Jimmy Hale is the owner and operator of the grain elevator in Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a decade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current financing sources. He now believes he will need an additional $240,000 for the 3-month period ending with the close of the harvest season. After meeting with his banker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of 1 percent over prime (which is currently 7 percent) and also requested that the firm increase its current bank balance of $4,000 to 20 percent of the loan. a. If interest and principal are all repaid at the end of the 3-month loan term, what is the annual percentage rate on the loan offer made by Mr. Hale’s bank? b. If the bank were to lower the rate to prime if interest is discounted, should Mr. Hale accept this alternative?
> Emma’s Electronics Incorporated has total assets of $63 million and total debt of $42 million. The company also has operating profits of $21 million with interest expenses of $6 million. a. What is Emma’s debt ratio? b. What is Emma’s times interest earn
> K. Johnson, Inc.’s managers want to evaluate the firm’s prior-year performance in terms of its contribution to shareholder value. This past year, the firm earned an operating return on investment of 12 percent, compared to an industry norm of 11 percent.
> Why is preferred stock referred to as a hybrid security? It is often said to combine the worst features of common stock and bonds. What is meant by this statement?
> The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 ye
> The annual sales for Salco, Inc. were $4.5 million last year. All sales are on credit. The firm’s end-of-year balance sheet was as follows: The firm’s income statement for the year was as follows: Sa
> Prepare an income statement and a balance sheet from the following scrambled list of items. What is the firm’s net working capital and debt ratio? Sales……………………………………………………………………..$550,000 Accumulated depreciation………………………………………..190,000 Cash…………………………
> Prepare a balance sheet and income statement for the Warner Company from the following scrambled list of items. a. Prepare a common-sized income statement and common-sized balance sheet. Interpret your findings. Depreciation expense……………………………………………………
> Prepare a balance sheet from the following information. What is the net working capital and debt ratio? Cash…………………………………………………………..$ 50,000 Accounts receivable……………….………………………. 42,700 Accounts payable……………………………………………. 23,000 Short-term notes payable…
> Prepare an income statement and a common sized income statement from the following information. Sales…………………………………………………………..$525,000 Cost of goods sold………………………………….………200,000 General and administrative expenses……………….62,000 Depreciation expenses……………
> Based on the information for the T. P. Jarmon Company for the year ended December 31, 2015 (see page 96): a. How much is the firm’s net working capital, and what is the debt ratio? b. Complete a statement of cash flows for the period. I
> a. How much is the firm’s net working capital, and what is the debt ratio for 2014 and 2015? b. Complete a common-sized income statement, a common-sized balance sheet, and a statement of cash flows for 2015. Interpret your results.
> Prepare a statement of cash flows from the following scrambled list of items. Increase in inventories…………………………………………$ 7,000 Operating income…………………………………………………219,000 Dividends………………………………………………………………29,000 Increase in accounts payable…………………………………43,
> Prepare a statement of cash flows for Abrahams Manufacturing Company for the year ended December 31, 2015. Interpret your results. Abrahams Manufacturing Company Income Statement for the Year Ended 12/31/2015 2015 Sales...............................
> What is the purpose of holding inventory? Name several types of inventory and describe their purpose.
> Interpret the following information regarding Maness Corporation’s statement of cash flows. Cash flow from operations Net income……………………………………………………………………$ 370 Depreciation expense………………………………………………………….60 Profits before depreciation……………………………………………….
> Sandersen, Inc. sells minicomputers. During the past year, the company’s sales were $3 million. The cost of its merchandise sold came to $2 million, and cash operating expenses were $400,000; depreciation expense was $100,000, and the firm paid $150,000
> Sales for L. B. Menielle, Inc. during the past year amounted to $5 million. The firm provides parts and supplies for oil field service companies. Gross profits for the year were $3 million. Operating expenses totaled $1 million. The interest income from
> The William B. Waugh Corporation is a regional Toyota dealer. The firm sells new and used trucks and is actively involved in the parts business. During the most recent year, the company generated sales of $3 million. The combined cost of goods sold and t
> Currently you have $50,000 that you would like to invest for 2 years and are considering buying a government security maturing in 1 year that pays 3% annually. If you do this, you will also have to purchase another 1-year security at the end of the first
> If yields on Treasury securities were currently as follows: TERM…………………………………….YIELD 6 months…………………………………………….1.0% 1 year…………………………………………………..1.7% 2 years…………………………………………………2.1% 3 years………………………………………………..2.4% 4 years…………………………………………………2.7% 5 years………
> You want to invest your savings of $20,000 in government securities for the next 2 years. Currently, you can invest either in a security that pays interest of 8% per year for the next 2 years or in a security that matures in 1 year but pays only 6% inter
> You’re looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk-free interest rate is 3.0%, and this rate is expected to continue on into the
> You’ve just taken a job at a investment-banking firm and been given the job of calculating the appropriate nominal interest rate for a number of different Treasury bonds with different maturity dates. The real risk-free interest rate that you have been t
> Given the following information, prepare a statement of cash flows. Dividend………………………………………....$25 Increase in common stock…………..………27 Increase in accounts receivable……………65 Increase in inventories…………………………..5 Operating income………………………………..215 Increas
> What are the risk–return trade-off associated with adopting a more liberal trade credit policy?
> At present, 20-year Treasury bonds are yielding 5.1%, while some 20-year corporate bonds that you are interested in are yielding 9.1%. Assuming that the maturity-risk premium on both bonds is the same and that the liquidity-risk premium on the corporate
> Given the following information, prepare a statement of cash flows. Increase in accounts receivable………………………………..$25 Increase in inventories……………………………………………….30 Operating income………………………………………………………..75 Interest expense…………………………………………………………25 Increas
> You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 4.5% and the future inflation rate is expected to be 2.1% per year. Ignoring the cross product between
> The CFO of your firm has asked you for an approximate answer to this question: What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds? Assume that the current 3-month Treasury bill rate is 4.
> Prepare a balance sheet and income statement for Belmond, Inc. from the following information. Inventory………………………………………………………………$ 6,500 Common stock………………………………………………………..45,000 Cash………………………………………………………………………...16,550 Operating expenses………………………………………
> Prepare a balance sheet and a common-sized balance sheet from the following information. Cash……………………………..……………………………$30,000 Account receivable……………………………………..…63,800 Accounts payable……………………………………………52,500 Short-term notes payable…………………………………11,000 I
> You’re considering an investment that you expect will produce an 8% return next year, and you expect that your real rate of return on this investment will be 6%. What do you expect inflation to be next year?
> At present, the real risk-free rate of interest is 2%, while inflation is expected to be 2% for the next 2 years. If a 2-year Treasury note yields 4.5%, what is the maturity-risk premium for this 2-year Treasury note?
> At present, 10-year Treasury bonds are yielding 4% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium on the corporate bond is 0.4%, what is the corporate bond’s default-risk premium?
> Suppose 1 year ago, Miller Company had inventory in Britain valued at 1.5 million Swiss francs. The exchange rate for dollars to Swiss francs was 1 franc = 1.15 dollars. Today, the exchange rate is 1 Swiss franc = 1.06 U.S. dollars. The inventory in Swit
> If a credit manager experienced no bad-debt losses over the past year, would this be an indication of proper credit management? Why or why not?
> You own $10,000. The dollar rate in Tokyo is 216.6743. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars? COUNTRY CONTRACT $/FOR
> Compute the indirect quote for the spot and forward Canadian dollar, yen, and Swiss franc contracts. COUNTRY CONTRACT S/FOREIGN CURRENCY Canada dollar Spot 0.8437 30-day 0.8417 90-day 0.8395 Japan yen Spot 0.004684 30-day 0.004717 90-day 0.004781 Sw
> A McDonald’s Big Mac costs 2.44 yuan in China but costs $4.20 in the United States. Assuming that purchasing-power parity (PPP) holds, how many Chinese yuan are required to purchase 1 U.S. dollar?
> Suppose 90-day investments in Europe have a 5 percent annualized return and a 1.25 percent quarterly (90-day) return. In the United States, 90-day investments of similar risk have a 7 percent annualized return and a 1.75 percent quarterly return. In toda
> Calculate the effective cost of the following trade credit terms when payment is made on the net due date: a. 2/10, net 30 b. 3/15, net 30 c. 3/15, net 45 d. 2/15, net 60
> On February 3, 2016, the Burlington Western Company plans a commercial paper issue of $25 million. The firm has never used commercial paper before but has been assured by the firm placing the issue that it will have no difficulty raising the funds. The c
> You plan to borrow $20,000 from the bank to pay for inventories for a gift shop you have just opened. The bank offers to lend you the money at 10 percent annual interest for the 6 months the funds will be needed. a. Calculate the effective annual rate of
> The Marlow Sales and Distribution Co. needs $1.5 million for the 3-month period ending September 30, 2015. The firm has explored two possible sources of credit. a. Marlow has arranged with its bank for a $1.5 million loan secured by its accounts receivab
> The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following
> Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 8 percent per annum with interest paid in advance (discounted). In addition, Paymaster must maintain a minimum dem
> What factors determine the size of the investment a firm has in its accounts receivable? Which of these factors are under the control of the financial manager?
> Historical data for the sales, accounts receivable, inventories, and accounts payable for the Crimson Mfg. Company follow: a. Calculate Crimson’s days of sales outstanding and days of sales in inventory for each of the 5 years. What h
> A popular theory for managing risk to the firm that arises out of its management of working capital (that is, current assets and current liabilities) involves following the principle of self-liquidating debt. How would this principle be applied in each o
> A factor has agreed to lend the JVC Corporation working capital on the following terms: JVC’s receivables average $100,000 per month and have a 90-day average collection period. (Note that JVC’s credit terms call for payment in 90 days, and accounts rece
> MDM, Inc. is considering factoring its receivables. The firm has credit sales of $400,000 per month and has an average receivables balance of $800,000 with 60-day credit terms. The factor has offered to extend credit equal to 90 percent of the receivable
> The Michelin Warehousing and Transportation Company (WTC) needs $300,000 to finance an anticipated expansion in receivables due to increased sales. WTC’s credit terms are net 60, and its average monthly credit sales are $200,000. In general, the firm’s c
> Tri-State Enterprises plans to issue commercial paper for the first time in the firm’s 35-year history. The firm plans to issue $500,000 in 180-day maturity notes. The paper will carry a 10 1/2 percent rate with discounted interest and will cost Tri-Stat
> On July 1, 2015, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1 percent over prime. In addition, the firm ha
> Compute the cost of the trade credit terms in Problem 15-3 using the compounding formula, or effective annual rate. Data from Problem 15-3: Historical data for the sales, accounts receivable, inventories, and accounts payable for the Crimson Mfg. Compan
> CL Marshall Liquors owns and operates a chain of beer and wine shops throughout the Dallas-Fort Worth metroplex. The rapidly expanding population of the area has resulted in the firm requiring a growing amount of funds. Historically, the firm has reinves
> Distinguish between the concepts of financial risk and interest rate risk as these terms are commonly used in discussions of cash management.
> Fishing Charter, Inc. estimates that it invests $0.30 in assets for each dollar of new sales. However, $0.05 in profits are produced by each dollar of additional sales, of which $0.01 can be reinvested in the firm. If sales rise by $500,000 next year fro
> The most recent balance sheet for the Armadillo Dog Biscuit Co., Inc. is shown in the corresponding table. The company is about to embark on an advertising campaign, which is expected to raise sales from the current level of $5 million to $7 million by t
> The balance sheet of the Boyd Trucking Company (BTC) shows that BTC had sales for the year ended December 31, 2015, of $25 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, BTC generates
> Which of the following accounts would most likely vary directly with the level of a firm’s sales? Discuss each briefly. YES NO YES NO Notes payable Plant and equipment Cash Marketable securities | Accounts payable Inventories ||
> Use the following industry-average ratios to construct a pro forma balance sheet for Phoebe’s Cat Foods, Inc. Total asset turnover Average collection period (assume 365-day year) Fixed asset turnover | Inventory turnover (based on
> Next year’s sales for Cumberland Mfg. are expected to be $22 million. Current sales are $18 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Cumberland estimates that cu
> Sambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1.
> The accounts receivable for Pastors Brewing Company on March 31, 2016 was $18,000. Firm sales were roughly evenly split between credit and cash sales, with 40 percent of the credit sales collected in the month after the sale and the remainder 2 months af
> Lewis Printing has projected its sales for the first 8 months of 2016 as shown in the table below. Lewis collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the remaining 30 percent 2 months follow
> The Sharpe Corporation’s projected sales for the first 8 months of 2016 are shown in the corresponding table. Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following the sales,
> Within the context of cash management, what are the key elements of total float? Briefly define each element.
> Findlay Instruments produces a complete line of medical instruments used by plastic surgeons and has experienced rapid growth over the past 5 years. In an effort to make more accurate predictions of its financing requirements, Findlay is currently attemp
> The Caraway Seed Company has grown rapidly over the last decade and is trying to forecast the firm’s inventory requirements for the next 5 years. Historical sales and inventories for the last 10 years are found below, along with project
> (Forecasting net income) In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Barker is a small electronics manufacturing compan
> Brigman Industries is evaluating its financing requirements for the coming year. The firm has been in business for 1 year, and the CFO expects that the relationship between firm sales and its operating expenses, current assets, its assets, and current li
> The Blunt Trucking Company needs to expand its fleet by 40 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The
> Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table. The firm has 7,500,000 shares of common stock outstanding. As assistant to the CFO, you are asked to dete
> The board of directors of Kensington Enterprises has decided to pay cash dividends totaling $5 million in the first quarter of the year. This payment represents the initiation of a cash dividend for the first time in company history, and your company CFO
> Describe the types of limitations firms can face from legal restrictions on dividend payments.
> Farm Co, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains after funding 40 percent of its planned capital expenditures. The firm tries to maintain a 40 percent debt and 60 percent equity capital structure and d
> The issue as to whether dividend policy has an effect on share prices raises a question as to whether dividends paid out to stockholders are any more “certain” than the expected future dividends the stockholders hope to receive from retention of firm ear
> Identify the principal motives for holding cash and near-cash assets. Explain the purpose of each motive.
> This Mini Case is available in My Finance Lab. On the first day of your summer internship, you’ve been assigned to work with the chief financial officer (CFO) of San Blas Jewels Inc. Not knowing how well trained you are, the CFO has dec
> Explain the notion of a perfect capital market. Use common-sense language such as you might use in explaining the concept to your grandfather who has never taken a finance class.
> Your firm needs to raise $12 million to finance its capital expenditures for the coming year. The firm earned $4 million last year and will pay out half this amount in dividends. If the firm’s CFO wants to finance new investments using no more than 40 pe
> Care More, Inc. provides in-home medical assistance to the elderly and earned net income of $5 million that it plans to use to repurchase shares of the firm’s common stock, which is currently selling for $50 a share. Care More has 20 million shares of st
> The Dunn Corporation is planning to pay dividends of $500,000. There are 250,000 shares outstanding, and earnings per share are $5. The stock should sell for $50 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchase
> The debt and equity section of the Robson Corporation balance sheet is shown here. The current market price of the common shares is $20. Reconstruct the financial statement assuming that (a) a 15 percent stock dividend is issued and (b) a 2-for-1 stock
> WW International (WWI) recently declared a 3-for-1 stock split for its common shares. Before the split, the firm’s share price had risen to $450 per share and the firm’s CFO felt that this high stock price inhibited trading in the firm’s shares. Prior to
> In the spring of 2016, the CFO of HTPL Distributing Company decided to distribute a stock dividend to its shareholders. Specifically, the CFO proposed that the company pay 0.05 shares of stock to the holders of each share of common stock, such that the h
> Define each of the following dates and place them in their proper order with respect to the payment and receipt of cash dividends: date of record, ex-dividend date, declaration date, and payment date.
> Parker Prints is in negotiation with two of its largest customers to increase the firm’s sales dramatically. The increase will require that Parker expand its production facilities at a cost of $30 million. Parker expects to pay out $8 million in dividend
> A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative
> What is meant by the term cash flow process?
> Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international retail outlets to distribute and service a full line of ing
> Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage in excessive risk taking (that is, investing in very
> Match each of the following definitions to the appropriate terms: TERMS DEFINITIONS Independence theory-with corporate taxes The cost of capital is unaffected by the firm's choice of debt and equity financing. Independence theoryno taxes The cost
> The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $600. The associated variable cost is $450 per unit. Fixed costs for the firm average
> Footwear Inc. manufactures a complete line of men’s and women’s dress shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for this same pair of shoes is $58. Footwear Inc. incurs fixed cos
> Simple Metal Works, Inc. will manufacture and sell 300,000 units next year. Fixed costs will total $350,000, and variable costs will be 65 percent of sales. a. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What sell
> You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday. Sales…………………………………………………………$ 50,439,375 Variable costs……………………………………………... (25,137,000) Revenue bef
> Financial data for three corporations are displayed here. a. Which firm appears to be excessively leveraged? b. Which firm appears to be employing financial leverage to the most appropriate degree? c. What explanation can you provide for the higher p
> Which of the following sources of new earnings volatility demonstrates the effect of business versus financial risk (discuss the rationale for your decisions): a. Amos Gooding Real Estate Company recently constructed a new office building and borrowed 10
