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financial management
Practical Financial Management 5th Edition William R. Lasher - Solutions
1. The Highland Instrument Company has revenues of about $300 million per year.Its management is interested in expanding into a new type of product manufactured primarily by Lowland Gauge Inc., a firm with sales of about $200 million annually. Both firms are publicly held with a broad base of
29. Go to the Business Owner’s Toolkit at http://www.toolkit.cch.com for information on how to more effectively manage accounts receivable. First click on Managing Your Business Finances, then on Credit and Collections. Read the introduction and the following sections: building a credit policy
28. EverFit Inc. manufactures commercial grade fitness equipment used in spas and health clubs. The firm produces complex resistance exercise machines designed to strengthen specific muscles. EverFit’s engineering department designs the equipment and then contracts with metal working shops to
27. Emmons Motors is a distributor of electric motors. The firm projects product demand of 25,000 units next year. It costs $320 to place an order with suppliers.Management has determined that the EOQ is 1,000 units. How much per year does it cost Emmons to carry a unit of inventory?
26. Smithson Hydraulics Inc. carries an inventory of valves that cost $25 each. The firm’s inventory carrying cost is approximately 18% of the value of the inventory. It costs $38 to place, process, and receive an order. The firm uses 20,000 valves a yeara. What ordering quantity minimizes the
25. Sharon’s Sweater Shop orders 5,000 sweaters per year from a supplier at a wholesale cost of $65 each. Carrying costs are 22% of inventory, and it costs $52 to place and receive an order. How many orders should Sharon place with the supplier each year, and how large should each be?
24. The Kranberry Kids Klothing Kompany is in the volatile garment business. The firm has annual revenues of $250 million and operates with a 30% gross margin on sales. Bad debt losses average 3% of revenues. Kranberry is contemplating an easing of its credit policy in an attempt to increase sales.
23. Over the past few years, the marketing department at Goldston & Co. has convinced the finance department to permit credit sales to increasingly marginal customers.Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested that the credit policy be tightened to
22. The Bailey Machine Tool Company thinks it can increase sales by $10 million by loosening its credit standards somewhat. The firm normally experiences bad debts of about 2% of sales, but marketing estimates that the incremental business would be from financially weaker customers who would not
21. Bozarth Business Machines (BBM) has analyzed the value of implementing a lock box system. The firm anticipates revenues of $630 million with an average invoice of $1,500. BBM borrows at 12% and has made an arrangement with Old Second Bank to manage a lock box for $.24 per check and 0.06% of
20. Colburn Inc. is considering a lock box system. The firm has analyzed its credit receipts and determined the following:Average time checks are in mail—3 days Average internal check-processing time—3 days Average to clear the banking system—2 days Total credit sales—$180 million Average
19. The Hadley Motor Company is located in Florida but has a number of customers in the Pacific Northwest. Sales to those customers are $30 million a year paid in checks that average about $1,500. The checks take an average of nine days to clear into Hadley’s Florida bank. A bank in Oregon will
18. Tambourines Inc. collects $12 million per year from customers in a remote location.The average remittance check is $1,200. A lock box system would shorten the overall float on these receipts from eight days to seven days, but would cost $2,500 per year plus $.20 per check. The relevant interest
17. The Shamrock Company has a raw materials inventory of $20 million, which is completely replaced approximately 10 times a year. The Bridgewater Bank is willing to advance financing of 75% of the value of Shamrock’s inventory at an interest rate of 12%. However, it requires a warehousing system
16. Central City Bank will lend Williams Inc. 60% of the value of its inventory at 12% if Williams will pledge the inventory as collateral for the loan. The bank also insists that Williams employ a warehousing company to monitor and control the inventoried material. Blyth Warehousing will do the
15. Southern Fabrics Inc. factors all of its receivables. The firm does $150 million in business each year and would have an ACP of 36.5 days if it collected its own receivables. The firm’s gross margin is 35%. The factor operates without recourse and pays immediately upon taking over the
14. The York Company has an average receivables balance of $55,000, which turns over once every 30 days. It offers all of its receivables to its bank as collateral for shortterm borrowing (pledging). The bank generally accepts 60% of the accounts offered and advances cash equal to 85% of those.
13. DeSquam Inc. pledges receivables of $250 million per year to the Sharkskin Finance Company, which advances cash equal to 80% of the face value of the accounts pledged. DeSquam’s receivables are usually collected in about 36 days, so 10% of the annual amount advanced is generally outstanding
12. Jenkins Appliances has cash flow problems and needs to borrow between $50,000 and $60,000 for approximately sixty (60) days. Because the business is small and relatively new, unsecured loans are very hard to get and are expensive when they are available. The bank has offered such a loan at 25%.
11. Calculate the effective interest rate on loans with the following minimum compensating balance requirements: Loan Rate Compensating Balance a. 6.5% 20% b. 12.0% 10% C. 10.5% 15% d. 14.0% 25% e. 8.5% 30%
10. What is the effective interest rate on a $750,000 loan at 8% for 120 days if a 20%minimum compensating balance is required?
9. Rocky Inc. can buy its inventory from any of four suppliers all of which offer essentially the same pricing and quality. Their credit terms, however, vary considerably as follows:A 2/10, net 30 B 3/5, net 20 C 1/20, net 45 D 3/5, net 90a. Calculate the implied interest rate associated with each
8. Calculate the effective interest rate implied by the following terms of sale.(Use a 365-day year.)2/10, net 30 1/5, net 15.5/10, net 30 2.5/10, net 25 1/5, net 20
7. The Langley Corporation is in a seasonal business. It requires a permanent base of net working capital of $10 million all year long, but that requirement temporarily increases to $20 million during a four-month period each year. Langley has three financing options for net working capital.a.
6. Southport Inc. has an inventory turnover of 10, an ACP of 45 days, and turns over its payables once a month. How long are Southport’s operating and cash conversion cycles? (Use a 360-day year.)
5. Bridgeport Inc. has a $30 million revolving credit agreement with its bank at prime plus 3.2% based on a calendar year. Prior to the month of April, it had taken down $15 million that was outstanding for the entire month. On April 10, it took down another $5 million. Prime is 8.2%, and the
4. The Grass Ridge Company has the following current asset accounts.Cash $1,900,000 Accounts Receivable 4,600,000 Inventory 5,500,000 Its current ratio is 2.5:1. The bank is willing to lend the company enough to finance its working capital needs under a $10 million revolving credit arrangement at a
3. The Conejo Corp. borrows from its bank under an $8 million revolving credit arrangement. It pays a base rate of 9% on its outstanding loan plus a .25% commitment fee on the unused balance. The firm had borrowed $2 million going into April and borrowed an additional $4 million on April 11. No
2. Thompson Inc. has a $10 million revolving credit agreement with its bank. It pays interest on borrowing at 2% over prime and a .25% commitment fee on available but unused funds. Last month Thompson had borrowings of $5 million for the first half of the month and $10 million for the second half.
1. Scherbert Industries has the following balance sheet accounts as of 12/31/X3 (not a complete balance sheet):Accounts Payable $ 650,000 Accounts Receivable 845,000 Accruals 257,500 Cash 137,200 Common Stock 1,200,000 Fixed Assets (net) 8,250,000 Inventory 655,000 Long-Term Debt 3,500,000
7. Wildebrant Inc. runs out of inventory all the time both in the factory and at the point of sale. However, the company is profitable, and no one worries about it much. Is this OK? What’s probably going on that management doesn’t see? Why don’t they see it? What would you suggest to fix the
6. Speculate on the nature of the relationship between the credit and collections department and the sales department at Wachusett Window in the last two questions.
5. In the situation at Wachusett Window outlined in the last question, do you think a higher prompt payment discount in addition to the new sales program would have kept receivables down? Why?
4. You’re the CFO of the Wachusett Window Company, which sells windows to residential builders. The firm’s customers tend to be small, thinly capitalized construction companies that are frequently short of cash. Over the past year, there’s been a slump in the housing industry and
3. You and your friend Harry have started a business. Harry is a technical whiz, but doesn’t know much about business or finance. After several months you’ve been approved for a $100,000 bank loan at what seems to be a rather high interest rate, 16%. Harry is especially bothered by the rate. He
2. Things tend to run more smoothly and efficiently with more working capital.With respect to each working capital account (four, excluding accruals), explain why this statement isn’t absolutely true. In other words, why might a very large inventory or receivables balance not do much good at all?
1. You’re a supervisor in the treasury department of Big Corp. Recently there has been increasing concern about the firm’s rising interest expense. Fred Eyeshade is an analyst in your group who transferred from the accounting department a short time ago.He has suggested that senior management
25. The Philipps Lighting Company manufactures decorative light fixtures. Its revenues are about $100 million a year. It purchases inputs from approximately 20 suppliers, most of which are much larger companies located in various parts of the country.Sam Spade, the vice president of manufacturing,
24. Does the EOQ model when properly applied prevent stockouts? Does it address stockouts at all? Do you think the EOQ model solves very many of management’s inventory problems?
23.. Because of the advances in computer technology, inventory management is a precise science, and there’s no excuse for not having the optimal quantity on hand at all times. Is that statement true or false? Explain.
22. Inventory management is a shared responsibility between finance and manufacturing just as receivables management involves both sales and finance. Right or wrong? Explain.
21. Outline the costs and benefits involved in the trade-off between a tighter versus a looser receivables policy.
20. Every company should take full advantage of the sophisticated cash management services offered by today’s banking industry. Right or wrong? Explain.
19. You’re the cash manager for Huge Inc., which has factories and stores all over the country. Each operation has several bank accounts to receive deposits and pay vendors, so the company’s cash is spread all over the country under the control of divisional CFOs. It’s essential that those
18. Sally Johnson lives in Baltimore and does business with a large, national brokerage firm. When she sends the broker a check, she mails it to a local address in Baltimore. However, when she receives a check from the broker, it comes from San Francisco. Her sister Joan lives in Los Angeles and
17. The Medco Supply Co. operates out of Waco, Texas, and has a number of customers around Portland, Maine. It seems to take a particularly long time for the Portland customers’ payment checks to reach Medco. What can the company do to speed things up? Explain how your solution would work.
16. Outline the reasons for holding cash and the big cost associated with it. How do these lead to the objective of cash management? How do marketable securities help or hinder achievement of the objective?
15. What is the biggest problem associated with financing secured by inventory? How is it addressed in practice?
14. Factoring may involve interest even though it isn’t a loan. How can this come about?
13. Explain the difference between pledging and factoring receivables. Which is likely to be a more expensive source of financing? Is factoring the same kind of financing as pledging?
12. What’s the difference between a promissory note, a line of credit, and a revolving credit agreement? Are they mutually exclusive? That is, might one be part of the other?
11. What are the advantages and disadvantages of stretching payables? If you owned your own business, would you do it? Why or why not?
10. You work in the finance department of HiTech Inc. The firm’s owner and CEO, Charlie Dollars, is very profit oriented. He understands that short-term interest rates are quite low at the moment, and has suggested that the firm finance all of its working capital needs with short-term loans. The
9. Why does it make sense to finance net working capital separately from fixed assets?
8. You work in the finance department of a manufacturing company. Over lunch, a friend in the engineering department said she’d heard that the firm used a lot of temporary working capital. Because temporary equipment is usually of lower quality than permanent material, she wonders why the
7. How does a firm’s operating cycle differ from its cash conversion cycle? Explain fully.
6. Support or challenge each of the following statements individually.a. Because accounts receivable aren’t purchased like inventory or fixed assets, they don’t require financing.b. Cash represents a pool of available money, so it actually reduces financing needs.
5. Working capital is generally defined as the difference between current assets and current liabilities. Is this definition precisely correct? Why?
4. Working capital spontaneously finances itself because it’s being turned over all the time. Is this statement true, false, or a little of both? Exactly what is meant by“spontaneous financing”? Does working capital require funding? Why?
3. Describe the maturity matching principle. What are the risks of not matching maturities? How would you characterize a firm that ignores the principle? Can you think of situations in which it would be advisable for an otherwise prudent firm to deviate from the principle?
2. Because companies always have inventory and accounts receivable, most banks are happy to make long-term loans to support those assets. Either refute or support that statement.
1. Explain the different circumstances under which firms should use short-term or long-term financing.
18. An excellent source of information on recent dividends is available at: www.ex-dividend.com. Select free services for access to the latest dividend news, as well as lists of companies that have recently increased or decreased their dividends. Scan dividend news, increases and then decreases
17. The stock market is generally depressed, and the price of Westin Metals Inc.’s common shares has been below its historic average value for some time. The shares are trading at $35 which represents a P/E of 19 on earnings of $7,000,000.Before the current slump, Westin generally maintained a
16. Tydek Inc. just lost a major lawsuit and its stock price dropped by 40% to $6.There are 3.5 million shares outstanding which are currently selling at their book value of $10. The company has $5 million in cash readily available. The CFO feels the decline in price is temporary and the firm’s
15. Parnell Bolts Inc. has 20 million common shares outstanding and net income of$30 million. The stock sells at a P/E of 15. The company has $5 million available to pay the next quarterly dividend, but is considering a repurchase instead.a. If Parnell pays the cash dividend, what will be its
14. The Featherstone Corp. has $8 million in cash for its next dividend but is considering a repurchase instead. Featherstone has 10 million shares outstanding, currently selling at $40 per share. The P/E is 20 on EPS of $2.a. If the dividend is paid, how large will it be per share?b. If stock is
13. The Alligator Lock Company is planning a two-for-one stock split. You own 5,000 shares of Alligator’s common stock, which is currently selling for $120 a share.a. What is the total value of your Alligator stock now, and what will it be after the split?b. Alligator’s CFO says that the value
12. Wysoski Enterprises is considering a stock dividend. The firm’s capital includes 3 million shares of $1 par value stock issued at an average price of $8. Retained earnings total $20 million. State the equity accounts now and after each of the following possible stock dividends.a. Wysoski
11. Seinway Corp just declared a 10% stock dividend. Before the dividend the stock sold for $34 per share and the equity section of the firm’s balance sheet was as follows:Common stock (10,000,000 shares, $.50 par) $ 5,000,000 Paid in excess 56,000,000 Retained earnings 87,500,000 Total
10. The Addington Book Company has the following equity position. The stock is currently selling for $3 per share.Common stock (8 million shares outstanding, $2 par) .......... $16,000,000 Paid in excess ............................................................................ 4,000,000 Retained
9. You own 1,000 shares of Jennings Corp. stock which is currently selling for $88.Calculate the number of shares you would own and the stock’s market price after each of the following stock splits.a. A two-for-one stock splitb. A three-for-one stock splitc. A three-for-two stock splitd. A
8. Harrison Hardware anticipates $2 million in net income next year and a 20% participation in the firm’s dividend reinvestment plan. Management expects to spend$2.375 million on new capital projects, and maintain the current capital structure which is 64% equity without issuing new stock. What
7. Segwick Petroleum Ltd. has a dividend reinvestment plan in which new stock is issued to participating investors. Segwick’s payout ratio is 40%, and 30% of stockholders participate in the plan. The firm’s ROE is 10%. What percentage increase in flotation-cost-free equity capital does the plan
6 The Montauk Company has a dividend reinvestment plan in which shareholders owning 25% of its common stock participate. Last year the firm’s EPS was $4.20, and its payout ratio was 50%. There are 2 million shares of common stock outstanding.How much new capital did Montauk raise through the
5. The Holderall Rope and Yarn Co. has 2 million common shares outstanding. Its capital structure is two-thirds equity. The firm expects earnings of $10 million next year and anticipates capital spending of $12 million on projects. Assume the projects will be funded with money raised in the
4. Biltmore Industries has grown at an average of 6% per year over its long history.Its stock price is currently $40.00, and its most recent dividend was$2.50. Biltmore just announced that it plans to discontinue dividends for several years to take advantage of some growth opportunities. Analysts
3. Randal Flapjack is a retired short-order cook living on a fixed income in the state of Utopia, where all financial markets are perfectly efficient. Randal has 20,000 shares of the Sugarcooky Corp., which pays an annualized dividend of $1 per share. Sugarcooky sells at a P/E of 10, has maintained
2. The Argo Pamphlet Company’s dividend payout ratio is 35%. It is currently paying an annual dividend of $1.30.a. What is Argo’s EPS?b. What is the market price of Argo’s stock if its P/E ratio is 14?c. How much current income per share will stockholders lose if Argo cuts its payout ratio to
1. Richard Ingram just bought 1,000 shares of Sisson Electronics at $40 per share.He plans to hold the stock for one year before selling. Sisson is in the process of selecting a new dividend policy. The firm will either pay out all of its earnings in dividends or retain and reinvest them all.
5. Blazingame Mill Works recently sold a tract of land it had owned for 30 years.All expenses and taxes have been paid, and the company has $10 million sitting in the bank as a result of the sale. Because there aren’t any pressing investment opportunities available, the board would like to
4. Your pal, Fred Flinderbinder, came into class this morning grinning from ear to ear. It seems a stock in which he advised his parents to invest is doing fabulously well. Fred said the firm usually pays a dividend of $2 a share, which is about 4% of its recent $50 market price. Yesterday,
3. You’re a bank officer considering making a loan to a small family-owned company.The firm’s principal owner is a hard-working, conservative woman who has built up the company over a number of years. However, two of her grown children are now active in the company’s management. They’re
2. The Tanglefern Corporation has traditionally paid out 60% of its earnings in dividends.Recently some marvelous growth opportunities have arisen that involve only a little risk but require a lot of cash. Most of the executive team thinks the firm should do two things to raise the cash needed to
1. You’re the treasurer of SuperTech Inc., a high-technology firm in the fast-growing computer business. The management team has recently been trying to decide on a long-term dividend policy. Earnings are good, but the firm has far more investment opportunities than income.There’s no doubt that
6. You’re a financial analyst for a large mutual fund. You’re doing an analysis of the Truebright Apparel Company, which makes stylish cotton clothes for teenagers.The company has recently been under attack by foreign competition and seems to have lost its edge in the fashion market. EPS fell
5. You’re an investment advisor and have several well-off older people among your clients. One of these individuals, Charlie Haverty, steadfastly refuses to invest in companies that pay significant dividends. A successful investment counselor advised him to avoid such stocks in 1965, and he’s
4. There is said to be a controversy over dividends. What is it, and why is it important?
3. Fully explain the choices implied by the dividend decision. Are the results of the choices known or uncertain?
2. Given the importance of dividends to the well-being of equity investors, why do they put up with the fact that dividends are discretionary?
1. Dividends are said to be the basis for the value of stocks. If that’s true, how do we explain the fact that companies that pay no dividends often have substantial market value? (Such companies are usually relatively young and in high-growth fields.) First explain the phenomenon in terms of the
22. Now compare each firm’s structure with those of its peers. For each firm enter the Thomson ONE peer analysis module, locate the balance sheet, and scroll down to the liabilities and equity section. Record the firm’s capital components and calculate its capital structure.Once you have the
21. In this exercise, we will calculate the capital structures of several firms and examine the stability of those structures.Enter Thomson ONE for each of the seven companies we have been working with; Sherwin Williams (SHW), General Motors (GM), Harley-Davidson(HOG), Starbucks (SBUX), Microsoft
20. Go to http://www.Morningstar.com. Click on quotes in the upper left corner of the page without putting anything in the window. Use the blue search box in the middle of the page to find information about companies. Put in a name or tickertape symbol and click search. When the firm comes up,
19. Assume Schoen Industries of the last problem is subject to income tax at a rate of 40%.a. Recalculate the value of the firm assuming there is no tax shield associated with debt and compare it to the value calculated in the last problem. That is, assume interest is subtracted in calculating
18. Schoen Industries pays interest of $3 million each year on bonds with an average coupon rate of 7.5%. The firm has 4.5 million shares of stock outstanding and pays out 100% of earnings in dividends. Earnings per share (EPS) is $3.50.Schoen’s cost of equity is 12%. Calculate the firm’s total
17. The Singleton Metal Stamping Company is planning to buy a new computercontrolled stamping machine for $10 million. The purchase will be financed entirely with borrowed money, which will change Singleton’s capital structure substantially. It will also change operations by adding $1.5 million
16. The Spitfire Model Airplane Company has the following modified income statement($000) at 100,000 units of production.Revenue $10,000 Variable cost 6,500 Fixed cost 2,200 EBIT $ 1,300 Interest (@ 10%) 500 EBT $ 800 Tax (@ 40%) 320 EAT $ 480 Number of shares 20,000a. What are Spitfire’s
15. Use the information from the previous two problems. Calculate BWP’s breakeven point in units and dollars, with and without the purchase of the new machine.
14. Calculate BWP’s DFL and DTL before and after the acquisition of the new machine.
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