Question: Tucker Manufacturing Company has a beta estimated

> 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

> 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

> 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 Carthage Sceptre Corporation is evaluating a possible investment in a new regional distribution warehouse. A careful evaluation of the anticipated net cash flows and net investment expected from the project indicates that the expected net present val

> 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