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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+c. Now assume the firm could stretch by 20 days the accounts payable (net periods only from the supplier, Nordex. What impact, if any, would that have on your answer in part b relative to this supplier?
=+b. If the firm needs short-term funds, which are currently available from Banca Mediolanum at 9%, and if each of the suppliers is viewed separately, which of the suppliers’ cash discounts should the firm give up? Explain why.
=+a. Calculate the approximate cost of giving up the cash discount from each supplier.
=+LG 1 LG 2 P16–6 Early payment discount decisions Brembo, an Italian automotive braking-systems supplier, has three alternative carbon ceramic suppliers, all of which offer different credit terms. Except for the different credit terms, their products are identical. The credit terms offered by
=+f. Should Antonio choose the financing or the cash alternative?
=+e. What is the cost of the cash alternative at the end of 5 years?
=+d. Given the interest rate on his savings, what will Antonio give up (opportunity cost) over the 5 years if he pays cash?
=+c. Calculate the net cash outlay under the cash purchase option.
=+b. Calculate the monthly payment on the available loan. (Hint: Treat the current loan as an annuity and solve for the monthly payment.)
=+a. Calculate the cash down payment for the loan.
=+LG 2 P16–5 Borrow or pay cash for an asset Antonio is considering renovating his apartment in Milan. He visits Meridiani and looks at different bedroom furniture sets. The bedroom sets are generally very expensive, and even though he has the cash to pay for one, he is thinking about getting a
=+P16–4 Cash discount versus loan The Wood Connection decides to offer cash discounts to its regular credit customers, provided that the credit customers have a proven track record of on-time payment. The Wood Connection is offering Monkey Suppliers a discount on its credit purchases. The credit
=+d. If the firm’s cost of short-term financing is 12%, should Wendy Interior Design give up the cash discount for each of the invoice credit terms presented in the table? Explain.
=+c. For each set of credit terms, calculate the cost of giving up the cash discount.
=+b. For each set of credit terms, calculate the number of days until full payment is due.
=+a. Write the shorthand expression of credit terms for each set in the table.
=+LG 1 P16–3 Credit terms Wendy Interior Design received four invoices with different credit terms. The manager needs to determine when the invoices, all dated March 25, need to be paid to avoid late-payment charges. A summary of the invoice credit terms are presented in the following table.
=+LG 1 P16–2 Cost of giving up early payment discounts Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.)a. 2/10 net 30.b. 1/10 net 30.c. 1/10 net 45.d. 3/10 net 90.e. 1/10 net 60.f. 3/10 net 30.g. 4/10 net 180.
=+P16–1 Payment dates On March 25, the following invoices were issued for a $500 purchase on credit. Indicate the meaning of each credit term.a. 2/10 net 30 date of invoice.b. 2/10 net 40 EOM.c. 2/10 net 20 EOM.d. 2/10 net 60 date of invoice.
=+LG 3 E16–4 Diamantis Masoutis S.A., a Greek supermarket chain, borrowed €250,000 under a line-of-credit agreement. Although the company normally maintains a checking account balance of €15,000 in the lending bank, this credit line requires a 10% compensating balance. The stated interest
=+LG 2 E16–2 Cleaner’s Inc. is switching to paying employees every 2 weeks rather than weekly and will therefore “skip” 1 week’s pay. The firm has 25 employees who work a 60-hour week and earn an average wage of $12.50 per hour. Using a 10% rate of interest, how much will this change save
=+c. Now assume that the firm could stretch its accounts payable (net period only) by 20 days from supplier Z. What impact, if any, would that have on your answer in part b relative to this supplier?
=+b. Assuming that the firm needs short-term financing, indicate whether it would be better to give up the discount or take the discount and borrow from a bank at 15% annual interest. Evaluate each supplier separately using your findings in part a.
=+a. Determine the approximate cost of giving up the early payment discount from each supplier.
=+ST16–1 Early payment discount decisions The credit terms for each of three suppliers are shown in the following table. (Note: Assume a 365-day year.)Supplier Credit terms X 1/10 net 55 EOM Y 2/10 net 30 EOM Z 2/20 net 60 EOM
=+In the chapter opener, you learned about FastPay, a company that lends to online ad publishers based on advertising receivables. Suppose you are running a business that relies on online ad revenues. It typically takes 60 days to collect from your customers and convert receivables into cash.
=+Why are these rates generally higher than the rates on unsecured short-term loans?
=+16–12 In general, what interest rates and fees are levied on secured short-term loans?
=+16–11 Are secured short-term loans viewed as more risky or less risky than unsecured short-term loans? Why?
=+ How is “netting” used in transactions between subsidiaries?
=+ How is a letter of credit used in financing international trade transactions?
=+16–10 What is the important difference between international and domestic transactions?
=+16–4 How is the prime rate of interest relevant to the cost of short-term bank borrowing? What is a floating-rate loan?
=+16–3 What is “stretching accounts payable”? What effect does this action have on the cost of giving up a discount?
=+13–1 What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?
=+13–2 What is the operating breakeven point? How do changes in fixed operating costs, the sale price per unit, and the variable operating cost per unit affect it?
=+13–3 What is operating leverage? What causes it? How do you measure the degree of operating leverage (DOL)?
=+13–4 What is financial leverage? What causes it? How do you measure the degree of financial leverage (DFL)?
=+13–5 What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?
=+13–6 What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?
=+13–7 In what ways are the capital structures of U.S. firms and non–U.S.firms different? How are they similar?
=+13–8 What is the major benefit of debt financing? How does it affect the firm’s cost of debt?
=+13–9 What are business risk and financial risk? How does each influence the firm’s capital structure decisions?
=+13–10 Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?
=+13–11 How does asymmetric information affect the firm’s capital structure decisions? How do the firm’s financing actions give investors signals that reflect management’s view of stock value?
=+13–13 Explain the EBIT–EPS approach to capital structure. Include in your explanation a graph indicating the financial breakeven point; label the axes. Is this approach consistent with maximization of the owners’wealth?
=+13–14 Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?
=+13–15 What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?
=+a. Now that the company has decided to use the proceeds from a bond issue to repurchase shares, what would you expect the effect of that decision to be on Apple’s degree of total leverage?
=+VVb. Calculate the percentage change in revenues and in EPS from 2010 to 2011 and from 2011 to 2012 (before Apple altered its capital structure). What was Apple’s degree of total leverage at this time?
=+c. Calculate the percentage changes in revenues and EPS from 2014 to 2015 and from 2015 to 2016 (after Apple had been altering its capital structure for a few years). What was Apple’s degree of total leverage at this time?
=+d. Do your findings in questions b and c align with your expectations from question a?
=+e. What do you think happened to the beta of Apple’s common stock from 2010 to 2016?
=+ST13–1 Breakeven point and all forms of leverage TOR most recently sold 100,000 units at$7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred
=+a. At what level of sales (in units) would the firm break even on operations (i.e., EBIT = $0)?
=+b. Calculate the firm’s earnings per share (EPS) in tabular form at (1) the current level of sales and (2) a 120,000-unit sales level.
=+c. Using the current $750,000 level of sales as a base, calculate the firm’s degree of operating leverage (DOL).
=+d. Using the EBIT associated with the $750,000 level of sales as a base, calculate the firm’s degree of financial leverage (DFL).
=+e. Use the degree of total leverage (DTL) concept to determine the effect (in percentage terms) of a 50% increase in TOR’s sales from the $750,000 base level on its earnings per share.
=+LG 5 ST13–2 EBIT–EPS analysis Newlin Electronics is considering additional financing of$10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12%(annual interest) bond issue or through the
=+a. Calculate two EBIT–EPS coordinates for each plan by selecting any two EBIT values and finding their associated EPS values.
=+b. Plot the two financing plans on a set of EBIT–EPS axes.
=+c. On the basis of your graph in partb, at what level of EBIT does the bond plan become superior to the stock plan?
=+LG 3 LG 6 ST13–3 Optimal capital structure Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.
=+a. Compute the estimated share value associated with each of the capital structures, using the simplified method described in this chapter (see Equation 13.12).
=+b. Determine the optimal capital structure on the basis of (1) maximization of expected earnings per share and (2) maximization of share value.
=+c. Which capital structure do you recommend? Why?
=+E13–1 Shelby’s Photographs has fixed operating costs of $16,500 and variable operating costs of $8 per photograph pack. The photograph packs sell for $20 each. How many photograph packs must be sold for the firm to break even in terms of EBIT?
=+LG 1 E13–2 Rio Mare currently has fixed operating costs of €1,100,000, and it sells canned tuna for €1.50 per can, while incurring variable operating costs of €0.65 per can. If the company can invest in better storing technology that would simultaneously raise its fixed costs to
=+LG 2 E13–3 Chico’s has sales of 15,000 units at a price of $20 per unit. The firm incurs fixed operating costs of $30,000 and variable operating costs of $12 per unit. What is Chico’s degree of operating leverage (DOL) at a base level of sales of 15,000 units?
=+LG 2 E13–4 Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base level of EBIT of $20,000?
=+P13–1 Breakeven point: Algebraic The Golf Shop needs to forecast the number of a specific golf set it needs to sell to break even. The golf set sells for $1,250 per set. The fixed operating costs are $21,000 while the variable operating costs are $750 per set. How many sets must The Golf Shop
=+LG 1 P13–2 Breakeven comparisons: Algebraic Jaipur Rugs, FabIndia, and Ashok Carpets are three carpet and rug manufacturing companies in India. Based on the information provided in the table below, answer the questions that follow.
=+a. What is the operating breakeven point in units for each firm?
=+b. How would you rank these firms in terms of their risk?
=+LG 1 P13–3 Breakeven point: Algebraic and graphical Fine Leather Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are $473,000 annually, and its variable operating costs are $86.00 per unit.
=+a. Find the firm’s operating breakeven point in units.
=+b. Label the x-axis “Sales (units)” and the y-axis “Costs/Revenues ($),” and then graph the firm’s sales revenue, total operating cost, and fixed operating cost functions on these axes. In addition, label the operating breakeven point and the areas of loss and profit (EBIT).
=+LG 1 P13–4 Breakeven analysis Anke Perks is opening an arts and crafts store that focuses on canvases, paints, and pencils. Each canvas is sold for $24. The variable operating costs are $14 per canvas while the fixed operating costs are $4,000.
=+a. Calculate how many canvases Anke needs to sell to reach her operating breakeven point.
=+b. Calculate the total operating costs at the breakeven point based on part a.
=+c. Anke’s business plan assumed that she would be able to sell 420 canvases per month. Will Anke be able to make a profit at this sales level?
=+d. How much EBIT will Anke generate if she sells 420 canvases per month?Personal Finance Problem
=+LG 1 P13–5 Breakeven analysis Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his car requires a flat fee of $500, and the service provider
=+a. Calculate the breakeven point for the device in months.
=+b. Based ona, should Paul have the system installed in his car?
=+LG 1 P13–6 Breakeven point: Changing costs/revenues Anki is a Finnish manufacturer of rugs.Last year, it sold rugs for €350, with a variable operating cost of €200 per rug and a fixed operating expense of €1,050,000.
=+a. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if all figures remain the same as for last year?
=+b. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if fixed operating costs increase to €1,300,000 and all other figures remain the same?
=+c. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if the selling price decreases to €320, and all other costs don’t change?
=+d. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if the variable operating cost per rug increases to €220 and all other figures remain the same?
=+e. What conclusions about the operating breakeven point can be drawn for your answers?
=+LG 1 P13–7 Breakeven analysis Antonio and his friend, Giancarlo, are both talented painters.Last year they began painting original artistic postcards, which they gave to their friends as holiday gifts. In addition, they began selling these at a crafts fair and sold them mainly for fun. At the
=+a. Calculate A&G’s operating breakeven point.
=+b. Calculate A&G’s EBIT on the contract.
=+c. If Antonio decides to renegotiate the contract at a price of €5.00 per postcard, what will the EBIT be?
=+d. If the buyer refuses to pay more than €4.00 per postcard, but is willing to negotiate quantity, what quantity of postcards will result in an EBIT of €1,200?
=+e. At this time, A&G’s postcards come in 20 different varieties. While the average variable cost per postcard is €1.50, the actual cost varies from unit to unit. What recommendation would you give to Antonio and Giancarlo with regard to pricing and the numbers and types of units that they
=+LG 2 P13–8 EBIT sensitivity Millard’s Enterprises sells wooden baby chairs for $28 per chair. The fixed operating costs are $23,000, and the variable operating cost is$18 per chair.
=+a. Calculate Millard’s Enterprises’ EBIT with an estimated sales of 12,000 chairs.
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