Question: Hollydale’s will issue an additional 5,

> When might it be detrimental to a company to have too many items in inventory? When might it be detrimental to have too few?

> Why is it often a good practice to simply write off a bad debt rather than pursue payment from a credit customer?

> Why is it necessary to consider changes to working capital accounts as part of the capital budgeting decision?

> Why are cash management and cash budgeting important to a company’s survival?

> What is the accounting identity?

> Runway Fashions Inc. is considering the following potential projects for the company but has only $1,000,000 in the capital budget. Which projects should it choose? Project Cost NPV IRR Winter coats $750,000 $95,000 13% Spring dresses $500,000 $45,00

> Get Real Inc. has announced that it will buy back 3,000,000 of its 27,000,000 shares over the next year. If the stock is selling for $15.30, what is the equivalent cash dividend that the company could pay? If you owned 500 shares of stock, how many would

> Sea Crest Corporation, which is an all-equity firm has an annual EBIT of $2,540,000, and a WACC of 15%. The current tax rate is 35%. Sea Crest Corp. will have the same EBIT forever. If the company sells debt worth $3,250,000 with a cost of debt of 10%, w

> The Always- Stocked Party Store wants to stay true to its name, especially since the “Out-to-Get-You” Party store is opening up very close by. One of their main sellers, the Mega-Keg, costs $2 to stock and accounts for sales of 3600 kegs per year. Each o

> You plan on traveling to South Korea and China on a business trip. You will first stop in Korea, where the current direct exchange rate is $1: 1243.78SK Won. You will next stop in China, where the current direct exchange rate is $1: Yuan 6.83013. As you

> R.K. Boats Inc. is in the process of making some major investments for growth and is interested in calculating their cost of equity so as to be able to correctly estimate their adjusted WACC. The firm’s common stock is currently trading for $43.25 and th

> You have been assigned the task of estimating the after-tax cost of debt for a firm as part of the process in determining the firm’s cost of capital. After doing some checking, you find out that the firm’s original 20-year 9.5% coupon bonds (paid semi-an

> Your company has posted you on an eighteen-month overseas assignment in Budapest, Hungary. You will be living on the Buda side of the river, but will be spending much of your time on the Pest side. The current indirect rate for the Hungarian forint is 18

> You plan on traveling to Japan and China on a business trip. You will first stop in Japan, where the current direct exchange rate is 0.0092. You will next stop in China, where the current direct exchange rate is 0.1285. As you leave Japan, you have ¥980,

> You are taking a trip to six European countries. It is a ten-day trip, and you are taking $3,500. The current direct conversion rate is 1.2150 for euros. While in Europe, you spend € 2638.30. You convert your remaining euros back to U.S. dollars upon you

> While traveling in various countries, you occasionally resort to U.S. food. You pay the following prices for a Big Mac: India – 210 rupee Kuwait – 1.39 dinar Sweden – 34.90 krona Ukraine – 133 rubles If the price of a Big Mac is $4.59 in the United State

> Country Farmlands, Incorporated is considering the following potential projects for this coming year, but has only $200,000 for these projects: Project A: Cost $60,000, NPV $4,000, and IRR 11% Project B: Cost $78,000, NPV $6,000, and IRR 12% Project C: C

> International Products has contracted for 5,000 winter hats from Russia. The contract price is 1,375 rubles per hat. The current direct exchange rate is 0.03562. The expected inflation rate for the next nine months is 5% in the United States and 2% in Ru

> International Products, Incorporated has ordered 10,000 leather coats from Argentina for delivery in six months. The contracted cost of a coat is 122 pesos. International Products will pay for the coats upon delivery. The current indirect exchange rate i

> While traveling in the following countries you see 20-ounce plastic bottles of Coca-Cola. You know the price in the United States for a coke is $1.09, but the countries have the following prices: Canada – C$ 1.50 Japan -- ¥ 125 England -- £ 0.60 Average

> Camelot Manufacturing, Inc. issues the following press release: “Camelot Manufacturing will pay a quarterly dividend of $1.00 per share on the 20th of the following month to record holders as of the 20th of this month.” This announcement was made on Sept

> Southern Railroad has announced the following stock repurchase plan: $5,000,000 repurchase over the next month. Current price of Southern Railroad is $18.50 per share, and there are 15,000,000 shares outstanding. How many shares is Southern expecting to

> Southern Railroad has announced the following stock repurchase plan: $5,000,000 repurchase over the next month. Current price of Southern Railroad is $18.50 per share, and there are 15,000,000 shares outstanding. How many shares is Southern expecting to

> Northeast Tires announces a reverse split. The company will consolidate outstanding shares through a 1- 5 split. That is, every 5 shares you currently own will be consolidated into 1 share. The current price of the stock is $2.50 per share. What will the

> Southwest Tires declares a stock split. The current price is $82.00 per share, and you own 300 shares. The split is a 4-for-1 split. What is the expected after-share price, and what is your wealth before and after the split?

> If a company declares a 3-for-1 stock split, show that a current shareholder is no better off after the split if the price before the split is $90 and the price after the split is $30.

> Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis (POH) philosophy when she raises capital for company projects. Currently, she can borrow up to $600,000 from her bank at a rate of 8.5%, float a bond for $1,100,000 at a

> Given the income statement below for California Cement Company for 2013, and the sales forecast from Problem 2, prepare a pro forma income statement for CCC for 2014. California Cement Company Income Statement for 2013 Sales Revenue ………… ………… $22,923,000

> Ross Enterprises can raise capital from the following sources: Ross has a new project that has an estimated IRR of 12% but will require an investment of $200,000. Should Ross borrow the money and invest in the new project? Source of Funds Interest Ra

> Vespucci is adding a project to the company portfolio and has the following information, the expected market return is 12%, the risk-free rate is 5%, and the expected return on the new project is 10%. What is the beta of the project?

> Magellan is adding a project to the company portfolio and has the following information: the expected market return is 14%, the risk-free rate is 3%, and the expected return on the new project is 18%. What is the project’s beta?

> A customer and an employee are waiting for payment from Gigantic Furniture after the company has filed for bankruptcy under Chapter 7 of the IRS bankruptcy laws. The employee’s claim against Gigantic Furniture is for $500 for health care benefits that we

> Gigantic Furniture is having its annual “Going Out of Business Sale.” If Gigantic Furniture is filing under Chapter 7, will it be back next year for another going out of business sale?

> Roxy Broadcasting has an annual EBIT of $3,500,000 and a WACC of 14%. The current tax rate is 40%. Roxy will have the same EBIT forever. The company currently has debt of $6,250,000 with a cost of debt of 14%. Roxy will sell $12,500,000 more of debt and

> Rachel can raise capital from the following sources: What is Rachel’s weighted average cost of capital if she needs to raise a. $10,000? b. $20,000? c. $30,000? Source of Funds Interest Rate Borrowing Limit Parents 0% $10,000 Friend

> What is the breakeven probability of success at the 15% borrowing rate in Problem 3? What is the breakeven probability of success if the loan rate is 20%?

> Wilson Motors is looking at expanding its operations by adding a second manufacturing location. If successful, the company will make $450,000. If it fails, the company will lose $250,000. Wilson Motors is trying to decide if it should borrow the $250,000

> Find the effective annual rate of the following credit terms: a. 2% discount if paid within ten days or net within thirty days b. 1% discount if paid within thirty days or net within sixty days c. 0.5% discount if paid within fifteen days or net within

> For the prior three years, sales for National Beverage Company have been $21,962,000 (2011), $23,104,000 (2012), and $24,088,000 (2013). The company uses the prior two year’s average growth rate to predict the coming year’s sales. What were the sales gro

> Keith Peterson is the CFO of Springfield Soups and Sauces. The company’s typical success rate for new products is 88%. Keith wants to improve this success rate to 94%. What loan improvement (in terms of rates) would do that for Springfield Soups and Sauc

> Roxy Broadcasting, Incorporated is currently a low leveraged firm with a debt-to-equity ratio of 1/ 3. The company wants to increase its leverage to 3/1 for debt-to-equity. If the current return on assets is 14% and the cost of debt is 11%, what is the c

> Air Seattle is looking at changing its capital structure from an all-equity firm to a leveraged firm with 50% debt and 50% equity. Air Seattle is a not-for-profit company and therefore pays no taxes. If the required rate on the assets of Air Seattle is 2

> Chandler has been hired by Cooking for Friends to raise capital for the company. Chandler increases the funding available from the bank to $900,000, but with a new rate of 8.75%. Using the data in Problem 9, determine what the new weighted average cost o

> Up-Front Bank uses discount loans for all its customers who want one-year loans. Currently, the bank is providing one-year discount loans at 8%. What is the effective annual rate on these loans? If you were required to repay $250,000 at the end of the lo

> Kyle hires Wilson Investment Bankers to sell the preferred stock from Problem 7. Wilson charges a fee of 3% on the sale of preferred stock. What is the cost of preferred stock for Kyle using the investment banker?

> Kyle is raising funds for his company by selling preferred stock. The preferred stock has a par value of $100 and a dividend rate of 6%. The stock is selling for $80 in the market. What is the cost of preferred stock for Kyle?

> Up-Front Bank is now offering a two-year discount loan for 10%. Working backwards, what are the available funds at the start of the loan and the implied balance at the end of the first year if the total lump sum repayment at the end of the second year is

> For the coming year, Rian Company wants to reduce its average production cycle to thirty days. If the target-ending inventory for 2015 is $61,000, what cost of goods sold will the company need to reach its goal? 2014 Selected Income Statement Items

> Nelson Heating and Ventilating Company estimates the coming year’s sales revenue based on external data. The company’s main business is new shopping mall construction, and uses the square footage of each mall as a “yardstick” for many financial statement

> 1. Complete the following table of cash collections for the months of July, August, and September. Use Table 12.1 as a model. 2. Complete the following table of cash outflows for the months of July, August, and September. 3. Complete the following monthl

> Raspberry Phones uses external data to forecast the coming year’s sales. Raspberry Phones have 8% of all new phone sales in the United States and 6% of all replacement phones. Industry forecasts predict an additional 18 million new phone buyers and repla

> Red Devil Investors has a success rate of one project for every four funded. Red Devil has an average loan period of two years and requires a portfolio return of 25%. If you borrow from Red Devil, what is your annual cost of capital?

> Atlantis Manufacturing, Inc. issues the following press release: “Atlantis Manufacturing will pay a quarterly dividend of $0.50 per share to record holders as of the 10th of this month on the 20th of this month.” This announcement was made on July 3, 201

> California Cement Co. produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 20% of the anticipated month’s sale. Beginning inventory in September 2014 was 33,9

> National Beverage Company produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 10% of the anticipated month’s sale. Beginning inventory in October 2014 was 2

> In Problem 4, Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds. The investment banker charges a fee of 2% on each bond sold. What is the cost of debt to DMI if the proceeds below are before the banker's fees are deducted?

> Kenny Enterprises will issue the same debt in Problem 3 but now will use an investment banker that charges $25 per bond for their services. What is the new cost of debt for Kenny Enterprises at a market price of a. $920? b. $1,000? c. $1,080? d. $1,173?

> Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of 12% on semiannual payments. The bond's par value is $100, and the bond will mature in thirty y

> Kenny Enterprises has just issued a bond with a par value of $1000, twenty years to maturity, and an 8% coupon rate with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following prices? What do you notice abo

> Grey’s Pharmaceuticals has a new project that will require funding of $4 million. The company has decided to pursue an all-debt scenario. Grey’s has made an agreement with four lenders for the needed financing. These l

> Hollydale’s is a clothing store in East Park. It paid an annual dividend of $2.50 last year to its shareholders and plans to increase the dividend annually at 2%. It has 500,000 shares outstanding. The shares currently sell for $21.25 per share. Hollydal

> Eric has another get-rich-quick idea but needs funding to support it. He chooses an all-debt funding scenario. Eric will borrow $2,000 from Wendy, who will charge Eric 6% on the loan. He will also borrow $1,500 from Bebe, who will charge 8% on the loan a

> Explain how translating a foreign balance sheet for inclusion in a multinational’s domestic balance sheet can violate the accounting identity.

> How can a changing exchange rate impact a company’s profits on one of its foreign operations?

> What is a cross rate? How can you find the cross rate of two foreign currencies if you only know the direct and indirect rates of those two foreign currencies with respect to your home currency?

> Explain how purchasing power parity determines the exchange rate between two currencies.

> What does it mean to nationalize a business? How can a domestic company minimize the risk of nationalization of its foreign operations?

> What are intellectual property rights? How have changes in technology impacted the ability to protect intellectual property rights?

> What effect can cultural differences have on the ownership structure of a foreign operation of a multinational business?

> Under what condition would a shareholder prefer a share repurchase over a cash dividend? Under what condition would a shareholder prefer a cash dividend over a share repurchase?

> Contrast a residual dividend program with a sticky dividend program.

> Thorpe and Company is currently an all equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85 and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds

> In a world of taxes when the capital gains tax and the ordinary income tax rates are the same is dividend policy relevant? Why or why not?

> In a world of no taxes and no transaction costs is dividend policy relevant? Why or why not?

> How does a stock dividend differ from a cash dividend? Is one better than the other from the shareholder’s perspective?

> What does it mean to be a beneficiary owner of stock? Why would individuals find this ownership stake convenient?

> Why is a dividend reinvestment program attractive to a shareholder that plans on increasing his or her holdings in a company?

> Who loses out on a company’s cash flow when it adds more and more debt is added to the financing structure? Who gains as a company when more and more debt is added?

> Explain why M&M Proposition I in a world of no taxes and no bankruptcy states that the firm's value does not depend on its capital structure.

> What does it mean when one states that the operating and financing decisions are separate from each other? How do we view the financing decision in terms of the magnitude of effect?

> What is asymmetric information? How does it affect the prioritization of financing sources under the pecking order hypothesis?

> What is the advantage of financial leverage, the degree to which a firm or individual utilizes borrowed money to make money?

> Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $43 per share. The company has a beta of 1.1, with the current risk-free rate at 3% and the market premium at 8%. The tax rate is 35% for the company. Ashma

> Why would one lender charge more for a loan to different borrowers? Why would two different lenders charge different rates to the same borrower?

> In the static theory of capital structure, how do you find a firm's optimal capital structure? In other words, what benefit are you receiving as you add debt, and what cost are you incurring when you add debt?

> In a world of taxes and no bankruptcy, why is a company's optimal capital structure all debt? What happens when a company adds bankruptcy to the world of taxes with regard to the optimal capital structure?

> Banker’s acceptance supports lending for what type of activities? Explain how collateral works in a banker’s acceptance arrangement.

> What is commercial paper? Why does it not need SEC approval?

> What is the role of an investment bank in selling stock?

> What is the difference between an angel investor and a venture capitalist? What event do these investors want to see happen? Why?

> What is the difference between Chapter 7 and Chapter 11 bankruptcies? Why might Chapter 11 be better for claimants than Chapter 7?

> What does analyzing companies against their industry tell a finance manager or financial analyst?

> What does the P/E ratio tell an outsider about a company? Why might this ratio not provide very compelling evidence on the firm's performance?

> Leeward Sailboats is reviewing the following new boat line: At what adjusted WACCs will the company accept this project? Hint: Find the IRR of the project and use it as the maximum adjusted WACC for accepting the project. Year 0 Year 1 Year 2 Year 3

> What are solvency ratios? Which ratio would be of most interest to a banker considering a debt loan to a company? Why?

> What are liquidity ratios? Given an example of a liquidity ratio and how it helps evaluate a company’s performance or future performance from an outsider’s view.

> What are some potential pitfalls of poor short-term financial planning?

> What does analyzing a company against firms in other industries tell a financial manager or analyst?

> Why might a company have extra inventory on hand above the amount suggested by the economic order quantity? Make a case for a redundant inventory item in a business setting.

> In a pro forma balance sheet, what line item would you expect to be constant from year to year in dollar terms and decreasing in terms of percentage of total assets? When would this line item have a significant change in percentage?