Elsee, Inc., has net sales of $13 million, and 75 percent of these are credit sales. Its cost of goods sold is 65 percent of annual net sales. The firm’s cash conversion cycle is 41.3 days. The inventory balance at the firm is $1,817,344, while its accounts payable balance is $2,171,690. What is the firm’s accounts receivable balance?
> What is M&M Proposition 1? M&M Proposition 2?
> Problem 16.22 introduces taxes and information and transaction costs to the simplified Modigliani and Miller model. If the marginal tax rate for the firm were to suddenly increase by a material amount, would the capital structure that maximizes the firm’
> Use the information in the following table to make a suggestion concerning the proportion of debt that the firm should utilize in its capital structure? Benefit or (Cost) No Debt 25% Debt 50% Debt 75% Debt Tax shield $10 $20 $30 Agency cost Financial
> Deficit Corp. management has determined that they will be $50 million short of being able to pay the firm’s debt obligations at the end of this year. Management has identified a positive NPV project that will require a great deal of effort on their part.
> Santa’s Shoes is a retailer that has just begun having financial difficulty. Santa’s suppliers are aware of the increased possibility of bankruptcy. What might Santa’s suppliers do based on this information?
> Describe what exactly is meant when someone is describing the value of the firm versus the value of the equity of the firm?
> Briefly discuss costs of financial distress to a firm that may arise when employees believe it is highly likely that the firm will declare bankruptcy?
> Backwards Resources Company has a WACC of 12.6 percent, and it is subject to a 40 percent marginal tax rate. Backwards has $250 million of debt outstanding at an interest rate of 9 percent and $750 million of equity (at market value) outstanding. What is
> What is the effect on Modigliani and Miller’s Proposition 1 of relaxing the assumption that there are no information or transaction costs?
> Keyboard Chiropractic Clinics produces $300,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to repurchase $600,000 of its equity by borrowing a similar amount at
> List and describe three practical considerations that concern managers when they make capital structure decisions?
> Give some examples of sources of short-term financing?
> The Modigliani and Miller theory suggests that the value of the firm’s assets is equal to the value of the claims on those assets and is not dependent on how the asset claims are divided. The common analogy to the theorem is that the total amount of pie
> Myriad Biotech management plans a $114 million IPO in which the offering price to the public will be $51 per share. The company will receive $47.50 per share. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs will total $525,000
> Trajax, Inc., a high-technology firm in Portland, raised a total of $90 million in an IPO. The company received $27 of the $30 per share offering price. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs were $450,000. The firm’s
> The 20-year Treasury rate is 4.67 percent, and a firm’s credit rating is BB. Suppose management of the firm decides to raise $20 million by selling 20-year bonds. Management determines that since it has plenty of experience, it will not need to hire an i
> Suppose that a biotech firm in Pittsburgh raised $120 million in an IPO. The firm received $23 per share, and the stock sold to the public for $25 per share. The firm’s legal fees, SEC registration fees, and other out-of-pocket costs were $270,000. The f
> Deere and Bros. is a broker that brings new issues of small firms to the public market. Its most recent deal for Dextra, Inc., had the following characteristics: Number of shares: ………………………… 1,000,000 Price to public: .………………………… $15 per share Proceeds t
> Which of the companies reduced the average time it took to collect on accounts receivable from 2016 to 2017? a. Company A. b. Company B. c. Company C. d. Company D.
> You work for a venture capital firm and are approached to finance a new high-tech start-up. While you believe in the business idea, you also believe it is very risky. What strategies can help to mitigate the risk of the investment to your firm? Explain h
> Nalco Holding is an international company that operates in 130 countries, has a market capitalization (market value of equity) of $2.3 billion, and reported net income of $45 million on $3.3 billion in revenues last year. The company needs to raise $200
> Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on Day 10 is closest to a. 14.6percent. b. 14.9percent. c. 15.0percent. d. 20.2perc
> List and briefly describe the three main strategies a firm may use to finance its working capital and fixed assets.
> Explain how term to maturity affects the price of a bank loan?
> Tanzaniqe, Inc., sells $200,000 of its accounts receivable to factors at a 5 percent discount. The firm’s average collection period is 90 days. a. What is the dollar cost of the factoring service? b. What is the simple annual interest cost of the loan?
> Jackson Electrical, one of the largest generator dealers in Phoenix, sells about 2,000 generators a year. The cost of placing an order with its supplier is $750, and the inventory carrying costs are $170 for each generator. Jackson likes to maintain safe
> Morgan Sports Company just reported the following financial information. a. Calculate the firm’s days’ sales outstanding. b. What is the firm’s days’ sales in inventory? c. What is
> What impact would the following actions have on the operating and cash conversion cycles? Would the cycles increase, decrease, or remain unchanged? a. Less raw material than usual is purchased. b. The company encounters unseasonable demand, and inventory
> What impact would the following actions have on the operating and cash conversion cycles? Would the cycles increase, decrease, or remain unchanged? a. More raw material than usual is purchased. b. The company enters into an off season, and finished goods
> Explain the difference between a competitive and negotiated cash sale. Which method of sale is likely to yield the lowest funding cost for firms selling plain vanilla bonds in stable markets?
> Zenex, Inc., sells $250,000 of its accounts receivable to factors at a 3 percent discount. The firm’s average collection period is 90 days. What is the dollar cost of the factoring service? What is the simple annual interest cost of the factors loan?
> Keswick Fencing Company collects 45 percent of its receivables in 10 days or fewer, 34 percent in 11 to 30 days, 12 percent in 31 to 45 days, 5 percent in 46 to 60 days, and 4 percent in more than 60 days. The company has $937,000 in accounts receivable.
> A partial aging of accounts receivable for Lincoln Cleaning Services is given in the accompanying table. What percent of receivables are in the 45-day range? Determine the firm’s effective days’ sales outstanding. How
> Explain how lockboxes are used?
> Ginseng Company collects 50 percent of its receivables in 10 days or fewer, 31 percent in 11 to 30 days, 7 percent in 31 to 45 days, 7 percent in 46 to 60 days, and 5 percent in more than 60 days. The company has $1,213,000 in accounts receivable. Prepar
> Hazel Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.1 days. Hazel Corp.’s remittances average $37,000 a day, and the average check is $125. The bank charges $0.37 per processed check. Assume that the
> Jennifer Electrical is evaluating whether a lockbox it is currently using is worth keeping. Management estimates that the lockbox reduces the mail float by 1.8 days and the processing by half a day. The remittances average $50,000 a day for Jennifer Elec
> Lansdowne Electronics has a formal line of credit of $1 million for up to three years with HND Bank. The interest rate on the loan is 5.3 percent, and under the agreement, Lansdowne has to pay an annual fee of 50 basis points on the unused amount. Suppos
> Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community Commercial Bank. The line of credit is good for up to five years. The bank will charge Gruppa an interest rate of 6.25 percent on any amount borrowed, and the firm
> The Colonial Window Treatments Company is borrowing $1.5 million. The loan requires a 10 percent compensating balance, and the effective interest rate on the loan is 9.75 percent. What is the stated APR on this loan?
> The Clarkson Designer Company Management wants to borrow $750,000.The bank will provide the loan at an APR of 6.875 percent. Since the loan calls for a compensating balance, the effective interest rate is actually 9.25 percent. What is the compensating b
> Longhorn Traders is one of the largest RV dealers in Austin, Texas, and sells about 2,800 recreational vehicles a year. The cost of placing an order with Longhorn’s supplier is $800, and the inventory carrying costs are $150 for each RV. Management likes
> Suppose a biotech company in Boston, Massachusetts, completes an $85 million IPO priced to the public at $75 per share. The firm receives $72 per share, and the out-of-pocket expenses are $340,000. The stock’s closing price at the end of the first day is
> Given the data for Telecraft Enterprises in problem 14.21, re-estimate the firm’s operating cycle if days’ sales outstanding decreased to 75 days. For the same level of net sales, what is the implied dollar value of receivables with 75 days’ sales outsta
> Why can cash investment in inventory be costly?
> Telecraft Enterprises carries 45 days of inventory in its stores. Last year Telecraft reported net sales of $1,400,000 and the company had receivables of $325,000 at the end of the year. What is the operating cycle at Telecraft?
> Premier Corp. has net sales of $812,344, and cost of goods sold equal to 70 percent of net sales. Assume all sales are credit sales. If the firm’s accounts receivable total $113,902 and its operating cycle is 81.6 days, how much inventory does the firm h
> Aviva Technology’s operating cycle is 81 days. Its inventory was $134,000 at the end of last year, and the company had cost of goods sold of $1.1 million. How long does it take Aviva to collect its receivables on average?
> Joanna Handicrafts, Inc., has net sales of $4.23 million with 50 percent being credit sales. Its cost of goods sold is $2.54 million. The firm’s cash conversion cycle is 47.9 days and its operating cycle is 86.3 days. What is the firm’s accounts payable?
> Blackwell Automotive, Inc., reported the following financial information for the last fiscal year. Calculate the firm’s cash conversion cycle and operating cycle? Blackwell Automotive, Inc. Assets Liabilities and Equity Cash and ma
> Your boss asks you to compute your company’s cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $26,300, accounts receivable averaged $17,900, and accounts payable averaged $15,100. You also se
> Winegartner Cosmetics management is setting up a line of credit at the company’s bank for $5 million for up to two years. The interest rate is 5.875 percent and the loan agreement calls for an annual fee of 40 basis points on any unused balance for the y
> Maltz Landscaping has an average collection period of 38 days for its accounts receivable. Currently, Maltz factors all of its receivables at a 2 percent discount. What is the effective annual interest rate on the financing from the factor?
> Morgan Contractors borrowed $1.75 million at an APR of 10.2 percent. The loan called for a compensating balance of 12 percent. What is the effective interest rate on the loan?
> What does “4/15, net 30” mean?
> The Kellogg Bank requires borrowers to keep an 8 percent compensating balance. Gorman Jewels borrows $340,000 at a 7 percent stated APR. What is the effective interest rate on the loan?
> Pacific Traders has annual sales of $1,895,000. The firm’s financial manager has determined that using a lockbox will reduce collection time by 2.3 days. If the firm’s opportunity cost on savings is 5.25 percent, what are the savings from using the lockb
> Why might a negotiated sale be the lowest cost means of issuing a complex debt security?
> Mill Street Corporation sells its goods with terms of 4/10 EOM, net 60. What is the implicit cost of the trade credit?
> Sybex Corp. sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?
> Describe the risks that are associated with a restrictive current asset management strategy?
> A majority of firms choose a firm-commitment underwriting arrangement rather than a best-effort arrangement for their IPO? Explain why.
> Based on your knowledge from this and previous chapters, what are some methods an investment banker uses to determine an IPO price? What factors will play a significant role in the calculation?
> Cerberus Security Company produces a cash flow of $200 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent, and the firm is financed entirely with equity. Management would like to re
> If the spot rate was $1.0413/C$ and the 90-day forward rate was $1.0507/C$, how much more (in U.S. dollars) would you receive by selling C$ 1,000,000 at the forward rate than at the spot rate?
> What are the two general current asset management strategies discussed in this section, and how do they differ?
> Explain the relation between each pair of currencies. Spot Rate $1.655/ £ Forward Rate а. $1.6001/£ b. ¥104.45/S ¥102.33/S C$1.1121/$ C$1.0940/$ с.
> Toyota is interested in borrowing $5 million for 90 days. Bank of America has quoted a rate that is 1.125 percent under the prime rate of 6.25 percent. Daiwa Bank is offering Toyota a rate that is 0.75 percent over the three-month LIBOR of 4.2 percent. W
> IBM’s German unit is looking to borrow €7.5 million from Deutsche Bank. Deutsche Bank quotes a rate of three-month LIBOR plus 0.25 percent for the 90-day loan. Currently, the three-month LIBOR is 3.875 percent. What is IBM’s interest cost on the loan in
> Caterpillar, Inc. management is trying to decide between selling a new bond issue in the U.S. or the Eurodollar bond market. In either market the bonds will be denominated in dollars and will have a three-year maturity. The domestic bond will have a coup
> The Boeing Company has two different debt issues, both maturing four years from now. The domestic bond issue pays semiannual coupons and has a coupon rate of 4.80 percent. The current price on the bond is $962.75. The Eurobond issue is priced at $964.33
> Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set up a plant in Alabama, where Kia Motors has an auto assembly plant for its SUVs. The cost of this plant will be $13.5 million. The current spot rate is 1
> Barrington Fertilizers, Inc., exports its specialized lawn care products to Canada. It made a sale worth C$1,150,000, with the payment due in 90 days. Barrington’s banker gave it a forward quote of $0.9021/C$. By using the forward rate, the firm gained a
> Covington Industries just sold equipment to a Mexican firm. Payment of 11,315,000 pesos will be due to Covington in 30 days. Covington has the option of selling the pesos today at a 30-day forward rate of $0.05139/peso. If it waits 30 days to sell the pe
> Tricolor Industries has purchased equipment from a Brazilian firm for a total cost of 272,500 Brazilian reals. The firm has to pay in 30 days. Citibank has given the firm a 30-day forward quote of $0.2715/real. Assume that on the day the payment is due,
> Alcor Pharma just received revenues of $3,165,300 in Australian dollars (A$). Management has the following exchange rates: A$1.08010/£ and $1.5906/£. What is the U.S. dollar value of the company’s revenues?
> What is the operating cycle, and how is it related to the cash conversion cycle?
> Banco Santiago wants to make a bid-ask spread of 0.65 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP18.3092/$, what does the bid rate have to be?
> The foreign exchange department of Bank of America has a bid quote on Canadian dollars (C$) of C$1.0800/$. If the bank typically tries to make a bid-ask spread of 0.5 percent on these foreign exchange transactions, what will the ask rate have to be?
> The spot rate of the Australian dollar (A$) is A$1.1667/$. The Australian dollar is quoted at a 30-day forward premium of 4.90 percent against the U.S. dollar. What is the 30-day forward quote?
> The foreign exchange department at Tokyo’s Daiwa Bank quoted the spot rate on the euro at €0.007269/¥. The 90-day forward rate is quoted at a premium of 5.42 percent on the euro. What is the 90-day forward rate?
> How is transaction exposure different from operating exposure?
> Ford Motor Company maintains production facilities in many different countries including Brazil, Taiwan, and the United States. Given the data in Exhibit 21.6, which production plant is likely to face the greatest country risk? How does country risk affe
> Use the data in Exhibit 21.5 to answer these questions: a. What is the six-month forward rate (in U.S. dollars) for Swiss francs? Is the Swiss franc selling for a premium or a discount? b. What is the six-month forward rate (in U.S. dollars) for the Jap
> Like owners of stock, owners of options can lose no more than the amount they invested. They are far more likely to lose that full amount, but they cannot lose more. Do sellers of options have the same limitation on their losses?
> What is the value of a call option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?
> What does the seller of a put option hope will happen?
> What are some of the trade-offs required in the management of working capital accounts?
> Husky Motors has two debt issues outstanding, both of which mature in five years. The senior debt issue, which has a face value of $10 million, must be paid in full before any of the principal for the junior debt issue is paid. The junior debt issue also
> Two call options have been written on the same underlying stock. Call #1 has a strike price of $42, and call #2 has a strike price of $52. Call #1 is selling for $5.00, and call #2 is selling for $6.00. What arbitrage opportunity do these prices present
> The price of a stock that does not pay dividends is currently $35, and the risk-free rate is 4 percent. A European call option on the stock, with a strike price of $35 and which expires in six months, sells for $3.04. A European put option on the same st
> What is the payoff for a call option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?
> SpinTheWheel Co. has assets currently worth $10 million in the form of one-year risk-free bonds that will return 10 percent. The company has debt with a face value of $5.5 million due in one year. (No interest payments will be made.) The stockholders dec
> What costs would a firm following a flexible current asset management strategy consider, and why?
> List some of the working capital management practices you would expect to see in a manufacturing company following just-in-time inventory practices?
> What factors must a financial manager consider when making decisions about accounts receivable?
> Stardust, Inc., is an exporter of plumbing fixtures. About 30 percent of its sales are made in Canada. The sales department just found out that the Canadian dollar is at a premium against the U.S. dollar based on the 90-day forward rate, while the 180-da
> A Canadian cooperative of wheat farmers sold wheat to a grain company in Russia. Under what circumstances will the Canadian farmers be exposed to foreign exchange risk? When will the Russian importer be facing foreign exchange risk?
> What types of conflicts arise with leases and why?
> In the United States, managers are asked to focus on maximizing stockholder value. Is this consistent with the goals of managers in Germany and Japan?
