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Questions and Answers of
Corporate Finance
This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions:Time
Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available contracts. What does your
Jennifer Williamson recently received her MBA and has decided to enter the mortgage brokerage business. Rather than work for someone else, she has decided to open her own shop. Her cousin Jerry has
Grohl Manufacturing, Inc., has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating
In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?
The Litzenberger Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $310. Litzenberger has a 45-day collection
Consider the following financial statement information for the Bulldog Icers Corporation:Calculate the operating and cash cycles. How do you interpret youranswer?
Lewellen Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers
The Thakor Corporations purchases from suppliers in a quarter are equal to 75 percent of the next quarters forecast sales. The payables period is 60 days. Wages, taxes, and
The following is the sales budget for Shleifer, Inc., for the first quarter of 2013:Credit sales are collected as follows:65 percent in the month of the sale.20 percent in the month after the sale.15
Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2013:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its
Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and theamount:
The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent with the first-quarter sales projection at $225 million. In addition to this basic trend, the
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the year after this one are projected at $120 million. Accounts receivable at
Rework Problem 13 assuming the following:In Problem 13, Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the year after this one
You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a
In a typical month, the Jeremy Corporation receives 140 checks totaling $124,000. These are delayed four days on average. What is the average daily float?
Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per
A mail-order firm processes 5,700 checks per month. Of these, 60 percent are for $55 and 40 percent are for $80. The $55 checks are delayed two days on average; the $80 checks are delayed three days
No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $3.2 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating
Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by
Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its
You place an order for 500 units of inventory at a unit price of $135. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full
The Paden Corporation has annual sales of $34 million. The average collection period is 33 days. What is the average investment in accounts receivable as shown on the balance sheet?
Tidwell, Inc., has weekly credit sales of $27,500, and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable
Bell Tolls, Inc., has an average collection period of 36 days. Its average daily investment in receivables is $58,300. What are annual credit sales? What is the receivables turnover?
Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net 40. The discount is taken by 40
Lealos, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Lealos should proceed or not.
Redan Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. If the relevant carrying cost per switch assembly is $7, and the fixed order cost is $725, is Redan’s
The Trektronics store begins each week with 750 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $65 per year and the fixed order cost is $395,
The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or
Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you
Tricia Haltiwinger, the president of Braam Industries, has been exploring ways of improving the company’s financial performance. Braam Industries manufactures and sells office equipment to
Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?
Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a brief explanation for your answer.a. By merging competitors, takeovers have created
Explain why diversification per se is probably not a good reason for merger.
In July 2011, fast food restaurant chain Wendy’s/Arby’s announced that it had sold its Arby’s restaurants and would change its name back to Wendy’s. Arby’s was purchased by the private
Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?
Describe the advantages and disadvantages of a taxable merger as opposed to a tax-free exchange. What is the basic determinant of tax status in a merger? Would an LBO be taxable or nontaxable?
What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate
What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their
Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your
Acquiring firm stockholders seem to benefit little from takeovers. Why is this finding a puzzle? What are some of the reasons offered for it?
Consider the following premerger information about firm X and firm Y:Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share. Assuming
Assume that the following balance sheets are stated at book value. The fair market value of James fixed assets is equal to the book value. Jurion pays $15,000 for James and raises the needed funds
In the previous problem, suppose the fair market value of James’s fixed assets is $i,000 versus the $8,900 book value shown. Jurion pays $23,000 for James and raises the needed funds through an
Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The market
In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining's
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by $1.1 million
EPS, PE, and Mergers The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:Flannery's shareholders will receive
Cholern Electric Company (CEC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-High Nuclear Station have been discouraging. Several shareholders
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.Firm B has estimated that the value of the
In Problem 10, are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the
Consider the following premerger information about Firm A and Firm B:Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of Bs stock. Both A and B
Merger NPV Show that the NPV of a merger can be expressed as the value of the synergistic benefits, ΔV, less the merger premium.
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual
Harrods PLC has a market value of £400 million and 30 million shares outstanding. Selfridge Department Store has a market value of £160 million and 18 million shares outstanding. Harrods is
Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each companys value in that state are shown here:Bentley currently has a bond issue
Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant's vice president of finance has collected the following information:Plant also knows that securities analysts expect the
The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different
Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for
What is prepackaged bankruptcy? What is the main benefit of prepackaged bankruptcy?
What is the absolute priority rule?
What are DIP loans? Where do DIP loans fall in the APR?
Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a
Several firms have entered bankruptcy, or threatened to enter bankruptcy, at least in part as a means of reducing labor costs. Whether this move is ethical, or proper, is hotly debated. Is this an
Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?
When the Beacon Computer Company filed for bankruptcy under Chapter of the U.S. bankruptcy code, it had the following balance sheet information:Assuming there are no legal fees associated with the
When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. bankruptcy code. Key information is shown here:As a trustee, what reorganization plan would you accept?
Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s
Jon Fulkerson has also received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below:Total assets
If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is
Suppose it is your task to evaluate two different investments in new subsidiaries for your company, one in your own country and the other in a foreign country. You calculate the cash flows of both
An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate used in the calculations is adjusted for political risk and any advantages from diversification.
If a U.S. firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them?
Suppose the Japanese yen exchange rate is ¥85 = $1, and the British pound exchange rate is £1 = $1.53.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥131.4 =
Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add East
What does the term mutually exclusive investments mean?
How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods?
If a corporation has projects that will earn more than the cost of capital, should it ration capital?
What is the net present value profile? What three points should be determined to graph the profile?
How does an asset’s ADR (asset depreciation range) relate to its MACRS category?
Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and that it is in a 30 percent tax bracket. Compute its cash flow using the following format.
Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $40,000, and that it has a 40 percent tax bracket. a. Compute its cash flow using the following
Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.a. Compute its cash flow.b. Assume it has $200,000 in depreciation.
Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.a. Compute its cash flow.b. Assume it has $200,000 in depreciation.
Assume a firm has earnings before depreciation and taxes of $440,000 and depreciation of $140,000.a. If it is in a 35 percent tax bracket, compute its cash flow.b. If it is in a 20 percent tax
Assume a $250,000 investment and the following cash flows for two products:Which alternatives would you select under the paybackmethod?
Assume a $40,000 investment and the following cash flows for two alternatives.Which of the alternatives would you select under the paybackmethod?
Assume a $90,000 investment and the following cash flows for two alternatives.a. Calculate the payback for investment A and B.b. If the inflow in the fifth year for Investment A was $25,000,000
The Short-Line Railroad is considering a $140,000 investment in either of two companies. The cash flows are as follows:a. Using the payback method, what will the decision be?b. Explain why the answer
X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:a. Which of the two projects should be chosen based on the payback method?b. Which of
You buy a new piece of equipment for $16,230, and you receive a cash inflow of $2,500 per year for 12 years. What is the internal rate of return?
King’s Department Store is contemplating the purchase of a new machine at a cost of $22,802. The machine will provide $3,500 per year in cash flow for nine years. King’s has a cost of capital
Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $50,000. The annual cash inflows for the next three years will be: YearCash Flow1 .........
Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? YearCash Flow1
The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years.Year Cash Flow1 ............ $15,0002 ............
Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual
The Hudson Corporation makes an investment of $24,000 that provides the following cash flow:YearCash Flow1 .........$ 13,0002 ......... 13,0003 ......... 4,000a. What is the net present value at an 8
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows
You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method combined with the profitability index approach described in footnote 2 of this
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