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principles managerial finance
Principles Of Managerial Finance 14th Global Edition Lawrence J. Gitman, Chad J. Zutter - Solutions
Outdoor Living Manufacturers uses 1,000 units of a product per year. The fixed cost is $28 per order, while the carrying cost is $5 per unit per year. The lead time is 5 days and, therefore, the firm keeps 7 days’ usage in inventory as safety stock.a. Calculate the economic order quantity (EOQ)
Clear Glass Company sells glass containers. It reported total sales of $1,580,000, with 60% of the sales on credit. It takes 60 days to collect accounts receivable. The selling price is $20 per container while the variable cost is $15 per container. The board is currently investigating a change in
Farmers World, a firm specializing in fertilizers, is evaluating a proposal to relax the credit standards to increase sales. The implementation of the proposed plan is expected to result in an increase of 10% in sales, from 15,500 to 17,050 units for the following year. The average collection
Pebbles & Stone Enterprises currently sells on credit only and does not offer any discounts. In an attempt to increase sales, the board is considering offering a 5% discount for payment within 15 days. Currently, the average collection period is 60 days, sales are 30,000 units, selling price is $40
Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000, while variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit
The credit terms for each of three suppliers are shown in the following table. Assume a 365-day year.a. Determine the approximate cost of giving up the cash discount from each supplier.b. Assuming that the firm needs short-term financing, indicate whether it would be better to give up the cash
On March 25, the following invoices were issued for a $500 purchase on credit. Indicate the meaning of each credit term.a. 2/10, net 30 date of invoiceb. 2/10, net 40 EOMc. 2/10, net 20 EOMd. 2/10, net 60 date of invoice
Wendy Interior Design received four invoices with different credit terms. The manager needs to determine when the invoices, all dated March 25, need to be paid to avoid late-payment charges. A summary of the invoice credit terms are presented in the table. Assume a 365-day year.a. For each set of
Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note: Assume a 365-day
The Floral Boutique approached two banks to obtain a $10,000 bank loan. Bank A will give a 120-day loan at an annual rate of 12% while Bank B will give a 90-day loan at an annual rate of 15%. Assume a 365-day year.a. Based on the amount of interest to be paid, which bank loan should The Floral
Lindsey Shaw requires a short-term loan of $55,000 to cover some of the costs of buying a new house. She will also use a portion of the money for renovations to the house. The bank is willing to lend her the money for a 180-day period. Her bank manager discussed two loan proposals with her. She
Charlton Enterprises negotiated a line of credit at the bank that requires it to pay 12.5% interest on its borrowing. The firm is required to maintain a compensating balance equal to 10% of the amount borrowed. The firm borrowed $500,000 during the year.a. Calculate the effective annual rate on the
Automotive Accessories needs to borrow $135,000 for 6 months for renovations. It is considering two financing options: Bank Helping Hand offers an 8% annual rate subject to a 10% compensating balance. Bank Friendly Financer offers the funds as a discount loan with an annual rate of 8%. Automotive
Bejeweled Enterprises received initial proceeds of $984,000 from issuing 120-day commercial paper. The face value of the commercial paper is $1 million. The commercial paper is rolled over every 120 days throughout the year. Use a 365-day year.a. Calculate the effective annual rate the firm will
Clothing Unlimited decided to apply for a $100,000 loan from its local bank. Clothing Unlimited will provide accounts receivable as collateral. The bank’s policy states that accounts normally paid within 30 days of the end of the credit period may be accepted as collateral. However, the age of
Nokia convertible bond issue in which each investor could exchange his or her €1,000 par value bond for 383 shares of Nokia common stock. When these bonds were issued, Nokia’s stock was trading for €2.04 per share.a. What is the conversion ratio of Nokia’s convertible bonds?b. What is the
Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years, 2015–2020, for each of these stocks are shown in the
You have been given the expected return data shown in the first table on three assets—F, G, and H—over the period 2016–2019.Using these assets, you have isolated the three investment alternatives shown in the following table.a. Calculate the expected return over the 4-year period for each of
Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchase 1,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 24.75 pesos per share. He received no dividends during that time.a. What was Joe’s
A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the last 10 years, 2006–2015.a. On a set of “market return (x axis)–asset return (y axis)” axes, use the
You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical Industries makes machine tools and other heavy equipment, the demand for whichrises and falls closely with the overall state of the economy. The second stock, shown in Panel
Schembri Investment Company Limited wishes to assess then impact of changes in the market return on an asset that has a beta of 0.8.a. If the market return increased by 42%, what impact would this change be expected to have on the asset’s return?b. If the market return decreased by 32%, what
Answer the questions below for assets W to Z shown in the table.a. What impact would a 10% decrease in the market return be expected to have on each asset’s return?b. What impact would a 10% increase in the market return be expected to have on each asset’s return?c. If you believed that the
You are considering three stocks—A, B, and C—for possible inclusion in your investment portfolio. Stock A has a beta of 0.80, stock B has a beta of 1.40, and stock C has a beta of -0.30.a. Rank these stocks from the most risky to the least risky.b. If the return on the market portfolio
Joe Moss is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. He is particularly interested in using beta to compare the risks of the portfolios, so he has gathered the data shown in the following table.a. Calculate the betas for
For each of the states of the economies shown in the following table, use the capital asset pricing model to find the required return. States AB C D E Risk-free rate, RF 6% 3 10 12 5 Market return, 7 22% 8 15 18 10 Beta, B 2.40 -0.50 0.9 1.00 0.70
Beta coefficients and the capital asset pricing model Suppose you are wondering how much risk you must undertake to generate an acceptable return on your investment portfolio. The risk-free return currently is 3%. The return on the overall stock market is 12%. Use the CAPM to calculate how high the
Use the basic equation for the capital asset pricing model (CAPM) to work each of the following situations.a. Find the required return for an asset with a beta of 2.2 when the risk-free rate and market return are 5% and 32%, respectively.b. Find the risk-free rate for a firm with a required return
Alcoa’s weighted average cost of capital was around 12 percent, but its investments were earning returns closer to 5 percent. From 2010 to 2012, Alcoa invested roughly $1 billion in capital expenditures. Suppose Alcoa spends $1 billion expanding its manufacturing facilities today, and that
Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data: Debt The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest
Profitable Consulting Investment Limited has been hired to evaluate the cost of a potential preferred stock offering by Life Insurance Group. This 6% preferred stock issue would be sold at its par value of $40 per share. Flotation costs would total $5 per share. Calculate the cost of this preferred
Simpson Web intends to acquire a bond issued by Orange Group. He has obtained the following information on the security.a. Calculate the before-tax cost of the Orange Group bond.b. Calculate the after-tax cost of the Orange Group bond given the corporate tax rate. Par value Cost $1,000 $1,200 Bond
Bill William intends to purchase a new racing car. He has decided to borrow money to pay the $500,000 purchase price of the car. He is in the 40% federal income tax bracket. He can either borrow the money at an interest rate of 10% from the car dealer, or he could take out a second mortgage on his
Mavis Taylor Corporation has just issued preferred stock. The stock has a 6% annual dividend and a $100 par value, and was sold at $98.5 per share. Flotation costs were an additional $3 per share.a. Calculate the cost of the preferred stock.b. If the firm sells the preferred stock with a 10% annual
The interest expense on debt provides a tax deduction for the issuer so any calculation of a firm’s net cost of debt should reflect this benefit. Based on the information provided at MFL, compute a firm’s after-tax cost of debt using a spreadsheet model.
Brigham Jewelery Corporation common stock has a beta, b, of 1.8. The risk-free rate is 5%, and the market return is 16%.a. Determine the risk premium on Brigham common stock.b. Determine the required return that Brigham common stock should provide.c. Determine Brigham’s cost of common stock
Smart Finance Corporation wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The company wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with equity is 12%, the cost of preferred stock
American Travel Limited has on its books the amounts and specific (after-tax) costs shown in the following table for different sources of capital.a. Calculate the firm’s weighted average cost of capital using book value weights.b. Explain how the firm can use this cost in the investment
Peter Chan has just acquired three houses by obtaining three mortgage loans. They all mature in 15 years and can be repaid without penalty any time before maturity. The amounts owed and the annual interest rate associated with each mortgage loan are given in the following table. Mortgage loan
The following is some additional information regarding the Seafield Resources’ mining opportunity mentioned in the chapter opener.a. The chapter opener reported that the project had an NPV of $66 million and an internal rate of return of 20%. From those two facts alone, what can you conclude
Provincial Imports, Inc., has assembled past (2015) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year (2016).Information related to financial projections for the year 2016 is as follows:(1) Projected
At the end of 2015, Uma Corporation is considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they
Future values for various compounding frequencies Delia Martin has $10,000 that she can deposit in any of three savings accounts for a 3-year period. Bank A compounds interest on an annual basis, bank B compounds interest twice each year, and bank C compounds interest each quarter. All three banks
The chapter opener described an arrangement in which the city of Cincinnati gave up the right to collect parking fees over a 30-year period in exchange for a lump sum of $92 million plus a 30-year annuity of $3 million. Suppose that if the city had not entered into that arrangement, it would have
Future values of annuities Ramesh Abdul wishes to choose the better of two equally costly cash flow streams: annuity X and annuity Y. X is an annuity due with a cash inflow of $9,000 for each of 6 years. Y is an ordinary annuity with a cash inflow of $10,000 for each of 6 years. Assume that Ramesh
Present values of single amounts and streams You have a choice of accepting either of two 5-year cash flow streams or single amounts. One cash flow stream is an ordinary annuity, and the other is a mixed stream. You may accept alternative A or B, either as a cash flow stream or as a single amount.
Judi Janson wishes to accumulate $8,000 by the end of 5 years by making equal, annual, end-of-year deposits over the next 5 years. If Judi can earn 7% on her investments, how much must she deposit at the end of each year to meet this goal?
First Choice Bank wants to earn an effective interest rate of 18% per year. In order to suit different potential borrowers’ needs, the bank offers two options. The first calculates interest on a weekly compounding basis while the second calculates interest on a monthly compounding basis. What
Peter just got his driver’s license, and he wants to buy a new sports car for $70,000. He has $3,000 to invest as a lump sum today. Peter is a conservative investor and he only invests in safe products. After approaching different banks, he is offered the following investment opportunities:(1)
Suppose you want to save money to pay for a down payment on an apartment in 5 years’ time. One year from now, you will invest your $30,000 yearend bonus for the down payment. If you can invest at 15% per year, how much interest will you receive on your cash in 5 years? If you need $210,000 for
Since tax time comes around every year you smartly decide to make equal contributions to your IRA at the end of every year. Based on the information provided at MFL, calculate the future value of annual IRA contributions grown until retirement.
You have just graduated from college, begun your new career, and now it is time to buy your first home. Based on the information provided at MFL (www.myfinancelab.com), determine how much you can spend for your new dream home.
In exchange for a $20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.a. Find the value today of each alternative.b. Are all the alternatives acceptable? That is, are they worth $20,000 today?c.
As a savvy finance major you realize that you can quickly estimate your retirement age by knowing how much you need to retire, how much you can contribute each month to your retirement account, and what rate of return you can earn on your retirement investment and solving for the number of years it
CSM Corporation has a bond issue outstanding at the end of 2015. The bond has 15 years remaining to maturity and carries a coupon interest rate of 6%. Interest on the bond is compounded on a semiannual basis. The par value of the CSM bond is $1,000, and it is currently selling for $874.42.TO
In the chapter opener, you learned that the U.S. government had more than $16 trillion in debt outstanding in the form of Treasury bills, notes, and bonds in 2013. From time to time, the Treasury changes the mix of securities that it issues to finance government debt, issuing more bills than bonds
Lahey Industries has outstanding a $1,000 par-value bond with an 8% coupon interest rate. The bond has 12 years remaining to its maturity date.a. If interest is paid annually, find the value of the bond when the required return is (1) 7%, (2) 8%, and (3) 10%.b. Indicate for each case in part a
Suppose that the real rate of return on T-bills is 5% and the inflation rate is estimated to be 2.4%. What is the nominal rate of return on the T-bills?
Nick is a product manager in an investment banking firm. His supervisor asked him to price an investment product, so Nick conducted some research and the market information he obtained is as follows: The rate of return of 3-month Treasury bills is 6%, the expected inflation rate is 3%, and the risk
A firm wishing to evaluate interest rate behavior has gathered data on the nominal rate of interest and on inflationary expectations for five U.S. Treasury securities, each having a different maturity and each measured at a different point in time during the year just ended. These data are
Elliot Enterprises’ bonds currently sell for $1,150, have an 11% coupon interest rate and a $1,000 par value, pay interest annually, and have 18 years to maturity.a. Calculate the bonds’ current yield.b. Calculate the bonds’ yield to maturity (YTM).c. Compare the YTM calculated in part b to
Consider the following information:a. Suppose the rate of return on 3-month Treasury bills is 4%, and the 3-month expected inflation rate is 2%. What is the real return?b. Based on your result in part a, what is the nominal rate of return of each security?c. Why is the inflationary expectation for
Your company needs to raise $50 million, and you want to issue 10-year annual coupon bonds to raise this capital. Suppose the market requires the return of your company’s bonds to be 6%, and you decide to issue them at par.a. How many bonds would you need to issue?b. What will be the total
An annual coupon bond has a $1,000 face value, coupon rate of 5%, will mature in 10 years, and currently sells for $810.34.a. What is the yield to maturity of the bond?b. What is the current yield of the bond?c. Why does the current yield differ from the yield to maturity?d. One year later, the
Peter, an intern at Elite Investments, is asked by his supervisor to perform simple analysis of bonds in the bond market. He wants to calculate the theoretical values of the following six bonds. Using the information provided below, calculate the intrinsic value of each $1,000-par-value bond. Bond
Bond X pays an 8% annual coupon and Bond Y pays a 4% annual coupon. Both bonds have 10 years to maturity. The yield to maturity for both bonds is now 8%.a. If the interest rate suddenly rises by 2%, by what percentage will the price of the two bonds change?b. If the interest rate suddenly drops by
Three years ago, ABC Company issued 10-year bonds that pay 5% semiannually.a. If the bond currently sells for $1,045, what is the yield to maturity (YTM) on this bond?b. If you are expecting that the interest rate will drop in the near future and you want to gain profit by speculating on a bond,
Spreadsheet models can be used to determine the value of a bond based on its provisions and the required rate of return. Based on the information provided at MFL, find the value of an annual coupon bond using a spreadsheet model.
Some bonds make interest payments more than once per year. Based on the information provided at MFL, develop a spreadsheet capable of comparing bond values for differing payment frequencies.
As a financial manager it is often helpful to know the yield to maturity of outstanding bonds. Based on the information provided at MFL, use a spreadsheet to compute the yield to maturity for a bond.
You are considering buying a bond with a 10-year maturity. The bond’s coupon rate is 8%, and the interest is paid semiannually. If you want to earn an effective interest rate of 8.16%, how much should you be willing to pay for the bond?
Three years ago, you purchased a bond with a coupon rate of 8% and 9 years left until maturity. The bond pays a coupon semiannually. Today, the market requires a return of 6% for a similar investment to your bond. What is the current value of your bond?
Tesla Motors shares were initially offered to investors at $17. Three years later, the price was $90 per share. What was the compound annual return that Tesla investors owned over this period? Given that Tesla paid no dividends and was not expected to start paying dividends anytime soon, what
Perry Motors’ common stock just paid its annual dividend of $1.80 per share. The required return on the common stock is 12%. Estimate the value of the common stock under each of the following assumptions about the dividend:a. Dividends are expected to grow at an annual rate of 0% to infinity.b.
Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of $12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division’s estimated free cash flow each year from 2016 through 2019 is given in
Anson Construction wants to raise $5 million for a new construction project. The company is now evaluating two issue alternatives: (1) a new issue of preferred stock with face value of $100 that pays a $5.40 dividend per year, and (2) an additional 1 million shares with an offering price of $5 per
You are a financial analyst for Elite Investment Company, and you are looking for undervalued securities. After searching the market, you identify Stock A and Stock B as potential purchases. Stock A is currently selling at $100 with an expected dividend of $6 and constant growth rate of 5%, while
Negative growth Ray Steel Company is a mature manufacturing company. The company just paid a $5 dividend and managementwants to cut future dividends, reducing them by 2% each year indefinitely. If you require an 8% return on this stock, how much will you pay for it?
Nick is a security analyst in an investment banking firm. His supervisor asked him to evaluate a preferred stock. The par value of the preferred stock is $100 and it pays an annual dividend of $5.30 per share. Answer the following questions on the basis that the market required return is 7%.a. What
In 2013, Stock A just paid an annual dividend of $2 per share. The dividend is expected to grow 4%, 3%, and 2% in 2014, 2015, and 2016, respectively. After that, it is expected that the dividend will not grow any more in the future. Given that the required return is 6%, complete the following table
Sweet Candy will pay a dividend of $0.72 next year. The CEO of the company declared that the company will maintaina constant growth rate of 7% per year every year from now on.a. How much will you pay for the stock if your required return is 10%?b. How much will you pay for the stock if your
In the chapter opener, you learned that Facebook sold shares to investors at $38 each in its IPO. One year later, its stock price was hovering around $26. What was the percentage drop in Facebook shares in its first year as a public company? Just after the IPO, Facebook’s CEO, Mark Zuckerberg,
Emphasis on Cash Flows Worldwide Rugs is a rug importer located in the United States that resells its import products to local retailers. Last year, Worldwide Rugs imported $2.5 million worth of rugs from around the world, all of which were paid for prior to shipping. On receipt of the rugs, the
Allie and Austin have operated a small florist business from their garage at home as an informal business for the last three years. After some deliberation, they have decided to make their business formal. They approach you, as a management consultant, to assist them in selecting the most
Liability comparisons John Bailey invested $50,000 in The Entertainment Company seven years ago. He is concerned about the future of the firm as the profits have plummeted over the last four years. The firm has $120,000 in outstanding debt and is considering declaring bankruptcy.a. If John is the
Cash flows Sheldon Smith spends many hours monitoring his personal cash flows every month. Sheldon earns 5% on his short-term investments while paying prime plus 2% (prime is 9%) on the mortgage. The cash inflows and outflows for the month of March are as follows:a. Determine Sheldon’s total cash
Assume you own stock in a company, and you are in the process of selling the stock to another investor. Since the transaction will occur between the buyer and the seller, the company will receive no direct cash flows as a result of the sale. Why should the company’s management care about the
During the 2013 financial year, Stacey Stationeries reported taxable earnings of $78,000. Use Table 2.1 to answer the following questions:a. How much tax should Stacey Stationeries have paid for the 2013 financial year?b. Calculate Stacey Stationeries’ average tax rate for the 2013 financial
In the chapter opener, you read about the steep decline in home prices in Phoenix. Starting in August 2011, home prices there began to rebound. Consider a buyer who purchased a home in Phoenix that month for $150,000, using $30,000 of her own funds as a down payment and borrowing the remaining
Brand New Corporation received confirmation that all of its New York Stock Exchange (NYSE) listing requirements were in order, and that it may proceed to issue its stock. The company plans to raise $10 million on the stock issue. On what market do you expect this stock to be traded? Would this
During the 2013 financial year, World Wide Contractors Corporation reported a gross profit of $520,000 and operating expenses of $235,000. The corporation received income from interest on bonds amounting to $15,000. It also has a 15% common stock holding in Multiple Wire Corporation, and received
Porter Corporation forecast that it would generate earnings before interest and tax of $250,000 for the current financial year. Assume a flat tax rate of 35% and all after-tax earnings are paid to the stockholders.a. If no interest payments are made, how much of the earnings are available to be
Woodpecker Manufacturing replaces its equipment and machinery on a regular basis. A number of pieces of equipment and machinery will be sold during the next month. Assume a 40% tax rate, and complete the following table. How much total capital gains tax will Woodpecker Manufacturing pay? Asset Edge
Hamberg Manufacturing identified two vehicles from the vehicle pool that can be sold. The purchase prices were $2,500 and $3,000 for Vehicle 1 and Vehicle 2, respectively, and the expected selling prices are $1,350 and $1,900 for Vehicle 1 and Vehicle 2, respectively. However, only one vehicle will
The income statement and balance sheet are the primary reports that a firm constructs for use by management and for distribution to stockholders, regulatory bodies, and the general public. They are the primary sources of historical financial information about the firm. Dayton Products, Inc., is a
Without referring to the text, indicate for each of the following ratios the formula for calculating it and the kinds of problems, if any, the firm may have if that ratio is too high relative to the industry average. What if the ratio is too low relative to the industry average? Create a table
Balance sheet completion using ratios Complete the 2015 balance sheet for O’Keefe Industries using the information that follows it.The following financial data for 2015 are also available:1. Sales totaled $1,800,000.2. The gross profit margin was 25%.3. Inventory turnover was 6.0.4. There are 365
Ocean Terminal Company Limited started its business in 2014 with retained earnings of $68,450,000. It paid two semiannual dividends of $0.23 per share to 3,250,000 preferred stockholders during the year. Common stockholders, holding 9,800,000 common shares, were paid four quarterly dividends of
David Chan operates Speedy Delivery Service Company, a fleet of delivery trucks in a large metropolitan area, and has just completed his first full year in business. During the year, the company billed $420,000 for delivery services. David has a total of 11 employees (10 truck drivers and a
Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the
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