Questions and Answers of Intermediate Financial Management

During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company
Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $920,000, and it would cost another $20,000 to install it. The machine falls
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
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million
The president of MorChuck Enterprises has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment’s basic price is $70,000, and it
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have
St. Johns River Shipyard’s welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The current machine has a book value of
The following table gives the current balance sheet for Travelers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains.The following facts also apply to TII.(1) The
A company’s 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515.16. The company’s federal-plus-state tax rate is 25%. What is the firm’s
Start with the partial model in Ch08 P26 Build a Model.xlsx on the textbook’s Web site. Traver-Dunlap Corporation has a 15% weighted average cost of capital (WACC). Its most recent sales were $980
Hatfield Medical Supply’s stock price had been lagging behind its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who
Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2021 to $9.2 million in 2022. Its operating assets were $5 million at the end of 2021. Broussard is already at full
Maggie’s Muffins Bakery generated $5 million in sales during 2021, and its year-end operating assets were $2.5 million. Also, at year-end 2021, current liabilities were $1 million, consisting of
At year-end 2021, Wallace Landscaping’s total assets, all of which are used in operations, were $2.17 million, and its accounts payable were $560,000. Sales, which in 2021 were $3.5 million, are
The Booth Company’s sales are forecasted to double from $1,000 in 2021 to $2,000 in 2022. Here is the December 31, 2021, balance sheet: Booth’s fixed assets were used to only 50% of capacity
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them
Start with the partial model in the file Ch09 P10 Build a Model.xlsx on the textbook’s Web site, which contains the 2021 financial statements of Zieber Corporation. Forecast Zieber’s 2022 income
Start with the partial model in the file Ch09 P11 Build a Model.xlsx on the textbook’s Web site, which contains Henley Corporation’s most recent financial statements. Use the following ratios and
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 25%. Ortiz’s CFO has
Garlington Technologies Inc.’s 2021 financial statements are shown here. Suppose that in 2022 sales increase to $4.4 million and that 2022 dividends will increase to $200,000. Forecast the
Stevens Textile Corporation’s 2021 financial statements are shown here. Stevens grew rapidly in 2021 and financed the growth with notes payable and long-term bonds. Stevens expects sales to
Conroy Consulting Corporation (CCC) has a current dividend of D0 = $2.50. Shareholders require a 12% rate of return. Although the dividend has been growing at a rate of 30% per year in recent years,
Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, RT is expected to experience a
What does it mean for growth, operating profitability, and capital utilization to be value drivers? How do changes in these drivers impact estimated intrinsic value in the free cash flow valuation
Brushy Mountain Mining Company’s coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company’s free
Explain using a simple constant growth example how you would use the free cash flow valuation model to estimate the intrinsic value of equity. Indicate what data you would need, and give an example
Current and projected free cash flows for Radell Global Operations are shown here. The growth rate from 2023 to 2024 is projected to remain the same for all years beyond 2024. The weighted average
JenBritt Incorporated had a free cash flow (FCF) of $80 million in 2021. The firm projects FCF of $200 million in 2022 and $500 million in 2023. FCF is expected to grow at a constant rate of 4% in
Define and discuss how to calculate a bond’s coupon rate, current yield, expected capital gains yield for the current year, yield to maturity (YTM), and yield to call (YTC). What might be some
Why, when applying the FCF valuation model, do you add in the value of non-operating assets and subtract the value of all debt and preferred stock when calculating the intrinsic value of equity?
What are free cash flows and why should a stock’s value depend on them? Explain in broad strokes how the FCF valuation model works.
Ogier Incorporated currently has $800 million in sales, which are projected to grow by 12.5% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement
Are most stocks traded on face-to-face exchanges or electronically? What impact has this had on retail stock transactions? On portfolio management?
Our global economy is increasingly interconnected. Explain first how in our interconnected global economy a decrease in housing prices in large U.S. cities can end up bankrupting Norwegian retires.
Start with the partial model in the file Ch02 P15 Build a Model.xlsx on the textbook’s Web site. The file contains data for this problem. Goodman Corporation’s and Landry Incorporated’s stock
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%.a. What are the betas of Stocks X and Y?b. What are the required rates
Would a bond be more or less desirable if you learned that it has a sinking fund that requires the company to redeem, say, 10% of the original issue each year beginning in 2030, either through open
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?
Start with the partial model in the file Ch04 P24 Build a Model.xlsx on the textbook’s Web site. A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call
Zucker Inc. recently reported $4 million in earnings before interest and taxes (EBIT). Its federal-plus-state tax rate is 25%. What is its net operating profit after taxes (NOPAT)?
Using the following balance sheets of Mimi’s Gymnastics Inc., what is the net operating working capital (NOWC) for 2022? Mimi's Gymnastics Inc.: Balance Sheets as of December 31 (Millions of
Athenian Venues Inc. just reported the following selected portion of its financial statements for the end of 2022. Your assistant has already calculated the 2022 end-of-year net operating working
Explain the differences between net cash flow, cash flow from operations (also called operating cash flow), and free cash flow.
Rhodes Corporation’s financial statements are shown after part f. Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions. a. What is the net operating profit
The Bookbinder Company had $500,000 cumulative operating losses prior to the beginning of last year. It had $100,000 in pre-tax earnings last year before using the past operating losses and has
Begin with the partial model in the file Ch06 P20 Build a Model.xlsx on the textbook’s Web site. a. Britton String Corp. manufactures specialty strings for musical instruments and tennis
Begin with the partial model in the file Ch06 P21 Build a Model.xlsx on the textbook’s Web site. a. Using the financial statements shown here for Lan & Chen Technologies, calculate net
The first part of the case, presented in the previous chapter, discussed the situation of Computron Industries after an expansion program. A large loss occurred rather than the expected profit. As a
Data for Lozano Chip Company and its industry averages follow. a. Calculate the indicated ratios for Lozano.b. Construct the extended DuPont equation for both Lozano and the industry.c. Outline
The Jimenez Corporation’s forecasted 2022 financial statements follow, along with some industry average ratios. Calculate Jimenez’s 2022 forecasted ratios, compare them with the industry average
Build a Model: Ratio Analysis Start with the partial model in the file Ch07 P15 Build a Model.xlsx from the textbook’s Web site. Joshua & White (J&W) Technology’s financial statements are
The current price of a stock is $30. Over the next 6 months, the price will either increase by a factor (u) of 1.2 or decrease by a factor (d) of 0.8330. The same is true for the next 6-month period.
How is the value of a financial option affected by;(a) The current price of the underlying asset.(b) The exercise (or strike) price.(c) The risk-free rate.(d) The time until expiration (or
Your project manager presents to you two mutually exclusive projects, A and B. They have the same initial investment and the WACCC is 10%. The cash flows are below. a. Calculate the IRR for each
PI and IRR can be interpreted as measuring a project's "bang for the buck" as well as its "margin for error." Consider Projects A and B, below. The WACC is 10%. a. Calculate the NPV, IRR, and PI
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield.
A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe’s current value of operations, which is also its value
What is financial risk? How is it related to business risk?
Start with the partial model in the file Ch16 P16 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would
Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity
A company has the following information: What is its free cash flow to equity? Earnings before interest and taxes Interest expense Tax rate Net change in debt Investment in total
The APV and corporate valuation models are entity valuation models while the FCFE model is an equity valuation model. Explain the difference between an entity valuation model and an equity valuation
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity
The APV model uses the unlevered cost of equity, rsU, to discount cash flows while the corporate valuation model uses the WACC. Explain why the two models use different discount rates.
What is the Free Cash Flow to Equity (FCFE) model? How might it be applied? When is it not appropriate?
Dreebyshaw Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the offering. The agreement stated that Security Brokers would sell 3 million shares to the public
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to
The Fryberry Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at
Dode Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Dode and ESM agree that Zang’s current value of equity is $60 million. Dode currently
Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the
Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and
The APV model, the MM model, and the Hamada equation have different formulas for calculating the unlevered cost of equity, rsU. Why is that, and which formula should you use?
A company’s most recent free cash flow to equity was $100 and is expected to grow at 5% thereafter. The company’s cost of equity is 10%. Its WACC is 8.72%. What is its current intrinsic value?
Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met.(2) Both firms are
Nodebt, Inc., has zero debt (wd = 0). It is considering restructuring to increase its percentage of debt to wd 5 40%. Its beta is 0.8, the riskfree rate is 6%, the market risk premium is 7%, and if
Somedebt, Inc., has a little debt (wd 5 20%) with required return 7%. It is considering restructuring to increase its percentage of debt to wd 5 40%. Its beta is 0.8, the risk-free rate is 6%, the
Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 7% rate.
Schwarzentraub Corporation’s expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of
Start with the partial model in the file Ch17 P12 Build a Model.xlsx on the textbook’s Web site. Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 25% rate. The 4-year
Suppose you want to value a company and you expect that its capital structure (weights on debt and equity) will remain constant. Which valuation model (corporate valuation model, FCFE, or APV) should
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $1.40. What is the 90-day forward
Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona,
The Verbrugge Publishing Company’s 2021 balance sheet and income statement are as follows (in millions of dollars): Verbrugge and its creditors have agreed upon a voluntary reorganization
SafeCo can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 8%, but it would prefer to use fixed-rate debt. RiskyCo can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 8.8%,
Stewart Manufacturing buys on terms of 2/10, net 30, but it has not been paying on time—it is a “slower payer” and its suppliers are getting upset. Stewart does not take discounts, and it has
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
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on
Captain Whitman Ship Supplies offers terms of 3/15, net 45.a. If a purchaser takes the discount and pays on the 10th day, what is the nominal cost of trade credit?b. Now suppose a purchaser actually
The Bahbat Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of
Start with the partial model in the file Ch19 P08 Build a Model.xlsx on the textbook’s Web site. As part of its overall plant modernization and cost reduction program, Western Fabrics’ management
Dreebyshaw Industries must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $3 million investment. These
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years, and in 2021 Boehm paid dividends of $4 million on net income of $10 million. However, net income is expected to
Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. J. Clark Inc. (JCI), a manufacturer and distributor of sports equipment, has grown until it has
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in
What is the trade-off theory of capital structure? How does it differ from MM’s theory?

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