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essentials managerial finance

Essentials of Managerial Finance 14th edition Scott Besley, Eugene F. Brigham - Solutions

The McLaughlin Corporation declared a 6 percent stock dividend. Construct a pro forma balance sheet showing the effect of this action. The stock was selling for $37.50 per share, and a condensed version of McLaughlin€™s balance sheet as of December 31, 2008, before the dividend, follows
Free Flying Aviation (FFA) just declared a 20 percent stock dividend to be paid three weeks from today. Before the ‘‘payment’’ of the stock dividend, the equity section on FFA’s balance sheet appeared as follows:Common stock (10,000 shares outstanding, $5 par
The Scanlon Company’s optimal capital structure calls for 50 percent debt and 50 percent common equity. The interest rate on its debt is a constant 10 percent; its cost of common equity from retained earnings is 14 percent; the cost of equity from new stock is 16 percent; and its marginal tax
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 $0.60 per share after the split. The company would like to pay an equivalent dividend per
Give arguments to support both the relevance and the irrelevance of paying dividends.
Data for Unilate Textiles€™ 2008 financial statements are given in Table 2-1 and Table 2-2 in the chapter.a. Compute the 2008 values of the following ratios:b. Briefly comment on Unilate€™s 2008 financial position. Can you see any obvious strengths or weaknesses?c. Compare
Use the following information to compute the firm’s degree of operating leverage (DOL), DFL, and degree of total leverage (DTL):Sales........................................................... $ 50,000Variable operating costs.......................... ( 30,000)Gross
Merville Corporation will begin operations next year to produce a single product at a price of $12 per unit. Merville has a choice of two methods of production: Method A, with variable costs of $6.75 per unit and fixed operating costs of $675,000, and Method B, with variable costs of $8.25 per unit
Following is the most recent income statement for Ironworks Railroad. Ironworks has no preferred stock.Sales.......................................................................................... $200,000Variable operating costs (70% of sales)................................. (140,000)Gross
The net operating income (EBIT) for Bear Investment Company (BIC) this year is $80,000. During the year, the company paid $20,000 interest on its debt and $25,000 dividends to its common stockholders. If BIC’s marginal tax rate is 40 percent, what is the company’s degree of financial leverage
Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating:According to this information, which firm would be considered riskiest? Degree of Financial Degree of Operating Company Leverage (DOL) 1.5x 3.0x 5.0x Leverage (DFL)
When Carson’s Cars sales increase by 5 percent, its earnings per share increase by 20 percent. Does the firm have leverage? If so, can you tell what kind? Explain.
Problem 10-16 contained the details of a new-project capital budgeting evaluation being conducted by Unilate Textiles. Although inflation was considered in the initial analysis, the riskiness of the project was not considered. The expected cash flows considering inflation as they were estimated in
Three companies€”Aggressive, Moderate, and Conservative€”have different working capital management policies as implied by their names. For example, Aggressive employs only minimal current assets, and it finances almost entirely with current liabilities plus equity. This
Diamond Hill Jewelers is considering the following independent projects:Which project(s) should be accepted if the required rate of return for the projects is 10 percent? Compute the NPV and the IRR for both projects. Expected Net Cash Flows Machine D Machine Q Year $(2,500) $(2,500) 2,000 1,800
Firm A and Firm B are competitors in the same industry. The two firms have similar operating costs, except Firm A has more fixed operating costs than Firm B. As a result, which firm would experience a greater change in operating income as the result of a particular change in sales? Why?
The after-tax cash flows for two mutually exclusive projects have been estimated, and the following information has been provided:The company€™s required rate of return is 14 percent, and it can get unlimited funds at that cost. What is the IRR of the better project? Expected Net Cash
The Cordell Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have
Following is information about two mutually exclusive capital budgeting projects:If the firm€™s required rate of return is 10 percent, which project should be purchased? Cash Flows Project R Year Project Q $(4,000) $(4,000) 1 3,500 1,100 5,000
Compute the internal rate of return (IRR) and the modified internal rate of return (MIRR) for each of the following capital budgeting projects. Assume that the firm€™s required rate of return is 14 percent.Which project(s) should be purchased if they are independent? Which project
If a firm’s ROE is low and management wants to improve it, explain how using more debt might help. Could using too much debt prove detrimental?
The following yields on U.S. Treasury securities were published in The Wall Street Journal on July 14, 2006:Term
Compute the internal rates of return (IRRs) for the following capital budgeting projects:Based on IRRs, under what conditions should each project be purchased? Project V $(36,000) (10,000) Project G $(23,000) 7,900 Project P Year $(48,000) 7,900 7,900 3 75,000 4 7,900 81,000
Use the model in File C18 to work this problem.a. Refer to Problem 18-6. Determine the lease payment at which Maltese would be indifferent to buying or leasing—that is, find the lease payment that equates the NPV of leasing to that of buying.b. Using the $400,000 lease payment, what would be the
‘‘The probability distribution of a less risky expected return is more peaked than that of a riskier return.’’ Is this a correct statement? Explain.
Kris Crawford, capital acquisitions manager for Heath Financial Services Inc., has been asked to perform a lease-versus-buy analysis on a new stock price quotation system for Heath’s Sarasota branch office. The system would receive current prices, record the information for retrieval by the
Maltese Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100 percent of the required amount. Alternatively, a Nevada investment banking firm that represents a group of investors believes that it can arrange for a lease financing plan.
Robert Campbell and Carol Morris are senior vice presidents of the Mutual of Chicago Insurance Company. They are co-directors of the company€™s pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock
The Cox Computer Company has grown rapidly during the past five years. Recently its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $150,000, carrying a 10 percent interest rate, and Cox has been 30 to 60 days
Can you think of some firms that might allow you to purchase on credit but probably would factor your receivables account?
Suppose interest rates on residential mortgages of equal risk were 8 percent in California and 10 percent in New York. Could this differential persist What forces might tend to equalize rates? Would differentials in borrowing costs for businesses of equal risk located in California and New York be
Gordon’s Plants has the following partial income statement for 2009:a. If Gordon’s has no preferred stock, what is its financial break-even point?Earnings before interest and taxes..............................................
What kinds of firms use commercial paper? Could Mama and Papa Gus’s Corner Grocery borrow using this form of credit?
‘‘Firms can control their accruals within fairly wide limits; depending on the cost of accruals, financing from this source will be increased or decreased.’’ Discuss.
Unilate Textiles is evaluating a new product, a silk/wool blended fabric. Assume you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new project. The fabric would be produced in an unused building adjacent to Unilate€™s Southern Pines,
The 2009 balance sheet and income statement for the Woods Company are shown here:Woods Company: Income Statement for the Year Ending December 31, 2009 ($ thousands)Sales.................................................................... $ 8,000Operating
Daniel Barnes, financial manager of New York Fuels (NYF), a heating oil distributor, is concerned about the company€™s working capital policy, and he is considering three alternative policies: (1) a restricted (lean and mean or tight) policy, which calls for reducing receivables by
Sanger Music Company’s preferred stock, which currently sells for $105 per share, pays an annual dividend equal to $12.60. What is the yield—that is, the rate of return—that Sanger’s preferred stockholders earn?
Tando Airlines has preferred stock outstanding that has a par value equal to $100. Preferred dividend payments equal 8 percent of the stock’s par value. If Tando’s preferred stock currently sells for $160, what is the rate of return that preferred stockholders earn? What portion of this
The Hawley Corporation is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion currently being undertaken. Fixed assets total $1 million, and the firm finances 60 percent
The city of Gainesville issued $1,000,000 of 14 percent coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now Gainesville can call the bonds if it chooses to do so. The call premium would be 10 percent of the face amount. New
Because of crop failures last year, the San Joaquin Packing Company has no funds available to finance its canning operations during the next six months. It estimates that it will require $1,200,000 from inventory financing during the period. One alternative is to establish a six-month, $1,500,000
Verbrugge Corporation is a leading U.S. producer of automobile batteries. Verbrugge turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Verbrugge allows its customers 40 days in which to pay for the
Assume you purchased the Wingler & Company stock described in Problem 7-9. When you purchased the stock, you decided that you would hold it for three years. If you plan to sell the stock in three years, what cash flows will you receive each year?In problem 7-9:Your broker offers to sell you
Cooley Industries needs an additional $500,000, which it plans to obtain through a factoring arrangement. The factor would purchase Cooley’s accounts receivable and advance the invoice amount, minus a 2 percent commission, on the invoices purchased each month. Cooley sells on terms of net 30
Go back to the GCP illustration at the beginning of the chapter. Assume the collection and payment patterns of both GCP and its customers do not change.a. Construct the balance sheet for GCP at the close of business on Day 31. Remember, the employees’ salaries will have been paid at the
Two textile companies, Grimm Manufacturing and Wright Mills, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $200,000. Grimm obtained a five year, $200,000 loan at an 8 percent interest rate from its bank. Wright, on the
The Swift Company was planning to finance an expansion in the summer of 2009. The principal executives of the company agreed that an industrial company like theirs should finance growth by means of common stock rather than by debt. However, they believed that the price of the company’s common
Bankston Feed and Supply Company buys on terms of 1/10, net 30, but it has not been taking discounts and has actually been paying in 60 days rather than 30 days. Bankston€™s balance sheet follows (thousands of dollars):
Distinguish between a congeneric merger and a vertical merger. Give examples of existing companies that if merged would be classified in each category.
Why is the average cash conversion cycle of European firms more than two times longer than the average cash conversion cycle of U.S. firms?
Describe how LBOs are used to finance mergers.
Can the cash conversion cycle be negative? Explain.
Describe some measures a firm can take to decrease its cash conversion cycle.
How does a firm ‘‘force’’ investors to convert their convertible bonds (or convertible preferred stock) into its common stock?
Gallinger Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. The money can be obtained from the bank at an interest rate of 13 percent, discount interest; no compensating balance is required.
Suppose a firm makes purchases of $3.6 million per year under terms of 2/10, net 30 and takes discounts.a. What is the average amount of accounts payable net of discounts? (Assume that the $3.6 million of purchases is net of discounts—that is, gross purchases are $3,673,469 and discounts are
The Meyer Company must arrange financing 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
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 non-discount customers?
Susan Visscher, owner of Visscher’s Hardware, is negotiating with First Merchant’s Bank for a $50,000, one-year loan. First Merchant’s has offered Visscher the following alternatives. Calculate the effective interest rate (rEAR) for each alternative. Visscher does not have a checking account
Explain why the effective interest rate (rEAR) on a loan often is much higher than the simple, or stated, interest rate (APR).
Under what circumstances do you think it would be wiser for a firm to factor its accounts receivable rather than pledging them?
What types of inventory make ‘‘good’’ collateral?
Today is January 1, 2009, and according to the results of a recent survey, investors expect the annual interest rates for the years 2012–2014 to be as follows:Year One-Year
What impact does a compensating balance requirement have on the cost of borrowing from a bank if the firm generally holds little or no checking balances at the bank? What would the impact be if the firm holds large checking balances?
On average, which group of borrowers would have to pay a higher effective rate for its short-term loans, those who are required to put up collateral or those who are not? Explain.
Sarah is on her way to the local Chevrolet dealership to buy a new car. The list, or ‘‘sticker,’’ price of the car is $13,000. Sarah has $3,000 in her checking account that she can use as a down payment toward the purchase of a new car. Sarah has carefully evaluated her finances, and she
The Singleton Company must decide between two mutually exclusive investment projects. Each project costs $6,750 and has an expected life of three years. Annual net cash flows from each project begin one year after the initial investment is made and have the following probability
Van Auken Lumber’s 2009 income statement is shown here:Sales........................................................................ $36,000Cost of goods sold.................................................. (25,200)Gross profit.............................................................
Use the model in File C15 to solve this problem.a. Refer back to Problem 15-8. Suppose that by offering a 2 percent cash discount for paying within the month of sale, the credit manager of Carol’s Fashion Designs Inc. has revised the collection percentages to 50 percent, 35 percent, and 15
The common stock of Old Betsy Flags is currently selling for $28 per share. The company has been growing at a constant annual rate of 4 percent, and this growth is expected to continue for an infinite period. The required rate on the stock is 11 percent. If you buy the stock today, what is the
The capital budgeting manager of Conscientious Construction Company (CCC) submitted the following report to the CFO:CCC generally takes risk into consideration by adjusting its average required rate of return (r), which equals 8 percent, when evaluating projects with risks that are either lower or
Your broker offers to sell you some shares of Wingler & Company common stock, which paid a dividend of $2 yesterday.You expect the dividend to grow at a rate of 5 percent per year into perpetuity. Given that the appropriate discount rate is 12 percent, what is the market value of Wingler’s
Following are Noso Textile€™s 2009 financial statements.a. Suppose 2010 sales are projected to increase by 15 percent over 2009 sales. Determine the additional funds needed. Assume that the company was operating at full capacity in 2009, that it cannot sell off any of its fixed assets,
McCue Mining Company’s ore reserves are being depleted, so the firm’s sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at a constant rate of 5 percent per year. If D0 = $5 and rs = 15%, what
Suppose you found a house that you want to buy, but you still have to determine what mortgage to use. Bank of Middle Texas has offered a 30-year fixed mortgage that requires you to pay 8 percent interest compounded monthly. If you take this offer, you will have to pay ‘‘3 points,’’ which
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. If PowerBuilt’s marginal tax rate is
The Ape Copy Company’s preferred stock pays an annual dividend equal to $16.50. If investors demand a return equal to 11 percent to purchase Ape’s preferred stock, what is its market value?
Should the total cash flows that are expected to be produced by a new international division be included in the analysis that is performed to make a decision as to whether a multinational firm should invest in the division? Explain.
Distinguish between beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in the capital budget. Which type of risk do you believe should be given the greatest weight in capital budgeting decisions? Explain.
In general, is an explicit recognition of incremental cash flows more important in new project analysis or replacement analysis? Why?
At year-end 2009, total assets for Shome Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2009 were $2.5 million, are expected to increase by 25 percent in 2010. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Shome
In January 2006, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the yield on these same bonds had climbed to about 6 percent because the Federal Reserve increased interest rates during the year. Assume that IBM issued a 10-year, 5 percent coupon bond on
Martell Corporation’s 2008 sales were $12 million. Sales were $6 million five years earlier. To the nearest percentage point, at what rate have sales grown?
What would be the effect of each of the following on a firm’s operating and financial break-even point? Indicate the effect in the space provided by placing a plus sign (+) for an increase, a negative sign (-) for a decrease, and a zero (0) for no effect. When answering this question, assume
What data are necessary to construct a financial break-even chart?
Firm A’s management is very conservative whereas Firm B’s is more aggressive. Is it true that, other things the same, Firm B would probably have larger holdings of marketable securities? Explain.
On January 2, 2007, a Sunny Communications $1,000 face value, six-year bond sold for $889. Investors who bought this particular bond will be paid interest equal to $40 every six months. Market interest rates did not change until December 31, 2007, when they decreased significantly. On January 2,
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100 percent, but the annual growth rate would be less than 10 percent. True? Explain. Under what conditions would the annual growth rate actually be 10 percent per year?
Your boss, the chief financial officer (CFO) for Southern Textiles, has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm€™s fabric line. It would take some time to build up the market for this product, so the cash inflows
What data are necessary to construct an operating break-even chart?
What does the term liquidity mean? Which would be more important to a firm that held a portfolio of marketable securities as a precautionary balance against the possibility of losing a major lawsuit—liquidity or rate of return? Explain.
It is now January 1, 2008, and you are considering the purchase of an outstanding Puckett Corporation bond that was issued on January 1, 2006. The Puckett bond has a 9.5 percent annual coupon and a 30-year original maturity (it matures on December 31, 2037). Interest rates have declined since the
Intercontinental Baseball Manufacturers (IBM) has an outstanding bond 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?
Use the model in File C16 to work this problem. Refer back to Problem 16-13.a. Would it be to Cooley’s advantage to offer to pay the factor a commission of 2.5 percent if it would lower the interest rate to 10.5 percent annually?b. Assume a commission of 2 percent and an interest rate of 12
C. Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company’s short-term financing policies and to prepare a report for Smith and the board of directors. To help you
A bond that pays interest forever and has no maturity date is a perpetual bond. How is the yield to maturity on such a bond determined?

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