The pecking order theory suggests that managers prefer to first use internally generated equity to finance new projects. Does this preference mean that these funds represent an even cheaper source of funds than debt? Justify your answer?
> You are considering buying a three-month put option on Wing and a Prayer Construction stock. The company’s stock currently trades for $10 per share and its price will either rise to $15 or fall to $7 in three months. The risk-free rate for three months i
> Assume that the stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month call option with a strike price of $25?
> The stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month call option with a strike price of $40?
> Explain how the payoff functions differ for the owner (buyer) and the seller:(1) of a call option; (2) of a put option?
> A convertible bond is a bond that can be exchanged for stock at the discretion of the bondholder. How would you go about finding the value of such a bond? Would the bond be worth more or less than an equivalent nonconvertible bond?
> Suppose that you own a call option and a put option on the same stock and that these options have the same exercise price. Explain how the relative values of these two options will change as the stock price increases or decreases?
> How are options related to the agency costs of debt and equity?
> What is a seasoned offering, and why are seasoned securities valued more highly than securities sold in an IPO?
> List and describe four different types of real options that are associated with investment projects?
> What is the value at expiration of a call option with a strike price of $65 if the stock price is $1? $50? $65? $100? $1,000?
> Goodwin Corp. has revenues of $12,112,659, costs of $9,080,545, interest payments of $412,375, and a tax rate of 34 percent. It paid dividends of $1,025,000 to its stockholders. What are the firm’s dividend payout ratio and retention ratio?
> Define the retention (plowback) ratio and the dividend payout ratio?
> Identify the steps in the financial planning process?
> Munson Communications Company has just reported earnings for the year ended June 30, 2017. Below are the firm’s income statement and balance sheet. The company had a 55 percent dividend payout ratio for the last 10 years and management
> Use the information for Morgan Construction Company from Problems 19.35 and 19.36. Assume that equity accounts do not vary directly with sales, but change when retained earnings change or new equity is issued. The company’s long-term debt-to-equity ratio
> Using the information for Morgan Construction Company in the preceding problem, calculate the firm’s internal growth rate and sustainable growth rate?
> Use the financial information for Morgan Construction Company from Problem 19.35. Assume now that equity accounts do not vary directly with sales but change when retained earnings change or new equity is issued. The company pays 75 percent of its income
> The financial statements for the year ended June 30, 2017, are given below for Morgan Construction Company. The firm’s sales are projected to grow at a rate of 25 percent next year, and all financial statement accounts will vary directl
> Explain the venture capital funding cycle?
> Rockville Consulting Group expects to add $271,898 to retained earnings this year. The company has total assets of $3,425,693 and wishes to add no new external funds for the coming year. If assets and costs vary directly with sales, how much sales growth
> Given the data for Capstone Marketing Group in Problem 19.32, what would Capstone’s payout ratio have to be for the firm’s EFN to be zero? Refer to the given data for Capstone Marketing Group in Problem 19.32 Capstone Marketing Group has total assets of
> Capstone Marketing Group has total assets of $5,568,000, sales of $3,008,725, and net income of $822,000. The company expects its sales to grow by 12 percent next year. All assets and costs (including taxes) vary directly with sales, and the firm expect
> Norton Group, Inc., expects to add $1,213,777 to retained earnings and currently has total assets of $23,159,852. If the company has the ability to borrow up to $1 million, how much growth can the firm support if it is willing to borrow to its maximum ca
> Ritchie Marble Company has total assets of $12,899,450, sales of $18,174,652, and net income of $4,589,774. Management expects sales to grow by 25 percent next year. All assets and costs (including taxes) vary directly with sales, and management expects
> What are the elements of a financing plan?
> Maryland Micro Brewers generated revenues of $12,125,800 with a 72 percent capital intensity ratio during the year ended September 30, 2017. Its net income was $873,058. With the introduction of a half dozen new specialty beers, management expects to gro
> Ellicott Textile Mills management has reported the following financial information for the year ended September 30, 2017. The company generated a net income of $915, 366 on a net profit margin of 6.4 percent. It has a dividend payout ratio of 50 percent,
> Rocky Sales, Inc., has current sales of $1,215,326 and net income of $211,253. It also has a debt ratio of 25 percent and a dividend payout ratio of 75 percent. The company’s total assets are $712,455. What is its sustainable growth rate?
> Refer to the information for Rowan Company in Problem 19.23. The firm’s management desires a sustainable growth rate (SGR) of 10 percent but does not wish to change the company’s level of debt or its payout ratio. What will the firm’s new profit margin h
> How do venture capitalists reduce the risk of their investments?
> Rowan Company has a net profit margin of 8.3 percent, debt ratio of 45 percent, total assets of $4,157,550, and sales of $6,852,654. If the company has a dividend payout ratio of 67 percent, what is its sustainable growth rate?
> Use the following pro forma information for Tomey Supply Company for next year: net income = $508,275; addition to retained earnings = $340,544; common equity = $848,171; net sales = $2,121,745. Assume that management does not want the ratio of long-term
> Tomey Supply Company’s financial statements for the most recent fiscal year are shown below. The company management projects that sales will increase by 20 percent next year. Assume that all costs and assets increase directly with sales
> Refer to Problem 19.7. Northwood expects to increase its sales by 15 percent next year. All costs vary directly with sales. If Northwood wants to retain $65,000 of earnings next year, will it have to change its dividend payout ratio? If so, what will be
> Swan Supply Company has net income of $1,212,335, assets of $12,522,788 and retains 70 percent of its income every year. What is the company’s internal growth rate?
> For McDonald Metal Works in Problem 19.13, how much must net sales grow if the capital intensity ratio has to drop to 60 percent? State your answer as both a percent of sales and a dollar sales increase.
> Given the data for Cattail Corporation in Problem 19.9, if you assume that all balance sheet items also vary with the change in sales, develop a pro forma balance sheet for Cattail for the next fiscal year. Assuming that the firm did not sell or repurcha
> Legitron Corporation has $350 million of debt outstanding at an interest rate of 9 percent. What is the dollar value of the tax shield on that debt, just for this year, if Legitron is subject to a 35 percent marginal tax rate?
> Swan Specialty Cycles is currently financed with 50 percent debt and 50 percent equity. The firm pays $125 each year to its debt investors (at a 10 percent cost of debt), and the debt has no maturity date. What will be the value of the equity if the firm
> A firm that is financed completely with equity currently has a cost of capital equal to 15 percent. If Modigliani and Miller’s Proposition 1 holds and the firm’s management is thinking about changing its capital structure to 50 percent debt and 50 percen
> Who are venture capitalists, and what do they do?
> You own all of the equity in a debt-free App development business that generates cash flows of $400,000 each year in perpetuity. The cost of assets, kAssets is 10 percent and the tax rate is 25 percent. What is the value of your all-equity firm? If yo
> Forwards Resources Company is currently an all-equity firm with a WACC of 14% and a 40 percent marginal tax rate. Forwards wants to move to a capital structure with $250 million of debt outstanding at an interest rate of 9 percent and a market value of e
> PolyAna Corporation has an abundant cash flow. It is so high that the managers take Fridays off for a weekly luncheon in Cancun using the corporate jet. Describe how altering the capital structure of the firm might make the management of this firm stay i
> If we drop the assumption that there are no information or transaction costs, in addition to dropping the no-tax assumption, then will the Modigliani and Miller model still suggest that the firm should take on greater proportions of debt in its capital s
> The Boring Corporation is currently valued at $900 million, but management wants to completely pay off its perpetual debt of $300 million. Boring is subject to a 30 percent marginal tax rate. If Boring pays off its debt, what will be the total value of i
> Finite Corp. has $250 million of debt outstanding at an interest rate of 11 percent. What is the present value of the debt tax shield if the debt will mature in five years (and no new debt will replace the old debt), assuming that Finite is subject to a
> Operating a firm without debt is generally considered to be a conservative practice. Discuss how such a conservative approach to a firm’s capital structure is good or bad for the value of the firm in the absence of information or transaction costs and an
> Discuss how the legal costs of financial distress may increase with the probability that a firm will formally declare bankruptcy, even if the firm has not reached that point yet?
> Describe the order of financial sources for managers who subscribe to the pecking order theory of financing. Evaluate that order by observing the costs of each source relative to the costs of other sources?
> Explain bootstrapping, and list the most common sources of seed money?
> What is M&M Proposition 1? M&M Proposition 2?
> Problem 16.22 introduces taxes and information and transaction costs to the simplified Modigliani and Miller model. If the marginal tax rate for the firm were to suddenly increase by a material amount, would the capital structure that maximizes the firm’
> Use the information in the following table to make a suggestion concerning the proportion of debt that the firm should utilize in its capital structure? Benefit or (Cost) No Debt 25% Debt 50% Debt 75% Debt Tax shield $10 $20 $30 Agency cost Financial
> Deficit Corp. management has determined that they will be $50 million short of being able to pay the firm’s debt obligations at the end of this year. Management has identified a positive NPV project that will require a great deal of effort on their part.
> Santa’s Shoes is a retailer that has just begun having financial difficulty. Santa’s suppliers are aware of the increased possibility of bankruptcy. What might Santa’s suppliers do based on this information?
> Describe what exactly is meant when someone is describing the value of the firm versus the value of the equity of the firm?
> Briefly discuss costs of financial distress to a firm that may arise when employees believe it is highly likely that the firm will declare bankruptcy?
> Backwards Resources Company has a WACC of 12.6 percent, and it is subject to a 40 percent marginal tax rate. Backwards has $250 million of debt outstanding at an interest rate of 9 percent and $750 million of equity (at market value) outstanding. What is
> What is the effect on Modigliani and Miller’s Proposition 1 of relaxing the assumption that there are no information or transaction costs?
> Keyboard Chiropractic Clinics produces $300,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to repurchase $600,000 of its equity by borrowing a similar amount at
> List and describe three practical considerations that concern managers when they make capital structure decisions?
> Give some examples of sources of short-term financing?
> The Modigliani and Miller theory suggests that the value of the firm’s assets is equal to the value of the claims on those assets and is not dependent on how the asset claims are divided. The common analogy to the theorem is that the total amount of pie
> Myriad Biotech management plans a $114 million IPO in which the offering price to the public will be $51 per share. The company will receive $47.50 per share. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs will total $525,000
> Trajax, Inc., a high-technology firm in Portland, raised a total of $90 million in an IPO. The company received $27 of the $30 per share offering price. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs were $450,000. The firm’s
> The 20-year Treasury rate is 4.67 percent, and a firm’s credit rating is BB. Suppose management of the firm decides to raise $20 million by selling 20-year bonds. Management determines that since it has plenty of experience, it will not need to hire an i
> Suppose that a biotech firm in Pittsburgh raised $120 million in an IPO. The firm received $23 per share, and the stock sold to the public for $25 per share. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs were $270,000. The f
> Deere and Bros. is a broker that brings new issues of small firms to the public market. Its most recent deal for Dextra, Inc., had the following characteristics: Number of shares: ………………………… 1,000,000 Price to public: .………………………… $15 per share Proceeds t
> Which of the companies reduced the average time it took to collect on accounts receivable from 2016 to 2017? a. Company A. b. Company B. c. Company C. d. Company D.
> You work for a venture capital firm and are approached to finance a new high-tech start-up. While you believe in the business idea, you also believe it is very risky. What strategies can help to mitigate the risk of the investment to your firm? Explain h
> Nalco Holding is an international company that operates in 130 countries, has a market capitalization (market value of equity) of $2.3 billion, and reported net income of $45 million on $3.3 billion in revenues last year. The company needs to raise $200
> Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on Day 10 is closest to a. 14.6percent. b. 14.9percent. c. 15.0percent. d. 20.2perc
> List and briefly describe the three main strategies a firm may use to finance its working capital and fixed assets.
> Explain how term to maturity affects the price of a bank loan?
> Tanzaniqe, Inc., sells $200,000 of its accounts receivable to factors at a 5 percent discount. The firm’s average collection period is 90 days. a. What is the dollar cost of the factoring service? b. What is the simple annual interest cost of the loan?
> Jackson Electrical, one of the largest generator dealers in Phoenix, sells about 2,000 generators a year. The cost of placing an order with its supplier is $750, and the inventory carrying costs are $170 for each generator. Jackson likes to maintain safe
> Morgan Sports Company just reported the following financial information. a. Calculate the firm’s days’ sales outstanding. b. What is the firm’s days’ sales in inventory? c. What is
> What impact would the following actions have on the operating and cash conversion cycles? Would the cycles increase, decrease, or remain unchanged? a. Less raw material than usual is purchased. b. The company encounters unseasonable demand, and inventory
> What impact would the following actions have on the operating and cash conversion cycles? Would the cycles increase, decrease, or remain unchanged? a. More raw material than usual is purchased. b. The company enters into an off season, and finished goods
> Explain the difference between a competitive and negotiated cash sale. Which method of sale is likely to yield the lowest funding cost for firms selling plain vanilla bonds in stable markets?
> Zenex, Inc., sells $250,000 of its accounts receivable to factors at a 3 percent discount. The firm’s average collection period is 90 days. What is the dollar cost of the factoring service? What is the simple annual interest cost of the factors loan?
> Keswick Fencing Company collects 45 percent of its receivables in 10 days or fewer, 34 percent in 11 to 30 days, 12 percent in 31 to 45 days, 5 percent in 46 to 60 days, and 4 percent in more than 60 days. The company has $937,000 in accounts receivable.
> A partial aging of accounts receivable for Lincoln Cleaning Services is given in the accompanying table. What percent of receivables are in the 45-day range? Determine the firm’s effective days’ sales outstanding. How
> Explain how lockboxes are used?
> Ginseng Company collects 50 percent of its receivables in 10 days or fewer, 31 percent in 11 to 30 days, 7 percent in 31 to 45 days, 7 percent in 46 to 60 days, and 5 percent in more than 60 days. The company has $1,213,000 in accounts receivable. Prepar
> Hazel Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.1 days. Hazel Corp.’s remittances average $37,000 a day, and the average check is $125. The bank charges $0.37 per processed check. Assume that the
> Jennifer Electrical is evaluating whether a lockbox it is currently using is worth keeping. Management estimates that the lockbox reduces the mail float by 1.8 days and the processing by half a day. The remittances average $50,000 a day for Jennifer Elec
> Lansdowne Electronics has a formal line of credit of $1 million for up to three years with HND Bank. The interest rate on the loan is 5.3 percent, and under the agreement, Lansdowne has to pay an annual fee of 50 basis points on the unused amount. Suppos
> Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community Commercial Bank. The line of credit is good for up to five years. The bank will charge Gruppa an interest rate of 6.25 percent on any amount borrowed, and the firm
> The Colonial Window Treatments Company is borrowing $1.5 million. The loan requires a 10 percent compensating balance, and the effective interest rate on the loan is 9.75 percent. What is the stated APR on this loan?
> The Clarkson Designer Company Management wants to borrow $750,000.The bank will provide the loan at an APR of 6.875 percent. Since the loan calls for a compensating balance, the effective interest rate is actually 9.25 percent. What is the compensating b
> Longhorn Traders is one of the largest RV dealers in Austin, Texas, and sells about 2,800 recreational vehicles a year. The cost of placing an order with Longhorn’s supplier is $800, and the inventory carrying costs are $150 for each RV. Management likes
> Suppose a biotech company in Boston, Massachusetts, completes an $85 million IPO priced to the public at $75 per share. The firm receives $72 per share, and the out-of-pocket expenses are $340,000. The stock’s closing price at the end of the first day is
> Given the data for Telecraft Enterprises in problem 14.21, re-estimate the firm’s operating cycle if days’ sales outstanding decreased to 75 days. For the same level of net sales, what is the implied dollar value of receivables with 75 days’ sales outsta
> Why can cash investment in inventory be costly?
> Telecraft Enterprises carries 45 days of inventory in its stores. Last year Telecraft reported net sales of $1,400,000 and the company had receivables of $325,000 at the end of the year. What is the operating cycle at Telecraft?
> Premier Corp. has net sales of $812,344, and cost of goods sold equal to 70 percent of net sales. Assume all sales are credit sales. If the firm’s accounts receivable total $113,902 and its operating cycle is 81.6 days, how much inventory does the firm h
> Aviva Technology’s operating cycle is 81 days. Its inventory was $134,000 at the end of last year, and the company had cost of goods sold of $1.1 million. How long does it take Aviva to collect its receivables on average?
> Joanna Handicrafts, Inc., has net sales of $4.23 million with 50 percent being credit sales. Its cost of goods sold is $2.54 million. The firm’s cash conversion cycle is 47.9 days and its operating cycle is 86.3 days. What is the firm’s accounts payable?
