax rates are the same is dividend policy relevant? Why or why not?
> In a world of no taxes and no transaction costs is dividend policy relevant? Why or why not?
> How does a stock dividend differ from a cash dividend? Is one better than the other from the shareholder’s perspective?
> What does it mean to be a beneficiary owner of stock? Why would individuals find this ownership stake convenient?
> Why is a dividend reinvestment program attractive to a shareholder that plans on increasing his or her holdings in a company?
> Who loses out on a company’s cash flow when it adds more and more debt is added to the financing structure? Who gains as a company when more and more debt is added?
> Explain why M&M Proposition I in a world of no taxes and no bankruptcy states that the firm's value does not depend on its capital structure.
> What does it mean when one states that the operating and financing decisions are separate from each other? How do we view the financing decision in terms of the magnitude of effect?
> What is asymmetric information? How does it affect the prioritization of financing sources under the pecking order hypothesis?
> What is the advantage of financial leverage, the degree to which a firm or individual utilizes borrowed money to make money?
> Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $43 per share. The company has a beta of 1.1, with the current risk-free rate at 3% and the market premium at 8%. The tax rate is 35% for the company. Ashma
> Why would one lender charge more for a loan to different borrowers? Why would two different lenders charge different rates to the same borrower?
> In the static theory of capital structure, how do you find a firm's optimal capital structure? In other words, what benefit are you receiving as you add debt, and what cost are you incurring when you add debt?
> In a world of taxes and no bankruptcy, why is a company's optimal capital structure all debt? What happens when a company adds bankruptcy to the world of taxes with regard to the optimal capital structure?
> Banker’s acceptance supports lending for what type of activities? Explain how collateral works in a banker’s acceptance arrangement.
> What is commercial paper? Why does it not need SEC approval?
> What is the role of an investment bank in selling stock?
> What is the difference between an angel investor and a venture capitalist? What event do these investors want to see happen? Why?
> What is the difference between Chapter 7 and Chapter 11 bankruptcies? Why might Chapter 11 be better for claimants than Chapter 7?
> What does analyzing companies against their industry tell a finance manager or financial analyst?
> What does the P/E ratio tell an outsider about a company? Why might this ratio not provide very compelling evidence on the firm's performance?
> Leeward Sailboats is reviewing the following new boat line: At what adjusted WACCs will the company accept this project? Hint: Find the IRR of the project and use it as the maximum adjusted WACC for accepting the project. Year 0 Year 1 Year 2 Year 3
> What are solvency ratios? Which ratio would be of most interest to a banker considering a debt loan to a company? Why?
> What are liquidity ratios? Given an example of a liquidity ratio and how it helps evaluate a company’s performance or future performance from an outsider’s view.
> What are some potential pitfalls of poor short-term financial planning?
> What does analyzing a company against firms in other industries tell a financial manager or analyst?
> Why might a company have extra inventory on hand above the amount suggested by the economic order quantity? Make a case for a redundant inventory item in a business setting.
> In a pro forma balance sheet, what line item would you expect to be constant from year to year in dollar terms and decreasing in terms of percentage of total assets? When would this line item have a significant change in percentage?
> What is the float? Why does it take time between when you write a check and when the funds come out of the account?
> If a pro forma income statement has 5% for the net income line, what does this mean in terms of a company’s total sales and per dollar sales?
> Should a company take all discounts offered by its suppliers? What criteria should be used when accepting or rejecting a discount on an invoice?
> What is credit screening? When would it be appropriate for a company to use credit screening? When would it be appropriate for a company to not use credit screening?
> Brawn Blenders has the following incremental cash flows for its new project: Should Brawn Blenders accept or reject this project at an adjusted WACC of 6%, 8%, or 10%? Year 0 Year 1 Year 2 Year 3 Category To T1 T2 T3 Investment $4,000,000 NWC -$300,0
> What is a line of credit? Why would a bank require a company with a line of credit to have a zero balance for at least sixty days a year in its line of credit?
> What is the function of the Small Business Administration in regard to business loans? Who receives the guaranty on the loans?
> Explain the three components of the cash conversion cycle.
> What are a company’s main sources of cash for a company? What are a company’s main uses of cash?
> On April 4th, Forex Corporation announced that it would pay a dividend of $0.75 per share to all shareholders that were on record as of April 11th, with checks being mailed on April 21st. Determine what the stock price of Forex Corporation will be after
> McRonald’s, which is currently valued at $10,000,000, is looking at changing its capital structure from an all-equity firm to a leveraged firm with 50% debt and 50% equity. Since McRonald’s is a not-for-profit company it pays no taxes. (a) If the require
> The Fast-Track Co. has thus far only used equity to finance its operations and currently has 1,000,000 shares outstanding with an EBIT of $1,500,000. The newly-hired CFO firmly believes that the firm would benefit its shareholders a great deal by issuing
> Loyola Turbo Engines is looking at expanding its operations by adding another manufacturing location. If successful, the company will make $750,000, but if it fails, the company will lose $300,000. Loyola can borrow the required capital of 300,000 at 16%
> Diversified Holdings has three subsidiaries, each of which borrows funds from the parent company and has a different success rate with the projects it undertakes. Subsidiary A is successful with its projects 80% of the time, Subsidiary B gets it right 93
> Your raw material supplier has been accepting payments on 30 day terms with no interest penalty. Recently, you received an invoice which stated that the supplier would offer terms of 1/10, net 30. You have a line of credit with your bank at an EAR of 14.
> Clark Explorers Inc., an engineering firm has the following capital structure: Using market value and book value (separately, of course), find the adjusted WACC for Clark Explorers at the following tax rates: a. 35% b. 25% c. 15% d. 5% Equity Preferr
> John Gray is really concerned that his company’s working capital is not being managed efficiently. He decides to take a look at the firm’s operating and cash conversion cycles to see what’s going on.
> The Global Growth Corporation is planning for next year and wants you to help them prepare a Pro Forma Balance Sheet for 2015. Their current Balance Sheet is shown below along with some pre-determined changes in key balance sheet accounts. How will you p
> Given the income statement below for Imperial Products Corporation for 2014, and a 20% growth in sales for 2015, prepare a pro forma income statement. Imperial Products Corp. Income Statement for 2014 Sales Revenue $28,800,000 COGS 11,400,000 SG&A E
> The Creative Products Corporation produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 15% of the anticipated month’s sale. Beginning inventory in October 201
> The financial manager of Hearty Cereals is in the process of preparing a cash budget for the first quarter of 2015. The firm typically sells 1/3 of its monthly sales on cash terms and the rest on credit. An analysis of the accounts receivables shows that
> You have been asked to forecast sales for the coming year. Being convinced that the compound average growth rate is the best way to forecast growth, you collect data for the prior three years as listed below. Using the data compute, the compound growth r
> Kalamazoo Marine wants to expand its operations to New Zealand. The current indirect exchange rate is 1.75 for U.S. and New Zealand dollars. The anticipated inflation rate is 3.8% in the United States, but only 1.75% in New Zealand. The discount rate in
> The Wall Street Journal lists forward rates for Euros. Say that the current listings are: 1-month forward rate (indirect) 0.7025 3-month forward rate (indirect) 0.7145 6-month forward rate (indirect) 0.7245 First, is the anticipated inflation rate high
> On-Line Currency, Incorporated is an online currency exchange company that will immediately convert and credit your bank account based on its published rates. Being the smart finance major that you are, you notice that one of the rates published below is
> Lewis runs an outdoor adventure company and wants to know what impact a tax change will have on his WACC. Currently Lewis has the following borrowing pattern: Equity: 35% and cost of 14% Preferred Stock: 15% and cost of 11% Debt: 50% and cost of 10% befo
> On the day you arrive in New Zealand, the exchange rate for U.S. dollars and New Zealand dollars is $1:2.25 NZ$. While you remain in New Zealand for the next few months, the exchange rate falls to $1:$1.75439 NZ$. When you entered New Zealand, you conver
> Comtrak Inc. has a dividend reinvestment program for shareholders. Over the past five years, the company has had the following share prices and the following dividends. If you started with 100 shares of stock at $58 per share and participated fully in th
> Pearl currently owns 600 shares of Ajax, Incorporated. Ajax has a low-payout dividend policy, and this year will pay 4% cash dividend on its shares selling currently at $40. Pearl wants a high-dividend policy of 9% of the stock price. What will Pearl nee
> Joan currently owns 800 shares of RST Inc. RST has a high-dividend-payout policy and this year will pay $3.00 cash dividend on its shares selling currently at $30.00 per share. Joan wants a low-dividend-payout policy of 5% of the stock price. What will J
> Cereal City Instruments will issue commercial paper for a short-term cash inflow. The paper is for 182 days, has a face value of $50,000, and is anticipated to sell at 94% of par value. Cereal City wants to raise $5,000,000, so what is the cost of this b
> Big Apple Investment Bankers offers Northern Diagnostics the following options on its initial public sale of equity: (1) a best-efforts arrangement whereby Big Apple will keep 2 % of the retail sales or (2) a firm-commitment arrangement of $6,000,000.
> The Fire-Keepers Casino is in the process of issuing a 25-year, 9% coupon (paid semi-annually) AA2-rated corporate bond with $1000 par value. If by the time the bonds receive SEC clearance, the market yield on this bond goes to 9.35%, and the company sel
> You want to borrow $250,000 for 1 year from your bank and are given the following 2 options: 1) Pay $35,000 per month for 12 months starting at the end of the 1st month. 2) Take a discount loan at the rate of 8% per year and pay the entire face value of
> Risk R Us Investors has a success ratio of 15% with its venture funding. Their owners require a rate of return of 25% for their portfolio of lending, and the average length on each loan is 4 years. If you were to apply to Risk R Us for a $200,000 loan, w
> Based on the ratios calculated in problem 4 above, and in conjunction with the industry averages given, conduct a DuPont analysis on Trimark’s key profitability ratios.
> The CFO of DMI is trying to determine the company’s WACC. Brad, a promising MBA, says that the company should use book value to assign the components percentage for the WACC. Angela, a long-time employee and experienced financial analys
> Using the 2014 income statement and balance sheet of Trimark Products Inc., as constructed in problems 1 and 2 above, compute its financial ratios. How is the firm doing relative to its industry in the areas of liquidity, asset management, leverage, and
> Re-state Tri-Mark Incorporated’s 2014 financial statements as common-size statements and comment on them
> Quick Start Ventures, Incorporated is has received 6 excellent funding proposals, but is only able to fund up to $2,500,000 Project A: Cost $700,000, NPV $50,000 Project B: Cost $800,000, NPV $60,000 Project C: Cost $500,000, NPV $40,000 Project D: Cost
> New Ideas Inc. currently has 30,000 of its 9% semi-annual coupon bonds outstanding (Par value =1000). The bonds will mature in 15 years and are currently priced at $1,340 per bond. The firm also has an issue of 1 million preferred shares outstanding with
> T.J. Enterprises is trying to determine the weights to be used in estimating their cost of capital. The firm’s current balance sheet and market information regarding the price and number of securities outstanding are listed below.
> Construct Tri-Mark Incorporated’s 2014 year-end Balance Sheet using the asset, liability, and equity accounts listed below: Retained Earnings …………………… $60,500,000 Accounts Payable …………………… $57,000,000 Accounts Receivable …………………… $43,000,000 Common Stoc
> Using the income and expense account information for Tri-Mark Products Inc. listed below, construct an income statement for the year ended 31st December, 2014. Shares outstanding: 16,740,000 Tax rate: ………………………………………………………………………………… 35% Interest expense:
> Using the data from Problem 7, determine what you would lose if you went the wrong way for the arbitrage. Explain this result. Problem 7: Great Exchanges, Inc. is a currency exchange company located at most international airports. Today, a clerk has made
> Great Exchanges, Inc. is a currency exchange company located at most international airports. Today, a clerk has made a mistake on one of the currency exchanges and has posted the following rates: Which corresponding rates do not match? And if you had $1,
> Fill in the missing cross rates and direct rates in the table below: International Cross Rates $ Euro Pound Peso Yen CS Canada 1.3689 Japan 109.48 Mexico 11.3921 U.K. 0.5460 Euro 0.8222 U.S.
> Compare Trout Inc. with Salmon Enterprises using the balance sheet of Trout and the market data of Salmon for the weights in the weighted average cost of capital. Salmon Enterprises Bonds Outstanding 3,000 selling at $980 Common Stock Outstanding 260,000
> On the day you arrive in England, the exchange rate for U.S. dollars and British pounds is $1:£0.58. While you remain in England for the next two weeks, the exchange rate falls to $1:£0.54. When you entered England, you converted $4,200 to pounds. As you
> Verify your answer to Problem 18 using the foreign-currency approach.
> Verify your answer to Problem 17 using the foreign-currency approach. Data from Problem 17: Copy-Cat, Incorporated has signed a deal to make vintage Nissan 240-Z sports cars for the next three years. The cars will be built in Japan and shipped to the Un
> Farbucks is thinking of expanding to South Korea. The current indirect rate for dollars and South Korean won is 1025. The inflation rate in South Korea is expected to hover near 0.5% for the next five years. The U.S. inflation rate is expected to stay ar
> Surfboards USA wants to expand its operations to Australia. The current indirect exchange rate is 1.45 for U.S. and Australian dollars. The anticipated inflation rate is 3% in the United States, but only 1.5% in Australia. The discount rate in the United
> Just before Copy-Cat, Incorporated starts the project outlined in Problem 15, the government announces new anticipated inflation numbers. For Japan, the estimate is a higher inflation rate of 5%. For the United States, the estimate is a lower projection
> Copy-Cat, Incorporated has signed a deal to make vintage Nissan 240-Z sports cars for the next three years. The cars will be built in Japan and shipped to the United States for sale. The current indirect rate is 103.50 for dollars and yen. The inflation
> Using the information in Table 18.4 and an average U.S. inflation rate of 1.733% for the three-year period, determine the inflation rates of Europe (euro currency countries) and Australia where the U.S. dollar strengthened over the period. Table 18.
> Using the information in Table 18.4 and an average U.S. inflation rate of 1.733% for the three year period, determine the inflation rates of Britain and China where the U.S. dollar weakened over the period. Table 18.4 U.S. Dollar Exchange Rates for M
> Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 1.25%. Canada: inflation is 4.5%. Switzerland: inflation is 1.25%. United States: inflation is 3%.
> Stan had to delay the sale of the common stock as outlined in Problem 9 for six months. When he finally did sell the stock, the risk-free rate had fallen to 3%, but the expected return on the market had risen to 13%. What was the effect on the cost of eq
> 1. Compute the yield to maturity and the after-tax cost of debt for the two bond issues. 2. Compute BioCom’s cost of preferred stock. 3. Compute BioCom’s cost of common equity. Use the average of results from the dividend growth model and the security ma
> Why is selecting a beta for a project more of an art than a science?
> What are the types of errors a manager can make if he or she does not assign individual WACCs to each potential project?
> Why not use a single WACC for all company projects?
> What are the two ways to estimate the percentage (weights) of funds that a company has received from lenders and owners? Which is more appropriate?
> When calculating the cost of capital, why is it that the company only adjusts the cost of debt for taxes?
> Should retained earnings reinvested in the company have a zero cost of capital because it generates the funds internally and the company does not need to pay itself for borrowing money? If not, why?
> What are the two different ways to estimate the cost of equity for a firm?
