Questions and Answers of Foundations Financial Management

Beachcomber Treasures has determined that its degree of operating leverage (DOL) is 3.5 and its degree of financial leverage (DFL) is 2.0. (a) What is Beachcomber’s degree of total leverage
Clicker Corporation must raise $50,000 to support operations for the next 12 months. Clicker buys from its suppliers on terms of 2.5/20, net 80, and it normally pays on Day 20 to take the cash
Connecticut Advanced Technologies (CAT) is planning to get a 30-day $150,000 simple interest loan from its bank. The quoted interest rate on the loan is 10 percent. Calculate the APR and rEAR
Calculate the APR and rEAR of non–free trade credit associated with credit terms of 3/10, net 50, and 2.5/15, net 45, assuming that customers who do not take the discount (a) Pay on the last
What is the APR and rEAR on the non–free credit associated with credit terms of(a) 2/15, net 45 (b) 3/5 net 45?
If a firm buys on terms of 3/15, net 45, what is the APR of its non–free trade credit? What is the effective annual rate, rEAR?
Swampy Ox Real Estate (SORE) has been growing at a constant 5 percent rate for many years, and it expects to continue this growth long into the future. On January 1 of this year, which is the slow
Look back in the chapter to Table 14.1, which showed the balance sheets for Unilate Textiles on three different dates. Assume all sales and all purchases are made on credit. Calculate the length of
Stratosphere Wireless is examining its cash conversion cycle. The company expects its cost of goods sold, which equals 80 percent of sales, to be $480,000 this year. Stratosphere normally turns over
Balloon Payment Financial (BPF) has an inventory conversion period of 45 days, a receivables collection period of 30 days, and a payables deferral period of 20 days. (a) What is the length of
Suppose that Kitty Hawk Airlines (see Problem 13–19) decided to initiate a 5-for-1 stock split rather than the stock dividend described in the problem. Show what the equity section of the balance
Kitty Hawk Airlines recently declared a 10 percent stock dividend. Prior to the stock dividend, the equity section on Kitty Hawk’s balance sheet was:Common stock (12,000 shares outstanding, $2 par
One week after Granddad’s Kitchen split its stock 3-for-1, it paid a dividend of $0.55 per new share. The dividend payment was 10 percent greater than last year’s pre-split dividend. What was
Coldwater Fishery is considering a 1-for-4 reverse stock split. Its stock is currently selling for $15 per share. Coldwater plans to pay a dividend equal to $0.48 per share after the split. But it
BKP plans to initiate a 10-for-1 stock split. BKP’s stock currently sells for $225 per share. What will be the stock price immediately after the split takes place?
Aunt Bea’s Barbeque (ABB) has two independent investment opportunities this year: Project S costs $45,000, and it has an IRR equal to 11 percent; Project T costs $52,000 and its IRR is 8 percent.
Dirty Dogs Grooming’s optimal capital structure calls for 40 percent debt and 60 percent common equity. The company’s weighted average cost of capital (WACC) is 10 percent if the amount of
Last year, Absolute Zero Freezers paid a dividend equal to $0.95 per share. Absolute follows the low regular dividend plus extras policy to determine its annual dividend. The policy requires the
Universal Utilities (U2) applies the low regular dividend plus extras policy when determining how much of its income will be paid out as dividends each year. U2’s policy states that the minimum
Ortinau’s Office Products and Supplies (OOPS) follows the constant payout ratio dividend policy by paying out 40 percent of earnings each year. This year, OOPS expects the dividend payment to be 7
Rapid Auto Transport (RAT) follows a constant payout ratio dividend policy, which requires the company to pay out 30 percent of income as dividends each year. If it wants to pay $840,000 in dividends
Last year, Headline News Corporation paid $600,000 in dividends and retained $360,000 of the earnings it generated. The company follows a constant payout ratio dividend policy. If Headline generates
Last year, Creative Artists retained $100,000 of the $250,000 net income it generated. This year, Creative generated net income equal to $275,000. If Creative follows the constant payout ratio
Texas Tea’s dividend policy calls for the dividend to be increased each year by the same rate. Last year, the company paid a dividend equal to $2.50 per share. This year, after the company
Darling’s Dry Cleaning has been growing at a constant 6 percent rate for more than 20 years, and this growth is expected to continue forever. Last year, Darling’s paid a dividend equal to $3.50
Baker Island Tours (BIT) expects earnings to grow at a constant rate of 4 percent forever. Its target debt/assets ratio is 40 percent, and it expects to have profitable investments of $1.3 million
In 2017, Seaworthy Dingy’s earnings are expected to be $14.4 million, and the firm expects to have profitable investment opportunities of $8.4 million. Last year, the company paid dividends equal
The Hawaiian Corporation expects this year’s net income to be $12 million. The firm’s target debt/assets ratio is 30 percent. This year, Hawaiian has $20 million profitable investment
Desert A/C plans to invest $50 million to expand operations. The firm wants to maintain a 60 percent debt/assets ratio in its capital structure. If net income is expected to be $25 million this year
The CFO determined that the firm’s degree of operating leverage (DOL) is 3× at sales equal to $900,000. She also determined that, if sales are actually $945,000, EPS will be $2.60 rather than the
Smith Bottling Company (SBC) expects this year's sales to be $560,000. SBC’s variable operating costs are 75 percent of sales and its fixed operating costs are $90,000. SBC pays interest on its
A firm has determined that its degree of operating leverage (DOL) is 5× and that its degree of financial leverage (DFL) is 2×. As a result, what will be the change in its expected EPS if sales are
Luxury Leisure’s forecasted EBIT is $750,000. This year, Luxury will pay $250,000 interest on its debt and $320,000 dividends to its common stockholders. If its marginal tax rate is 40 percent,
Muddy Murphy’s degree of financial leverage (DFL) is 4×. The company knows that if sales are 6 percent higher than forecasted, its EPS will increase by 36 percent. What is Muddy’s degree of
Enigma Energy has forecasted that its EPS will be $4 per share this year. If the firm’s degree of operating leverage (DOL) is 3.0× and its degree of financial leverage (DFL) is 2.0×, what will
The CFO of The Chop Shop has determined that the company’s degree of operating leverage (DOL) is 2.5× and that its degree of financial leverage (DFL) is 3.0×. According to this information, how
The CFO of Jupiter Jibs (JJ) expects this year’s sales to be $2.5 million. EBIT is expected to be $1 million. The CFO knows that if sales actually turn out to be $2.3 million, JJ’s EBIT will be
Data Recovery Systems (DRS) has a degree of operating leverage (DOL) equal to 3.2× and a degree of total leverage (DTL) equal to 8×. DRS forecasts that this year’s sales will be $300,000 and that
Following is the latest income statement for Surfside Airlines:Sales ………………………………………………… $150,000Variable operating costs …………………..
Using the following information for Handy Hardware, determine the capital structure that results in the lowest weighted average cost of capital (WACC) for the firm. Explain your answer.
Absolute Corporation currently has $50 million in liabilities and common equity in combination. The firm has no preferred stock. After careful evaluation, the CFO constructed the following table to
The CFO of Ink Imagination (II) wants to calculate next year?s EPS using different leverage ratios. II?s total assets are $5 million, and its marginal tax rate is 40 percent. The company has
Given the following information, calculate the expected value, standard deviation, and coefficient of variation of the EPS for both firms. Probability 0.6 0.3 0.1 Firm 1: EPS, Firm 2: EPS, $1.30
Senior management of Nancy’s Nooks (NN) has determined that there is a 20 percent chance EPS will be $4.50 next year, there is a 60 percent chance EPS will be 1.50, and there is a 20 percent chance
Firm LM’s debt-to-total-assets ratio (D/TA) is 25 percent, whereas Firm QR’s D/TA ratio is 50 percent. LM has $800,000 in assets, $60,000 EBIT, and 15,000 shares of stock outstanding, and it pays
Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm
Using the information provided in Tables 12.1 and 12.2, compute OptiCap?s EPS when sales are $200,000 and the debt-to-total-assets ratio (D/TA) is 20 percent. Tables 12.1? Tables 12.2 Financial
Tri-Q Supply Company is considering an expansion project to increase sales. The project, which costs $2.6 million, has an IRR equal to 9.5 percent. Any portion of the project can be purchased. Tri-Q
Peter Piper’s Pies (P3) is evaluating four independent investments. The cost of each project is $214,000. The internal rates of return (IRRs) for the projects are IRR1 = 19%, IRR2 = 15%, IRR3 =
Debbie’s Sod Farm (DSF) expects its EBIT to be $2,250 this year. DSF’s marginal tax rate is 40 percent, it must pay $1,000 in interest this year, and it has 500 shares of common stock
Carefree Leisure has a 40-day discount interest loan outstanding. The principal amount of the loan is $60,000, its quoted interest rate is 12 percent, and there is no compensating balance
PanAir Reservations (PAR) borrowed $150,000 for 60 days from its bank. The simple interest rate on the loan is 12 percent. Calculate the APR and rEAR assuming the loan is a simple interest loan
Montana Allied Products (MAP) must borrow $1.7 million to finance its working capital requirements. The bank has offered a 45-day simple interest loan with a quoted interest rate of 8 percent.
Stumpy’s Gator Farm forecasts that its net income will be $46,800 this year. The firm’s marginal tax rate is 35 percent, and it must pay $36,000 interest on outstanding debt. Stumpy’s has no
The CFO of Lazy Loungers is evaluating the following independent, indivisible projects: Lazy?s weighted average cost of capital (WACC) is 14 percent if the firm does not have to issue new common
Albatross Boats can borrow $450,000 from its bank using a 30-day discount interest loan. The loan has a quoted interest of 9 percent and no compensating balance requirement. (a) Compute the
United Sales Association (USA) recently borrowed $25,000 from its bank at a simple interest rate of 11 percent. The loan is for one year, and the loan agreement calls for the interest to be added to
Xenon Xrays (XX) recently issued 180-day commercial paper with a face value of $100,000 and a simple interest rate of 7 percent. XX paid a transaction fee equal to 0.3 percent of the issue, which
Futuristic Coiffures (FC) needs to raise $85,000 to purchase a new machine. FC knows its component costs of capital are rd = 5%, rps = 7%, rs = 11%, and re = 13%. FC maintains a capital structure
Nuance Art has only one type of debt outstanding: a long-term bond with a face value of $300,000 and a coupon rate of interest equal to 11 percent. Nuance expects this year’s EBIT to equal
Killer Burgers’ capital structure consists of 20 percent debt, 30 percent preferred stock, and 50 percent common stock. If Killer raises new capital, its after-tax cost of debt will be 3.5
Juniper Jams’ balance sheet shows that its outstanding debt consists of $15,000 in 9 percent notes payable and $48,000 in 6 percent bonds. In addition, Mercury has $60,000 preferred stock that
Yunes’ Yearlings (YY) is able to raise funds by issuing commercial paper with a face value of $100,000. If commercial paper is issued, the simple interest rate would be 5 percent, the time to
PDQ Enterprise can borrow from its bank using a one-year (a) Simple interest loan with a 12 percent quoted rate and no compensating balance (b) A discount interest loan with a quoted rate
Refer to the information provided in Problem 14-18. Suppose PDQ needs $90,000 today to pay past due bills. How much must PDQ borrow for each loan so that it has $90,000 available to pay the bills?
BoGo Textbooks is evaluating two options for funding its working capital during the next year. Option 1 is borrowing from the bank using a 180-day discount interest loan, which has a quoted interest
Floribama Clothing has generated $130,000 in sales during the past few months, and it is expected that this level of sales will continue for the next year. Based on past experience, 40 percent of the
Vertical Ladder Company (VLC) forecasts that its sales for January through April will be $60,000, $70,000, $90,000, and $80,000, respectively. All sales are made on credit, and past experience
Smitty’s Chop Shop normally writes checks in the amount of $15,000 each day. It takes five days for these checks to clear through the banking system. The firm also receives checks in the amount of
On average, Bowden Farms receives checks that amount to $420,000 each day, whereas the amount of checks the company writes each day averages $380,000. It normally takes three days for incoming checks
Currently, it takes six days for Apsoft Corporation to receive, process, and deposit its customers’ payments. If it sets up a lockbox collection system, Apsoft estimates collection float would be
Currently, it takes five days from the time customers mail payments until Shark Bait Rafts (SBR) deposits them. SBR would like to set up a lockbox collection system that would reduce this collection
Compute the DSO for Buckwell Corporation, which has the following aging schedule: Account Age Amount Outstanding Average Days 0-30 days 31-60 days Over 60 days 23 $65,000 43 25,000 10,000 63
Following is the aging schedule for QRM Corporation: If its DSO is 37 days, on average, on what day does QRM collect from customers who take longer than 60 days to pay for their purchases??
Finology Company’s average collection period (DSO) is 37 days, which is only seven days longer than the net 30 terms the company offers credit customers. Fifty percent of Finology’s customers pay
Great Munchies (GM) Corporation has a variable operating cost ratio of 60 percent, its cost of capital is 12 percent, and current sales are $100,000. All of its sales are on credit, and it
Axis Wells and Excavation (AWE) currently generates $72,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $12,000. AWE is considering a new
Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $360,000, and the average
The CFO of JJ’s Jungle Equipment has decided that the company must sell its products on credit. As a result, she is evaluating two credit terms. (1) Net 45, which would generate $50,000 in annual
Next Week’s Technology (NWT) is evaluating whether to change its credit terms from 2/10, net 30 to 3/10, net 30. At present, 50 percent of NWT’s sales are paid on Day 10, whereas, under the new
Michael’s Mechanical sells 6,000 jettison machines annually. Each machine costs Michael’s $2,000 to purchase, inventory carrying costs are 45 percent of the purchase price, and the cost of
PC Calculators sells calculators that it purchases for $15 each. It costs PC $60 each time calculators are ordered, and carrying costs are 20 percent of the calculator’s purchase price. Annual
Media Moguls (M&M) normally sells 240,000 units per year. It costs M&M $52 to purchase each unit, the fixed cost of ordering is $260, and the carrying costs equal 15 percent of the unit’s
Mercury Air’s debt consists of $50,000 in accounts payable, $100,000 in 10 percent notes payable, and $240,000 in 8 percent bonds. Mercury has no preferred stock. If its marginal tax rate is 35
Divided Walls Construction (DWC) has determined that the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11
Refer to the information provided for M&M in Problem 15–17. Suppose that M&M must place orders in increments of 5,000 units and that it takes three days for each order to be
Western Transportation’s capital structure consists of 30 percent debt and 70 percent common equity. According to its investment banker, Western can issue up to $240,000 new debt at a 3.8 percent
Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the
Bonanza Gold’s common stock currently sells for $32 per share. Bonanza’s investment banker charges 6.5 percent flotation costs when new common stock is issued. The company expects to pay a
Roybow Corporation sells lawn mowers that cost $160 each to purchase and prepare for sale. Annual sales are 5,000 mowers, carrying costs are 20 percent of inventory costs, and Roybow incurs a cost of
Refer to the information provided for Roybow Corporation in Problem 15–19. Suppose that Roybow’s supplier decides to offer a 2 percent cash discount if products are ordered in increments of
Midwest Mining (MWM) expects its sales to grow by 20 percent next year. Last year, when the firm was operating at full capacity, MWM generated sales equal to $250,000 with assets of $800,000. MWM’s
Esther’s Egg Farm is constructing its pro forma financial statements for this year. At year end, assets were $400,000 and accounts payable (the only current liabilities account) were $125,000.
Open Door Manufacturing (ODM) and Closed Window Industries (CWI) have identical operating cost structures. Both firms incur a fixed operating cost equal to $420,000, their variable cost ratio is 80
In its most recent fiscal year, SynoCorp generated $810,000 in sales. The firm was operating at 90 percent capacity. How much more sales can SynoCorp generate before it is at full capacity?
TransCan Industries has been operating at 60 percent capacity the past few years. In each of these years, TransCan generated sales of $5.4 million. By what percentage can TransCan increase its sales
Prime Colors (PC) sells one-gallon cans of house paint for $25 each. The variable cost to produce each can is $17.50, and fixed operating costs are $1,500. PC normally sells 30,000 gallons of paint
Maxine’s Pumps (MP) sells bilge pumps for $250 each. Each pump costs $150 to produce, and MP’s fixed operating costs equal $600,000.(a) What is MP’s operating breakeven point? (b) What is
Flash Gordon Memory (FGM) sells memory cards for $45 each. Fixed costs are $900,000 for output up to 200,000 cards. Variable costs are $25 per card. (a) What is FGM’s operating income at sales
Last Chance Gaming manufactures slot machines that are sold to individuals for $575 each. Fixed operating costs are $690,000, and each machine’s variable cost is 70 percent of its selling price.

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