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Financial Management Theory And Practice 3rd Canadian Edition Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason - Solutions
After all foreign and Canadian taxes, a Canadian corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.80 per pound, and the pound is expected to depreciate 3% against the dollar each year
A trader observes the following market information and sees an opportunity to make an arbitrage profit.The spot rate is 82 yen per dollar, while the 1-year forward rate is 80.20 yen per dollar. The nominal risk-free rate is 1% in Japan and 2.5% in Canada. a. Do the relevant calculation for
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in Canada and 5.3% in Germany. In the spot market, 1 euro equals $1.30.a. Is the 90-day euro forward rate at a premium or discount relative to the spot rate? b. What is the 90-day euro forward rate?
Neeves New Zealand Imports has agreed to purchase 16,000 cases of New Zealand wine for 3 million New Zealand dollars at today's spot rate. The firm's financial manager, Hinda Wilson, has noted the following current spot and forward rates:
In September 1983, it took about 245 Japanese yen to equal $1. Thirty-one years later, in September 2014, the exchange rate had fallen to 98 yen to $1. Assume the price of a Japanese manufactured automobile was $8,000 in September 1983 and that its price changes were in direct relation to exchange
You are the vice president of International InfoXchange, headquartered in Toronto. All shareholders of the firm live in Canada. Earlier this month, you obtained a loan of five million US dollars from a bank in Chicago to finance the construction of a new plant in St. Louis. At the time the loan was
A Canadian company is exporting lumber to Japan. The sales agreement calls for a payment of 7,000,000 yen to the Canadian company in 60 days. The current spot rate is 102 yen per dollar. a. Is the Canadian company worried that the yen may appreciate or depreciate in value over the next 60
In the spot market 12.8 pesos can be exchanged for one Canadian dollar. A DVD costs $15 in Canada. If purchasing power parity holds, what should be the price of the same DVD in Mexico?
Assume that interest rate parity holds. In both the spot market and the 90-day forward market one Japanese yen equals 0.0098 dollar. The 90-day risk-free securities yield 4.2% in Japan. What is the yield on 90-day risk-free securities in Canada?
Suppose the exchange rate between US dollars and the Mexican peso is Ps 13.0 = 1 and that the exchange rate between the dollar and the British pound was ยฃ1 = $1.58. What is the cross rate between pesos and pounds?
Suppose that the exchange rate is $1.10 dollars per Swiss franc. If the franc appreciated 10% tomorrow against the dollar, how many francs would a dollar buy tomorrow?
If British pounds sell for $1.50 (Canadian) per pound, what should dollars sell for in pounds per dollar?
A computer costs $900 in Canada. The same computer costs 650 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, one yen equals $0.012. If interest rate parity holds, what is the 6-month forward exchange rate?
A currency trader observes that in the spot exchange market, one Canadian dollar can be exchanged for 12 Mexican pesos or for 102 Japanese yen. What is the cross rate between the yen and the peso? That is, how many yen would you receive for every peso exchanged?
Why do corporations build manufacturing plants abroad when they could build them at home?
If Canada imports more goods from abroad than it exports, foreigners will tend to have a surplus of Canadian dollars. What will this do to the value of the dollar with respect to foreign currencies? What is the corresponding effect on foreign investments in Canada?
If the Swiss franc depreciates against the Canadian dollar, can a dollar buy more or fewer Swiss francs as a result?
Use the information and data from Problem 20.5. a. Create a hedge with the futures contract for Zinn Company's planned June debt offering of $10 million. What is the implied yield on the bond underlying the futures contract? b. Suppose interest rates fall by 300 basis points. What are the
The following are data on August 2015 gold futures contracts:A mining company wishes to hedge against a decline in gold prices between now and August. The company has 2,500 oz. of gold to hedge (each futures contract is based on 100 oz.). a. If gold prices decline by $0.25 per oz., what is the
DeWalden Resources Inc. plans to issue $30,000,000 of 10-year debt in September, and the chief financial officer is concerned that interest rates will rise over the next six months until the debt is raised. The current cost of debt for De Walden Resources is 7.50%. The following futures prices
Zinn Company plans to issue $10,000,000 of 10-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the current cost of debt to the high-risk biotech company is 9%. However, the firm's financial manager is
What is the implied interest rate on a Government of Canada bond ($100,000) futures contract that settled at 112.75? If interest rates increased by 1%, what would be the contract's new value?
A Government of Canada bond futures contract has a settlement price of 91.50. What is the implied annual yield?
The current price of a stock is $28. In 1 year, the price will be either $35 or $23. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $30 and that expires in 1 year.
Assume that you have been given the following information on Purcell Industries:Current stock price = $25Time to maturity of option = 6 monthsVariance of stock return = 0.09d1 = 0.2239d2 = 0.0118Strike price of option = $25Risk-free rate = 5%N(d1) = 0.5886N(d2) = 0.5047According to the
A call option on the stock of Cranberry Glass has a market price of $12. The stock sells for $45 a share, and the option has a strike price of $35 a share. What is the exercise value of the call option? What is the option's time value?
Rework Problem 18-8 using a spreadsheet, and do sensitivity analysis with respect to quantity ordered.Data from Problem 18-8:Lucas Mitchell, financial manager of Inland Industrial, has been asked by the firm's CEO to evaluate the company's inventory control techniques and to lead a discussion of
Lucas Mitchell, financial manager of Inland Industrial, has been asked by the firm's CEO to evaluate the company's inventory control techniques and to lead a discussion of the subject with the senior executives. Lucas plans to use as an example one of Inland's "big ticket" items, a customized
Kate Hansen, the new credit manager of the Farpoint Communications, was alarmed to find that Farpoint sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $6 million, Farpoint currently averages 98 days of sales
A-1 Electrical has annual credit sales of $2.2 million. Current expenses for the collection department are $42,000, bad debt losses are 1.5%, and days' sales outstanding is 25 days. The firm is considering easing its collection efforts in such a way that collection expenses will be reduced to
Whitestone Corporation has a DSO of 26 days. The company averages $5,500 in credit sales each day. What is the company's average account receivable?
Williams & Sons last year reported cost of sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 5 while maintaining the
Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2015 and 2016:Estimates obtained from the credit and
High North Apparel Ltd. estimates that because of the seasonal nature of its business, it will require an additional $1.5 million of cash for the month of December. High North has the following four options available for raising the needed funds:(1) Establish a 1-year line of credit for $1.5
Montgomery 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. Montgomery can finance the expansion by no longer taking discounts, thus increasing accounts payable. Montgomery purchases under
Payne Products's sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends
Qbit Technology is considering changes in its working capital policies to improve its cash flow cycle. Qbit's sales last year were $3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods
Sterling Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales.a. What is the length of the firm's cash conversion cycle?b. If Sterling's annual sales are
Griswall Industries sells on terms of 2/10, net 30. Total sales for the year are $1,460,000. Thirty percent of the customers pay on the 10th day and take discounts; the other 70% pay, on average, 40 days after their purchases.a. What is the days' sales outstanding?b. What is the average amount of
Jade Rabbit Imports obtains merchandise under the credit terms of 1/20, net 30, but routinely takes 50 days to pay its bills. Given that the retailer is an important customer, suppliers allow the firm to stretch its credit terms. What is the retailer's effective cost of trade credit?
What is the nominal and effective cost of trade credit under the credit terms of 3/20, net 40?
Define each of the following terms:a. Working capital; net working capital; net operating working capitalb. Inventory conversion period; receivables collection period; payables deferral period; cash con version cyclec. Relaxed NOWC policy; restricted NOWC policy; moderate NOWC policy d. Cash
Memtech Ltd. needs to raise $15 million to construct production facilities for a new type of USB memory device. The firm's straight nonconvertible debentures currently yield 8%. Its stock sells for $23 per share, its most recent dividend (00) was $2.00, and the dividend has an expected constant
The table below provides market data from October 1, 2014, Solve for the unknown variables. The "Premium" column refers to the percentage extra an investor would pay for the stock if it purchased the bond at the market price and immediately converted at the conversion ratio. Assume that the bonds
Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the price of the company's common stock did not reflect
Complete the following table. Assume a bond with a $1,000 par value, 10-year maturity that pays interest annually. Number of warrants Price per warrant Bond with warrant Straight bond coupon rate Bond YTM A $2.46 8% 10% 4% 40 $4.49 $3.68 20 6%
Fisher Investments recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $50 a share. What is the convertible issue's conversion ratio?
Newhouse Enterprises recently issued two types of bonds. The first issue consisted of 15-year straight debt with a 7% annual coupon. The second issue consisted of 15-year bonds with a 5% annual coupon and attached warrants. Both issues sold at their $1,000 par values. What is the implied value of
Two companies, Shipton Ltd. and Falco Corporation, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $100,000. Shipton obtained a 5-year, $100,000 loan at a 7% interest rate from its bank. Falco, on the other hand, decided to
Precision Graphics Ltd. (PGL) is looking at modernizing its facilities. As part of that process, PGL has decided to acquire new high-speed colour laser photocopiers. It has the option of buying the machines for $75,000 or leasing them for 5 years. PGL would be able to finance 100% of the purchase
Misty River Minerals must install $5.6 million of new machinery in its Ontario mine. It can Buy obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply:(1) The machinery falls into asset Class 38 with a declining balance CCA rate of
Define each of the following terms:a. Lessee; lessorb. Operating lease; financial lease; sale-and-leaseback; combination lease; synthetic lease; SPEc. Off-balance sheet financing; capitalizingd. lAS 17e. Residual valuef. Lessee's analysis; lessor's analysisg. Net advantage to leasing (NAL)
South Tel Technologies is considering whether or not to refund a $90 million, 8% annual coupon, 30-year bond issue that was sold 5 years ago. South Tel's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 6.5% (annual payments) in today's market.
Jan Volk, financial manager of Green Sea Services (GSS), has been asked by her boss to review GSS's outstanding debt issues for possible bond refunding. Five years ago, GSS issued $40,000,000 of 9%, 25-year debt. The issue, with semiannual coupons, is currently callable at a premium of 9%, or $90
Rework Problem 14A-2, Bond Refunding Part a, using a spreadsheet model, and answer the following question: At what interest rate on the new debt is the NPV of the refunding no longer positive?Data from Problem 14A-2:South Tel Technologies is considering whether or not to refund a $90 million, 8%
Edelman Gem Company, a small jewellery manufacturer, has been successful and has New Stock Issue enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price on the stock. The company and its investment
East Jet Airlines is an all-equity firm with a book value of $100,000,000 and 16,000,000 shares outstanding. Its stock currently trades at $9 per share, and EPS is $0.50. East Jet wishes to issue another 1,500,000 shares to finance the purchase of a new IT system. The new system will increase EBIT
Elie's Concrete Co. (ECC) currently has sales of $30 million and a net profit margin of 5%. Management is contemplating expansion, which would lead to sales growth of 8% but would also require raising $4 million through an equity issue. ECC's shares currently trade at $14.75, and its underwriter
J. Bourne Security Products (JBSP) is a successful company, but it needs $200,000 in additional funding to grow. JBSP and an angel investor agree the business is worth $800,000 and the angel has agreed to invest the $200,000 that is needed. There are currently 40,000 shares outstanding. What is a
Security Brokers Inc. completed a firm commitment underwriting for Beedles Inc. The terms were as follows:Price to public $12 per shareNumber of shares
Before entering into a formal agreement, investment banks carefully investigate the companies whose securities they underwrite; this is especially true of the issues of firms going public for the first time. Since the banks do not themselves plan to hold the securities but intend to sell them to
How do you think each of the following items would affect a company's ability to attract new capital and the flotation costs involved in doing so?a. A decision of a privately held company to go publicb. The increasing institutionalization of the "buy side" of the stock and bond markets c. The
Define each of the following terms:a. Going public; new issue market; initial public offering (IPO)b. Public offering; private placementc. Venture capitalists; roadshow; spreadd. Securities regulatorse. Prospectus; "red herring" prospectusf. Best efforts arrangement; underwritten arrangementg.
J. Clark Inc. (JCI), a manufacturer and distributor of sports equipment, has grown until it has become a stable, mature company. Now JCI is planning its first distribution to shareholders. (See the file for the most recent year's financial statements and projections for the next year, 2014; JCI's
Landry Corporation is reviewing its capital budget for the upcoming year. It has paid a $2.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain constant for the next several years. The company's target capital structure is 70% equity and 30%
In 2015, Sytek Environmental paid dividends totalling $2.6 million on net income of $9.8 million. 2015 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 8%. However, in 2016, earnings are expected to jump to $12.6 million, and the firm expects to have
Peninsula Technology Corporation (PTC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When PTC's founder, who was also its research director and most successful inventor, retired unexpectedly to the South Pacific in late 2015, PTC was
Burnaby Packers is considering three independent projects, each of which requires a $3 million investment. These projects have different levels of risk and therefore different costs of capital. Their projected IRRs and cost of capital are as follows:Project A: Cost of capital = 17%; IRR =
Industrial Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $15 million investment in plant and machinery. The firm wants to maintain a 0.43 debt-equity ratio in its
Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different
Flex Logic System (FLS) is considering a change in its capital structure. FLS currently has $20 million in debt carrying a rate of 8%, and its stock price is $20 per share with 4 million shares outstanding. FLS is a zero-growth firm and pays out all of its earnings as dividends. EBIT is
Willard Pest Control (WPC) currently has a capital structure, based on market values, of 50% debt. The debt consists of 8% perpetual bonds selling at par. The company's EBIT is $7.25 million, and its tax rate is 15%. WPC can change its capital structure by either increasing its debt to 70% (based
Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $28.80 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,200,000, and fixed production
Fikse Gardening Supplies has no debt outstanding, and its financial position is given by the following data:Assets (book = market)...........................................$4,000,000EBIT............................................................................$500,000Cost of equity, rs
An unlevered firm has a value of $600 million. An otherwise identical but levered firm has $120 million in debt. If the corporate tax rate is 30%, what is the value of the levered firm using the MM corporate-tax model?
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt. Under the MM zero-tax model, what is the value of the levered firm?
Gourmet Foods To Go has the following financial information:Debt:....................................................$0Book Equity: ....................................$4,000,000Tax
J. Kirk Ltd. has fixed operating costs of $4,800,000 and variable costs of $75 per unit. If it sells the product for $95 per unit, what is the break-even quantity?
Nicola Company (NC) must decide between two mutually exclusive investment projects. Each project costs $25,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:NC has
Green Day Packers (GOP) purchased a computer for its back office operations in 2011 (assume 45% CCA) for $5,000. Because of expanding operations, GOP purchased two additional computers in 2013 for $4,000 each. By 2014, the original computer was considered to be too slow and was sold for $800. One
Taylor Corporation currently uses an injection-moulding machine that was purchased 2 years ago. The CCA rate on this machine is 30%. Currently, it can be sold for $2,500. If this old machine is not replaced, it is not expected to have any value at the end of its useful life, estimated to be 6 years
Central Drug Mart (COM) is a drugstore chain operating in Ontario and Quebec. The company is contemplating a home delivery service for its prescription drug sales to customers who are unable to pick up their drugs in the stores. COM is investigating whether to invest in small hybrid automobiles.
Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $120,000, and it would cost another $9,500 to modify it for special use. The machine falls into Class 8 with a 20% CCA rate, and it would be sold after 4 yearsfor $60,000. The machine would
Assume the following information for Project X:Initial investment: $50,000Annual after-tax cash flows:
A company has purchased a piece of equipment for $10,000 that has a 5-year useful life and no salvage value. The company's tax rate is 30% and its cost of capital is 10%. a. What is the present value of the CCA tax shield if the equipment has a 20% declining balance CCA rate? (Ignore the
Marine Technologies has identified a project that will lower annual operating costs by $10,000 per year for 5 years. The equipment costs $30,000, installation and training is $5,000, and there is an initial investment in net operating working capital of $6,000. There is no expected salvage value in
Zepplin Aerospace is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: Projected sales ............................................. $18 millionOperating costs
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 30%.a. What is the initial investment outlay?b. The
Johnson Industries is considering an expansion project. The necessary equipment could be purchased for $9 million, and the project would also require an initial $3 million investment in net operating working capital. The company's tax rate is 40%. What is the project's initial investment outlay?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $31,000, and it is expected to generate net after-tax operating cash flows, of $8,300 per year. The truck has a 5-year expected life. The expected proceeds upon sale after tax adjustments for the truck are
The Aubey 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
Contec Systems has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $2.5 million and realizes after-tax inflows of $900,000 per year for 5 years. Machine B costs $3.4 million and realizes
DHT International is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:a. Construct NPV profiles for Projects A and B.b. If you were told that each project's cost of capital was 10%, which project should be selected? If the cost of capital was
Your company is considering two mutually exclusive projects, J and K, whose costs and cash flows are shown below:The projects are equally risky, and their cost of capital is 12%. You must make a recommendation, and you must base it on the modified IRR (MIRR). What is the MIRR of the better
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $39,500, and that for the pulley system is $94,800. The firm's cost of capital is 14%.
Refer to Problem 10-1. What is the project's discounted payback period?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV?
Refer to Problem 10-1. What is the project's payback period?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV?
Refer to Problem 10-1. What is the project's PI?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV?
Refer to Problem 10-1. What is the project's IRR?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV?
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