CFIN 6th Edition Scott Besley, Eugene Brigham - Solutions

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At year-end 2010, total assets for Shome Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25 percent in 2011. Total assets and accounts payable are proportional to sales, and that relationship will be maintained.Shome
The Niendorf Corporation produces tea kettles, which it sells for $15 each. Fixed costs are $700,000 for up to 400,000 units of output. Variable costs are $10 per kettle.(a) What is the operating breakeven point?Illustrate by means of a chart. (b) What is Niendorf’s degree of operating leverage
Analysts have evaluated the Sivar Silver Company and discovered that if sales are$800,000, the following measures will exist for the company:Degree of operating leverage (DOL) 4.0Degree of fi nancial leverage (DFL) 2.0Earnings before interest and taxes (EBIT) $50,000 Earnings per share (EPS)
The following relationships exist for Dellva Industries, a manufacturer of electronic components. Each unit of output is sold for $45; the fi xed costs are $175,000, of which $110,000 is annual depreciation charges; and variable costs are $20 per unit. (a) What is Dellva’s operating breakeven
Premier Primer Pumps (PPP) sells sump pumps for $2,500 each. The variable cost to manufacture each pump is $1,750, and fi xed operating costs are $150,000 annually. PPP normally sells 300 pumps each year, has an interest expense equal to $30,000, and its marginal tax rate is 40 percent. Given this
Suppose a fi rm makes purchases of $3.6 million per year under terms of 2/10, net 30, and takes discounts. (a) Is there a cost for the trade credit the fi rm uses? (b) If the fi rm did not take discounts and it paid on time, what would be the APR and EAR of this non-free trade credit? (c) What
The Meyer Company must arrange fi nancing for its working capital requirements for the coming year. Meyer can (a) borrow from its bank on a simple interest basis (interest payable at the end of the loan) for one year at a 12 percent simple rate; (b) borrow on a three-month renewable loan at an 11.5
Boles Corporation needs to raise $500,000 for one year to supply capital to a new store.Boles buys from its suppliers on terms of 3/10, net 90, and it currently pays on Day 10 and takes discounts, but it could forgo discounts, pay on Day 90, and get the needed$500,000 in the form of costly trade
Howe Industries sells on terms of 2/10, net 40. Gross sales last year were $4.5 million, and accounts receivable averaged$437,500. Half of Howe’s customers paid on Day 10 and took discounts. What is the cost of trade credit to Howe’s nondiscount customers? (Hint: Calculate sales per day based
If a fi rm buys under terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the APR of its non-free trade credit? Does the fi rm receive more or less credit than it would if it paid within 15 days?
The Pettit Corporation has annual credit sales of $2 million. Current expenses for the collection department are $30,000, bad debt losses are 2 percent, and the DSO is 30 days. Pettit is considering easing its collection efforts so that collection expenses will be reduced to $22,000 per year. The
The McCollough Company has a variable operating cost ratio of 70 percent, its cost of capital is 10 percent, and current sales are$10,000. All of its sales are on credit, and it currently sells on terms of net 30. Its accounts receivable balance is $1,500. McCollough is considering a new credit
Green Thumb Garden Centers sells 240,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25. (a) What is the economic
Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000.Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40 days after their purchases.What are (a) the days sales outstanding(DSO) and (b) the average amount of
The accounts payables of Momma’s Baby, Inc. generally equal $1.6 million. If the turnover of accounts payables is 20, what are its (a) payables deferral period (DPO)and (b) annual credit purchases?
At any point in time, Grandiron Fertilizer generally owes its suppliers $180,000. The company’s cost of goods sold averages$2.52 million. What are Grandiron’s (a)payables turnover and (b) payables deferral period (DPO)?
Unique Uniforms generally has accounts receivables that equal $480,000. If the accounts receivables turnover for the com pany is 12, what are its (a) receivables collection period (DSO) and (b)annual credit sales?
Small Fry Pools generally carries an amount of receivables equal to $80,000, and its annual credit sales equal $2.4 million. What are Small Fry’s (a) receivables turnover and(b) receivables collection period (DSO)?
Wally’s Motors generally has inventory that equals $48 million. If the inventory turnover for the company is 8, what are its (a)inventory conversion period and (b) cost of goods sold?
The Cristo Candy Corporation carries an average balance of inventory equal to$400,000. The company’s cost of goods sold averages $4.5 million. What are Cristo’s(a) inventory turnover and (b) inventory conversion period?
Free Flying Aviation (FFA) declared a 20 percent stock dividend that will be paid three weeks from today. Before the “payment”of the stock dividend, the equity section of FFA’s balance sheet showed the following:The market value of FFA’s stock is $7.00 per share. Construct a pro forma
The Scanlon Company’s optimal capital structure calls for 50 percent debt and 50 percent common equity. The interest rate on its debt, rd, is a constant 10 percent;its cost of common equity from retained earnings, rs, is 14 percent; the cost of equity from new stock, re, is 16 percent; and its
HQ Company is considering a 1-for-3 reverse stock split. HQ’s stock is currently selling for $3 per share. (a) What will the price of the stock be after the stock split?(b) HQ plans to pay a dividend equal to$0.25 per share after the split. The company would like to pay an equivalent dividend per
After a 5-for-1 stock split, the Swensen Company paid a dividend of $0.75 per new share, which represented a 9 percent increase over last year’s pre-split dividend. What was last year’s dividend per share?
Last year the Bulls Business Bureau (BBB)retained $400,000 of the $1 million net income it generated. This year BBB generated net income equal to $1.2 million. If BBB follows the constant payout ratio dividend policy, how much should be paid in dividends this year?
The Garlington Corporation expects next year’s net income to be $15 million. The fi rm’s debt/assets ratio currently is 40 percent.Garlington has $12 million of profi table investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend policy,
Northern California Heating and Cooling Inc. has a six-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 35 percent with a$10 million investment in plant and machinery.The fi rm wants to maintain a 40 percent
The fi rms HL and LL are identical except for their debt-to-total-assets ratios and interest rates on debt. Each has $20 million in assets, earned $4 million before interest and taxes in 2010, and has a 40 percent marginal tax rate. Firm HL, however, has a debt-to-total-assets ratio (D/TA) of 50
The net operating income (EBIT) for Bear Investment Company (BIC) this year is$80,000. During the year, the company paid$20,000 in interest on its debt and $25,000 in dividends to its common stockholders. If BIC’s marginal tax rate is 40 percent, what is the company’s DFL?
A fi rm has determined that its DOL is 2.0and its DFL is 1.5. As a result, what will be the change in its EPS if sales are 10 percent lower than expected?
Axiom Company’s DFL is 1.5. Axiom knows that if sales increase by 10 percent, its EPS will increase by 30 percent. What is Axiom’s DOL?
Executives of the Donut Shop have determined that the company’s DOL is 3 and its DFL is 6. According to this information, how will Donut Shop’s EPS be affected if its amount of EBIT turns out to be 4 percent higher than expected?
The CFO of Mega Munchies recently received a report that contained the following information:Capital Structure Project Cost IRR Type of Capital Proportion E $200,000 19% Debt 40%F 300,000 17 Preferred stock 0G 200,000 14 Common equity 60 The weighted average cost of capital(WACC) is 12 percent if
Assume the following information:Type of Capital Proportion of After-Tax Cost Capital Structure Debt 5.0% 20.0%Common equity—retained earnings 11.0 80.0 Common equity—new issue 14.0 The fi rm expects to retain $160,000 in earnings this year to invest in capital budgeting projects. If the fi
Magnifi cent Metal Mining (MMM) expects to generate $60,000 in earnings that will be retained for reinvestment in the fi rm this year. If MMM’s capital structure consists of 25 percent debt and 75 percent common equity, stated in total funds, what is the weighted average cost of capital
Chicago Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity. The company expects to have $600 of after-tax income during the coming year, and it plans to retain 40 percent of its earnings. The current stock price is P0 $30, the last dividend paid was
Analysts of the ICM Corporation have indicated that the company is expected to grow at a 5 percent rate for as long as it is in business.Currently ICM’s stock is selling for$70 per share. The most recent dividend paid by the company was $5.60 per share.If ICM issues new common stock, it will
Hybrid Hydro Plants, Inc., which has a marginal tax rate equal to 34 percent, has preferred stock that pays a constant dividend equal to $15 per share. The stock currently sells for $125. If the company incurs a 3 percent fl otation cost each time it issues preferred stock, what is the cost of
The capital budgeting manager of Conscientious Construction Company (CCC)submitted the following report to the CFO:Project IRR Risk A 9.0% Low B 10.0 Average C 12.0 High CCC generally takes risk into consideration by adjusting its average required rate of return (r), which equals 8 percent, when
The risk-free rate of return is currently 5 percent and the market risk premium is 4 percent. The beta of a project under analysis is 1.4, with expected net cash fl ows estimated to be $1,500 per year for fi ve years. The required investment outlay on the project is $4,500. What is the required
The Ewert Company is evaluating the proposed acquisition of a new milling machine.The machine’s base price is $108,000, and it will cost another $12,500 to modify it for special use by the fi rm. The machine falls into the MACRS 3-year class, and it can be sold after three years for $65,000. (See
Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $54,000 per year. The new machine will cost $82,500, and it will have an estimated life of eight years and no salvage value.The new
PowerBuilt Construction is considering whether to replace an existing bulldozer with a new model. If the new bulldozer is purchased, the existing bulldozer will be sold to another company for $85,000. The existing bulldozer has a book value equal to $100,000.What will be the net after-tax cash fl
Compute the internal rate of return (IRR)and the modifi ed internal rate of return(MIRR) for each of the following capital budgeting projects. The fi rm’s required rate of return is 14 percent.Year Project G Project J Project K 0 $(180,000) $(240,000) $(200,000)1 80,100 0 (100,000)2 80,100 0
What are the (a) net present value, (b) internal rate of return (IRR), and (c) modifi ed internal rate of return (MIRR) of the following project? Assume the fi rm’s required rate of return is 15 percent.Year Cash Flow 0 $(75,000)1 50,000 2 40,000
Project P costs $15,000 and is expected to produce benefi ts (cash fl ows) of $4,500 per year for fi ve years. Project Q costs $37,500 and is expected to produce cash fl ows of$11,100 per year for fi ve years. Calculate each project’s (a) net present value (NPV),(b) internal rate of return (IRR),
Project K has a cost of $52,125 and its expected net cash infl ows are $12,000 per year for eight years. The fi rm’s required rate of return is 12 percent. Compute the project’s(a) traditional payback period (PB),(b) discounted payback period (DPB),(c) net present value (NPV), and (d) internal
What is the traditional payback period (PB)of a project that costs $450,000 if it is expected to generate $120,000 per year for fi ve years? If the fi rm’s required rate of return is 11 percent, what is the project’s discounted payback period (DPB)?
What is the internal rate of return (IRR) of a project that costs $45,000 if it is expected to generate $15,047 per year for fi ve years?What is its net present value (NPV)?
A fi rm is evaluating an investment that costs$90,000 and is expected to generate annual cash fl ows equal to $20,000 for the next six years. If the fi rm’s required rate of return is 10 percent, what is the net present value(NPV) of the project? What is its internal rate of return (IRR)? Should
Suppose rRF 9%, rM 14%, and X 1.3.(a) What is rX, the required rate of return on Stock X?(b) Suppose rRF (1) increases to 10 percent or (2) decreases to 8 percent. The slope of the SML remains constant. How would each change affect rM and rX?(c) Assume rRF remains at 9 percent, but rM (1)
Terry recently invested equal amounts in fi ve stocks to form an investment portfolio, which has a beta equal to 1.2—that is, P 1.2. Terry is considering selling the riskiest stock in the portfolio, which has a beta coeffi cient equal to 2.0, and replacing it with another stock. If Terry
The market and Stock S have the following probability distributions:Probability rM rS 0.3 15% 20%0.4 9 5 0.3 18 12 Calculate (a) the expected rates of return for the market and Stock S, (b) the standard deviations for the market and Stock S, and(c) the coeffi cients of variation for the market and
Following is information for two stocks: Expected Standard Investment Return, f Deviation, or Stock D Stock E 10.0% 8.0% 36.0 24.0 Which investment has the greater relative risk?
Suppose that rRF 5%, rM 12%. What is the appropriate required rate of return for a stock that has a beta coeffi cient equal to 1.5?
Tanner Technologies Corporation (TTC)has been growing at a rate of 20 percent per year in recent years. This same growth rate is expected to last for another two years. If D0 $1.60, rs 10%, and gnorm 6%, what is TTC’s stock worth today? What are its expected dividend yield and capital gains
Microtech Corporation is expanding rapidly.Because it needs to retain all of its earnings, it does not currently pay any dividends.Investors expect Microtech to begin paying dividends eventually, with the fi rst dividend of $1.00 coming three years from today. The dividend should grow rapidly—at
Assume that the average fi rm in your company’s industry is expected to grow at a constant rate of 6 percent, and its dividend yield is 7 percent. Your company is considered as risky as the average fi rm in the industry, but it has just successfully completed some research and development work
The stock of East/West Maps is currently selling for $122.40, which equates to a P/E ratio of 30. Using the P/E ratio, compute the current EPS of East/West.
J.D. Agribusiness has $500,000 in invested capital, 60 percent of which is in the form of debt. With this capital structure, the company’s average cost of funds is 12 percent.According to J.D.’s latest income statement, the fi rm’s operating income (EBIT)is $100,000 and its marginal tax rate
McCue Mining Company’s ore reserves are being depleted, so the fi rm’s sales are falling.In addition, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 5 percent per year. If D0 $5 and rs
Nancy Cotton bought NuTalk for $15 per share. One year later, Nancy sold the stock for $21 per share, just after she received a$0.90 cash dividend from the company.What total return did Nancy earn? What portion of the total return is the dividend yield and what portion is the capital gains yield?
Robert paid $1,000 for a 10-year bond with a coupon rate equal to 8 percent when it was issued on January 2. If Robert sold the bond at the end of the year in which it was issued for a market price of $925, what return would he earn? What portion of this return represents capital gains, and what
It is now January 1, 2011, and you are considering the purchase of an outstanding Puckett Corporation bond that was issued on January 1, 2009. The Puckett bond has a 9.5 percent annual coupon and a 30-year original maturity (it matures on December 31, 2038). Interest rates have declined since the
Intercontinental Baseball Manufacturers(IBM) has an outstanding bond with a$1,000 face value that matures in 10 years.The bond, which pays $25 interest every six months ($50 per year), is currently selling for $598.55. What is the bond’s yield to maturity?
Suppose you and most other investors expect the rate of infl ation to be 7 percent next year, to fall to 5 percent during the following year, and then to remain at a rate of 3 percent thereafter. Assume that the real risk-free rate, r*, is 2 percent and that there is no maturity risk premium on
Today is January 3, 2011, and according to the results of a recent survey, investors expect the annual interest rates in the years 2014–2016 to be Year 1-Year Rate 2014 5.0%2015 4.0 2016 3.0 The rates given here include the risk-free rate, rRF, and appropriate risk premiums.Today a three-year
Suppose that economists have determined that the real risk-free rate of return is 3 percent and that infl ation is expected to average 2.5 percent per year long into the future. A one-year Treasury note offers a rate of return equal to 5.6 percent. You are evaluating two corporate bonds: Bond
The interest rate on one-year Treasury bonds is 2.2 percent, the rate on two-year Treasury bonds is 3.0 percent, and the rate on threeyear Treasury bonds is 3.6 percent. These bonds are considered risk free, so the rates given here are risk-free rates (rRF). The oneyear bond matures one year from
The rate of infl ation for the coming year is expected to be 3 percent, and the rate of infl ation in Year 2 and thereafter is expected to remain constant at some level above 3 percent.Assume that the real risk-free rate, r*, is 2 percent for all maturities and the expectations theory fully
A year ago, Melissa purchased 50 shares of common stock for $20 per share. During the year, value of her stock decreased to $18 per share. If the stock did not pay a dividend during the year, what yield did Melissa earn on her investment?
If the appropriate interest rate is 8 percent, what are the present values of the following cash fl ow streams?Year Cash Stream A Cash Stream B 1 $100 $300 2 400 400 3 400 400 4 300 100
Allison wants to pay off her existing automobile loan. Two years ago, Allison borrowed$35,600 with terms that required her to make monthly payments equal to $739 for a period of fi ve years. The interest rate on the loan is 9 percent. To the nearest dollar, how much does Allison currently owe on
Brandi just received her credit card bill, which has an outstanding balance equal to $3,310. The credit card carries an 18 percent simple interest rate, which is compounded monthly. If Brandi pays $150 each month, how long will it take her to pay off the credit card bill? Assume that the only
Jack just discovered that he holds the winning ticket for the $87 million “mega”lottery in Missouri. Now he must decide which alternative to choose: (a) a $44 million lump-sum payment today or (b) a payment of $2.9 million per year for 30 years.With the second option, the fi rst payment will be
Hilda invested $5,000 four years ago. If the investment is now worth $7,058, what rate of return has Hilda earned on her investment?Assume that interest is compounded annually.
While Steve Bouchard was a student at the University of Florida, he borrowed $12,000 in student loans at an annual interest rate of 9 percent. If Steve repays $1,500 per year, how long, to the nearest year, will it take him to repay the loans?
Find the present value of $500 due in fi ve years if the investment earns 12 percent compounded (a) annually, (b) semiannually, and (c) monthly.
Find the amount to which $500 will grow in fi ve years if the investment earns 12 percent compounded (a) annually, (b) semiannually, and (c) monthly.
What is the present value of a perpetuity of$280 per year if the appropriate discount rate is 7 percent? What would happen to the present value of the perpetuity if the appropriate rate rose to 14 percent?
If you want to pay yourself $600 per year for the next 10 years, how much must you deposit today in an investment account that will pay 10 percent interest annually? The fi rst $600 payment will be withdrawn from the account today.
If you want to pay yourself $600 per year for the next 10 years, how much must you deposit today in an investment account that will pay 10 percent interest annually?The fi rst $600 payment will be withdrawn from the account at the end of this year.
If you invest $600 per year for the next 10 years, how much will your investment be worth at the end of 10 years if your opportunity cost is 10 percent? The fi rst $600 investment will be made today.
If you invest $600 per year for the next 10 years, how much will your investment be worth at the end of 10 years if your opportunity cost is 10 percent? The fi rst $600 investment will be made at the end of this year.
Martell Corporation’s sales were $12 million this year. Sales were $6 million fi ve years earlier. To the nearest percentage point, at what annual rate have sales grown?
Compute the present value of $1,552.90 due in 10 years at (a) a 12 percent discount rate and (b) a 6 percent rate.
WonderWorld Widgets (WWW) needs to raise $75 million in debt. To issue the debt, WWW must pay its underwriter a fee equal to 3 percent of the issue. The company estimates that other expenses associated with the issue will total $450,000. If the face value of each bond is $1,000, how many bonds must
The Taussig Company, whose stock price is currently $25.90, plans to raise $15 million by issuing common stock. Underwriters have informed Taussig’s management that it must price the new issue to the public at$25 per share to ensure that all shares will be sold. If the underwriters’
How has deregulation of the fi nancial services industry affected the makeup of fi -nancial intermediaries? How do you think intermediaries’ characteristics will change in the future?
The SEC attempts to protect investors who are purchasing newly issued securities by requiring issuers to provide relevant fi -nancial information to prospective investors.The SEC does not provide an opinion about the real value of the securities. Do you think the SEC should, as a part of every new
Assume that you are given the following relationships for Zumwalt Corporation:Sales/total assets 1.5Return on assets (ROA) 3.0%Return on equity (ROE) 5.0%Calculate Zumwalt’s net profi t margin and debt ratio.
Last year Z&B Paints reported its net income as $650,000. A review of its income statement shows that Z&B’s operating expenses (fi xed and variable), excluding depreciation and amortization, were $1,500,000, its depreciation and amortization expense was $300,000, and its company’s tax rate was
Barbell Corporation’s income statement reports that the company’s “bottom line”was $180,000 in 2009. The statement also shows that the company had depreciation and amortization expenses equal to $50,000 and taxes equal to $120,000. What was Barbell’s net cash fl ow?
Coastal Packaging’s ROE last year was only 3 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $300 per year.Management projects an EBIT of $1,000 on sales of
Wolken Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Wolken’s annual sales are $2 million, its average tax rate is 20 percent, and its net profi t margin is 5 percent. If the company does not maintain a TIE ratio of at least 5 times, its bank
W. F. Bailey Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover of 5, total current assets of $810,000, and cash and equivalents of $120,000 in 2009. If the cost of goods sold equaled 86 percent of sales, what were Bailey’s annual sales and DSO?
The president of United Semiconductor Corporation made this statement in the company’s annual report: “United’s primary goal is to increase the value of the common stockholders’ equity over time.” Later on in the report, the following announcements were made:a. The company contributed
If you were the president of a large, publicly owned corporation, would you make decisions to maximize stockholders’ welfare or your own personal interests? What are some actions that stockholders could take to ensure that management’s interests and those of stockholders coincide? What are some
Should stockholder wealth maximization be thought of as a long-term goal or a shortterm goal? For example, if one action would probably increase the fi rm’s stock price from a current level of $20 to $25 in six months, and then to $30 in fi ve years, but another action would probably keep the
What is the expected return of the following portfolio of investments, rˆp: Investment DEF JKL TUV Î 4% 24 14 Amount Invested $30,000 25,000 45,000

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CFIN 6th Edition Scott Besley, Eugene Brigham - Solutions

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