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Fundamentals of Financial Management Concise 6th Edition Eugene F. Brigham, Joel F. Houston - Solutions
What would the future and present values be if it was an annuity due?
A 5-year $100 ordinary annuity has an annual interest rate of 10%. What is its present value?
A 20-year-old student wants to save $3 a day for her retirement. Every day she places $3 in a drawer. At the end of each year, she invests the accumulated savings ($1,095) in a brokerage account with an expected annual return of 12%. If she keeps saving in this manner, how much will she have
If a 40-year-old investor began saving in this manner, how much would he have at age 65?
How much would the 40-year-old investor have to save each year to accumulate the same amount at 65 as the 20-year-old investor?
What is the present value of the following uneven cash flow stream? The annual interest rate is10%.
Will the future value be larger or smaller if we compound an initial amount more often than annually (e.g., semiannually, holding the stated (nominal) rate constant)? Why?
Define (a) the stated (or quoted or nominal) rate, (b) the periodic rate, and (c) the effective annual rate (EAR or EFF%).
What is the EAR corresponding to a nominal rate of 10% compounded semiannually? Compounded quarterly? Compounded daily?
What is the value at the end of Year 3 of the following cash flow stream if interest is 10%, compounded semiannually?
What is the PV?
Construct an amortization schedule for a $1,000, 10% annual interest loan with 3 equal installments.What is the annual interest expense for the borrower and the annual interest income for the lender during Year 2?
What are some pros and cons of holding high levels of current assets in relation to sales?Use the DuPont equation to help explain your answer.
Define cash conversion cycle (CCC). Explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.
What are the two definitions of cash, and why do corporate treasurers often use the second definition?
What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets, and how might a cash budget be used when a firm is negotiating a loan from its bank?
What are the four key factors in a firm’s credit policy? How would an easy policy differ from a tight policy? Give examples of how the four factors might differ between the two policies. How would the easy versus the tight policy affect sales? profits?
What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and risk? In general, is one approach better than
Why is some trade credit called free while other credit is called costly? If a firm buys on terms of 2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payable on its balance sheet, would the entire $300,000 be free credit, would it be costly credit, or would
Define each of the following loan terms, and explain how they are related to one another: the prime rate, the rate on commercial paper, the simple interest rate on a bank loan calling for interest to be paid monthly, and the rate on an installment loan based on add-on interest. If the stated rate
Why are accruals called spontaneous sources of funds, what are their costs, and why don’t firms use more of them?
Indicate using a (+), (-), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminatemanner:
Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. What is Primrose’s cash conversion cycle (CCC)? If Primrose could lower
Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar’s DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that
Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much additional credit could it get and what would
Zocco Corporation has an inventory conversion period of 75 days, an average collection period of 38 days, and a payables deferral period of 30 days.a. What is the length of the cash conversion cycle?b. If Zocco’s annual sales are $3,421,875 and all sales are on credit, what is the investment in
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 40 days after their purchases.a. What is the days’ sales outstanding?b. What is the average amount of
Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the
Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s 2008 sales (all on credit) were $150,000; and it earned a net profit of 6%, or $9,000. It turned over its inventory 6 times during the year,
Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 60% debt ratio.
Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit
Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2009 and 2010:May 2009 $180,000June 180,000July 360,000August 540,000September 720,000October 360,000November
Rework Problem 15-10 using a spreadsheet model. After completing Parts a through d, respond to the following: If Bowers’ customers began to pay late, collections would slow down, thus increasing the required loan amount. If sales declined, this also would have an effect on the required loan. Do a
Barnes plans to use the ratios in Table IC 15-1 as the starting point for discussions with SKI?s operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and the way changes would interact to affect profits and EVA. Based on the data in Table
How can we distinguish between a relaxed but rational working capital policy and a situation where a firm has a large amount of current assets simply because it is inefficient? Does SKI’s working capital policy seem appropriate?
SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt a more aggressive or a more conservative financing policy.
Assume that SKI’s payables deferral period is 30 days. Now calculate the firm’s cash conversion cycle.
What might SKI do to reduce its cash and securities without harming operations?
In his preliminary cash budget, Barnes has assumed that all sales are collected and, thus, that SKI has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense?
Barnes?s cash budget for the entire year, although not given here, is based heavily on his forecast for monthly sales. Sales are expected to be extremely low between May and September but then increase dramatically in the fall and winter. November is typically the firm?s best month, when SKI ships
Is there any reason to think that SKI may be holding too much inventory? If so, how would that affect EVA and ROE? Discuss.
If the company reduces its inventory without adversely affecting sales, what effect should this have on the company’s cash position (1) in the short run and (2) in the long run? Explain in terms of the cash budget and the balance sheet.
Barnes knows that SKI sells on the same credit terms as other firms in the industry. Use the ratios presented in Table IC 15-1 to explain whether SKI?s customers pay more or less promptly than those of its competitors. If there are differences, does that suggest that SKI should tighten or loosen
If the company reduces its DSO without seriously affecting sales, what effect will this have on its cash position (1) in the short run and (2) in the long run? Answer in terms of the cash budget and the balance sheet. What effect should this have on EVA in the long run?
Assume that SKI buys on terms of 1/10, net 30, but that it can get away with paying on the 40th day if it chooses not to take discounts. Also assume that it purchases $3 million of components per year, net of discounts. How much free trade credit can the company get, how much costly trade credit
Suppose SKI decided to raise an additional $100,000 as a 1-year loan from its bank, for which it was quoted a rate of 8%. What is the effective annual cost rate assuming simple interest and add-on interest on a 12-month installment loan?
What are the key factors on which external financing depends as indicated in the AFN equation?
Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark (✓) next to those items that typically increase spontaneously.Accounts payable____________Notes payable to banks____________Accrued wages____________Accrued taxes____________Mortgage
Suppose a firm makes the following policy changes. If the change means that external non-spontaneous financial requirements (AFN) will increase, indicate this with a (+), indicate a decrease with a (-), and indicate an indeterminate or negligible effect with a (0). Think in terms of the immediate
Carter Corporation’s sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2008, current liabilities are $1
Refer to Problem 16-1. What additional funds would be needed if the company’s year-end 2008 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 16-1? Is the company’s “capital intensity” the same or different?
Refer to Problem 16-1 and assume that the company had $3 million in assets at the end of 2008. However, now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in Problem 16-1?
Austin Grocers recently reported the following 2008 income statement (in millions of dollars):Sales $700Operating costs including depreciation 500EBIT $200Interest 40EBT $160Taxes (40%) 64Net income $ 96Dividends $ 32Addition to retained earnings $ 64This year the company is forecasting a 25%
Walter Industries has $5 billion in sales and $1.7 billion in fixed assets. Currently, the company’s fixed assets are operating at 90% of capacity.a. What level of sales could Walter Industries have obtained if it had been operating at full capacity?b. What is Walter’s Target fixed assets/Sales
Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship
At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):Sales $3,000Operating costs excluding depreciation 2,450EBITDA $ 550Depreciation 250EBIT $ 300Interest 125EBT $ 175Taxes (40%) 70Net income $ 105Looking ahead to the following year, the
At year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2008 were $2.5 million, are expected to increase by 25% in 2009. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is,
Pierce Furnishings generated $2 million in sales during 2008, and its year-end total assets were $1.5 million. Also, at year-end 2008, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to
Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards’ CFO uses a simple linear regression to forecast the company’s receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship
Charlie’s Cycles Inc. has $110 million in sales. The company expects that its sales will increase 5% this year. Charlie’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated
Edney Manufacturing Company has $2 billion in sales and $0.6 billion in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity.a. What level of sales could Edney have obtained if it had been operating at full capacity?b. What is Edney’s Target fixed assets/Sales
Morrissey Technologies Inc.’s 2008 financial statements are shown here.Suppose that in 2009, sales increase by 10% over 2008 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2008 dividend payout ratio and believes that its assets should grow at the same rate
Krogh Lumber's 2008 financial statements are shown here. a. Assume that the company was operating at full capacity in 2008 with regard to all items except fixed assets; fixed assets in 2008 were being utilized to only 75% of capacity. By what percentage could 2009 sales increase over 2008 sales
Use a spreadsheet model to forecast the financial statements in Problems 16-13 and 16-14.
Assume (1) that NWC was operating at full capacity in 2008 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2008 profit margin and dividend payout will
Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information.(1) NWC’s high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be
Calculate NWC’s forecasted ratios based on its final forecast and compare them with the company’s 2008 historical ratios, the 2009 initial forecast ratios, and the industry averages. How does NWC compare with the average firm in its industry, and is the company’s financial position expected
Based on the final forecast, calculate NWC’s free cash flow for 2009. How does this FCF differ from the FCF forecasted by NWC’s initial “business as usual” forecast?
Initially, some NWC managers questioned whether the new facility expansion was necessary, especially since it results in increasing net fixed assets from $500 million to $700 million (a 40% increase). However, after extensive discussions about NWC needing to position itself for future growth and
How would changes in these items affect the AFN? (Consider each item separately and hold all other things constant.) The dividend payout ratio.
The capital intensity ratio.
If NWC begins buying from its suppliers on terms that permit it to pay after 60 days rather than after 30 days.
Why do U.S. corporations build manufacturing plants abroad when they can build them at home?
Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain. Discuss.
Does interest rate parity imply that interest rates are the same in all countries? Discuss.
Why might purchasing power parity fail to hold? Discuss.
What is a Eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in New York, have Eurodollars been created? What if the deposit is made in Barclay’s Bank in London? Chase Manhattan’s Paris branch? Does the existence of the Eurodollar market make the Federal Reserve’s job of
A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.50 Israeli shekels or for 104.00 Japanese yen. What is the cross-ex-change rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged?
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate parity holds, what is the 6-month forward exchange rate?
A television costs $500 in the United States. The same television costs 312.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
Table 17-1 lists foreign exchange rates for May 26, 2008. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars, EMU euros, Japanese yen, Mexican pesos, and Swedish kronas?
Look up the six currencies in Problem 17-5 in the foreign exchange section of a current issue of The Wall Street Journal.a. What is the current exchange rate for changing dollars into 1,000 units of pounds, Canadian dollars, euros, yen, Mexican pesos, and Swedish kronas?b. What is the percentage
Look up the three currencies in Problem 17-8 in the foreign exchange section of a current issue of The Wall Street Journal. What is the current exchange rate between Swedish kronas and pounds?
Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen = 0.0086 dollar. And 90-day risk-free securities yield 4.6% in Japan. What is the yield on 90-day risk-free securities in the United States?
In the spot market, 10.5 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same disc in Mexico?
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Britain. In the spot market, 1 pound = $2.a. Is the 90-day forward rate trading at a premium or a discount relative to the spot rate?b. What is the 90-day forward rate?
Chamberlain Canadian Imports has agreed to purchase 15,000 cases of Canadian beer for 4 million Canadian dollars at today’s spot rate. The firm’s financial manager, James Churchill, has noted the following current spot and forward rates:On the same day, Churchill agrees to purchase 15,000 more
You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in the United States. Earlier this month you obtained a loan of 5 million Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At
Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 25 years later, in May 2008, that exchange rate had fallen to 103.5 yen to $1. Assume that the price of a Japanese-manufactured automobile was $9,000 in September 1983 and that its price changes were in direct relation to
After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $2 per pound, and the pound is expected to depreciate 5% against the dollar each year for an
Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar- denominated cash flows consist of an initial investment of $1,000 and a cash inflow the
Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually buys its raw materials in several different foreign countries using several different foreign
What is a multinational corporation? Why do firms expand into other countries?
What are the 5 major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?
Calculate the indirect quotations for yen and Australian dollars.
What is a cross rate? Calculate the two cross rates between yen and Australian dollars.
Now assume that Citrus Products begins producing the same liter of orange juice in Japan. The product costs 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale?
What is exchange rate risk?
Briefly describe the current international monetary system. What are the different types of exchange rate systems?
What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? At a discount?
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