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Questions and Answers of
Corporate Finance
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.a. How are the current assets of each firm financed?b. Which firm has the
In a typical month, the Warren Corporation receives 140 checks totaling $113,500. These are delayed four days on average. What is the average daily float?
No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $2.9 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank
Each business day, on average, a company writes checks totaling $14,400 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
Purple Feet Wine, Inc., receives an average of $13,800 in checks per day. The delay in clearing is typically three days. The current interest rate is .018 percent per day.a. What is the company's
Your neighbor goes to the post office once a month and picks up two checks, one for $9,700 and one for $2,600. The larger check takes four days to clear after it is deposited; the smaller one takes
Your firm has an average receipt size of $119. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,650 checks per
A mail-order firm processes 5,450 checks per month. Of these, 70 percent are for $55 and 30 percent are for $80. The $55 checks are delayed two days on average; the $80 checks are delayed three days
Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:Average number of payments per day ...........................410Average
It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter's management is considering a lockbox system to reduce the firm's collection
No More Pencils, Inc., disburses checks every two weeks that average $61,700 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
You place an order for 400 units of inventory at a unit price of $115. 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
Leeloo, 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 the company should proceed or not.
Fhloston Manufacturing uses 1,860 switch assemblies per week and then reorders another 1,860. If the relevant carrying cost per switch assembly is $6.25, and the fixed order cost is $730, is the
The Trektronics store begins each week with 675 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $73 per year and the fixed order cost is $340,
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 not.
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
The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 700 bicycles. The average cost to the shop of a bicycle is $650.
The Paden Corporation has annual sales of $29.5 million. The average collection period is 27 days. What is the average investment in accounts receivable as shown on the balance sheet?
Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/15, net 30. Based on experience, 70 percent of all customers will take the discount.a. What is the average
Tidwell, Inc., has weekly credit sales of $31,400, and the average collection period is 29 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable
Chen, Inc., has an average collection period of 34 days. Its average daily investment in receivables is $61,300. What are annual credit sales? What is the receivables turnover?
Essence of Skunk Fragrances, Ltd., sells 5,450 units of its perfume collection each year at a price per unit of $480. All sales are on credit with terms of 1/10, net 40. The discount is taken by 35
The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 5 days past due. If annual credit sales are $8.95 million, what is the company's balance sheet amount in
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
Consider the following premerger information about Firm A and Firm B:...................................................Firm A................ Firm BTotal earnings
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 £360 million and 30 million shares outstanding. Selfridge Department Store has a market value of £144 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 company's value in that state are shown here:Bentley currently has a bond issue outstanding
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
Consider the following premerger information about firm X and firm Y:.............................................Firm X ...............Firm YTotal earnings ..........................$105,000
Assume that the following balance sheets are stated at book value. Suppose that Jurion Co. purchases James, Inc. Then suppose the fair market value of James's fixed assets is $23,000 versus the
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
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $1.3 million
The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:..............................................Flannery
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
No matter how you look at it, Dow Chemical had busy years in 2014 and 2015. In 2014, Dow announced that it was planning to sell its subsidiaries Angus Chemical Company, Sodium Borohydride, and
Holmes, Inc., has offered $295 million cash for all of the common stock in Watson Corporation. Based on recent market information, Watson is worth $278 million as an independent operation. If the
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
When the Beacon Computer Company filed for bankruptcy under Chapter 7 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
Define financial distress using the stock-based and flow-based approaches.
What are some benefits of financial distress?
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.97 and Kr 7.06, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate
Suppose the spot and three-month forward rates for the yen are ¥115.13 and ¥114.35, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference
Suppose the spot exchange rate for the Hungarian forint is HUF 251. The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you predict the exchange
Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1
Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 43,000 solaris, debt in the amount of 14,000 solaris, and equity of 29,000
In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet
Suppose the spot exchange rate for the Canadian dollar is Can $1.13 and the six-month forward rate is Can $1.16.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Suppose the Japanese yen exchange rate is ¥126 = $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 ¥195.8 =
The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .17 percent per month. The interest rate in Great Britain is .61
Suppose the current exchange rate for the Polish zloty is Z 3.29. The expected exchange rate in three years is Z 3.41. What is the difference in the annual inflation rates for the United States and
The St. Louis Federal Reserve has historical exchange rates on its website, www.stlouisfed.org. On the website, look for the FRED data. Download the exchange rate with U.S. dollars over the past
The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2016.INCOME STATEMENT OF QUICK BURGER CORP., 2016(Figures in $ millions)Net sales
a. What would be the marginal tax rate for a married couple with income of $90,000?b. What would be the average tax rate for a married couple with income of $90,000?c. What would be the marginal tax
A married couple earned $95,000 in 2016. How much did they pay in taxes?a. What was their marginal tax bracket?b. What was their average tax bracket?
Construct a balance sheet for Fincorp for 2015 and 2016. What is shareholders' equity?
What was the change in net working capital during the year?
Construct an income statement for Fincorp for 2015 and 2016. What were reinvested earnings for 2016?
Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?
Examine the values for depreciation in 2016 and net fixed assets in 2015 and 2016. What was Fincorp's gross investment in plant and equipment during 2016?
Book versus Market Value. Suppose that the market value (in thousands of dollars) of Fincorp's fixed assets in 2016 is $6,000 and that the value of its long-term debt is only $2,200. In addition, the
Construct a statement of cash flows for Fincorp for 2016
What was the firm's average tax bracket for each year?
The year-end 2015 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $1,100,000 and retained earnings at $3,400,000. The next year, retained earnings were listed at
South Sea Baubles has the following (incomplete) balance sheet and income statement.a. What is shareholders' equity in 2015?b. What is shareholders' equity in 2016?c. What is net working capital in
Here are the 2015 and 2016 (incomplete) balance sheets for Newble Oil Corp.a. What was shareholders' equity at the end of 2015?b. What was shareholders' equity at the end of 2016?c. If Newble paid
a. In early 2015, the market values of the shares of many banks (e.g., Bank of America or Citigroup) were less than book value per share. How would you interpret this pattern? b. At the same time,
Here is a simplified balance sheet for Locust Farming:Locust has 657 million shares outstanding with a market price of $83 a share.a. Calculate the company's market value added.b. Calculate the
Recalculate Home Depot's economic value added as we did in Section 4.3, but assuming its cost of capital is 10%.
You will require $700 in 5 years. If you earn 5% interest on your funds, how much will you need to invest today in order to reach your savings goal?
A factory costs $400,000. You forecast that it will produce cash inflows of $120,000 in year 1, $180,000 in year 2, and $300,000 in year 3. The discount rate is 12%.a. What is the value of the
The 2-year discount factor is .92. What is the present value of $1 to be received in year 2? What is the present value of $2,000?
British government 4% perpetuities pay £4 interest each year forever. Another bond, 2.5% perpetuities, pays £2.50 a year forever.a. What is the value of 4% perpetuities if the long-term interest
Suppose that the value of an investment in the stock market has increased at an average compound rate of about 5% since 1900. It is now 2016.a. If your great grandfather invested $1,000 in 1900, how
Consider a 4-year amortizing loan. You borrow $1,000 initially and repay it in four equal annual year-end payments.a. If the interest rate is 8%, what is the annual payment?b. Fill in the following
You invest $1,000 at a 6% annual interest rate, stated as an APR. Interest is compounded monthly. How much will you have in 1 year? In 1.5 years?
How much will $100 grow to if invested at a continuously compounded interest rate of 10% for 8 years? What if it is invested for 10 years at 8%?
Lenny Loanshark charges "1 point" per week (i.e., 1% per week) on his loans. What APR must he report to consumers? Assume exactly 52 weeks in a year. What is the effective annual rate?
In April 2016 a pound of apples cost $1.41, while oranges cost $1.05. Four years earlier the price of apples was only $1.20 a pound and that of oranges was $.91 a pound.a. What was the annual
a. It is 2016, you've just graduated college, and you are contemplating your lifetime budget. You think your general living expenses will average around $50,000 a year. For the next 8 years, you will
A retiree wants level consumption in real terms over a 30-year retirement. If the inflation rate equals the interest rate she earns on her $450,000 of savings, how much can she spend in real terms
Sludge Corporation has two bonds outstanding, each with a face value of $2 million. Bond A is a senior bond; bond B is subordinated. Sludge has suffered a severe downturn in demand, and its assets
No-Growth Industries pays out all of its earnings as dividends. It will pay its next $4 per share dividend in a year. The discount rate is 12%.a. What is the price-earnings ratio of the company?b.
Rework Table 7.4 for horizon years 1, 2, 3, and 10, assuming that investors expect the dividend and the stock price to increase at only 6% a year and that each investor requires the same 12% expected
True or false?a. The bid price is always greater than the ask price.b. An investor who wants to sell his stock immediately should enter a limit order.c. The sale of shares by a large investor is
True or False? a. Investors will invest in a stock only if it gives a higher return than they could get elsewhere. Therefore, if a stock is fairly priced, its expected return will be greater than
Here is a small part of the order book for Mesquite Foods:a. Georgina Sloberg submits a market order to sell 100 shares. What price will she receive? b. Norman Pilbarra submits a market order to buy
Investors in Rance Electric's stock require a return of 8%. If the company simply earns the cost of capital on its new investments, what is the stock's P/E?
Which if any of these statements are true? Stock prices appear to behave as though successive values. a. are random numbers. b. follow regular cycles. c. differ by a random number.
Amazon has never paid a dividend, but in December 2015, the market value of its stock was greater than $300 billion. Does this invalidate the dividend discount model?
Suppose that you can choose only one of these projects. Which would you choose? The discount rate is still 11%.Year.........................Project A......................Project
Consider the following cash flows:a. Which two of the following rates are the IRRs of this project: 2.5%, 7.2%. 14.3%, 33.7%,40.0%?b. What is project NPV if the discount rate is 5%?c. What if it is
What is the profitability index of a project that costs $10,000 and provides cash flows of $3,000 in years 1 and 2 and $5,000 in years 3 and 4? The discount rate is 9%.
Is the project with the highest profitability index also the one with the highest NPV?Year.........................Project A......................Project
What is the payback period of each project?Year.........................Project A......................Project
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