Questions and Answers of Essentials Corporate Finance

Schwert Corp. shows the following information on its 2019 income statement: sales = $246,000; costs = $135,000; other expenses = $7,100; depreciation expense = $19,100; interest expense = $10,000;
During the year, the Senbet Discount Tire Company had gross sales of $865,000. The firm’s cost of goods sold and selling expenses were $455,000 and $210,000, respectively. The company also had
The Stancil Corporation provided the following current information:Proceeds from long-term borrowing ................................ $16,400Proceeds from the sale of common stock
Ritter Corporation?s accountants prepared the following financial statements for year-end 2019: a. Explain the change in cash during 2019. b. Determine the change in net working capital in 2019. c.
Given the information for Spieth’s Golf Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2019 was $735,000 and that the firm reduced its
The 2018 balance sheet of Spieth’s Golf Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2019 balance sheet showed $525,000
The 2018 balance sheet of Spieth’s Golf Shop, Inc., showed long-term debt of $1.565 million, and the 2019 balance sheet showed long-term debt of $1.645 million. The 2019 income statement showed
The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. from one year ago:
Earnhardt Driving School’s 2018 balance sheet showed net fixed assets of $1.28 million, and the 2019 balance sheet showed net fixed assets of $1.43 million. The company’s 2019 income statement
Sheaves, Inc., has sales of $22,400, costs of $11,600, depreciation expense of $2,200, and interest expense of $1,370. If the tax rate is 22 percent, what is the operating cash flow, or OCF?
Terri Simmons is single and had $189,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate her income taxes. What is the average tax rate? What is the marginal tax
Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.6 million. The machinery can be sold to the Romulans today for $6.4 million. Klingon’s current balance sheet shows
Gia, Inc., has sales of $473,000, costs of $275,000, depreciation expense of $42,000, interest expense of $23,000, and a tax rate of 21 percent. What is the net income for the firm? Suppose the
Alesha, Inc., has current assets of $4,300, net fixed assets of $24,000, current liabilities of $2,900, and long-term debt of $10,700. What is the value of the shareholders’ equity account for this
Why is the goal of financial management to maximize the current value of the company’s stock? In other words, why isn’t the goal to maximize the future value?
Critics have charged that compensation to top managers in the United States is too high and should be cut back. For example, focusing on large corporations, Dara Khosrowshahi (now at Uber, formerly
According to purchasing power parity, if a Big Mac sells for $4.89 in the United States and króna 522.50 in Iceland, what is the króna/$ exchange rate?
In the previous problem, suppose the company instead decides on a two-for-one stock split. The firm’s 67-cent-per-share cash dividend on the new (postsplit) shares represents an increase of 10
The British pound trades at $1.3679 in London and $1.3668 in New York. How much profit could you earn on each trade with $10,000?
Suppose the current exchange rate for the Russian ruble is RUB 64.18. The expected exchange rate in three years is RUB 69.32. What is the difference in the annual inflation rates for the United
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .24 percent per month. The interest rate in Great Britain is .31 percent per
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
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.
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,
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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?
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.
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
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
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 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
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
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
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
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
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
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
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 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
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
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
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
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
The owners’ equity accounts for Masterson International are shown here:Common stock ($1 par value) .......$ 45,000Capital surplus ..................................157,000Retained earnings
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
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
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
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
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
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
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,
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
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
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
What is the payback period for the following set of cash flows?Year .....................Cash Flow0 ..............................−$7,8001 ..................................3,1002
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
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
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
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
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
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
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
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
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
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?
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?
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .............Cash Flow0 ............−$38,000,0001 ................56,000,0002
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
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
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
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
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
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,
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

Showing 600 - 700 of 1419