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Intermediate Financial Management 12th edition Eugene F. Brigham, Phillip R. Daves - Solutions

Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25 million in long-term debt. What is the debt ratio?
Reno Revolvers has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio?
Gardial & Son has an ROA of 12%, a 5% profit margin, and a return on equity equal to 20%. What is the company's total assets turnover? What is the firm's equity multiplier?
Assume you are given the following relationships for the Haslam Corporation: Sales/total assets ...................... 1.2 Return on assets (ROA) .............. 4% Return on equity (ROE) ............. 7% Calculate Haslam's profit margin and liabilities-to-assets ratio. Suppose half its liabilities
Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow).b. Calculate the present value of the
Traver-Dunlap Corporation has a 15% weighted average cost of capital (WACC). Its most recent sales were $980 million and its total net operating capital is $870 million. The following shows estimates of the forecasted growth rates, operating profitability ratios, and capital requirement ratios
a. Describe briefly the legal rights and privileges of common stockholders.b. Use a pie chart to illustrate the sources that comprise a hypothetical company's total value. Using another pie chart, show the claims on a company's value.c. Suppose the free cash flow at Time 1 is expected to grow at
What is the required rate of return on a preferred stock with a $50 par value, a stated annual dividend of 7% of par, and a current market price of? (a) $30, (b) $40, (c) $50, (d) $70 (Assume the market is in equilibrium with the required return equal to the expected return)?
Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 80% per
Investors require a 13% rate of return on Brooks Sisters's stock (rs = 13%).a. What would the estimated value of Brooks' stock be if the previous dividend were D0 = $3.00 and if investors expect dividends to grow at a constant annual rate of:(1) 25%,(2) 0%,(3) 5%,(4) 10%?b. Using data from part a,
Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is 12%.a. What is the terminal, or
You are analyzing Jillian's Jewlery (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it. a. What dividends do you
Conroy Consulting Corporation (CCC) has been growing at a rate of 30% per year in recent years. This same nonconstant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 30%). a. If D0 = $2.50, rs = 12%, and gL = 7%, then what is CCC's stock worth today? What is its expected dividend
Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8; the risk-free rate is 5.2%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share.
Assuming that the required rate of return is determined by the CAPM, explain how you would use the dividend growth model to estimate the price for Stock i. Indicate what data you would need, and give an example of a "reasonable" value for each data input. How would this be different if you used
How could you use the nonconstant growth model to find the value of the stock? Here you can assume that the expected growth rate starts at a high level, then declines for several years, and finally reaches a steady state where growth is constant.
Suppose you were offered a chance to buy a stock at a specified price. The stock paid a dividend last year, and the dividend is expected to grow at a very high rate for several years, at a moderate rate for several more years, and at a constant rate from then on. How could you estimate the expected
Start with the partial model in the file Ch09 P10 Build a Model.xlsx on the textbook's Web site, which contains the 2015 financial statements of Zieber Corporation. Forecast Zeiber's 2016 income statement and balance sheets. Use the following assumptions:(1) Sales grow by 6%.(2) The ratios of
Start with the partial model in the file Ch09 P11 Build a Model.xlsx on the textbook's Web site, which contains Henley Corporation's most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the next questions.a. Forecast
a. Using Hatfield's data and its industry averages, how well run would you say Hatfield appears to be in comparison with other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and point to various ratios that support your position. Also, use the
Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2015 to $9.2 million in 2016. Its assets totaled $5 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, current liabilities
Maggie's Muffins Inc. generated $5,000,000 in sales during 2015, and its year-end total assets were $2,500,000. Also, at year-end 2015, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2016, the
At year-end 2015, Wallace Landscaping's total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2015 were $3.5 million, are expected to increase by 35% in 2016. Total assets and accounts payable are proportional to sales, and that relationship will be maintained.
Stevens Textiles' 2015 financial statements are shown below:Balance Sheet as of December 31, 2015 (Thousands of Dollars)Income Statement for December 31, 2015 (Thousands of Dollars)Sales ......................................................$36,000Operating costs
Garlington Technologies Inc.'s 2015 financial statements are shown below:Balance Sheet as of December 31, 2015Income Statement for December 31, 2015Sales ....................................$3,600,000Operating costs ........................ 3,279,720EBIT .................................... $
A major component of financial planning is to forecast future financial statements. If you had a company's balance sheets and income statements for the past 5 years but no other information, how could you use the forecasted financial statement approach to forecast the following items for the coming
Define each of the following terms: a. Agent; principal; agency relationship b. Agency cost c. Basic types of agency conflicts d. Managerial entrenchment; nonpecuniary benefits e. Greenmail; poison pills; restricted voting rights f. Stock option; ESOP
What is the possible agency conflict between inside owner/managers and outside shareholders?
What are some possible agency conflicts between borrowers and lenders?
What is an agent and what is a principal? What kinds of situations in companies give rise to conflicts between these two, called agency conflicts?
Managers of corporations don't always take actions that are in the best interest of the corporation's owners. What are some of those actions, and how can corporations structure the management contract to help control them?
What are some of the pros and cons of using stock options to compensate managers?
How have events such as the accounting frauds at AIG, Enron, WorldCom, and several other companies affected people's ideas about corporate governance, the government's role in corporate governance, and the use of options for management compensation?
The stock of Gao Computing sells for $50, and last year's dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock pays a dividend of $3.30 per share, and new preferred stock could be sold at a price to net the company $30 per share. Security
a. What is the market interest rate on Harry Davis's debt and what is the component cost of this debt for WACC purposes?b. (1) What is the firm's cost of preferred stock?(2) Harry Davis's preferred stock is riskier to investors than its debt, yet the preferred's yield to investors is lower than the
Suppose the Schoof Company has this book value balance sheet:The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV?
Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:The projects are equally risky, and their cost of capital is 12%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Which project has the higher MIRR?
Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows:a. Construct NPV profiles for Projects A and B. b. What is each project's IRR? c. If each project's cost of capital were 10%, which project, if either, should be selected? If the cost
What is a post-audit, and what is the purpose of this audit?
a. Disregard the assumptions. What is Shrieves' depreciable basis? What are the annual depreciation expenses?b. Construct annual incremental operating cash flow statements.c. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital.d.
How do simulation analysis and scenario analysis differ in the way they treat very bad and very good outcomes? What does this imply about using each technique to evaluate project riskiness?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 40%. a. What is the initial investment outlay? b. The
St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $182,500 and have an estimated life of 8 years with
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales ................................................... $18 million Operating costs (not including depreciation) ................ $9
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value?
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,700,000 of equipment. The company could use either straight line or the
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the
The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for 5 years and $325 for the sixth year. Its current book value is $3,575,
Bradford Services Inc. (BSI) is considering a project with a cost of $10 million and an expected life of 3 years. There is a 30% probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each of the next 3 years. There is a 40% probability of
a. Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 per year for three years. The cost of capital for this type of project is 10 percent and the risk-free rate is 6 percent. After discussions with the marketing department, you learn
Start with the partial model in the file Ch15 P13 Build a Model.xls on the textbook's Web site. J. Clark Inc. (JCI), a manufacturer and distributor of sports equipment, has grown until it has become a stable, mature company. Now JCI is planning its first distribution to shareholders. (See the file
Puckett Products is planning for $5 million in capital expenditures next year. Puckett's target capital structure consists of 60% debt and 40% equity. If net income next year is $3 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2015 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2016 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This
Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $15 million to fund all of its positive-NPV projects and her job is to determine how to raise the money. Reynolds's net income is $11 million, and it has paid a $2
JPix management is considering a stock split. JPix currently sells for $120 per share and a 3-for-2 stock split is contemplated. What will be the company's stock price following the stock split, assuming that the split has no effect on the total market value of JPix's equity?
Gardial GreenLights, a manufacturer of energy-efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a $15 million investment in new machinery. Gardial plans to maintain its current 30%
Fauver Enterprises declared a 3-for-1 stock split last year, and this year its dividend is $1.50 per share. This total dividend payout represents a 6% increase over last year's pre-split total dividend payout. What was last year's dividend per share?
Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $3 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and
a. Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variables costs of $10.b. Now, to develop an example which can be presented to PizzaPalace's management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U,
Shapland Inc. has fixed operating costs of $500,000 and variable costs of $50 per unit. If it sells the product for $75 per unit, what is the break-even quantity?
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under
Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has zero coupon debt outstanding that matures in 3 years with $110 million face value. The
Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 40% rate. The 4-year forecasts of free cash flow and interest expenses are shown below. Free cash flow and interest expenses are expected to grow at a 5% rate starting after Year 4. Answer the following questions.a.
a. Assume that Firms U and L are in the same risk class, and that both have EBIT = $500,000. Firm U uses no debt financing, and its cost of equity is rsU = 14%. Firm L has $1 million of debt outstanding at a cost of rd = 8%. There are no taxes. Assume that the MM assumptions hold, and then:(1)
Explain, in your own words, how MM uses the arbitrage process to prove the validity of Proposition I. Also, list the major MM assumptions and explain why each of these assumptions is necessary in the arbitrage proof.
Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 7% rate. Sheldon's unlevered cost of equity is 13% its tax rate is 40%.a. What is Sheldon's unlevered horizon
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%.
Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumptions are met. a. Suppose that both firms are subject to a 40% federal-plus-state corporate tax rate,
What is the compressed adjusted present value (APV) model and how does this differ from the Modigliani and Miller models?
In what circumstances is the compressed adjusted present value (APV) model useful and how would it be applied?
Start with the partial model in the file Ch18 P08 Build a Model.xls on the textbook's Web site. Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10%
The estimated pre-IPO value of equity in the company is about 63 million and there are 4 million shares of existing shares of stock held by family members. The investment bank will charge a 7% spread, which is the difference between the price the new investor pays and the proceeds to the company.
Benjamin Garcia's start-up business is succeeding, but he needs $200,000 in additional funding to fund continued growth. Benjamin and an angel investor agree the business is worth $800,000 and the angel has agreed to invest the $200,000 that is needed. Benjamin presently owns all 40,000 shares in
Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks
Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $60 million. Zang currently has 4 million shares outstanding and will issue 1 million new shares. ESM charges a 7% spread. What is
What's the difference between an IPO and an SEO? Would you view purchasing a stock in an SEO to be more or less risky than purchasing a stock in an IPO? Would you expect the same first-day returns for an SEO purchase as for an IPO purchase? Why?
Start with the partial model in the file Ch19 P06 Build a Model.xls on the textbook's Web site. As part of its overall plant modernization and cost reduction program, Western Fabrics' management has decided to install a new automated weaving loom. In the capital budgeting analysis of this
a. (1) What is the present value cost of owning the equipment?(2) Explain the rationale for the discount rate you used to find the PV.b. What is Lewis's present value cost of leasing the equipment?c. What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or
Maggie's Magazines (MM) has straight nonconvertible bonds that currently yield 9%. MM's stock sells for $22 per share, has an expected constant growth rate of 6%, and has a dividend yield of 4%. MM plans on issuing convertible bonds that will have a $1,000 par value, a coupon rate of 8%, a 20-year
Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 5% coupon paid annually and warrants attached. These bonds are currently trading for $1,000. Neubert also has outstanding $1,000 par value 15-year straight debt with a 7% coupon paid annually, also trading for $1,000. What
Breuer Investment's convertible bonds have a $1,000 par value and a conversion price of $50 a share. What is the convertible issue's conversion ratio?
Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2016 and 2017:Estimates obtained from the credit and
a. Johnson plans to use the preceding ratios as the starting point for discussions with RR's operating team. She wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data, does RR seem to be
Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales. a. What is the length of the firm's cash conversion cycle? b. If Negus' annual sales are $4,380,000
Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow
Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,500,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases. a. What is the days sales outstanding? b. What is the average amount of
Rework parts a through d of Problem 22-9 using a spreadsheet model. Answer the following questions:a. How large would the accounts payable balance be if Malone takes discounts? If it does not take discounts and pays in 30 days?b. How large must the bank loan be if Malone takes discounts? If Malone
a. Assume that, on average, the brothers expect annual sales of 18,000 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 is its expected average daily sales (ADS)?(3) What is its expected average accounts
The following inventory data have been established for the Adler Corporation.(1) Orders must be placed in multiples of 100 units.(2) Annual sales are 338,000 units.(3) The purchase price per unit is $3.(4) Carrying cost is 20% of the purchase price of goods.(5) Cost per order placed is $24.(6)
Start with the partial model in the file Ch24 P06 Build a Model.xls on the textbook's Web site. Use the information and data below. F. Pierce Products Inc. is financing a new manufacturing facility with the issue in March of $20,000,000 of 20-year bonds with semiannual interest payments. It is now
a. It is January and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion, and is concerned that interest rates will rise during the interim. Currently, TS can issue 20-year bonds at 7%, but interest rates are on the rise and Stooksbury is
Define each of the following terms: a. Derivatives b. Enterprise risk management c. Financial futures; forward contract d. Hedging; natural hedge; long hedge; short hedge; perfect hedge; symmetric hedge; asymmetric hedge e. Swap; structured note f. Commodity futures
Start with the partial model in the file Ch25 P05 Build a Model.xls on the textbook's Web site. Duchon Industries had the following balance sheet at the time it defaulted on its interest payments and filed for liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral
The Verbrugge Publishing Company's 2015 balance sheet and income statement are as follows (in millions of dollars):Balance SheetIncome StatementNet sales ...........................................................$540.0Operating expense ............................................... 516.0Net

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