- A retail store sells its goods on credit. How should it estimate the cost of credit to its customers?
- Under what circumstances is the decision to provide credit to a customer solely a financing decision?
- Why is it difficult to define precisely the period of credit?
- Under what circumstances should a firm accept a period of credit and reject a discount for early payment?
- Under what circumstance is it possible for the provision of trade credit to be profitable to both parties?
- Compute the average debtor collection period for a company with Accounts Receivable (Debtors) outstanding totaling €14,000 and annual sales of €132,000. If the maximum credit period granted by
- A company forecasts sales totaling €100,000 for the next quarter assuming a 1% discount for payment within seven days. The maximum permitted credit period is 28 days, although some customers take
- A company currently gives 28 days’ credit for all sales but experiences the repayments schedule listed in the second column below. The final column shows the forecast collections if the company
- Customer X purchases €10,000 of goods from Company Y with the usual two months’ credit period. In addition, Y offers a 10% discount for immediate payment. Y is aware that X is a risky customer
- Both the supplier and its customers are short of funds due to a severe credit squeeze imposed by the Government and the banks. In order to attract customers, however, the supplier considers offering
- What factors make inventory control an important part of the production planning and control system?
- Describe an effective means of planning and monitoring the aggregate investment in inventories.
- What are the main costs of carrying stocks? How significant are they in total?
- What are the principal categories of inventory carried by companies and what types of stock must be provided within each category?
- What are the characteristics of the six basic inventory replenishment systems in use? In what circumstances is the use of each most appropriate?
- Describe some of the problems arising in the operation of inventory control systems.
- LMN Company manufactures Product Line A at the rate of 18,750 per month. The table below gives the quarterly sales forecast.Aggregate inventory for Product Line A at the beginning of the year was
- Identify and label the following on the diagram below: (a) order quantity, (b) reorder level, (c) ordering lead time, and (d) safety stock. Stock Time
- For the (s; S) stock control system, identify s and S on the diagram in Problem 8. How would you estimate the values of s and S?Data From Problem 8:-Identify and label the following on the diagram
- The company manufactures stock especially for one industrial customer who regularly orders €1,000 worth (at marginal cost) at the end of each month. If the inventory carrying cost is 30% per year,
- SMOOTHING Corporation’s Treasurer is trying to ascertain what proportion of the company’s borrowing should be floating rate debt. His immediate objective is to minimize the variance of the
- SMOOTHING Corporation’s Treasurer finds that he should increase the existing proportion of the company’s floating rate interest payments. An interest rate swap appears to be a good way of doing
- The Treasurer of Company X intends borrowing fixed rate one year from now. The particular loan is to have a one-year maturity. Unfortunately, interest rates on fixed rate loans could rise before
- In April 2002, the Treasurer of Company X also intends to borrow euros in the London money market toward the end of June. The loan will have a three-month maturity ending in September. In the
- On 16 April 2002, a German investor could invest in a two-year German Government bond yielding 4.19%. At the same time, she could invest in a comparable one-year US Government bond yielding 3.31%.
- The rate of inflation in Country A is 10% and in Country B is 30%. The real rate of interest in Country A is 2% and in B is 5%. The spot rate of exchange is 1.5 units of B’s currency for each unit
- On 16 April 2002, the US\($–euro\) exchange rate was \($0.8829/€.\) At the same time, the yen– US \($\) exchange rate was Y131.105/\($\). What yen–euro (Y/€) exchange rate would eliminate
- A French company exporting to the USA expects \($1\) million from various customers in 30 days’ time. The company’s Treasurer seeks to eliminate the resulting exposure to changes in the
- GLOBAL ENTERPRISE plc is an international manufacturing company domiciled within the EU. The company plans the Ventgo project for manufacturing in Anderia, a sovereign nation outside the euro zone.
- GLOBAL’S real required rate of return for the Ventgo project is 15%. Referring to the previous problem, what is the corresponding nominal discount rate for the project’s Anderian cash flow?Data
- GLOBAL will sell the Ventgo product in the EU. The following is the expected real before tax net cash flow (€ million) resulting from selling the product.Problem 1 gives the corresponding
- Economic forecasters predict a 17% annual rate of inflation for Anderia and a rate of only 3% for the euro zone during the next five years. The current spot rate of exchange is Al.2222/€1.00. Use
- Referring to the problems above, use Method 2 to find the before-tax NPV in euros for GLOBAL’S project in Anderia.Data From Above Problems:-1. Economic forecasters predict a 17% annual rate of
- The Anderian subsidiary is to sell the entire Ventgo product in the euro zone. Expected sales are 150,000 units per year. The proposed price will be €80, rising at the euro zone rate of inflation.
- Suppose expected dividends from GLOBAL’s Anderian subsidiary are A5 million per year (unadjusted for inflation) during the next 10 years. GLOBAL’s real discount rate for these dividends is 15%.
- LESSEECO considers leasing an asset costing €1 million for one year. A lessor proposes a one-year lease with just one payment in advance. The current rate of interest on a loan secured on the asset
- As an alternative to the lease proposed in Problem 1, the lessor offers LESSEECO a one year lease with four quarterly rentals payable in advance.(a) What is the largest quarterly rental the company
- Assuming the residual value of the asset in Problem 1 will equal €100,000 and the lessor will rebate 90% of the residual value to the lessee at the end of the lease, what is the largest rental the
- In the following year, a lessor offers LESSEECO a two-year lease on an asset costing €1 million. The lessor proposes eight quarterly rentals of €133,400 payable in advance. The lease begins
- Describe the reasons for financial planning. What options are available to the firm if forecasts suggest an unacceptable level of risk?
- What is the method for preparation of the:(a) cash budget?(b) funds flow forecast?Describe the principal uses of these two projections and explain their importance.
- Is financial planning complementary to or inconsistent with the use of the Capital Asset Pricing Model in project appraisal?
- ‘‘A company should accept all profitable investment opportunities.’’ What qualifications would you make to this statement?
- What importance does the distinction between fixed and variable expenditures have in financial planning?
- What are the essential elements in a sound financial planning procedure?
- Construct a scenario for a well-known company, or one with which you are relatively familiar using the following steps:(a) Draw up a list of events and changes that you think could materially affect
- List six types of security issued by companies to finance their activities.
- How do the characteristics of preferred stock differ from those of ordinary shares?
- Discuss the tax implications of a company issuing preferred stock.
- What are the implications of limited liability of the corporation for its ordinary shareholders?
- How might changes in the level of dividends cause conflicts of interest between holders of different kinds of the company’s securities?
- What are the important differences between rights issues and public offerings of ordinary shares?
- How do existing shareholders benefit from the services of the underwriters in a rights issue?
- How does the discount on the price of shares sold via a rights offering affect the wealth of existing shareholders?
- What is a warrant, and why do companies issue them?
- What is a convertible? Compare two examples of convertibles.
- What is the net present value of a bond traded in a competitive market?
- The ordinary shares in XYZ plc currently sell for 100 cents per share and there are 10,000,000 shares outstanding. The company announces a one-for-two rights issue. The issue grants existing
- A company announces a two-for-one rights issue giving the shareholders the right to buy new shares for 200 cents. A shareholder who owns 2,000 of the shares is convinced that the company is selling
- FOGLEY plc plans a private placement of 500,000 new shares to a new investor. The company offers new shares at a 10% discount on the present market price of €4. There are 200,000 shares
- An investor has €10,000 of CLIPPER BOARD plc’s bond paying 10% and redeemable in the year 2010. Each €1,000 bond carries 100 warrants. The conditions provide that the holder of four warrants
- MEGAZONEMANUFACTURING plc has issued €10,000,000 worth of convertible bonds with a 7% coupon (interest payable on the face or par value of the bond), which mature in three years. The €100 par
- Suppose that a company forecasts after-tax earnings of €100 million net of depreciation equal to €25 million per year. Suppose also that it requires financing to the amount of€ 60 million.(a)
- LINTNER PLC declared dividends in a predictable pattern. Its target dividend payout ratio averaged 55% of annual earnings. When earnings changed, however, the company usually changed its dividend
- FAMACO PLC announces an increase in its annual dividend. The percentage increase is the same as the percentage increase in annual earnings announced at the same time. The market had correctly
- GROWTHTEC PLC expects after tax earnings this year to equal approximately €10 million. The expected earnings are net of depreciation equaling €3 million annually. The company expects earnings to
- YIELDCO is subject to a jurisdiction operating a classical tax system. The company pays taxes on its income at the 35% corporate tax rate. The company’s shareholder clientele pays taxes on
- PAYOUT PLC is subject to a jurisdiction operating an imputation tax system. The company pays taxes on its income at the 30% corporate tax rate. The company’s shareholder clientele pays taxes on
- SENIOR CITIZEN’S PENSION FUND paid no taxes on dividend income or on capital gains. The fund operated in a classical tax jurisdiction. The tax rate on dividends was somewhat higher than on realized
- A company has 500 million shares outstanding at 90c per share.(a) Calculate the company’s market capitalization (the value of its equity).(b) Suddenly, the company announces an unexpected €50
- The CFO of NET INC Ltd. believes that the company’s cost of equity is 11%. The company’s expected borrowing rate is 7%, and it pays Corporation Tax at 30%. One-half the company’s financing is
- Suppose that the CFO of NETINC Ltd decides to increase the company’s debt financing from one-half to three-quarters of its total financing. Based on the data in Problem 1, what would be the effect
- Suppose that the net income view were to be correct in Problem 1. Describe a profitable investment strategy for investors in the company’s bonds and equity if the company were to reduce its debt.
- TRANSNATIONAL POULTRY FARMS expects to invest €240 million in additional capacity next year. The CFO needs to decide how to fund this expansion. She first considers what would be the Pecking Order
- The CFO of TRANSNATIONAL POULTRY FARMS is not satisfied with the Pecking Order solution to the company’s financing problem. She feels uncomfortable about the large amount of debt in the Pecking
- Suppose that the cost of floating an equity issue for TRANSNATIONAL would be 6%, and the estimated cost of equity would be 12% per year. Suppose also that the issuing cost for corporate bonds would
- After revising some of the data used previously, TRANSNATIONAL’s CFO compiled the following table.Calculate the highest level of interest that the company should be willing to pay for each level of
- TRANSNATIONAL’s CFO knew that having ascertained the most interest the company should be willing to pay (as in Problem 7), she was well on her way to estimating the optimum combination of debt and
- BIOTEK SA is developing a genetically engineered drug. Tests indicate that the drug can almost certainly arrest particular types of cancer. Before the drug can become a marketable product, however,
- If HARDWARE PLC invests now in the Alpha Project, the NPV would be €45,000. If the company delays investing in the project for one year instead, the expected NPV at that time would be €50,000.
- HARDWARE PLC is considering how much to charge for the extra benefit customers would derive from incorporation of reconfigurable microprocessor chips in the company’s Gamma Product. Reconfiguration
- The industrial engineers at HARDWARE PLC are designing a new factory building. By altering the design, they can make it feasible to sell the building in the future. The design change would increase
- HARDWARE’s industrial engineers are also contemplating the option to expand the size of the factory building five years from now. The limited space on the site means that increasing the size of the
- HARDWARE’s industrial engineers want to know the value of the option to use the new building longer than expected. The company expects to use the building for 10 years. The expected residual value
- INTERNATIONAL MACHINERY PLC is interested in establishing a small manufacturing operation in China. The expected NPV for this operation is– €6 million. The justification for this loss-making
- The expected value of an uncertain cash flow in the fifth year of a project’s life is €100,000.The following data are relevant to the cash flow. The risk-free rate is equal to 6%. The risk
- The data below are the risk-neutral values of a project’s cash flows. The risk-free rate equals 6%. Calculate the rolled-back PV of the remaining risk-neutral cash flows in each year of the
- The expected price per unit of a product is €100 each. The variable cost is €33 per unit and the project’s expected annual fixed expenditure is €100,000. The project can produce 2,000 units
- A project’s contribution cash flow can be €2 million or €500,000 per year with equal probability. If there is no limit on capacity, what is the expected contribution cash flow? If capacity
- Expected demand implies that the risk-neutral value of the unrestricted contribution cash flowing Year t is €1.4 million. There is a 0.40 probability of more demand in the following period and a
- In Period t = 2, the risk-neutral value of the expected unrestricted contribution E(c) would be €2 million. Of course, the risk-neutral contribution could have any number of different values around
- In the binomial tree the unrestricted contributions can move up in the next period to the next higher state with the risk-adjusted probability p or down with probability 1– p. In Problem 7 what are
- A financial analyst at INVESTMENTBANK INTERNATIONAL is attempting to value the equity of IPCO. This growing company approached the bank about the possibility of an Initial Public Offering (IPO) of
- The financial analyst at INTERNATIONAL wants to continue her valuation of IPCO using some additional valuation methods. The second is the prospective P/S method. The prospective P/S ratio she uses
- The third method INTERNATIONAL’s analyst wants to use for valuing IPCOis discounted free cash flow. Her range of estimates for the coming year’s free cash flow and for the corresponding initial
- INTERNATIONAL’s analyst believes that compound growth models overvalue companies.She prefers linear growth models, which give more conservative valuations. IPCO’s free cash flow for the current
- INTERNATIONAL’s analyst thinks it would be worthwhile valuing IPCO in two parts: the company’s existing business and its investment opportunities. This would facilitate incorporating additional
- After obtaining the PV of the cash flows from IPCO’s existing products, the next step is to calculate the PV of the company’s investment of opportunities. The analyst favors using the value 1.77
- The analyst used the following equation to obtain the value PI–1= 1:77 supplied in Problem 6:For example, suppose the PV o of each real investment option equals 0.314 per unit of investment and the
- Two companies operate factories having virtually the same capacity and efficiency. They each have an equal share of the market for product X. New manufacturing technology would permit increased

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