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principles managerial finance
Principles Of Managerial Finance Brief 8th Global Edition Chad J. Zutter, Scott B. Smart - Solutions
Dacia Gears Ltd. has two alternative projects to choose from for their new distribution facility in Europe. The annual rate of return and the related probabilities given in the following table summarize the firm’s analysis to this point.a. For each project, compute:(1) The range of possible rates
CG Forest and Paper Ltd. raises capital by selling £5,000,000 worth of debt with flotation costs equal to 3% of its par value. If the debt matures in 15 years and has coupon rate of 6% (paid annually), what is the bond’s YTM?
Belle Fashions supplies garments to high street retailers. They have been paying dividends steadily for 10 years. During that time, dividends have grown at a compound annual rate of 5%. If Belle Fashions’s current stock price is £5.80 and the firm plans to pay a dividend of £0.70 next year,
Garba Exports Ltd. is a manufacturer of cotton yarn. It has 40% debt and 60% equity in its capital structure. The firm’s estimated after-tax cost of debt is 7% and its estimated cost of equity is 12%. Determine the firm’s weighted average cost of capital (WACC).
Currently, Jackson Real Estate Inc. can sell 10-year, $100-par-value bonds paying annual interest at a 6% coupon rate. Jackson can sell its bonds for $106.20 each. Jackson will incur flotation costs of $2.50 per bond in this process. The firm is in the 25% tax bracket.a. Find the net proceeds from
Jim Paige is opening his own restaurant, and he is taking out a 10-year mortgage. Jim will borrow $400,000 from a bank, and to repay the loan he will make 120 monthly payments (principal and interest) of $4,420.82 per month over the next 10 years. Jim is in the 30% tax bracket.a. What is the
Boots Mechanics is based in Manchester, United Kingdom. The market values and after-tax costs of various sources of capital used by the company are shown in the following table.a. Calculate the WACC for Boots Mechanics.b. Explain how the company can use this cost if it wants to invest in a new
Company has compiled the information shown in the following table.a. Calculate the WACC using book value weights.b. Calculate the WACC using market value weights.c. Compare the answers obtained in parts a and b. Explain the differences. Source of capital Long-term debt Preferred stock Common stock
After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table.The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of retained earnings is 13.0%, and the cost of
GB Timbers GmbH, based in Germany, supplies timber products to construction and manufacturing industries. The company reported after-tax earnings available to common stock of €3,200,000. From these earnings, the management paid a dividend of €0.80 on each of its 4,000,000 common shares
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained
Mandy Robertson has just bought a new house and wants to consolidate her finances. She has three loans outstanding. They all mature in 5 years, and she can repay them without penalty any time before maturity. The following table shows the amounts owed on each loan and the annual interest rate
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will
Tack Laser Ltd., a high-end medical equipment manufacturer, is trying to decide whether to revise its target capital structure. Currently, it targets a structure with 40% debt, but it is considering a target capital structure with 60% debt. Tack Laser currently has an 8% after-tax cost of debt and
Volkswagen AG (VW) uses a maximum payback period of 4 years and currently must choose between two mutually exclusive electric car projects. Project Crozz requires an initial outlay of €25,000,000; Project Buzz requires an initial outlay of €15,000,000. Using the expected cash inflows given for
RII, a Japanese electronic accessories firm, uses the internal rate of return (IRR) to select projects. Project RK100 Rubber Keyboard requires an initial investment of ¥1,000,000 and generates cash inflows of ¥220,000 per year for 5 years. Project MK300 Mechanical Keyboard requires an initial
Conad, an Italian supermarket chain, is considering two mutually exclusive projects. Each project requires an initial investment (CF0) of €1,000,000. Francesco Pugliese, the general director of Conad, has set a maximum payback period of 5 years. The net receivable cash inflows associated with
Francesco Giovanni’s business partner, Pepino, has proposed that they invest in a coffee shop. This investment costs €90,000 today and promises to pay €22,000, €25,000, €25,000, €20,000, and €18,000 over the next 5 years. Alternatively, Pepino suggests they can invest €90,000 in a
Diamantis Masoutis S.A. is considering the following 10-year projects. Comment on the acceptability of each project. Assume that the firm has a cost of capital of 5%.a. Initial investment is €1,000,000; cash inflows are €100,000 per year.b. Initial investment is €2,000,000; cash inflows are
The BMW Group is considering the replacement of one of its car-manufacturing robot lines. Three alternative replacement robot lines are under consideration. The relevant cash flows associated with each line are shown in the following table. The firm’s cost of capital is 15%.a. Calculate the net
Internal rate of return Sigma is an insurance company based in Albania. Altin, a product manager, is responsible for evaluating the viability of a new insurance product, which covers electronic equipment. A buyer of this proposed policy would be required to pay Sigma only once, at the time of
Wesfarmers, an Australian conglomerate, is considering investing in a project that has the following unusual cash flow pattern.a. Calculate the project’s NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, and 50%.b. What do the calculations tell you about this project’s IRR?
Woolworths Ltd. is evaluating the feasibility of investing A$1,000,000 in a new store in Sydney, having a 5-year life. The firm has estimated the cash inflows from the proposed store, as shown in the following table. The firm has an 8% cost of capital.a. Calculate the payback period for the
Apart from opening a new store in Sydney, Woolworths Ltd. is also considering opening a store in Canberra. Like the Sydney store, this store will have the same initial cost of A$1,000,000. The company must now decide which store to invest in: Sydney or Canberra. The cash flows associated with each
BP is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table.a. Why is it difficult to calculate the payback period for this project?b. Calculate the investment’s net present value (NPV) at each of the
Omni Motors is considering buying new equipment with an initial investment value of $30,000. The equipment has a 5-year life and no residual value at the end of the 5 years. There are many uncertainties in the industry and, therefore, the company has estimated expected cash inflows for three
Mulliri Vjeter, an Albanian coffee shop chain, uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 1 to 5. The scale is re-created in the following table.The company is analyzing two projects
Kubi Software Inc., based in Turkey, has hired Rezart to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, Gamma and Beta. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present
Luxottica Group spent 2 years and €1,000,000 to develop its new line of folding eyewear to replace an older line. To begin manufacturing them, the company will have to invest €2,500,000 in new equipment. The new eyewear line is expected to generate an increase in operating cash inflows of
Hans has been living in his current apartment in the Helmholtzkiez neighborhood in Berlin for the past 10 years. During that time, he has replaced the coffee maker for €300, has replaced the washing machine for €350, and has had to make miscellaneous repair and maintenance expenditures of
Novartis International AG is considering replacing one labeling system with a new model. The old system was purchased 2 years ago for an installed cost of CHf 500,000. The firm is depreciating the labeling system using a straight line amortization schedule for 5 years. The new machine costs CHf
Michele operates a local tourist agency. He has been using an Olivetti personal computer (PC) for several years and believes it is time to buy a new one. He would like to know the operating cash flows associated with the replacement of the old PC. The following data are available:There are 5 years
Hoffmann-La Roche is considering replacing one permeability test equipment with a new model. The old equipment is fully depreciated and would last 3 more years. The new equipment is expected to have a 5-year life and depreciation charges of CHf 20,000 in year 1; CHf 32,000 in year 2; CHf 19,000 in
Central Laundry is replacing an existing piece of machinery with a new model. The old machine was purchased 3 years ago for $50,000 and was being depreciated under MACRS, using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine costs $76,000, requires $4,000
Pirelli & C. S.p.A. is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and the other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 5 years ago, at an installed cost of €400,000; it was
Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), one of the world’s largest semiconductor foundries, is considering building a new production facility close to one of its main business partners. Once the facility is built, TSMC will be the exclusive supplier for that client for the subsequent
Novartis International AG, a global healthcare company based in Switzerland, is considering producing either a generic multivitamin or a specific blend of vitamins A, C, and D. Novartis expects both products to provide benefits over a 12-year period, and each has a required (initial) investment of
Mayflower Interiors is considering investing in one of three mutually exclusive projects, X, Y, and Z. The firm’s cost of capital, r, is 13.5% and the risk-free rate, RF, is 10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the following table.a. Find
Diane Smith is interested in two mutually exclusive investments. Both investments have a time horizon of 8 years. The first investment opportunity requires an initial investment of $10,000, to receive equal and consecutive year-end payments of $2,500. The second investment opportunity requires an
Roots to Branches Corp., a company specializing in event décor, is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Management expects that the appropriate market rate of return is 10%, while they observe that
Patek Philippe & Co. is attempting to select one of three mutually exclusive projects for the redesign of its classic watches: Nautilius, Grand Complications, and Calatrava. Although all the projects have 5-year lives, they possess differing degrees of risk. Project Nautilius has the highest
Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 64-inch plasma with 1080p capability and the Sony
Suppose Dave Marberger, the CFO of Godiva Chocolatier, has just completed an evaluation of a proposed capital expenditure for the expansion of the firm’s chocolate factory in Brussels. Using the traditional NPV methodology, he has found the project unacceptable because NPVtraditional =
Hotel Amazing is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $5.5 million. Management recognizes that any unused portion of this budget will earn less than the 12% cost of capital, thereby resulting in a present value of
In less than three decades, China has become the second largest economy in the world. But this rapid growth has led to a lot of environmental and health issues. These developments have placed environmental pollution at the top of the government’s reform agenda. Suppose that Sinochem Group, a
Rio Mare currently has fixed operating costs of €1,100,000, and it sells canned tuna for €1.50 per can, while incurring variable operating costs of €0.65 per can. If the company can invest in better storing technology that would simultaneously raise its fixed costs to €1,200,000, but lower
Shaga shpk is an Albanian company that produces and sells furniture. Last year it had sales of 2,000 units at a price of L12,000 per unit (Albania’s currency is Albanian lek, L). It faced fixed operating costs of L12,500,000 and variable costs of L4,000 per unit. The company is subject to a tax
The Golf Shop needs to forecast the number of a specific golf set it needs to sell to break even. The golf set sells for $1,250 per set. The fixed operating costs are $21,000 while the variable operating costs are $750 per set. How many sets must The Golf Shop sell to breakeven on this specific
Jaipur Rugs, FabIndia, and Ashok Carpets are three carpet and rug manufacturing companies in India. Based on the information in the table below, answer the questions that follow:a. What is the operating breakeven point in units for each firm?b. How would you rank these firms in terms of their risk?
Anke Perks is opening an arts and crafts store that focuses on canvases, paints, and pencils. Each canvas is sold for $24. The variable operating costs are $14 per canvas while the fixed operating costs are $4,000.a. Calculate how many canvases Anke needs to sell to reach her operating breakeven
Anki is a Finnish manufacturer of rugs. Last year, it sold rugs for €350, with a variable operating cost of €200 per rug and a fixed operating expense of €1,050,000.a. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if all figures remain
Antonio and his friend, Giancarlo, are both talented painters. Last year they began painting original artistic postcards, which they gave to their friends as holiday gifts. In addition, they began selling these at a crafts fair and sold them mainly for fun. At the last fair, a buyer who really
Olivetti Corporation has fixed operating costs of €850,000, variable costs of €350 per unit of personal computers (PC) produced, and a selling price of €550 per unit.a. Calculate the operating breakeven point in units of PC produced.b. Compute the degree of operating leverage (DOL) using the
Margaret has just received an MS degree from Oxford University. She has outstanding school loans that require a monthly payment of £800. She wants to rent a small apartment in London near her new workplace and estimates that this purchase will add £1,000 per month to her existing monthly
Profarma shpk, an Albanian pharmaceutical company, makes a patented flu medicine that wholesales for L600. Each bottle of the flu medicine has variable operating costs of L400, while fixed costs are L2,000,000 per year. The firm pays L150,000 interest and preferred dividends of L40,000 per year. At
Altin Greene is looking to buy a new apartment in Tirana, the capital of Albania. He visits Credins Bank and reviews all the data that is required to get a loan. He must submit his personal financial data, like his income from work, expenses, and other existing loan payments. The bank then decides,
Barrilla Group’s CEO has made the forecast of sales as shown in the following table.The company has fixed operating costs of €1,500,000 and variable operating costs of 75% of the sales level. The company pays €135,000 in interest per year. The tax rate is 24%.a. Compute the earnings before
Geniaware is considering two capital structures. The key information is shown in the following table. Assume a 24% tax rate.a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of €30,000 and €50,000 with their associated EPS values.b. Plot the two capital structures
Suppose SpazioDatti is considering adding preferred stock to its capital structures. The key information is shown in the following table. Assume a 24% tax rate.a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of €30,000 and €40,000 with their associated EPS
Theodora works as a financial analyst for Berrios S.A., a construction company headquartered in Athens, Greece. She has been asked to make an analysis of the possibilities of optimizing the capital structure of the company. She starts her analysis by making the following forecast of sales, with the
Attica Group, a transportation company, has fixed operating costs of €250,000 and variable costs of 60% of sales. It has made the following sales estimates, with the probabilities noted.The company wants to analyze four different capital structures: 0%, 30%, 50%, and 80% debt ratios. The total
Royal Mail Group, a British postal services provider, pays regular dividends. It declared a dividend of £0.077 per share for its shareholders on record on December 7. The Group has 1 million shares outstanding and will pay the dividend on the January 8. How much cash is needed to pay the dividend?
Legal & General, an insurance company, has the following stockholders’ equity account:Assuming that laws and regulators in the United Kingdom define legal capital solely as the par value of common stock, how much of a per-share dividend can Legal & General pay? If legal capital was more
Legal & General, with the equity account as described in E14-3, announces its plans to issue an additional 58,710 shares of common stock as part of its stock dividend plan. The current market price of Legal & General is £2.69 per share. Show how the proposed dividend would affect the
Steel Enterprises’ earnings per share for the period 2013–2020 are summarized in the table below. Use this information to calculate the dividends per share for each of the years and scenarios presented in parts a through d.a. For positive earnings only, pay out 40% of earnings.b. Pay $0.75 per
Luxottica, an Italian eyewear company, has the following stockholders’ equity account. The firm’s common stock currently sells for €40 per share.a. Show the effects on the firm of a cash dividend of €0.1, €0.5, €1,0 and €2.0 per share.b. Show the effects on the firm of a 1%, 5%, 10%
Brembo, an Italian automotive braking-systems supplier, announced that it was going to split the stock 5-for-1. Brambilla Fumagalli owns 100 shares of the company, which he had purchased for €40 per share years ago. Just before the stock split, Brembo’s shares were trading for €64. Answer the
The board of Diamantis Masoutis S.A. is considering increasing the number of shares, and making the price more appealing to investors. It is considering either a 30% stock dividend or a 2-for-1 stock split. Currently the firm’s equity account and other per-share information are as follows:a. Show
The following data are available on Volkswagen AG as of December 22, 2017:The firm’s board is currently considering whether it should use €295,000,000 of its earnings to pay cash dividends of €1 per share or to repurchase stock at €170.20 per share.a. Calculate the approximate number of
Heidelberg Cement, one of the world’s largest building materials companies is concerned about preserving the wealth of its stockholders during a cyclical downturn in the building and construction business. The company has a constant dividend payout of €2.5 tied to a target payout ratio of 30%.
Rajasthani Umbrella is a seasonal business that sells umbrellas. At the peak of its rainy selling season, the firm has INR 2,500,000 in cash, INR 3,600,000 in inventory, INR 400,000 in accounts receivable, and INR 350,000 in accounts payable. During the slow dry season, the firm holds INR 800,000
The Furniture Corporation turns over its inventory 7 times a year, has an average collection period of 45 days, and has an average payment period of 30 days. It has annual sales of $5 million and cost of goods sold of $1.8 million.a. What is the firm’s operating cycle and cash conversion cycle?b.
Alessandro is a successful soccer player. He is considering buying a new Porsche. There are two options available: the new Porsche Panamera and the Porsche Boxter. Whichever model he chooses he plans to drive it for a period of around 4 years and then sell it. Assume that the trade-in value of both
Germanos Group is evaluating an accounts receivable change that would increase bad debts from 5% to 10% of sales. Sales are currently 100,000 units of batteries, the selling price €25 per unit, and the variable cost per unit is €15. As a result of the proposed change, sales are forecast to
Uneblej.com is an online retail company, which operates in Albania. It has daily cash receipts of L150,000. Its CFO is analyzing the time it takes for the collection of the customers’ payment to clear the banking system. From the analysis it appears that it takes 2 days for the online payment to
Aditya Birla Retail Limited, an Indian retail company, is considering a lockbox system that can shorten its accounts receivable collection by 1 day.Credit sales are INR 550,000,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 14%. The
Alumina Ltd. is considering establishing a zero-balance account. The company currently maintains an average of A$1,380,000 in its disbursement account. As compensation to the bank of maintaining the zero-balance account, the company will have to pay a monthly fee of A$100 and maintain an
Dream Cakes bought some baking ingredients costing $12,500 on credit. The credit terms are 2.5/5 net 30 EOM. If Dream Cakes pays the invoice within 5 days after the purchase, how much should it pay? What is the approximate cost of giving up the discount, when it pays 30 days after the invoice date?
Diamantis Masoutis S.A., a Greek supermarket chain, borrowed €250,000 under a line-of-credit agreement. Although the company normally maintains a checking account balance of €15,000 in the lending bank, this credit line requires a 10% compensating balance. The stated interest rate on the
Antonio is considering renovating his apartment in Milan. He visits Meridiani and looks at different bedroom furniture sets. The bedroom sets are generally very expensive, and even though he has the cash to pay for one, he is thinking about getting a loan and not exhaust all his savings. The
Brembo, an Italian automotive braking-systems supplier, has three alternative carbon ceramic suppliers, all of which offer different terms.Except for the different credit terms, their products are identical. The credit terms offered by these suppliers are shown in the following table.a. Calculate
After consultation with its employees, Sunshine Company decides to switch the employee pay period to biweekly instead of weekly. Sunshine’s weekly payroll is $925,000. The annual cost of funds is 12%. Will it be beneficial for Sunshine Company to change the pay period? Explain your answer.
Lifestyle International, a wholesales company in India, is looking to get a loan using its accounts receivable as collateral. The firm’s credit extension is net-30-day credit. The amounts that are owed Lifestyle by its main clients, the average for each account, and the average payment period
Heidelberg Cement factors the accounts of Titan Cement. All five factored accounts are shown in the following table, with the amount factored, the date due, and the status on November 30. Indicate the amounts that Heidelberg Cement should have remitted to Titan as of November 30 and the dates of
Which legal form of business organization is most common? Which form do the largest businesses typically take and why?
Explain why corporations face a double taxation problem? For corporations, how are the marginal and average tax rates related?
You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments toward LED-based lighting solutions instead of traditional light bulbs. You are currently evaluating two
The Quickclick Media Ltd. announced that the profit for the previous year is twice the amount earned in the previous year, an improvement from the projected numbers. The chief human resources officer (CHRO) suggested that the employees need to be rewarded for their efforts. To keep them motivated,
The chief financial officer (CFO) of New Age Fashion Ltd. has just received a request from a project manager to authorize an expenditure in the amount of £45,000. The manager states that this expenditure is necessary for the last stage development of a space navigation system, which is based on a
Premier Baking Ltd. has recently appointed a new CEO to run its bakery business, which supplies to supermarkets and restaurants. The new CEO has instituted a new compensation policy and dropped the earlier incentive scheme, which was based on overall production achieved within the targeted time
Eastern Trading Company has a pretax trading profit of €250,000. Britain has a flat corporation tax rate of 19% on trading profits while Ireland has a flat rate of 12.5% on trading profits. As Britain is still in Eurozone, the company can register its business in either country and follow their
The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the end of the financial year, the dealer still owed The Motor Corporation $350,000. The cost of the vehicles sold was $400,000, and this cost was incurred and paid by The Motor Corporation.a. Determine the
Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system. The new system would require an initial cash outlay of $250,000. The current system could be sold for $55,000. The monetary benefit of the new system over the next five years is $325,000, while
You are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson Corporation. To obtain all the stock of Nelson Corporation, Pollack Enterprises is willing to pay $38.60 per share. At a meeting with your management, you
Southern Textile Ltd. is a manufacturer of sportswear that supplies to a number of European retail stores. Its registered office is in Singapore. During 2017, the firm earned SGD 112,000 before taxes. Singapore’s corporate tax rate is 20%. Firms are eligible for a tax rebate of 50% of the tax
Depot Logistics Inc. has declared pretax income from its operations for the year of $560,000. In addition, it also received interest payment of $40,000 on bond stock held in Warehouse PLC. During the year, they also received $40,000 in income from dividends on its 20% common stock holding in Zephir
Derwent Ltd. has announced that the earnings before income and taxes is going to be £300,000 for the current year. Assuming corporate tax rate for Derwent Ltd. is a flat 30%, compute the firm’s profit after taxes and earnings available for common stockholders (earnings after taxes and preferred
One of the key risk areas that corporates need to manage is “ethical risks.” Do you think that management of ethical risks is as important for businesses as management of financial risks? Explain how ethical problems may affect a firm’s profits and stock price.
Who are the key customers of financial institutions? Who are net suppliers, and who are net demanders of funds?
What is a private placement versus a public offering?
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