Question: What is the advantage of financial leverage,

> Roxy Broadcasting has an annual EBIT of $3,500,000 and a WACC of 14%. The current tax rate is 40%. Roxy will have the same EBIT forever. The company currently has debt of $6,250,000 with a cost of debt of 14%. Roxy will sell $12,500,000 more of debt and

> Rachel can raise capital from the following sources: What is Rachel’s weighted average cost of capital if she needs to raise a. $10,000? b. $20,000? c. $30,000? Source of Funds Interest Rate Borrowing Limit Parents 0% $10,000 Friend

> What is the breakeven probability of success at the 15% borrowing rate in Problem 3? What is the breakeven probability of success if the loan rate is 20%?

> Wilson Motors is looking at expanding its operations by adding a second manufacturing location. If successful, the company will make $450,000. If it fails, the company will lose $250,000. Wilson Motors is trying to decide if it should borrow the $250,000

> Find the effective annual rate of the following credit terms: a. 2% discount if paid within ten days or net within thirty days b. 1% discount if paid within thirty days or net within sixty days c. 0.5% discount if paid within fifteen days or net within

> For the prior three years, sales for National Beverage Company have been $21,962,000 (2011), $23,104,000 (2012), and $24,088,000 (2013). The company uses the prior two year’s average growth rate to predict the coming year’s sales. What were the sales gro

> Keith Peterson is the CFO of Springfield Soups and Sauces. The company’s typical success rate for new products is 88%. Keith wants to improve this success rate to 94%. What loan improvement (in terms of rates) would do that for Springfield Soups and Sauc

> Roxy Broadcasting, Incorporated is currently a low leveraged firm with a debt-to-equity ratio of 1/ 3. The company wants to increase its leverage to 3/1 for debt-to-equity. If the current return on assets is 14% and the cost of debt is 11%, what is the c

> Air Seattle is looking at changing its capital structure from an all-equity firm to a leveraged firm with 50% debt and 50% equity. Air Seattle is a not-for-profit company and therefore pays no taxes. If the required rate on the assets of Air Seattle is 2

> Chandler has been hired by Cooking for Friends to raise capital for the company. Chandler increases the funding available from the bank to $900,000, but with a new rate of 8.75%. Using the data in Problem 9, determine what the new weighted average cost o

> Up-Front Bank uses discount loans for all its customers who want one-year loans. Currently, the bank is providing one-year discount loans at 8%. What is the effective annual rate on these loans? If you were required to repay $250,000 at the end of the lo

> Kyle hires Wilson Investment Bankers to sell the preferred stock from Problem 7. Wilson charges a fee of 3% on the sale of preferred stock. What is the cost of preferred stock for Kyle using the investment banker?

> Kyle is raising funds for his company by selling preferred stock. The preferred stock has a par value of $100 and a dividend rate of 6%. The stock is selling for $80 in the market. What is the cost of preferred stock for Kyle?

> Up-Front Bank is now offering a two-year discount loan for 10%. Working backwards, what are the available funds at the start of the loan and the implied balance at the end of the first year if the total lump sum repayment at the end of the second year is

> For the coming year, Rian Company wants to reduce its average production cycle to thirty days. If the target-ending inventory for 2015 is $61,000, what cost of goods sold will the company need to reach its goal? 2014 Selected Income Statement Items

> Nelson Heating and Ventilating Company estimates the coming year’s sales revenue based on external data. The company’s main business is new shopping mall construction, and uses the square footage of each mall as a “yardstick” for many financial statement

> Hollydale’s will issue an additional 5,000 bonds with the help of an investment banker. The bonds will be semiannual bonds with thirty years to maturity. The coupon rate will be 8% and the par value $1,000. These bonds will be sold at $851.86 in the mark

> 1. Complete the following table of cash collections for the months of July, August, and September. Use Table 12.1 as a model. 2. Complete the following table of cash outflows for the months of July, August, and September. 3. Complete the following monthl

> Raspberry Phones uses external data to forecast the coming year’s sales. Raspberry Phones have 8% of all new phone sales in the United States and 6% of all replacement phones. Industry forecasts predict an additional 18 million new phone buyers and repla

> Red Devil Investors has a success rate of one project for every four funded. Red Devil has an average loan period of two years and requires a portfolio return of 25%. If you borrow from Red Devil, what is your annual cost of capital?

> Atlantis Manufacturing, Inc. issues the following press release: “Atlantis Manufacturing will pay a quarterly dividend of $0.50 per share to record holders as of the 10th of this month on the 20th of this month.” This announcement was made on July 3, 201

> California Cement Co. produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 20% of the anticipated month’s sale. Beginning inventory in September 2014 was 33,9

> National Beverage Company produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 10% of the anticipated month’s sale. Beginning inventory in October 2014 was 2

> In Problem 4, Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds. The investment banker charges a fee of 2% on each bond sold. What is the cost of debt to DMI if the proceeds below are before the banker's fees are deducted?

> Kenny Enterprises will issue the same debt in Problem 3 but now will use an investment banker that charges $25 per bond for their services. What is the new cost of debt for Kenny Enterprises at a market price of a. $920? b. $1,000? c. $1,080? d. $1,173?

> Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of 12% on semiannual payments. The bond's par value is $100, and the bond will mature in thirty y

> Kenny Enterprises has just issued a bond with a par value of $1000, twenty years to maturity, and an 8% coupon rate with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following prices? What do you notice abo

> Grey’s Pharmaceuticals has a new project that will require funding of $4 million. The company has decided to pursue an all-debt scenario. Grey’s has made an agreement with four lenders for the needed financing. These l

> Hollydale’s is a clothing store in East Park. It paid an annual dividend of $2.50 last year to its shareholders and plans to increase the dividend annually at 2%. It has 500,000 shares outstanding. The shares currently sell for $21.25 per share. Hollydal

> Eric has another get-rich-quick idea but needs funding to support it. He chooses an all-debt funding scenario. Eric will borrow $2,000 from Wendy, who will charge Eric 6% on the loan. He will also borrow $1,500 from Bebe, who will charge 8% on the loan a

> Explain how translating a foreign balance sheet for inclusion in a multinational’s domestic balance sheet can violate the accounting identity.

> How can a changing exchange rate impact a company’s profits on one of its foreign operations?

> What is a cross rate? How can you find the cross rate of two foreign currencies if you only know the direct and indirect rates of those two foreign currencies with respect to your home currency?

> Explain how purchasing power parity determines the exchange rate between two currencies.

> What does it mean to nationalize a business? How can a domestic company minimize the risk of nationalization of its foreign operations?

> 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?

> 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

> 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

> 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.