Question: The Carthage Sceptre Corporation is evaluating a

> 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 $

> Panhandle Industries Inc. currently pays an annual common stock dividend of $2.20 per share. The company’s dividend has grown steadily over the past 9 years from $1.10 to its present level; this growth trend is expected to continue. The company’s present

> Against what types of risks should a wealth-maximizing firm try to purchase insurance? What types of risks should be self-insured?

> Pacific Intermountain Utilities Company has a present capital structure (which the company feels is optimal) of 50 percent long-term debt, 10 percent preferred stock, and 40 percent common equity. For the coming year, the company has determined that its

> The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds h

> Wentworth Industries is 100 percent equity financed. Its current beta is 0.9. The expected market rate of return is 14 percent and the risk-free rate is 8 percent. a. Calculate Wentworth’s cost of equity. b. If Wentworth changes its capital structure

> The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley’s beta is 0.9. The expected market return is 16 percent, and the risk-fre

> The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, D0, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next 2 years. This annual dividend growth rate is expec

> St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share. After issuance costs, St. Joe netted $57 per share. The company has a marginal tax rate of 40 percent. a. Calculate the after-tax cost of this

> Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines Inc., which is planning to sell $10 million of $6.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $2 a share. The compa

> Husky Enterprises recently sold an issue of 10-year maturity bonds. The bonds were sold at a deep discount price of $615 each. After flotation costs, Husky received $604.50 each. The bonds have a $1,000 maturity value and pay $50 interest at the end of e

> Calculate the after-tax cost of a $25 million debt issue that Pullman Manufacturing Corporation (40% marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 9.375 percent to the insurance company.

> The Marietta Corporation, a large manufacturer of mufflers, tailpipes, and shock absorbers, is currently carrying out its financial planning for next year. In about two weeks, at the next meeting of the firm’s board of directors, Frank

> What role does diversification play in risk-management strategies?

> What is the difference between an operational restructuring and a financial restructuring?

> ZeeBancorp is considering the establishment of a contract collection service subsidiary that would provide collection services to small and medium-size firms. Compensation would be in the form of a percentage of the amount collected. For amounts collecte

> Boris’ Bucket Works, Inc. (BBW) is the maker of new “easy spill” buckets. These buckets have quickly gained market share and now control 90 percent of the spillable bucket market. BBW is looking to do a product line expansion into the “spill-free” bucket

> Jeff Himm has recently been hired as a financial analyst for the Bunich Corporation. Bunich has traditionally used the payback method in conjunction with NPV as a way to assess the risk of capital investments that the firm makes. Jeff is a new MBA gradua

> Worrall’s Wahoo Novelties is considering a new venture that would produce golden Wahoo commemorative coins. Worrall has estimated that the net investment required will be $15,000, including a $2,000 investment in net working capital. The project is expec

> The Super Muench Cookie Company is considering a diversification effort that would move it into small retail outlets at major malls around the country. Currently, Super Muench has a capital structure consisting of 30 percent debt and 70 percent equity. S

> The management of Greensboro Products has been evaluating the risk of the cash flows associated with a proposed new project. The expected net cash flow for year 1 is $50,000. The most optimistic estimate (not expected to be exceeded more than 10% of the

> Albright Properties Inc. (API) has three divisions: The leveraged beta for API is 1.2. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division’s capital structure

> You have estimated the expected NPV from a project to be $3 million with a standard deviation of $4 million. The distribution of the possible NPVs is approximately normal. If you are willing to accept a 25 percent chance of incurring a negative NPV on th

> An investment your firm is considering will cost you $5 million today. You expect to receive $7 million one year from now from the sale of the investment. You also expect to receive $500,000 in income from the investment at the end of one year. The expec

> How can the acquisition of additional information be an effective tool of risk management? Give an original example of the use of this technique.

> The 3Z Company has estimated that a major project has an expected internal rate of return (IRR) of 18 percent. The most optimistic estimate of the project’s IRR is 24 percent, and the most pessimistic estimate is 12 percent. The company expects that its

> Essex Chemical Company is considering an expansion into a new product line that is more risky than its existing product mix. The new product line requires an investment, NINV, of $10 million and is expected to generate annual net cash inflows of $2.0 mil

> U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.4. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate

> The managers of U.S. Rubber have analyzed a proposed investment project. The expected net present value (NPV) of the project, evaluated at the firm’s weighted cost of capital of 18 percent, has been estimated to be $100,000. The company’s managers have d

> A new project is expected to have an 8-year economic life. The project will have an initial cost of $100,000. Installation and shipping charges for the equipment are estimated at $10,000. The equipment will be depreciated as a 7-year asset under MACRS ru

> Project Alpha offers the following net cash flows following an initial (year 0), certain outlay (NINV) of $70,000: a. Compute the NPV of this project at a 12 percent cost of capital. b. If the risk-free rate is 4 percent, what is the certainty equival

> The Buffalo Snow Shoe Company is considering manufacturing radial snow shoes, which are more durable and offer better traction. Buffalo estimates that the investment in manufacturing equipment will cost $250,000 and will have a 10-year economic life. Buf

> A simulation model similar to the one described in this chapter has been constructed by the Great Basin Corporation to evaluate the largest of its new investment proposals. After many iterations of the model, Great Basin’s management has arrived at an ex

> The Seminole Production Company is analyzing the investment in a new line of business machines. The initial outlay required is $35 million. The net cash flows expected from the investment are as follows: Year……………Net Cash Flow (Million) 1………….……………………………

> Apple Jacks Inc. produces wine. The firm is considering expanding into the snack food business. This expansion will require an initial investment in new equipment of $200,000. The equipment will be depreciated on a straight-line basis over a 10-year peri

> What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why?

> Fox Enterprises is considering expanding into the growing laser copier business. Fox estimates that this expansion will cost $1.8 million and will generate a 20-year stream of expected net cash flows amounting to $400,000 per year. The company’s weighted

> Valley Products, Inc. is considering two independent investments having the following cash flow streams: Valley uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. It requires that all proje

> Advanced Systems Company is financed one-third with debt and two-thirds with equity. Its market beta has been estimated to be 1.5. The current risk-free rate is 4 percent, and the expected market return is 11 percent. Advanced Systems’ tax rate is 40 per

> Gamma Biosciences is financed entirely with equity. Its beta is 1.5, and its price earnings ratio is 16. The current risk-free rate is 8 percent, and the expected return on the market is 14 percent. a. What rate of return should the company require on p

> American Steel Corporation is considering two investments. One is the purchase of a new continuous caster costing $100 million. The expected net present value of this project is $20 million. The other alternative is the purchase of a supermarket chain, a

> Two projects have the following expected net present values and standard deviations of net present values: a. Using the standard deviation criterion, which project is riskier? b. Using the coefficient of variation criterion, which project is riskier?

> A proposed factory expansion project has an expected net present value of $100,000 with a standard deviation of $50,000. What is the probability that the project will have a negative net present value, assuming that net present value is normally distribu

> A new project has expected annual net cash flows of $400,000 with a standard deviation of $250,000. The distribution of annual net cash flows is approximately normal. a. What is the probability of the project having negative annual net cash flows? b.

> Mitchell Auto Parts Inc. has estimated the probability distribution of its annual net cash flows as follows: Probability………………….Cash Flow (in Thousands of Dollars) 0.10……………….…………….$1,000 0.20……………….……………..1,500 0.40……………………………..2,000 0.20…………….…………

> First Republic Bancorp is considering the acquisition of a new data processing and management information system. The system, including computer hardware and software, will cost $1 million. Delivery and installation of the system is expected to add $100,

> The Swiss franc (CHF) is currently trading in the spot market at $0.5800/CHF. The 180-day forward rate is $0.5743/CHF. The U.S. Treasury bill rate for 180 days is 3.1 percent in the United States. What do you expect is the 180-day Swiss government securi

> Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will generate first-year revenues of $2 million. These revenues are expected

> Hurley’s Winery is planning to acquire a new grape masher. The masher will cost $100,000 including shipping and installation and will be depreciated as a seven-year MACRS asset. At the time the masher is purchased, Hurley will have to invest $5,000 in ne

> Steber Packaging Inc. expects sales next year of $50 million. Of this total, 40 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $25 million. Accelerated depreciation is ex

> Clyne Industries wants to market its new Slammin Jammin Basketball Goal Set. To bring this product to the market will require the purchase of equipment costing $650,000. Shipping and installation expenses associated with the equipment are estimated to be

> Locus Quintatus, Inc., a highly profitable maker of customized chariots, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of $900,000. Freight and installation costs for this equipment will be $100,000.

> Bratton Stone Works is considering an expansion proposal that will require an outlay of $1 million for land and $5 million for equipment. The equipment will be depreciated under MACRS rules as a seven-year class asset. The salvage value of the equipment

> Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1 million. It is classified as a seven-year MACRS asset and will be depreciated as such. Inter

> Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $100,000. A new building will cost $100,000 and will be depreciated on a straight-line basis over 20 years to a s

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated as a seven-year class MACRS asset. The firm’s marginal tax rate is 40 percent. What a

> The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model that forecasts future spot exchange rates. Finley Inco

> Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated over a five-year period on a straight-line basis t

> Two years ago Agro Inc., purchased an ACE generator that cost $250,000. Agro had to pay an additional $50,000 for delivery and installation, and the investment in the generator required the firm to increase its net working capital position by $25,000. Th

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> Five years ago, the Mori Foods Company acquired a bean processing machine. The machine cost $30,000 and is being depreciated using the straight-line method over a 10-year period to an estimated salvage value of $0. A new, improved processor is now availa

> A firm has an opportunity to invest in a new device that will replace two of the firm’s older machines. The new device costs $570,000 and requires an additional outlay of $30,000 to cover installation and shipping. The new device will cause the firm to i

> The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15

> The Jacob Chemical Company is considering building a new potassium sulfate plant. The following cash outlays are required to complete the plant: Year………….Cash Outlay 0…….……….$4,000,000 1……………….2,000,000 2………………….500,000 Jacob’s cost of capital is 12 pe

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 12-year period to an estimated salvage value of $0. Th

> Johnson Products is considering purchasing a new milling machine that costs $100,000. The machine’s installation and shipping costs will total $2,500. If accepted, the milling machine project will require an initial net working capital investment of $20,

> The Cooper Electronics Company has developed the following schedule of potential investment projects that may be undertaken during the next 6 months: a. If Cooper requires a minimum rate of return of 10 percent on all investments, which projects should

> On January 1, the cost of borrowing Hong Kong dollars (HKD) for 1 year was 18 percent. During the year the U.S. inflation rate was 2 percent and the Hong Kong inflation rate was 9 percent. The exchange rate on January 1 was HKD7/$. On December 31, the ex

> Calculate the annual straight-line depreciation for a machine that costs $50,000 and has installation and shipping costs that total $1,000. The machine will be depreciated over a period of 10 years. The company’s marginal tax rate is 40 percent.

> The MacCauley Company has sales of $200 million and total expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company’s assets is $15 million, and the maximum accelerated depreciation allowed by law is $25 million. Assume