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principles managerial finance

Principles Of Managerial Finance 14th Global Edition Lawrence J. Gitman, Chad J. Zutter - Solutions

Use the information in the following table to determine (1) the ratio of exchange of shares and (2) the ratio of exchange in market price for each of the cases shown. What is the meaning of each ratio? Case AB А с D E Current market price per
Shelby Computing is in negotiations with Ponting Consulting. Currently, Shelby Computing is considering swapping 0.6 shares of Shelby Computing for each share of Ponting Consulting. Shelby Computing has sufficient authorized but unissued shares to carry out the proposed merger. Additional financial
After conducting a viability study, Spring Clean Chemicals is considering the acquisition of Daily Chemicals for $250,000 cash. Spring Clean Chemicals estimates that the acquisition would increase its cash flows by $45,000 per year for each of the next 5 years after the acquisition, then increase
Sunshine Pools is considering the acquisition of Cool Pools. Information about both companies is presented in the following table. Sunshine Pools has sufficient authorized but unissued shares to carry out the proposed merger.a. Suppose the ratio of exchange is 1.6. Calculate the earnings per share
The Swedish krona (SEK) is currently trading at 6.39 SEK to one U.S. dollar. During the year, U.S. inflation is expected to average 2.4% while Sweden’s inflation is expected to average 0.6%. Calculate the value of one SEK in terms of the USD. Calculate the exchange rate in one year’s time using
Sam and Suzy Sizeman need to prepare a cash budget for the last quarter of 2016 to make sure they can cover their expenditures during the period. Sam and Suzy have been preparing budgets for the past several years and have been able to establish specific percentages for most of their cash outflows.
The actual sales and purchases for Xenocore, Inc., for September and October 2015, along with its forecast sales and purchases for the period November 2015 through April 2016, follow. The firm makes 20% of all sales for cash and collects on 40% of its sales in each of the 2 months following the
Markham Enterprises needs to plan its cash requirements and short-term investment opportunities for the months of June, July, and August. The following data are available. The beginning balance is –$28,000 for June and the minimum required cash balance is $30,000. All amounts are shown in
Bells Manufacturing estimates that the sales for the 2016 financial year will be $2.25 million. No new borrowing was obtained and, therefore, the interest expense remained unchanged at $24,500. Bells Manufacturing is planning on paying cash dividends of $85,000 during 2016. Refer to the financial
You are analyzing the stock of First Health Company, a healthcare company with a current stock price of $78. The company just paid an annual dividend of $5, and it is expected that the dividend will grow at 4% in the coming two years and then increase by 5% per year thereafter. You estimate that
The Best Equipment Company just released a successful new and innovative product. It is expected the product will bring huge profits to the company, and its dividend will grow at 7% every year from now on. The last annual dividend of the company was $0.50 per share. The current risk-free rate of
Bill Miller’s investment performance was alternating between the very top and the very bottom of his profession. What aspect of his investment strategy would lead you to expect that his performance might exhibit greater volatility than that of other mutual funds? The following table shows the
A financial analyst for Smart Securities Limited, Paul Chan, wishes to estimate the rate of return for two similar-risk investments, A and B. Paul’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year ago, investment A and investment B
Currently under consideration is an investment with a beta, b, of 1.50. At this time, the risk-free rate of return, RF, is 7%, and the return on the market portfolio of assets, rm, is 10%. You believe that this investment will earn an annual rate of return of 11%.a. If the return on the market
Suppose you are the fund manager of a portfolio that has three asset classes. U.S. government T-bills account for 25% of the portfolio, large-company stocks constitute 50%, and small-company stocks make up the remaining 25%. If the expected returns are 4.8% for the T-bills, 15.2% for the
Stephen So, the financial manager for Cathay Pacific In corporation, wishes to evaluate three prospective investments: A, B, and C. Stephen will evaluate each of these investments to decide whether they are superior to investments that his company already has in place, which have an expected return
Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown in the following table.a. Determine the range of the rates of return for each of the two
Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech, Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is an innovative market player. However, Mike realizes that any time you consider a technology stock,
Christine Law is the Chief Investment Officer for Elite Investment Company. She is now calculating the equity value of Rays Food Company. She compiled the following dividend information for the company.a. Complete the table by filling in the growth rate for each year.b. What is the average growth
Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.The following financial data are also available:(1) The firm has estimated that its sales for 2016 will be $900,000.(2) The firm expects to
Randy & Wiskers Enterprises reported sales of $15.5 million for the 2015 financial year. In order to identify the financial needs for the 2016 financial year, you were requested to compile a pro forma balance sheet. The balancesheet as of December 31, 2015 (shown on the next page) and other
Basic Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2016. The firm expects 2016 sales to total $3,000,000. The following information has been gathered:(1) A minimum cash balance of $50,000 is desired.(2) Marketable securities are expected to remain unchanged.(3)
Allen Products, Inc., wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic prediction is $1,280,000. Allen’s income statement for the most recent year follows.a. Use the
Expected return, standard deviation, and coefficient of variation Three assets—F, G, and H—are currently being considered by Perth Industries. The probability distributions of expected returns for these assets are shown in the following table.a. Calculate the expected value of return, r, for
Quick Profit Entity is considering a capital expenditure that requires an initial investment of $84,000 and returns after-tax cash inflows of $7,000 per year for 20 years. The firm has a maximum acceptable payback period of 8 years.a. Determine the payback period for this project.b. Should the
NPV for varying costs of capital Empire Hotel is considering acquiring new flat-panel displays to replace the antiquated computer terminals at the registration desk. The new computer displays require an initial investment of $235,000 and will generate after-tax cash inflows of $65,000 per year for
Almost all firms have to deal with limited financial resources and therefore cannot undertake all positive NPV projects. Based on the information provided at MFL, use a spreadsheet to rank various projects based on their NPVs.
In addition to using NPV to elevate projects, most firms also use IRR. Based on the information provided at MFL, use a spreadsheet to rank various projects based on their IRRs.
Assume a project costs $860,000 initially and will generate cash flows in perpetuity of $320,000. The firm’s cost of capital is 12%.a. Calculate the project’s NPV.b. Calculate the annual EVA in a typical year.c. Calculate the overall project EVA and compare to your answer in part a.
IRR method Kelvin and Vivian Wong have $33,000 to invest. On average, they do not make any investment that will not return at least 7% per year. They have been approached with a “profitable” investment opportunity that requires $33,000 up front and has a payout of $8,300 at the end of each of
Gigantic Group has prepared the following estimates for a long-term expansion project. The initial investment is $248,250, and the project is expected to yield after-tax cash inflows of $65,000 per year for 5 years. The firm has an 8% cost of capital.a. Determine the net present value (NPV) for the
Given the following list of expenditures, indicate whether each is normally considered an operating expenditure or a capital expenditure. Explain your answers.a. An initial lease payment of $7,500 for renting the office buildingb. An outlay of $150,000 to purchase a trademark for manufacturing a
A few years ago, Tasty Food Company purchased an automatic production line at an installed cost of $325,000. The company has recognized depreciation expenses totaling $215,250 since its installation. What is the production line’s current book value? If Tasty Food sells the production line for
Research Clinic purchased a blood-testing machine 4 years ago for $96,000. It is being depreciated under MACRS with a 7-year recovery period using the percentages given in Table 4.2 on page 166. Assume a 30% tax rate.Table 4.2:a. What is the book value of the blood-testing machine?b. Calculate the
Colorado Cleaning has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new washing machine and must choose between two alternative ones. The first machine requires an initial investment of $25,000 and generates annual after-tax cash inflows of $6,500 for each of
Sweet Potato Corporation is considering the acquisition of a new cooking machine. The initial investment is estimated at $2.52 million, and the machine will have a 5-year life with no salvage value. Using a 10% discount rate, determine the net present value (NPV) of the machine given its expected
DC Fragrance intends to purchase new fragrance-mixing equipment for a $245,000 initial investment. The equipment generates an annual after-tax cash inflow of $68,500 for 5 years.a. Determine the net present value (NPV) of the equipment, assuming that the firm has a 15% cost of capital. Is the
Mavis Chan is currently a Financial Controller of a listed company, and has researched the financial pros and cons of enrolling in a 1-year Executive MBA (EMBA) program at her local university. The tuition and books for the EMBA program will involve an up-front cost of $67,000. If she enrolls in
Mutually exclusive projects Ocean Pacific Restaurant is evaluating two mutually exclusive projects for expanding the restaurant’s seating capacity. The relevant cash flows for the projects are shown in the following table. The firm’s cost of capital is 4%.a. Calculate the IRR to the nearest
The chapter opener talked about Diamond Comic Distributor’s attempt to reduce the cost of opening a retail comic book store. Suppose that the current cost of opening such a store is $400,000 and that $250,000 of that initial investment is the cost of stocking the shelves with new inventory.
Irvin Enterprises is considering the purchase of a new piece of equipment to replace the current equipment. The new equipment costs $75,000 and requires $5,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. The old piece of equipment was purchased 4 years
A machine currently in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under MACRS using a 5-year recovery period; it has 3 years of usable life remaining. The current machine can be sold today to net $42,000 after removal and cleanup costs. A new machine,
Stable Nuclear Plant Corporation has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.a. If project A were actually a replacement for project B and the $38,000 initial investment shown for project B were the after-tax cash
Tasty Bakery Corporation is evaluating the acquisition of a bakery machine that costs $72,000 and requires $3,000 in installation costs. If the corporation depreciates the machine under MACRS, using a 5-year recovery period (see Table 4.2 on page 166 for the applicable depreciation percentages),
Sony Pacific Music Corporation is considering the purchase of a new sound board used in recording studios to improve its sound effect. The existing sound board was purchased 3 years ago at an installed cost of $23,500; it was being depreciated under MACRS using a 5-year recovery period.Table
The chapter opener describes the expropriation of a Spanish company’s investment in an Argentina oil and gas company as well as the decision by Chevron to undertake a major new investment in that country. If you were a financial analyst at Chevron, how might you use scenario analysis to evaluate
Miller Dental, Inc. is considering replacing its existing laser checking system, which was purchased 3 years ago at a cost of $568,000. The laser checking system can be sold for a lump sum of $253,000. It is being depreciated using MACRS and a 5-year recovery period (see Table 4.2, page
MSF Manufacturing Company is considering the purchase of a new machine to improve its production efficiency. The company has total current assets amounting to $865,000 and total current liabilities of $673,000. As a result of the proposed replacement, the following changes are expected in the
Determine the total taxes payable, with a 20% tax rate, for each of the following situations. The asset was purchased 5 years ago for $460,200 and is being depreciated under MACRS using a 7-year recovery period. (See Table 4.2 on page 166 for the applicable depreciation percentages. Round answers
CBA Company is considering two mutually exclusive projects, A and B. The following table shows the CAPM-type relationship between a risk index and the required return (RADR) applicable to CBA Company.Project data are as follows:a. Ignoring any differences in risk and assuming that the firm’s cost
Automotive Assemblers is considering buying new equipment with an investment value of $30,000. The equipment has a 5-year life and no salvage value at the end. There are many uncertainties in the industry and, therefore, Automotive Assemblers estimated the cash inflows for three different
The Golden Company specializes in manufacturing goldplated jewelry. The company is considering buying new equipment costing $220,000 to improve the efficiency of the production process. The equipment is expected to generate a steady income throughout its 10-year life.a. Calculate the minimum yearly
Blair Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Blair to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Blair will be the exclusive supplier for that
To judge the sensitivity of a project’s NPV, financial managers will often compare a project’s forecasted cash inflows to the breakeven cash flows. Based on the information provided at MFL, develop a spreadsheet to compare forecasted and breakeven cash inflows.
Projects is currently evaluating two new aluminum cutting machines with the intention of purchasing one of them. The economists estimated the pessimistic, most likely, and optimistic cash inflows for the two machines, which are shown in the following table. Both machines have 12-year lives.a.
The Choc Shop is considering buying new equipment with an initial investment outlay of $32,000. The equipment has a 5-year life with cash inflows in years 1 to 5 of $11,500, $12,000, $12,500, $10,000, and $9,500, respectively. You earn 6% on all your current investments. The economists, however,
Mayflower Interiors is evaluating three mutually exclusive projects. The cost of capital, r, is 13.5% and the risk-free rate, RF, is 10%. The following information is available regarding the three mutually exclusive projects.a. Calculate the net present value (NPV) of each project using the
The Wentworth Art School is evaluating a few investment opportunities. It developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the following table.The Wentworth Art School is considering two mutually exclusive projects. The information available is
TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It currently has 20,000 shares
Diane’s Florist has fixed operating costs of $3,825, variable operating costs of $9.50 per flower arrangement, and an average selling price of $24.50 per flower arrangement.a. What is Diane’s Florist’s operating breakeven point in units (flower arrangements)?b. Calculate the EBIT for sales of
Millard’s Enterprises sells wooden baby chairs for $28 per chair. The fixed operating costs are $23,000, and the variable operating cost is $18 per chair.a. Calculate Millard’s Enterprises’ EBIT with an estimated sales quantity of 12,000 chairs.b. Calculate EBIT for sales of 10,000 and 14,000
Paul Scott has a 2008 Cadillac that he wants to update with a GPS system so that he will have access to up-to-date road maps and directions. Aftermarket equipment can be fitted for a flat fee of $500, and the service provider requires monthly charges of $20. In his line of work as a traveling
Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.a. Compute the estimated share value associated with each of the capital structures, using the simplified method described in this
The following sales price and cost data are available for three companies that are competitors.a. Calculate the operating breakeven point in units for each of the three competitors.b. How would you rank the three competitors based on their riskiness? Sale price per unit Variable operating cost per
Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12% (annual interest) bond issue or through the sale of 1,000 shares of common stock.
Shelby’s Photographs has fixed operating costs of $16,500 and variable operating costs of $8 per photograph pack. The photograph packs sell for $20 each. How many photograph packs must be sold for the firm to break even in terms of EBIT?
The chapter opener describes a shift in Lowe’s financial strategy that began in April 2012. Specifically, Lowe’s took actions that increased its reliance on debt. The following table shows Lowe’s annual revenues (in millions) and its earnings per share (EPS) for the fiscal years ending in
Hotel Amazing made a list of various independent projects it wants to launch with a fixed capital budget of $5.5 million. Management established that any unused portion of the fixed capital budget will earn less than the cost of capital of 12%. A summary of the independent projects are shown in the
Warehouse Systems Enterprises (WSE) designed a new inventory management system. WSE managers must choose among three alternative courses of action: (1) WSE can sell the design of the new system to a warehouse and receive payment over 3 years; (2) WSE can license the design to other warehouses for a
Duan 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 year-end payments of $2,500. The second investment opportunity requires an $8,500 investment
Comparing projects with unequal lives is often done by comparing the projects’ annualized net present value. Based on the information provided at MFL, use a spreadsheet to compare projects based on their ANPV.
Porter & Sons is evaluating three different machines to be used in its workshop to polish marble. All three of the machines are equally risky. The cost of capital of Porter & Sons is 15%. The initial investment and annual cash inflows over the life of each machine are shown in the following
Roots to Branches Corporation, a company specializing in event décor, is considering two mutually exclusive investments: “Roots” and “Branches.” Both investments will assist the company with the décor arrangements in buildings with high ceilings. Management expects that the market rate of
The Wood Connection decided to offer cash discounts to its regular credit customers, provided the credit customers have a proven track record of on-time payment. The Wood Connection is offering Monkey Suppliers a discount on its credit purchases. The credit term offered is 2/10, net 60. Should
Mix and Brix Suppliers is contemplating shortening its credit period from 45 to 30 days. Based on an analysis, it is estimated that this change will reduce the average collection period from 50 to 45 days, and the bad debts are expected to decrease from 2% to 1% of sales. Currently, sales are
In the chapter opener, you learned about FastPay, a company that lends to online ad publishers based on advertising receivables. Suppose that you are running a business that relies on online ad revenues. It typically takes 60 days to collect from your customers and convert receivables into cash.
Maitland Enterprises has $70,000 of 10% (annual interest) bonds outstanding, 500 shares of preferred stock paying an annual dividend of $45 per share, and 6,000 shares of common stock outstanding. Maitland Enterprises is taxed at 40%. Calculate the earnings per share (EPS) whenEBIT is:a.
The Plastic Corporation has a current capital structure consisting of $150,000 of 15% debt and 3,500 shares of common stock. The tax rate is 40%.a. Determine the earnings per share (EPS) when EBIT is $75,000 and $99,500.b. Calculate the degree of financial leverage (DFL) using EBIT of $75,000 as a
Multiple leverage measures Hugg-a-Bugg Soft Toys manufactures teddy bears. The annual sales are 350,000 teddy bears at $26 per teddy bear. Fixed operating costs are $28,000 while variable operating costs are $16 per teddy bear. The manufacturer pays annually $4,500 of interest on long-term debt and
Cosmetic Manufacturers is contemplating changing the capital structure of the firm. The firm has $45,000,000 in total assets, earnings before interest and taxes of $8,500,000, and is taxed at a rate of 40%.a. Complete the following table showing the values of debt, equity, and the total number of
Welding Manufacturing is currently financed with 100% equity. To take advantage of financial leverage, Welding Manufacturing wants to acquire debt. Management is considering various debt ratios, namely 10%, 20%, 30%, 40%, 50%, 60%, and 90%. The amount of total assets remains unchanged at
Whirlpool’s decision to dramatically increase its dividend in early 2013 to $0.625 per share. When it made that announcement, Whirlpool indicated that the date of record for the dividend would be Friday, May 17, and that the payment date would be Saturday, June 15. When would you expect the stock
Stock repurchase The Off-Shore Steel Company has earnings available for common stockholders of $2 million and has 500,000 shares of common stock outstanding at $60 per share. The firm is currently contemplating the payment of $2 per share in cash dividends.a. Calculate the firm’s current earnings
At the quarterly dividend meeting, Perfect Frame Manufacturing declared a $2.00 per share dividend for the holders on record as at Monday, March 10. The outstanding common stock is 250,000 shares. The dividend payment date was set as Monday, March 31. Prior to the dividend declaration, the firm’s
Staff Excellence Enterprises identified two independent projects to enhance staff training. The investments would require financing of $750,000 and $980,800, respectively. Retained earnings are $1.3 million, and the firm has a capital structure with 40% debt and 60% equity. What dividends, if any,
Sandra Gray owns 800 shares of Steel & Fittings Corporation. At the annual dividend meeting, a dividend payment of $1.05 was declared to be paid on September 30 to all the holders of record as at September 9.a. What is the amount of the dividend Sandra would receive on September 30?b. If Sandra
The stockholders’ equity account of Plastic Enterprises is as follows: The earnings available for the common stockholders are $280,000 and are included in the $1,200,000 retained earnings.a. Calculate the maximum dividend per share that the firm can pay if the legal capital includes all paid-in
The new intern is trying to understand the dividend policy of your firm. Having studied dividend policies at university, the intern wonders why the firm chose its dividend policy. The intern also wants to know how to estimate the dividend amount likely to be paid the following year. The following
Steel Enterprises’ earnings per share (EPS) for the period 2008 to 2015 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
The stockholders’ equity account for Paper Manufacturers is shown below. The firm’s common stock has a current market price of $20 per share.a. How will the stockholders’ equity account change if Paper Manufacturers pays a 5% stock dividend?b. How will the stockholders’ equity account
The stockholders’ equity account of Paper Weight Company is as follows:a. How will the stockholders’ equity account change if Paper Weight Company declares a 2-for-1 stock split?b. How will the stockholders’ equity account change if Paper Weight Company declares a 1-for-2 reverse stock
John McKay holds 500 common shares of Smart Life Corporation. The corporation has 50,000 shares outstanding. The current price per share is $25. Smart Life Corporation has reported earnings available to common stockholders of $220,000. The firm intends to retain its earnings and pay a 10% stock
Distilled Water Corporation is a company specializing in water purification and distributing bottled water to retailers. The corporation is considering a 3-for-2 stock split. The current stock price is $25 per share. The stockholders’ equity account is as follows:a. What changes will occur in the
U.S. companies had been building up their cash balances after the financial crisis, even though the interest rates that they could earn on low risk, liquid investments were extremely low. Describe the trade-off that companies face when they are deciding how much cash to hold.
Hurkin Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40 days. The firm currently has annual sales of about $18 million and purchases of $14 million. The firm is considering a plan that would
Metal Supplies is concerned about its cash management. On average, the day’s sales in inventory (duration of inventory on shelf) is 90 days. Accounts receivable are collected in 90 days, while accounts payable are paid in 60 days. Metal Supplies has annual sales of $14 million, cost of goods sold
The Furniture Corporation has an inventory turnover of 7, an average collection period of 45 days, and an average payment period of 30 days. Annual sales are $5 million, while the cost of goods sold is $1.8 million.a. What is The Furniture Corporation’s operating cycle and cash conversion
Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and the variable cost per unit is $28. Regency expects
Cohen Industrial Products uses 2,100 switch assemblies per month and then reorders another 2,100. The relevant carrying cost per switch assembly is $20 every year, and the fixed order cost is $300. The plant operates 250 days in a year and maintains a safety stock of 2 days’ worth of switch
Enviro Exhaust Company purchases 1,200,000 units per year of a component with a purchase price of $50. The fixed cost is $15 per order, and the carrying cost is 30% of the purchase price.a. Calculate the economic order quantity (EOQ) based on the data given. b. Calculate the EOQ if the order cost

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