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Financial Management For Decision Makers 2nd Canadian Edition Peter Atrill, Paul Hurley - Solutions

Mahmood al-Fahdui Importers Limited (MFIL) of Vancouver has 30 million common shares outstanding at a market value of $7.80 per share on March 31, 2010. On April 1, 2010, MFIL issued one right for each outstanding share. To acquire a new share at $6.00 will require three rights. Your father
Four companies are considering a rights offering. The data is as follows:Required: (a) Calculate the theoretical ex-rights share price for each company. (b) Calculate the value of one right for each company.
Lots of fiend Curling Supplies Limited (LBCS) has 1 million shares outstanding as of November 30, 2010. The share price is $25.00. Required: Calculate the new share price on December 1, 2010, if: (a) LBCS executes a four-for-one stock split. (b) LBCS declares a stock dividend that will give each
How might a business find out whether a particular planned level of leverage would be acceptable to investors?
What factors might a prospective lender take into account when deciding whether to make a long-term loan to a particular business?
Should the specific cost of financing a particular project be used as the appropriate discount rate for investment appraisal purposes?
What are the main implications for the financial manager who accepts the arguments of: (a) The traditional approach (b) The MM (excluding tax effects) approach (c) The MM (including tax effects) approach concerning capital structure?
Rank the following three forms of financing according to cost of capital to the corporation, from lowest to highest, and provide reasons for your ranking: Common shares Debt Preferred shares
You have collected the following bond data from the annual reports of several of your global competitors.Required: Determine the after-tax cost of debt for each company.
These companies in the same industry have the following capital structures:Required: Calculate the leverage ratio for each company.
You have gathered the following information on your competitors for 2010. The corporate income tax rate is 42%.Required:(a) Calculate the earnings available to common shareholders for each company for 2010.(b) Calculate the earnings per share for each company for 2010.
The following data is for 2011. All other data remains the same as Problem and Case 10.11.In problem 10.11Required:Calculate the degree of financial leverage for each company.
You are examining various financing options that will yield the following results.Required:Calculate the degree of leverage associated with each financing option.
Celtor Ltd. is a property development business operating in London, Ontario. The business has the following capital structure as at November 30, 2011: ($000)Common shares (10 million outstanding) ...................10,000Retained earnings
Wireless Video Ltd. needs to expand operations for 2011 and is considering two financing options to raise $200 million-either issuing additional common shares or additional long-term bonds. The interest rate on the new bonds would be 10%. The new shares would require an additional annual dividend
Trexon Ltd. is a junior oil and gas exploration business that has most of its operations in Alberta. Recently, the business acquired rights to explore for oil and gas in the Gulf of Mexico. Trexon proposes to finance the new operations from the issue of common shares. At present, the business is
Ashcroft Corp., a family-controlled business, is considering raising additional funds to modernize its factory. The plan is expected to cost $2.34 million and will increase annual earnings before interest and taxes starting January 1, 2011, by $0.6 million. A summarized balance sheet and income
You have collected the following preferred share data from the annual reports of several of your global competitors.Required: Determine the cost of preferred shares for each company.
You have collected the following common share data from the annual reports of several of your global competitors.Required:Determine the cost of common shares for each company.
You have collected the following common share data from the annual reports of several of your global competitors.Required: Determine the cost of common shares for each company.
Richelieu Investments Limited has the following capital structure, which is considered ideal, taken from the annual report and market data as at December 31, 2010:* There are 7 million shares outstanding at a market price of $30 per share. The corporate income tax rate is 30%. The dividends on
You have gathered the following information on companies in your industry.Required:(a) Calculate the cost of common shares for each of the companies.(b) Which company has the lowest cost of common shares?
With additional work, you have gathered more information on companies in your industry as shown below. These companies have both bonds and preferred shares outstanding. This table shows the amount of interest (I) and the price of the bonds (Pd) related to $100 face value bonds. The tax rate (t)
Riphean and Silurian are two businesses operating in different industries. Both are financed by a mixture of common shares and debt and both are seeking to derive their cost of capital for investment decision making purposes. The following information is available concerning the two businesses
With additional work, you have gathered more information on companies in your industry as shown below. This table shows the amount of interest and the price of the bonds related to $100 face value bonds.Required:(a) Calculate the cost of common shares, preferred shares, and debt for each of the
List three reasons why a business should wish to repurchase some of its shares.
The business's dividend decision is really a by-product of its capital investment decision. Discuss.
Is it really important for a business to try to meet the needs of different types of investors when formulating its dividend policy?
Describe how agency theory may help to explain the dividend policy of businesses.
In Chapter 10 we learned that the dividend growth model suggests that the fair value of a common share is based on next year's dividend. This is expressed in the formula P0 = D1 / K0 - g. With this in mind, how is it possible for a company like Google, which has never paid a dividend, to have a
Which of the following investors are entitled to the current dividend?
The following listed businesses have different policies concerning distributions to shareholders: • North Ltd. pays all profits available for distribution to shareholders in the form of a cash dividend each year. • South Ltd. has yet to pay any cash dividends to shareholders and has no plans to
Fellingham Ltd. has 20 million common shares in issue. No shares have been issued during the past four years. The business's earnings and dividends as taken from the annual reports showed:At the annual general meeting for 2007, the chairman had indicated that it was the intention to
Mondrian Ltd. is a new business that aims to maximize the wealth of its shareholders. The board of directors is currently trying to decide upon the most appropriate dividend policy to adopt for the business's shareholders. However, there is strong disagreement among three of the directors
Your company is thinking of paying its first-ever dividend. You are interested in how dividend policy might affect your company's share price. Therefore, you gathered the following information from your closest competitors.Required: Compare the dividend policy of these two firms and how each seems
Arc Ltd. has $1,000 excess cash. It can declare a dividend now (choice 1) or invest the money and pay the dividend in one year (choice 2). The tax rates and interest rate are shown below.Corporate tax rate ............................ 40%Personal tax rate ..............................
Go to the Dividendlnvestors.ca website at www.dividendinvestors.ca/ and find the ex-dividend date and quarterly dividend payments for the following companies:Royal Bank (RY)Toronto-Dominion Bank (TD)Bank of Nova Scotia (BNS)Canadian Imperial Bank of Commerce (CM)Bank of Montreal (BMO)Tim Hortons
You are an analyst at Oil Patch Semiconductors Inc. (OPS), a small high-tech firm specializing in the design of proprietary chips used by oil companies to help find new sources of oil and natural gas. Your company has had a very successful quarter and currently has $1 million in excess cash to be
Northern Technology Inc. (NTI) closed the end of 2009 with a balance of $1,500,000 in retained earnings, as shown below. Because of a poor economy, NTI cut its total annual dividends to $30,000, after which it expects earnings and dividends to increase. For the next eight years, it expects the
Early Bird Bakeries Ltd. (EBB) is planning to pay a special dividend per share, over and above its regular quarterly dividend, at the end of the fourth quarter of 2012. EBB ended 2009 with retained earnings of $1,240,000.Required:Calculate the maximum special dividend per share EBB could pay at the
Community Electric Power Corporation (CEPC) is the one and only power supplier to Uranium City, located in the far north. The power rates are regulated by the government and consequently, CEPC has had a net income of $75 million for each of the last five years. Beginning January 1, 2011, CEPC will
You have collected the following data:Required: Use the concept of the life cycle of a business to rank these companies according to the following categories: pre-teenaged, teenaged, middle-aged, and old. Provide a reason for your choice.
You have $10,000 invested within your registered retirement savings plan (RRSP) in common shares of Canadian companies. All taxes on earnings within your RRSP are deferred until the time when you decide to withdraw money from your RRSP. Withdrawals are taxed fully as regular income in the year the
The dividend policies of businesses has been the subject of much debate in the financial management literature. Required: Discuss the view that dividends can increase the wealth of shareholders.
Terry is the credit manager of Heltex Ltd. He is concerned that the pattern of monthly sales receipts shows that accounts receivable collection is poor compared with budget. Heltex's sales manager believes that Terry is to blame for this situation, but Terry insists that he is not. Why might Terry
How might each of the following affect the level of inventory held by a business? (a) An increase in the number of production bottlenecks experienced by the business (b) A rise in the level of interest rates (c) A decision to offer customers a narrower range of products in the future (d) A change
What are the reasons for holding inventory? Are these reasons different from the reasons for holding cash?
Identify the costs of holding: (a) Too little cash (b) Too much cash.
Define working capital and describe the working capital cycle for a retailing company.
Your company is planning to cut inventory levels to reduce working capital to $250,000 for next year. You are developing a sensitivity analysis for next year's budget and have arrived at the following scenarios.Required:(a) Calculate the inventory reduction required to reduce working capital to
Nanaimo Candy Company (NCC) expects sales for the first six months of 2010 to show the following pattern. Previously, NCC made sales on the basis of a cash-only policy. For 2010, NCC will institute a net 30 (n30) payment policy for its customers. NCC expects that, on average, 40% of credit sales
Your firm is considering several options concerning its inventory, receivables, and payables. Data is shown below.Required:(a) Which option has the longest operating cash cycle?(b) Which option has the shortest operating cash cycle?
Selected information from the income statement and balance sheet of Fraser River Adventures Ltd. (FRA) is as follows: Sales ............................................................... $5,300,000 Percentage of credit sales ....................................... 80% Cost of goods sold as a
International Electric Ltd. at present offers its customers 30 days' credit. Half the customers, by value, pay on time. The other half take an average of 70 days to pay. The business is considering offering a cash discount of 2% to its customers for payment within 30 days. The credit manager
Mayo Computers Ltd. has annual sales of $20 million before taking into account bad debts of $0.1 million. All sales made by the business are on credit and, at present, credit terms are negotiable by the customer. On average, the collection period for accounts receivable is 60 days. Receivables are
Boswell Enterprises Ltd. is reviewing its credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the forthcoming year will be $3 million under the existing policy; 30% of accounts receivable are expected to be collected one month after being
Delphi Ltd. has recently decided to enter the expanding market for minidisc players. The business will manufacture the players and sell them to small TV and hi-fi specialists, medium-sized music stores, and large retail chain stores. The new product will be launched next February and predicted
You are employed as an analyst at the Candy Company of Canada Ltd. (CCC). CCC manufactures candy and sells it to various retailers across the country. You have gathered the following information.Annual sales ............................................$18,000,000Gross margin
Your company has six product lines as shown below.Required:Calculate the reorder point for inventory for each product.
You have recently been hired to work in the accounts receivable department of Canadian Moonlighting Film Inc. (CMF). As part of your introduction and familiarization with the company, you are comparing the aging listings for accounts receivable and accounts payable as shown below:Required: (a)
For the six product lines from Problem and Case 12.2, you have collected the following additional information.Required:Calculate the economic order quantity (EOQ) for each inventory product.
You have been attending a small and medium-sized companies' trade conference where one of the topics was inventory management. You have gathered and shared the following information on cutting tools:Required:(a) Calculate the EOQ for cutting tools for each company.(b) Calculate the number of orders
You are looking at changing the credit policy on credit sales from n60 to either n30 or n45. If the collection period is decreased, you can expect decreases in average accounts receivable, the opportunity cost financing charge on accounts receivable, bad debts expenses, and sales. You have
You manage your firm's accounts receivable and are dissatisfied with the current credit policy. You are analyzing two alternative plans, shown below.Required:Recommend, with supporting calculations, which proposed plan is better.
Castlefield Furniture Ltd. wants to change its credit policy to stimulate the sales of its new line of leather sofas. The credit manager has asked you to analyze the situation. You have gathered the following data from your company's records and forecasts:Required: Determine which length of credit
Your company has been offered a choice of two discounts because of a new policy change at a major supplier. Your company normally takes 60 days to pay for purchased goods. The discount choices are as follows:Option 1: 3% discount if paid within 10 days Option 2: 2% discount if paid within 20
The shareholder value approach to managing businesses is different from the stakeholder approach to managing businesses. In the latter case, the different stakeholders of the business (employees, customers, and suppliers) are considered of equal importance and so the interests of shareholders will
Why is MVA not really suitable as a tool for internal management purposes?
Should managers interpret changes in the total market value of the shares (i.e., share price multiplied by the number of shares outstanding) over time as an indicator of shareholder value created (or lost)?
It has been argued that many businesses are overcapitalized. If this is true, what may be the reasons for businesses having too much capital, and how can EVA help avoid this problem?
Comment on these facts taken from the most recent annual report of Island Conglomerates. "Island posted a 21% total shareholder return last year. This was 50% higher than the average for the past five years. Halfway through last year, Island, which is mainly a communications company, acquired 80%
You are analyzing seven competitors.Required:(a) Calculate the shareholder value for each firm.(b) Calculate the fair value per share for each firm.
Refer to the same data as Problem and Case 13.9.In problemPrairie WindPower Ltd. is a venture that will operate for five years, at which time it will be wound up. $50 million in shares have been sold to the public, and $20 million in five-year bonds have been purchased by the Manitoba Heritage
The Bluenose Ship Company executed an initial public offering five years ago by selling 10 million shares at $10 each after brokerage costs. At the same time, $50 million of 10% bonds maturing in 20 years were issued at par ($100). The shares now sell at $25 and the bonds trade at $102. Retained
Cole Harbour Silver Ltd. (CHS) was formed by a hockey player to sell engraved silver teacups. CHS is capitalized by $4 million in shares and $1 million in bonds. It will use all that money to buy assets with a five-year economic life and use straight-line depreciation. EBIT is expected to be
You are using market value added to examine your closest competitors.Required:Calculate the missing data for each company.
Drinks Inc. has estimated the following free cash flows for its five-year planning period: Year Free Cash Flows ($ millions) 1 ........................ 35.0 2 ........................ 38.0 3 ........................ 45.0 4 ........................ 49.0 5
Ahmed Trucking Ltd. was recently formed and issued 80 million shares at $0.50 each and obtained loans of $24 million. The business used the proceeds to purchase the remaining leases on some commercial properties that are rented out to small businesses. The leases will expire in four years' time and
Valley Forms Ltd. is considering introducing a system of EVA and wants its managers to focus on the longer term rather than simply on the year-to-year EVA results. The business is seeking your advice as to how a management bonus system could be arranged so as to ensure that the longer term is taken
You are a financial analyst employed at Clarington Quarry Works (CQW). CQW has a December 31 year-end. CQW's board of directors is considering a change to the company's executive compensation plan so that in the future it will be based on economic value added. Your manager, who reports to the
Peterborough Outboard Motors (POM), a profitable maker of outboard motors for pleasure boats, would like to enter the snow blower market. POM's weighted average cost of capital is 7% and its accounting department notes depreciation expense will approximate capital cost allowances in the company's
You are analyzing three competitors, shown below.Required: Calculate the free cash flows for the three firms.
Wood Industries has the following data for 2010:Sales .....................................................................$25,000,000Depreciation expense ................................................. $4,000,000Reduction in working capital in 2010.............................. $1,200,000New
Sandy River Oil Sands Ltd. (SROS) has a terminal value of $200 million. SROS used a cost of capital of 20%.Required:(a) Calculate the present value of the terminal value of SROS with a planning horizon of:1. 8 years2. 15 years3. 20 years.(b) Define present value of the terminal value.(c) What do
It is now the end of 2009 and Astrid Sportswear Inc. (ASI), is considering acquiring Halloween Attire Ltd. (HAL). ASI uses a 12% discount rate. ASI has gathered the following data on HAL.Required:Calculate HAL's total business value at the end of 2009.
Refer to the data in Problem and Case 13.5. HAL has 100 million shares outstanding and $1 billion in debt. Required:In problemRequired:What is the minimum per share offer for HAL shares that HAL's board of directors would consider accepting?
You have gathered the following information on your competitors.Required:Calculate the missing information.
You have gathered data from the annual reports of the following companies:Required:(a) Calculate EVA for each company.(b) In which company would you buy shares? Why?
Prairie WindPower Ltd. is a venture that will operate for five years, at which time it will be wound up. $50 million in shares have been sold to the public, and $20 million in five-year bonds have been purchased by the Manitoba Heritage Fund. Capital assets totalling $70 million are being
Distinguish between a merger and an acquisition. What is the significance of this distinction?
Identify and discuss four reasons why a business may divest part of its operations.
Identify four reasons why a business seeking to maximize the wealth of its shareholders may wish to take over another business.
Identify four tactics the directors of a target company might use to resist an unwelcome bid.
Bonaventure Cabinets Ltd. is a small publicly traded company that prides itself on being one of the few independent Canadian furniture makers listed on the TSX. It has an enviable record of profitability growth over the past 10 years. Bonaventure is known for its very conservative accounting
A Company is interested in a merger with B Company. B Company is growing very fast and the price of its shares has risen rapidly. The two firms will continue as separate companies after the merger, with one being a subsidiary of the other. However, the two parties are having difficulty agreeing to
For TRE, you have collected the following information:Required: Estimate the market price of a common share using the: (a) Dividend valuation method (b) Free cash flow method.
When a business wishes to acquire another, it may make a bid in the form of cash, a share-for-share exchange, or cash obtained from a debt-for-share exchange. Required: Discuss the advantages and disadvantages of each form of consideration from the viewpoint of: (a) The bidding business's
Pea Inc. is considering the acquisition of Shooter Ltd. The most recent data is presented below. Pea will offer one of its shares for two shares of Shooter if they decide to go ahead with the deal. Net income for 2011 is expected to grow by 10% at Pea and by 20% at Shooter, excluding any
Dawn Raider Ltd. has just offered one of its shares for two shares in Sleepy Giant Corp., a business in the same industry as itself. Extracts from the financial statements of each business for the year ended May 31, 2010, appear below:If the takeover succeeds, Dawn Raider plans to combine .Sleepy

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