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Corporate Finance
Effective Cost of Short-Term Credit Yonge Corporation must arrange financing for its working capital requirements for the coming year. Yonge can(a) Borrow from its bank on a simple interest basis
Monitoring of Receivables The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on January 1. Its credit sales for the first 6 months of operations were a
Short-Term Financing Analysis Malone Feed and Supply Company buys on terms of 1/10, net 30, but it has not been taking discounts and has actually been paying in 60 rather than 30 days. Assume that
Alternatis’c Financing Arrangement Suncoast Boats Inc. estimates that because of the seasonal nature of its business, it will require an additional $2 million of cash for the mouth of July.
Discuss, in general, what it means for the brothers to set a credit and collections policy.Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with
Assume that, on average, the brothers expect annual sales of 10,000 items at an average price of $100 per item. (Use a 365-day year.)(1) What is the firm's expected days sales outstanding (DSO)?(2)
What are some factors that influence(1) A firms receivables level and(2) The dollar cost of carrying receivables?Rich Jackson, a recent finance graduate, is planning to go into the
Assuming the monthly sales forecasts given previously are accurate and that customers pay exactly as was predicted, what would the receivables level be at the end of each month? To reduce
What is the firm's forecasted average daily sales for the first 3 months? For the entire half-year? The days sales outstanding is commonly used to measure receivables performance. What DSO is
Construct aging schedules for the end of March and the end of June (use the format given below), Do these schedules properly measure customers' payment patterns? If not, why not?Rich Jackson, a
Construct the uncollected balances schedules for the end of March and the end of June. Use the format given below. Do these schedules properly measure customers payment patterns?Rich
Assume it is now July of Year 1 and the brothers are developing pro forma financial statements for the following year, Further, assume that sales and collections in the first half-year matched the
Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to
Under the current credit policy, what is the firms days sales outstanding (DSO)? What would the expected DSO be if the credit policy change were made?Rich Jackson, a recent finance
What is the dollar amount of the firms current bad debt losses? What losses would be expected under the new policy?Rich Jackson, a recent finance graduate, is planning to go into the
What would be the firms expected dollar cost of granting discounts under the new policy?Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply
What is the firms current dollar cost of carrying receivables? What would it be after the proposed change?Rich Jackson, a recent finance graduate, is planning to go into the wholesale
What is the incremental after-tax profit associated with the change in credit terms? Should the company make the change? (Assume a tax rate of 40%.)Rich Jackson, a recent finance graduate, is
Suppose the firm makes the change, but its competitors react by making similar changes to their own credit terms, with the net result being that gross sales remain at the current $1,000,000 level.
The brothers are considering taking out a 1-year bank loan for $100,000 to finance part of their working capital needs and have been quoted a rate of 8%. What is the effective annual cost rate
Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to
Explain briefly what the EOQ model is and how it can be used to help establish an optimal inventory policy. Is the EOQ concept consistent with just-in-time procedures for managing inventories?
Explain how the EOQ inventory model can be modified and used to help determine the optimal size of a firm’s cash balances. Do you think the EOQ approach to cash management is more or less relevant
What four methods are used to account for inventory? What are the financial implications of one method over another? How does the choice of inventory accounting method affect the order in which
Define each of the following terms:a. Baumol modelb. Total carrying cost; total ordering cost; total inventory costsc. Economic ordering quantity (EOQ); EOQ model; EOQ ranged. Reorder point; safety
Indicate by a (+), (−), or (0) whether each of the following events would probably cause average annual inventory holdings to rise, fall, or be affected in an indeterminate manner:a. Our suppliers
Assuming the firm’s sales volume remained constant, would you expect it to have a higher cash balance during a right-money period or during an easy-money period? Why?
Explain how each of the following factors would probably affect a firm’s target cash balance if all other factors were held constant:a. The firm institutes a new billing procedure that better
Economic Ordering Quantity The Gentry Garden Center sells 90,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,000 bags. Each bag costs the firm $1.50,
Optimal Cash Transfer Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling
Why is inventory management vital to the financial health of most firms?Andria Mullins, financial manager of Webster Electronics, has been asked by the firm’s CEO, Fred Weygandt, to evaluate the
What assumptions underlie the EOQ model?Andria Mullins, financial manager of Webster Electronics, has been asked by the firm’s CEO, Fred Weygandt, to evaluate the company’s inventory control
Write out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model.Andria Mullins, financial manager of Webster Electronics, has been asked
What is the EOQ for custom microchips? What are total inventory costs if the EOQ is ordered?Andria Mullins, financial manager of Webster Electronics, has been asked by the firm’s CEO, Fred
What is Webster’s added cost if it orders 400 units at a time rather than the EOQ quantity? ‘What if it orders 600 units?Andria Mullins, financial manager of Webster Electronics, has been asked
Suppose it takes 2 weeks for Webster’s supplier to set up production, make and test the chips, and deliver them to Webster’s plant. Assuming certainty in delivery times and usage, at what
Of course, there is uncertainty in Webster’s usage rate as well as in delivery times, so the company must carry a safety stock to avoid running out of chips and having to halt production. If a
Now suppose Webster’s supplier offers a discount of 1% on orders of 1,000 or more. Should Webster take the discount? Why or why not?Andria Mullins, financial manager of Webster Electronics, has
For many firms, inventory usage is not uniform throughout the year but rather follows some seasonal pattern. Can the EOQ model be used in this situation? If so, how?Andria Mullins, financial manager
How would these factors affect an EOQ analysis?(1) The use of just-in-time procedures.(2) The use of air freight for deliveries.(3) The use of a computerized inventory control system, in which an
Webster runs a $l00,000 per month cash deficit, requiring periodic transfers from its portfolio of marketable securities. Broker fees are $32 per transaction, and Webster earns 7% on its investment
What does it mean to “manage” risks? Should its stockholders want a firm to “manage” all the risks it faces?
What types of risks are interest rate and exchange rate swaps designed to mitigate? Why might one company prefer fixed-rate payments while another company prefers floating-rate payments, or payments
What is a futures contract, and how are futures used to manage risk? What are you protecting against if you buy Treasury futures contracts? What if you sell Treasury futures short?
Stohs Semiconductor Corporation plans to issue $50 million of 20-year bonds in 6 months. The interest rate would be 9% if the bonds were issued today. How can Stohs set up a hedge against an increase
Explain how the futures markets can be used to reduce interest rate and input price risk.
Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a midsized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The
What are six reasons risk management might increase the value of a corporation?Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a midsized Tennessee company that
What is corporate risk management? Why is it important to all firms?Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a midsized Tennessee company that specializes in
Risks that firms face can be categorized in many ways. Define the following types of risk:(1) Speculative risks(2) Pure risks(3) Demand risks(4) Input risks(5) Financial risks(6) Property risks(7)
What are the three steps of corporate risk management?Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a midsized Tennessee company that specializes in creating
What are some actions that companies can take to minimize or reduce risk exposures?Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a midsized Tennessee company that
What is financial risk exposure? Describe the following concepts and techniques that can be used to reduce financial risks:(1) Derivatives(2) Futures markets(3) Hedging(4) SwapsAssume you have just
1. Describe how commodity futures markets can be used to reduce input price risk.2. It is January and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an
Is bankruptcy a fairly common occurrence among large companies, or is it restricted primarily to small firms?
How can a company use a bankruptcy to abrogate labor contracts? Has this occurred in certain industries in recent years?
In your answers to the following set of questions, assume that Ross Corporation has $200 million of assets at book value, $150 million of liabilities owed to 500 different creditors, and $50 million
Define each of the following terms:a. Informal restructuring; reorganization in bankruptcyb. Assignment; liquidation in bankruptcy; fairness; feasibilityc. Absolute Priority doctrine; relative
Why do creditors usually accept a plan for financial rehabilitation rather than demand liquidation of the business? Discuss.
Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.
Liquidation Southwestern Wear Inc. has the following balance sheet:The trustee's costs total $281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying
Kimberly MacKenzie, president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing, is worried. Her firm has been selling clothes to Russ Brothers Department Store for
What key issues must managers face in the financial distress process?Kimberly MacKenzie, president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing, is worried. Her
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:(1) Workout(2) Restructuring(3) Extension(4) Composition(5) Assignment(6)
Briefly describe U.S. bankruptcy law, including the following terms:(1) Chapter 11(2) Chapter 7(3) Trustee(4) Voluntary bankruptcy(5) Involuntary bankruptcyKimberly MacKenzie, president of Kim’s
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:(1) Common pool problem(2)
What is a prepackaged bankruptcy? Why have prepackaged bankruptcies become more popular in recent years?Kimberly MacKenzie, president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s
Briefly describe the priority of claims in a Chapter 7 liquidation.Kimberly MacKenzie, president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing, is worried. Her
Assume that Russ Brothers did indeed fail, and that it had the following balance sheet when it was liquidated (in millions of dollars):The liquidation sale resulted in the following proceeds:From
What are horizontal, vertical congeneric, and conglomerate mergers? Are the different types of mergers equally likely to pass muster with the Justice Department?
What is synergy? What are some factors that might lead to synergy? How is the amount of synergy in a proposed merger measured, and how is it allocated between the two firms’ stockholder? Would the
Many companies have serious discussions about merging. Sometimes these discussions lead to mergers, sometimes not. What are some factors that should be considered and that affect the likelihood of a
Explain how the market multiples method is used to determine the value of a target firm to a potential acquirer. Give several examples of this procedure.
Explain how the corporate valuation model and the adjusted present value (APV) method are used to estimate the value of a target company. If someone did a complete and careful analysis of a given
If you were conducting a merger analysis, would you give the multiples method or one of the DCF methods (that is, the APV or corporate valuation model) more weight in your decision? Explain.
Explain how purchase accounting is implemented in a merger. Does the accounting profession now require this method? How is any premium that the acquiring firm paid over the acquired firm’s book
Acquisitions can have important tax consequences depending on(a) Whether the acquiring firm purchases the target’s stock or just its assets,(b) Whether cash or stock is used for the payment, and(c)
Distinguish between the APV, FCFE, and corporate valuation models.
Valuation Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year: its beta is 1.4. What is the value of Vandell’s operations? If Vandell
Merger Valuation with Change in Capital Structure VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional
Several reasons have been proposed to justify mergers. Among the more prominent are(1) Tax considerations,(2) Risk reduction,(3) Control.(4) Purchase of assets at below-replacement cost,(5) Synergy,
Briefly describe the differences between a hostile merger and a friendly merger.Hagers Home Repair Company, a regional hardware chain that specializes in
What are the steps in valuing a merger?Hagers Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is
Use the data developed in the table to construct the L division's free cash flows for 2010 through 2014. Why are we identifying interest expense separately, since it is not normally included in
Conceptually, what is the appropriate discount rate to apply to the cash flows developed in part c? What is your actual estimate of this discount rate?Hager's Home Repair Company, a regional
What is the estimated horizon, or continuing, value of the acquisition; that is, what is the estimated value of the L division's cash flows beyond 2014? What is LL's value to Hager's shareholders?
Assume that LL has 20 million shares outstanding. These shares are traded relatively infrequently, but the last trade, made several weeks ago, was at a price of $11 per share. Should Hager’s make
How would the analysis be different if Hager’s intended to recapitalize Lyons’ with 40% debt costing 10% at the end of four years? This amounts to $221.6 million in debt as of the end of
There has been considerable research undertaken to determine whether mergers really create value and, if so, how this value is shared between the parties involved. What are the results of this
1. What method is used to account for mergers?2. What merger-related activities are undertaken by investment bankers?Hagers Home Repair Company, a regional hardware chain that specializes
a. What is a leveraged buyout (LBO)? What are some of the advantages and disadvantages of going private? Hager's Home Repair Company, a regional hardware chain that specializes in "do-it-yourself"
What are the major types of divestitures? What motivates firms to divest assets? Hagers Home Repair Company, a regional hardware chain that specializes in
What are holding companies? What are their advantages and disadvantages? Hagers Home Repair Company, a regional hardware chain that specializes in do-it-yourself
How is multinational financial management different from financial management as practiced by a firm that has no direct contacts with foreign firms or customers? What special problems and challenges
What is an exchange rate? What is the difference between direct and indirect rates? What is a cross rate?
What is the difference between a Spot rate forward rate? How can forward rates be used for hedging Purposes? Why would hedging occur?
What is interest rate parity? How might the treasurer of a multinational firm use the interest rate parity concept(a) When deciding how to invest the firm’s surplus cash and(b) When deciding where
What purchasing power parity? How might a firm use this concept in its operations?
Suppose IBM signed a contract to buy a supply of computer chips from a German firm. The price is 10 million euros, and the chips will be delivered immediately, but IBM can delay payment for six
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