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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+c. What is the marginal fuel cost from purchasing the Panamera?
=+d. What is the marginal cost of purchasing the Panamera?
=+e. What is the total marginal cost associated with purchasing the Panamera? How does that compare with the €12,000 that Alessandro calculated?
=+LG 4 P15–8 Accounts receivable changes without bad debts Clear Glass Company sells glass containers. It reported total sales of $1,580,000, with 60% of the sales on credit.It takes 60 days to collect accounts receivable. The selling price is $20 per container while the variable cost is $15 per
=+a. Calculate the additional profit contribution from sales if the change in collecting accounts receivable is implemented.
=+b. Calculate the marginal investment in accounts receivable that will result from the change.
=+c. Calculate the cost of the marginal investment in accounts receivable.
=+d. Would you recommend the firm implement the proposed change?
=+LG 4 P15–9 Accounts receivable changes with bad debts Germanos Group is evaluating an accounts receivable change that would increase bad debts from 5% to 10% of sales.Sales are currently 100,000 units of batteries, the selling price €25 per unit, and the variable cost per unit is €15. As a
=+a. What are bad debts in euros currently and after the proposed change?
=+b. Calculate the cost of the marginal bad debts for Germanos.
=+c. Ignoring the additional profit contribution for the increased sales, if the proposed change saves €50,000 and causes no change in the average investment in accounts receivable, would you recommend it? Explain.
=+d. Considering all changes in costs and benefits, should the change be made? Explain.
=+e. Compare and discuss your answers in parts c and d.
=+LG 4 P15–10 Relaxation of credit standards Farmers World, a firm specializing in fertilizers, is evaluating a proposal to relax the credit standards to increase sales. The implementation of this plan is expected to increase sales by 10% from 15,500 to 17,050 units in the following year. The
=+LG 5 P15–11 Initiating a cash discount Pebbles & Stone Enterprise currently sells on credit only and does not offer any discounts. In an attempt to increase sales, the board is considering offering a 5% discount for payment within 15 days. Currently, the average collection period is 60 days,
=+LG 5 P15–12 Shortening the credit period Mix and Brix Suppliers is contemplating shortening its credit period from 45 to 30 days. Based on an analysis, it is estimated that this change will reduce the average collection period from 50 to 45 days, and the bad debts are expected to decrease from
=+LG 5 P15–13 Lengthening the credit period Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000 and variable costs are $455,000. The selling price is $20 per unit.
=+a. Calculate the additional profit contribution from sales if the proposal is implemented.
=+b. Calculate the cost of the marginal investment in accounts receivable.
=+c. Calculate the cost of the marginal bad debts.
=+d. Should the proposal be implemented? Explain.
=+LG 6 P15–14 Float Uneblej.com is an online retail company, which operates in Albania. It has daily cash receipts of L150,000. Its CFO is analyzing the time it takes for the collection of the customers’ payment to clear the banking system. From the analysis it appears that it takes 2 days for
=+a. How much collection float (in days) does the company currently have?
=+b. If its opportunity cost is 10%, would it be economically advisable for the company to pay an annual fee of L18,000 to reduce collection float by 3 days?Explain.
=+c. What would the company’s opportunity cost have to be to make the L18,000 fee worthwhile?
=+LG 6 P15–15 Lockbox system Aditya Birla Retail Limited, an Indian retail company, is considering a lockbox system that can shorten its accounts receivable collection by 1 day.Credit sales are INR 550,000,000 per year, billed on a continuous basis. The firm has other equally risky investments
=+a. What amount of cash will be made available for other uses under the lockbox system?
=+b. What net benefit (cost) will the firm realize if it adopts the system? Should the company adopt it?
=+LG 6 P15–16 Zero balance account Alumina Ltd. is considering establishing a zero-balance account. The company currently maintains an average of A$ 1,380,000 in its disbursement account. As compensation to the bank of maintaining the zero-balance account, the company will have to pay a monthly
=+LG 6 P15–17 Management of cash balance Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is$4,200. Alexis has a
=+a. What can Alexis do regarding the handling of her current balances?
=+b. What do you suggest that she do with her monthly surpluses?
=+c. What do you suggest Alexis do about the manner in which she pays her bills?
=+d. Can Alexis grow her earnings by better managing her cash balances? Show your work.
=+The current balance in accounts receivable for Eboy Corporation is $443,000. This level was achieved with annual (365 days) credit sales of $3,544,000. The firm offers its customers credit terms of net 30. However, in an effort to help its cash flow position and to follow the actions of its
=+a. Additional profit contribution from sales.
=+b. Average investment in accounts receivable at present (without the early payment discount).
=+c. Average investment in accounts receivable with the proposed discount.
=+d. Reduction in investment in accounts receivable.
=+e. Cost savings from reduced investment in accounts receivable.
=+f. Cost of the discount.
=+g. Net profit (loss) from initiation of proposed discount.
=+17–1 Differentiate between a hybrid security and a derivative security.
=+17–3 Describe the four basic steps involved in the lease-versus-purchase decision process. How are capital budgeting methods applied in this process?
=+17–4 What type of lease must be treated as a capitalized lease on the balance sheet? How does the financial manager capitalize a lease?
=+17–5 List and discuss the commonly cited advantages and disadvantages that should be considered when deciding whether to lease or purchase.
=+17–8 Define the straight bond value, conversion (or stock) value, market value, and market premium associated with a convertible bond, and describe the general relationships among them.
=+17–10 What is the implied price of a warrant? How is it estimated? To be effective, how should it be related to the estimated market value of a warrant?
=+17–11 What is the general relationship between the theoretical and market values of a warrant? In what circumstances are these values quite close? What is a warrant premium?
=+V17–12 What is an option? Define calls and puts. What role, if any, do call and put options play in the fund-raising activities of the firm?
=+17–13 How can the firm use currency options to hedge foreign-currency exposures resulting from international transactions?
=+The chapter opener described an AMD 10-year convertible bond issue in which each investor could exchange his or her $1,000 par value bond for 125 shares of AMD common stock. When these bonds were issued, AMD’s stock was trading for $6 per share.
=+a. What is the conversion ratio of AMD’s convertible bonds?
=+b. What is the conversion price associated with AMD’s convertible bonds?
=+c. What was the conversion value of AMD’s convertible bonds at the time they were issued?
=+d. By how much did AMD’s stock price have to increase (from its starting value of$6 per share) before it would make sense for investors to exchange their bonds for common stock?
=+e. If AMD had attempted to issue nonconvertible bonds, the company would have had to pay an interest rate of 3.5%. What was the straight bond value of AMD’s convertible bonds when they were issued? (For simplicity, assume annual interest payments.)
=+ST17–1 Lease versus purchase The Hot Bagel Shop wishes to evaluate two plans for financing an oven: leasing and borrowing to purchase. The firm is in the 40%tax bracket.Lease The shop can lease the oven under a 5-year lease requiring annual end-of-year payments of $5,000. All maintenance costs
=+Purchase The oven costs $20,000 and will have a 5-year life. It will be depreciated under MACRS using a 5-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) The total purchase price will be financed by a 5-year, 15% loan requiring equal annual end-of-year payments
=+a. For the leasing plan, calculate the following:(1) The after-tax cash outflow each year.(2) The present value of the cash outflows, using a 9% discount rate.
=+b. For the purchasing plan, calculate the following:(1) The annual interest expense deductible for tax purposes for each of the 5 years.(2) The after-tax cash outflow resulting from the purchase for each of the 5 years.
=+(3) The present value of the cash outflows, using a 9% discount rate.
=+c. Compare the present values of the cash outflow streams for these two plans, and determine which plan would be preferable. Explain your answer.
=+LG 4 ST17–2 Finding convertible bond values Mountain Mining Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 40 shares of common stock. They have a 5% annual coupon rate and a 25-year maturity. The interest rate on a straight bond
=+a. Calculate the straight bond value of the bond.
=+b. Calculate the conversion (or stock) value of the bond when the market price of the common stock is $20, $25, $28, $35, and $50 per share.
=+c. For each of the stock prices given in partb, at what price would you expect the bond to sell? Why?
=+d. What is the least you would expect the bond to sell for, regardless of the common stock price behavior?
=+E17–1 Heidelberg Cement, a German building materials company, is considering leasing a new cement packaging machine for €250,000 per year. The lease arrangement calls for a 6-year lease with an option to purchase the machine at the end of the lease for€35,000. Assuming the corporate tax
=+LG 3 E17–2 Hugh, an investment analyst in Brisbane, is analyzing three separate convertible bonds issued by Woolworths Limited, the Commonwealth Bank of Australia, and BHP Billiton. For each of them, calculate the conversion price:
=+a. A bond of A$1,000 par value that is convertible into 15 shares of common stock.b. A bond of A$1,500 par value that is convertible into 20 shares of common stock.c. A bond of A$2,000 par value that is convertible into 20 shares of common stock.
=+LG 4 E17–4 Woolworths Group recently sold a £1,000-par-value, 5-year convertible bond with a 5% coupon rate. The interest payments will be paid annually at the end of each year and the principal will be repaid at maturity. A similar bond without a conversion feature would have sold with a 7%
=+LG 6 E17–5 A 3-month call option on 100 shares of ThyssenKrupp stock is selling for €150. The strike price for the option is €30, while the current stock price is €26.30 per share.Ignoring brokerage fees, what price must the stock achieve to just cover the expense of the option? If the
=+P17–1 Lease cash flows Given the lease payments and terms shown in the following table, calculate the yearly after-tax cash outflows for each of the five firms, assuming that lease payments are made at the end of the year and that the firm is in the 40% tax bracket. Assume that no purchase
=+P17–2 Loan interest Francesco is reviewing brochures from different banks for each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table. Calculate the annual interest he must pay every year over the term of the loan, assuming that the payments are
=+P17–3 Loan payments and interest Just Water International Ltd. wants to purchase water purification equipment costing $250,000. The full amount needed to finance the asset can be borrowed at an interest rate of 12.5%. The terms of the loan require equal end-of-year payments for the next 5
=+LG 2 P17–4 Lease versus purchase JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 21% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows:Lease Annual end-of-year
=+a. Calculate the after-tax cash outflows associated with each alternative.
=+b. Calculate the present value of each cash outflow stream, using the after-tax cost of debt.c. Which alternative—lease or purchase—would you recommend? Why?
=+LG 2 P17–5 Lease versus purchase Northwest Lumber Company needs to expand its facilities.To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and
=+a. Determine the after-tax cash outflows of Northwest Lumber under each alternative.
=+b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt.
=+c. Which alternative—lease or purchase—would you recommend? Why?
=+P17–6 Lease-versus-purchase decision Antonio Di Capri is looking to get the new Alfa Romeo Giulia, a luxury sport sedan. He can either buy it at a retail price of €38,000 or get a lease from an auto dealership. The dealership offers a 5-year lease that requires an initial payment of €5,000
=+a. Calculate the total cost of leasing.
=+b. Calculate the total cost of purchasing.
=+c. Which option should Antonio choose?
=+LG 2 P17–7 Capitalized lease values A firm leases five different pieces of equipment from various suppliers. Details of these leases are provided in the following table. Calculate the capitalized value of each lease, assuming that the lease payments are made annually at the end of each
=+LG 3 P17–8 Conversion price The Bonds Specialists issued two types of bonds, one of which was premium bonds and the other was discount bonds. The company’s common stock price is $25 per share. Calculate the following:
=+a. The conversion price of Bond A, which is a $1,200-par-value bond that is convertible into 50 shares of common stock.b. The conversion price of Bond B, which is an $870-par-value bond that is convertible into 30 shares of common stock.c. If a bondholder holds a premium and a discount bond
=+LG 3 P17–9 Conversion ratio What is the conversion ratio for each of the following bonds?a. A $1,000-par-value bond that is convertible into common stock at $63.75 per share.b. A $950-par-value bond that is convertible into common stock at $43.25 per share.
=+c. A $1,630-par-value bond that is convertible into common stock at $57.50 per share.
=+LG 3 P17–10 Conversion (or stock) value Assume that BHP Billiton, an Anglo-Australian multinational public company, has issued the following convertible bonds. What is the conversion (or stock) value for each of these?
=+a. A bond of A$1,000 par value that is convertible into 10 shares of common stock.The common stock is currently selling for A$25 per share.b. A bond of A$1,000 par value that is convertible into 17.5 shares of common stock. The common stock is currently selling for A$20 per share.
=+c. A bond of A$1,000 par value that is convertible into 20 shares of common stock.The common stock is currently selling for A$10 per share.
=+P17–11 Conversion (or stock) value Find the conversion (or stock) value for each of the four $1,000-par-value convertible bonds given in the following table. X MyLab Convertible bond name Conversion ratio Current market price of stock A 25 $30.00 B 20 29.75 C 15 38.25 D 9 55.50 Bond Par value
=+LG 4 P17–12 Straight bond value Calculate the straight bond value for each of the bonds shown in the table below.
=+LG 4 P17–13 Determining values: Convertible bond The Volkswagen Group has just issued a convertible bond with a €1,000 par value. The bond is convertible into 20 shares of common stock. It has a 3% coupon rate and a 10-year maturity. The interest rate on
=+a straight bond of similar risk is currently 5%.a. Calculate the straight bond value of the bond.b. Calculate the conversion (or stock) value of the bond when the market price of the common stock is €40, €45, €50, €53, and €55 per share.
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