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essentials corporate finance
Essentials of Corporate Finance 10th edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
Use Table 18.2 to answer the following questions. Suppose interest rate parity holds, and the current risk-free rate in the United States is 2.1 percent per six months. What must the six-month risk-free rate be in Australia? In Japan? In Great Britain?
Suppose the Japanese yen exchange rate is ¥119 = $1 and the British pound exchange rate is £1 = $1.39.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥168 = £1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the
The Trektronics store begins each month with 735 phasers in stock. This stock is depleted each month and reordered. If the carrying cost per phaser is $26 per year and the fixed order cost is $365, what is the total carrying cost? What is the restocking cost? Should the company increase or decrease
Clap Off Manufacturing uses 975 switch assemblies per week and then reorders another 975. If the relevant carrying cost per switch assembly is $6.25 and the fixed order cost is $430, is the company’s inventory policy optimal? Why or why not?
Rose, Inc., has an average collection period of 29 days. Its average daily investment in receivables is $91,300. What are annual credit sales? What is the receivables turnover?
Four Doors Down, Inc., has weekly credit sales of $36,500, and the average collection period is 31 days. What is the company’s average accounts receivable figure?
Miyagi Data, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average collection period?b. If the company sells 1,100 forecasts every month at a price of $1,950 each,
The Malibu Corporation has annual credit sales of $29.5 million. The average collection period is 34 days. What is the average investment in accounts receivable as shown on the balance sheet?
Essence of Skunk Fragrances, Ltd., sells 6,700 units of its perfume collection each year at a price per unit of $215. All sales are on credit with terms of 1/10, net 30. The discount is taken by 60 percent of the customers. What is the amount of the company’s accounts receivable? In reaction to
Each business day, on average, a company writes checks totaling $26,700 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $39,600. The cash from the payments is
In a typical month, the Pier Corporation receives 100 checks totaling $57,400. These are delayed three days on average. What is the average daily float? Assume 30 days in a month.
You place an order for 560 units of Good X at a unit price of $67. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?b. What is the discount being offered? How quickly must you pay to get
In the chapter opening, we discussed the cash positions of several companies. Automobile manufacturers also have enormous cash reserves. In the middle of 2018, Ford Motor Co. had about $27.5 billion in cash, General Motors had about $17.2 billion, and Toyota had about $53.8 billion. Why would firms
You have $21,400 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $4,300 and then deposit a check for $4,900. What are your disbursement, collection, and net floats?
You have $11,900 on deposit with no outstanding checks or uncleared deposits. If you deposit a check for $2,200, does this create a disbursement float or a collection float? What is your available balance? Book balance?
You have $85,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $21,600. Does this create a disbursement float or a collection float? What is your available balance? Book balance?
Come and Go Bank offers your firm a discount interest loan with an interest rate of 7.3 percent for up to $20 million, and in addition requires you to maintain a 4 percent compensating balance against the face amount borrowed. What is the effective annual interest rate on this lending arrangement?
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.58 percent per quarter on any funds actually borrowed.2. Maintain a 5 percent compensating balance on any funds actually borrowed.3. Pay an up-front commitment fee of .25 percent of the
Hurzdan, Inc., has a 32-day average collection period and wants to maintain a minimum cash balance of $20 million, which is what the company currently has on hand. The company currently has a receivables balance of $236 million and has developed the following sales and cash disbursement budgets (in
Hanse, Inc., has a cash cycle of 38.5 days, an operating cycle of 62.4 days, and an inventory period of 24.4 days. The company reported cost of goods sold in the amount of $445,000, and credit sales were $724,000. What is the company’s average balance in accounts payable and accounts receivable?
A bank offers your firm a revolving credit arrangement for up to $75 million at an interest rate of 1.54 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be deposited in a noninterest-bearing account.
You’ve worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is .527 percent per month. In addition, 4 percent of the amount that you borrow must be deposited in a noninterest-bearing account. Assume that your bank uses compound
The Doak Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $1,700. The company has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following: b. Rework part
Here are some important figures from the budget of Crenshaw, Inc., for the second quarter of 2019. The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale, and the remaining 60 percent will be collected in
The following is the sales budget for Coore, Inc., for the first quarter of 2019. Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 percent in the second month after the saleThe accounts receivable balance at the end of the previous
The MacDonald Corporation?s purchases from suppliers in a quarter are equal to 75 percent of the next quarter?s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 30 percent of sales, and interest and dividends are $110 per quarter. No capital expenditures are
Wentworth Products has projected the following sales for the coming year: Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers assuming that the company places orders during each quarter equal to 30 percent of projected sales
Your firm has an average collection period of 43 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.
Consider the following financial statement information for the Sourstone Corporation: Assume all sales are on credit. Calculate the operating and cash cycles. How do you interpret your answer? Beginning Ending Item $7,203 $9,041 Inventory 3,069 Accounts receivable 3,995 Accounts payable Net sales
The Geller Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $360. The company has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following: b. Rework part
Peeples, Inc., has a book value of equity of $14,325. Long-term debt is $8,200. Net working capital, other than cash, is $2,340. Fixed assets are $19,260. How much cash does the company have? If current liabilities are $1,840, what are current assets?
The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wiley received $21.39 for each of the 7.75 million shares sold. The initial offering price was $23 per share, and the stock rose to $26.30 per share in the first few minutes of trading. Wiley paid $1,350,000 in legal and
The Elkmont Corporation needs to raise $63.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $22 per share and the company’s underwriters charge a spread of 7.5 percent, how
The Sugarland Co. has just gone public. Under a firm commitment agreement, the company received $17.67 for each of the 27 million shares sold. The initial offering price was $19 per share, and the stock rose to $24.80 per share in the first few minutes of trading. The company paid $1,475,000 in
In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1,425,000, how many shares need to be sold now?Previous ProblemThe Sullivan Co. needs to raise $78 million to finance its expansion into new markets. The company will sell new shares of equity
The Sullivan Co. needs to raise $78 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $31 per share and the company’s underwriters charge a spread of 7 percent, how many shares
The Koepka Co. and the Johnson Co. both have announced IPOs at $40 per share. One of these is undervalued by $12.25, and the other is overvalued by $5.50, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed,
The Gecko Company and the Gordon Company are two firms whose business risk is the same while having different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 3.5 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 28
The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $450,000 next year and $790,000 in two years, including the proceeds
Taco Time Corporation is evaluating an extra dividend versus a share repurchase. In either case, $7,095 would be spent. Current earnings are $2.70 per share, and the stock currently sells for $59 per share. There are 4,300 shares outstanding. Ignore taxes and other imperfections in answering the
The company with the common equity accounts shown here has declared a 10 percent stock dividend at a time when the market value of its stock is $48 per share. What effects on the equity accounts will the distribution of the stock dividend have?Common stock ($1 par value)
The market value balance sheet for Briggs Manufacturing is shown here. The company has declared a 20 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 21,000 shares of stock outstanding. What will the
In the previous problem, suppose the company has announced it is going to repurchase $21,850 worth of stock instead of paying a dividend. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase?
The balance sheet for Tempest, Inc., is shown here in market value terms. There are 19,000 shares of stock outstanding. The company has declared a dividend of $1.15 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for
Bermuda Triangle Corporation (BTC) currently has 395,000 shares of stock outstanding that sell for $83 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. BTC has a five-for-three stock split?b. BTC has a 15 percent stock dividend?c. BTC has a
For the company in Problem 4, show how the equity accounts will change if:a. The company declares a two-for-one stock split. How many shares are outstanding now? What is the new par value per share?b. The company declares a one-for-five reverse stock split. How many shares are outstanding now?
The owners’ equity accounts for Masterson International are shown here:Common stock ($1 par value) .......$ 45,000Capital surplus ..................................157,000Retained earnings ......................603,000Total owners’ equity
During 2017, 108 companies went public with common stock offerings, raising a combined total of $24.5 billion. Relatively few of these 108 companies involved paid cash dividends. Why do you think most chose not to pay dividends?
On Friday, December 8, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3. When is the ex-dividend date? If a shareholder buys stock before that date, who gets the dividends on
Estes Park, Inc., has declared a dividend of $8.40 per share. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The company’s stock sells for $87 per share, and the stock is about to go
Your portfolio is 200 shares of Callahan, Inc. The stock currently sells for $93 per share. The company has announced a dividend of $1.43 per share with an ex-dividend date of April 19. Assuming no taxes, how much will your stock be worth on April 19?
Tatum can borrow at 6.7 percent. The company currently has no debt, and the cost of equity is 12.9 percent. The current value of the firm is $595,000. What will the value be if the company borrows $310,000 and uses the proceeds to repurchase shares? The corporate tax rate is 21 percent.
Bird Enterprises has no debt. Its current total value is $47 million. Ignoring taxes, what will the company’s value be if it sells $18.4 million in debt? Suppose now that the company’s tax rate is 23 percent. What will its overall value be if it sells $18.4 million in debt? Assume debt proceeds
You have found the following historical information for the Daniela Company: Earnings are expected to grow at 7 percent for the next year. Using the company?s historical average PE as a benchmark, what is the target stock price in one year? Year 1 Year 3 Year 2 Year 4 Stock price $63.25 $71.94
Berta, Inc., currently has an EPS of $3.85 and an earnings growth rate of 7 percent. If the benchmark PE ratio is 21, what is the target share price five years from now?
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 10
Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $2.40 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 8 percent, 0 percent, and -5 percent per year, respectively.
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its
What is the payback period for the following set of cash flows?Year .....................Cash Flow0 ..............................−$7,8001 ..................................3,1002 ..................................3,2003 ..................................2,2004
An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7,900?
Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Cash Flow (A) Cash Flow (B) Year -$75,000 -$125,000 33,000 29,000 36,000 32,000 2 19,000 35,000 4 9,000 240,000
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000,
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .62. The company’s cost of equity is 11.8 percent, and the aftertax cost of debt is 4.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor
A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?Year ............Cash Flow0 .................−$157,3001 .......................74,0002 .......................87,0003 .......................46,000
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent?Previous problemA firm evaluates all of its projects by applying the IRR rule. If the required
A project that provides annual cash flows of $2,620 for eight years costs $9,430 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate would you be indifferent between accepting the project and rejecting it?
What is the IRR of the following set of cash flows?Year .......Cash Flow0 .............−$19,4001 .................10,4002 ...................9,3203 ...................6,900
In June 2017, automobile manufacturer BMW announced plans to invest $600 million to expand production at its South Carolina plant. BMW apparently felt that it would better be able to compete and create value with a U.S.-based facility. In fact, BMW expected to export 70 percent of the vehicles
For the cash flows in the previous problem, what is the NPV at a discount rate of 0 percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?Previous problemWhat is the IRR of the following set of cash flows?Year .......Cash Flow0 .............−$19,4001
Piercy, LLC, has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?b. If the required return is 11 percent, what is the NPV for
Consider the following two mutually exclusive projects: Sketch the NPV profiles for X and Y over a range of discount rates from 0 to 25 percent. What is the crossover rate for these two projects? Cash Flow (X) Cash Flow (Y) Year -$23,900 -$23,900 13,100 9,300 9,480 10,620 2 11,180 3 7,890
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .............Cash Flow0 ............−$38,000,0001 ................56,000,0002 ................−9,000,000a. If the company requires a return of 10 percent on its investments, should it accept
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?Year .......................Cash Flow0 ..............................−$29,5001 ..................................16,9002
The Whenworth Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept? b. If the company applies the NPV decision rule,
Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a return of 13 percent on your investment. a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the NPV criterion, which investment will you choose?
Bausch Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent. a. What is the IRR for each project?b. What is the NPV for each project?c. Which, if either, of the projects should the company accept? Year Project M Project N
Coore Manufacturing has the following two possible projects. The required return is 12 percent. a. What is the profitability index for each project?b. What is the NPV for each project?c. Which, if either, of the projects should the company accept? Project Y Project Z Year -$47,600 -$81,000 34,000
Ace Industrial Machines issued 195,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 5.2 percent. Interest rates have recently decreased, and the bonds now have a yield to maturity of 4.9 percent. If the company has a $73 million market
Crenshaw Enterprises has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is above this interest rate? Why? Year Project I Project J -$189,000 -$189,000 93,500 84,600
An investment has an installed cost of $787,350. The cash flows over the four-year life of the investment are projected to be $312,615, $304,172, $245,367, and $229,431. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent. a. Calculate the payback period for both projects.b. Calculate the NPV for both projects.c. Which project, if
Doak Corp. is evaluating a project with the following cash flows:Year ................Cash Flow0 .......................−$32,6001 ...........................11,5202 ...........................14,6703 ...........................11,2704 ...........................10,9405
Hanse, Inc., has the following two mutually exclusive projects available. What is the crossover rate for these two projects? What is the NPV of each project at the crossover rate? Year Project R Project S -$51,000 -$76,000 19,000 20,000 20,000 19,000 3 24,000 35,000 11,000 30,000 4 7,000 10,000
A project has the following cash flows:Year ..........Cash Flow0 ................$112,0001 .................− 67,0002 .................− 57,000What is the IRR for this project? If the required return is 10 percent, should the firm accept the project? What is the NPV of this project? What is the
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $164,000 for the firm during the first year, and the cash flows are projected to grow at a rate
Koepka Corp. has a project with the following cash flows:Year ...............Cash Flow0 .......................$35,0001 ......................− 27,0002 .........................29,000What is the IRR of the project? What is happening here?
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year ...................Cash Flow0 ........................−$875,0001 ............................306,9002 ...........................287,6003 ...........................285,3004
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $7.7
Winnebagel Corp. currently sells 28,000 motor homes per year at $84,000 each and 7,000 luxury motor coaches per year at $135,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 29,000 of these campers per year at $24,700 each. An independent
A proposed new investment has projected sales of $635,000. Variable costs are 40 percent of sales, and fixed costs are $168,000; depreciation is $83,000. Prepare a pro forma income statement assuming a tax rate of 23 percent. What is the projected net income?
Consider the following income statement:Sales ........................$537,200Costs .........................346,800Depreciation ..............94,500EBIT...................................?Taxes (21%)......................?Net income......................?Fill in the missing numbers and then
A piece of newly purchased industrial equipment costs $745,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.
Consider an asset that costs $635,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $105,000. If the relevant tax rate is 22 percent, what is the aftertax cash flow from the
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6.8 million and will be sold for $1.46 million at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset?
Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently sells 1,850 units of its existing model per year. If the new model is introduced, sales of the
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated straight-line to zero over its three year tax life, after which time it will be worthless. The project is estimated to generate
In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?Previous
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?Previous problemH. Cochran, Inc., is considering a new three-year expansion
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This cost will be depreciated straightline to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $85,000. The sausage system will save the firm $183,000 per
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemKolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This cost will be depreciated
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