Question: Jay Linoleum Company has fixed costs of $

> Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand po

> Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with

> Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in fixed assets. a. Construct two alternative financing plans for t

> In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 4 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will ea

> Winfrey Diet Food Corp. has $4,500,000 in assets. Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $960,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) wit

> Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will be 12 percent. If the firm goes with a short-term fina

> Assume that Hogan Surgical Instruments Co. has $2,000,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high liquidity plan, the return will be 14 percent. If the firm goes with a short-ter

> Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $200,000. The company can borrow $200,000 for three years at 12 percent annual interest or for one year at 10 percent annual interest.

> Biochemical Corp. requires $500,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead,

> Boatler Used Cadillac Co. requires $800,000 in financing over the next two years. The firm can borrow the funds for two years at 9 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing inst

> Sales for Western Boot Stores are expected to be 40,000 units for October. The company likes to maintain 15 percent of unit sales for each month in ending inventory (i.e., the end of October). Beginning inventory for October is 8,500 units. How many unit

> Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: If seasonal production is used, it is assumed that inventory will directly match sales for each month and th

> Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as: If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inven

> Antivirus, Inc., expects its sales next year to be $2,000,000. Inventory and accounts receivable will increase $430,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 25 percent dividend payout. How much exte

> Axle Supply Co., expects sales next year to be $300,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 30 percent dividend payout. How much external

> Sharpe Knife Company expects sales next year to be $1,500,000 if the economy is strong, $800,000 if the economy is steady, and $500,000 if the economy is weak. Mr. Sharpe believes there is a 20 percent probability the economy will be strong, a 50 percent

> Explain how combined leverage brings together operating income and earnings per share.

> How does the interest rate on new debt influence the use of financial leverage?

> What does risk taking have to do with the use of operating and financial leverage?

> What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?

> Discuss the various uses for break-even analysis.

> Dodge Ball Bearings had sales of 10,000 units at $20 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 5 percent price decrease (due to a price reduction by a competitor). Returned merchandise

> Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.

> Discuss the limitations of financial leverage.

> Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).

> What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?

> When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you are indifferent as to which plan is selected?

> Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the faci

> Mr. Gold is in the widget business. He currently sells 1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-assets ratio is five times, and 40 percent of his asse

> The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 15 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considerin

> Edsel Research Labs has $24 million in assets. Currently half of these assets are financed with long-term debt at 8 percent and half with common stock having a par value of $10. Ms. Edsel, the vice-president of finance, wishes to analyze two refinancing

> Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 percent and half with common stock having a par value of $8. Ms. Smith, vice-president of finance, wishes to analyze two refinancing plans,

> Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketing manager projects a 20 percent increase in unit volume sales this year with a 10 percent price increase. Returned merchandise will represent 6 percent of total sales.

> The Norman Automatic Mailer Machine Company is planning to expand production because of the increased volume of mailouts. The increased mailout capacity will cost $2,000,000. The expansion can be financed either by bonds at an interest rate of 12 percent

> Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: a. If you combine Sinclair's capital structure with Boswell's operating plan, what is

> Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships. Assume the Mitaka Company has a sales volume of 125,000 units at a price of $25 per unit; variable cos

> Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $120,000. The separate capital structures for Sterling and Royal are shown below: a. Compute earnings per share for both firms.

> Compute the stock price for Cain if it sells at 18 times earnings per share and EBIT is $40,000.

> Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below. a. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000,

> U.S. Steal has the following income statement data: a. Compute DOL based on the formula below (see page 128 for an example): b. Confirm that your answer to part a is correct by recomputing DOL using formula 5–3 on page 129. There may

> International Data Systems information on revenue and costs is only relevant up to a sales volume of 100,000 units. After 100,000 units, the market becomes saturated and the price per unit falls from $4.00 to $3.80. Also, there are cost overruns at a pro

> United Snack Company sells 50-pound bags of peanuts to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of peanuts are $.10 per pound. a. What is the break-even point in bags? b. Calculate the

> Mo & Chris's Delicious Burgers, Inc., sells food to Military Cafeterias for $15 a box. The fixed costs of this operation are $80,000, while the variable cost per box is $10. a. What is the break-even point in boxes? b. Calculate the profit or loss on 15,

> Bronco Truck Parts expects to sell the following number of units at the prices indicated under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales projection? Probabili

> The Harding Company manufactures skates. The company's income statement for 2010 is as follows: Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Brea

> The Sterling Tire Company's income statement for 2010 is as follows: Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units.

> Boise Timber co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $6,000,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus vari

> Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,400,000, but 15 percent of this value is represented by depreciation. Its contribution margin (price minus v

> Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $400,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variab

> Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit. a. Compute the break-even point. b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be requi

> Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales v

> Therapeutic Systems sells its products for $8 per unit. It has the following costs: Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $8 compute the break-even point. $120,000 $1.

> The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez's autograph stamped on them. Each bat sells for $13 and has a variable cost of $8. There are $20,000 in fixed costs involved in the production process. a. Compute the break-even p

> The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales project

> Shock Electronics sells portable heaters for $25 per unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed costs are $96,000. a. Compute the break-even point in units. b. Fill in the table below (in dollars) to illustr

> Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.

> What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

> Explain the relationship between inventory turnover and purchasing needs.

> Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement.

> With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?

> What are the basic benefits and purposes of developing pro forma statements and a cash budget?

> Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales.

> In Problem 1 if there had been no increase in sales and all other facts were the same, what would Philip’s ending cash balance be? What lesson do the examples in Problems 1 and 2 illustrate?

> Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 9 percent r

> Galehouse Gas Stations Inc., expects sales to increase from $1,500,000 to $1,700,000 next year. Mr. Galehouse believes that net assets (Assets Liabilities) will represent 70% of sales. His firm has a 10 percent return on sales and pays 40% of profits out

> Conn Man's Shops, Inc., a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 8 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown below. The fi

> The Manning Company has financial statements as shown below, which are representative of the company's historical average. The firm is expecting a 20 percent increase in sales next year, and management is concerned about the company's need for external f

> Owen's Electronics has 9 operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All asset

> Archer Electronics Company's actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sal

> Harry's Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January thr

> Lansing Auto Parts, Inc., has projected sales of $25,000 in October, $35,000 in November, and $30,000 in December. Of the company's sales, 20 percent are paid for by cash and 80 percent are sold on credit. The credit sales are collected one month after s

> What is a deferred annuity?

> If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?

> Adjust the annual formula for a future value of a single amount at 12 percent for 10 years to a semiannual compounding formula. What are the interest factors (FVIF) before and after? Why are they different?

> Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow?

> How is the present value of a single sum (Appendix B) related to the present value of an annuity (Appendix D)?

> How is the future value (Appendix A) related to the present value of a single sum (Appendix B)?

> List five different financial applications of the time value of money.

> Why does money have a time value?

> The Volt Battery Company has forecast its sales in units as follows: Volt Battery always keeps an ending inventory equal to 120 percent of the next month's expected sales. The ending inventory for December (January's beginning inventory) is 960 units, w

> Tom Busby owes $20,000 now. A lender will carry the debt for four more years at 8 percent interest. That is, in this particular case, the amount owed will go up by 8 percent per year for four years. The lender then will require Busby to pay off the loan

> If you borrow $9,725 and are required to pay back the loan in five equal annual installments of $2,500, what is the interest rate associated with the loan?

> Dr. Oats, a nutrition professor, invests $80,000 in a piece of land that is expected to increase in value by 14 percent per year for the next five years. She will then take the proceeds and provide herself with a 10-year annuity. Assuming a 14 percent in

> Alex Bell has just retired from the telephone company. His total pension funds have an accumulated value of $200,000, and his life expectancy is 16 more years. His pension fund manager assumes he can earn a 12 percent return on his assets. What will be h

> Franklin Templeton has just invested $8,760 for her son (age one). This money will be used for his son’s education 17 years from now. He calculates that he will need $60,000 by the time the boy goes to school. What rate of return will Mr. Templeton need

> Beverly Hills started a paper route on January 1, 2004. Every three months, she deposits $300 in her bank account, which earns 8 percent annually but is compounded quarterly. On December 31, 2007, she used the entire balance in her bank account to invest

> You need $23,956 at the end of nine years, and your only investment outlet is an 7 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. a. What

> Related to the discussion in problem 27, what is the present value of a 10-year annuity of $3,000 per period in which payments come at the beginning of each period? The interest rate is 12 percent.

> As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find th

> Determine the amount of money in a savings account at the end of five years, given an initial deposit of $3,000 and a 8 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.

> The Boswell Corporation forecasts its sales in units for the next four months as follows: Boswell maintains an ending inventory for each month in the amount of one and one-half times the expected sales in the following month. The ending inventory for Fe

> Cousin Bertha invested $100,000 10 years ago at 12 percent, compounded quarterly. How much has she accumulated?

> Barney Smith invests in a stock that will pay dividends of $3.00 at the end of the first year; $3.30 at the end of the second year; and $3.60 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the st

> If you owe $30,000 payable at the end of five years, what amount should your creditor accept in payment immediately if she could earn 11 percent on her money?

> At a growth (interest) rate of 8 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.

> Christy Reed has been depositing $1,500 in her savings account every December since 2001. Her account earns 6 percent compounded annually. How much will she have in December 2010? (Assume that a deposit is made in December of 2010. Make sure to count the

> Bruce Sutter invests $2,000 in a mint condition Nolan Ryan baseball card. He expects the card to increase in value 20 percent a year for the next five years. After that, he anticipates a 15 percent annual increase for the next three years. What is the pr

> Rita Gonzales won the $60 million lottery. She is to receive $1 million a year for the next 50 years plus an additional lump sum payment of $10 million after 50 years. The discount rate is 10 percent. What is the current value of her winnings?

> The Western Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at the rate of $50,000 a year for the next 20 years. With a discount rate of 12 percent, what is the present value of your winnings?

> General Mills will receive $27,500 per year for the next 10 years as a payment for a weapon he invented. If a 12 percent rate is applied, should he be willing to sell out his future rights now for $160,000?