National Business Machine Co. (NBM) has $4 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 2.5 percent or in 4.3 percent preferred stock. Assume IRS regulations allow the company to exclude from taxable income 70 percent of the dividends received from investing in another company’s stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield, or in preferred stock. The corporate tax rate is 21 percent. Assume the investor has a 31 percent personal income tax rate, which is applied to interest income and preferred stock dividends. Also assume the personal dividend tax rate is 15 percent on common stock dividends. Should the cash be paid today or in three years? Which of the two options generates the highest aftertax income for the shareholders?
> It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce re
> Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:Average number of payments per day ……………………………………………………. 485Average value of payment ………………………………………….………………………… $935Variable l
> A 15-year annuity pays $1,475 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first seven years, and 6 percent compounded monthly thereafter, what is the present value of the annuity
> Frostbite Thermal wear has a zero coupon bond issue outstanding with a face value of $23,000 that matures in one year. The current market value of the firm’s assets is $26,200. The standard deviation of the return on the firm’s assets is 38 percent per y
> A mail-order firm processes 5,300 checks per month. Of these, 60 percent are for $47 and 40 percent are for $79. The $47 checks are delayed two days on average; the $79 checks are delayed three days on average. Assume 30 days in a month.a. What is the av
> Your firm has an average receipt size of $125. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,100 checks per day. The daily interest rate is .016 percent. If the b
> Your neighbor goes to the post office once a month and picks up two checks, one for $10,700 and one for $4,600. The larger check takes four days to clear after it is deposited; the smaller one takes three days. Assume 30 days in a month.a. What is the to
> Purple Feet Wine, Inc., receives an average of $17,500 in checks per day. The delay in clearing is typically three days. The current interest rate is .017 percent per day.a. What is the company’s float?b. What is the most the company should be willing to
> Suppose a firm’s business operations are such that they mirror movements in the economy as a whole very closely; that is, the firm’s asset beta is 1.0. Use the result of Problem 21 to find the equity beta for this firm for debt-equity ratios of 0, 1, 5,
> Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, Rf. Define βA as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define βE to be the beta of the firm’s equity. Use the capital asset pricing
> Each business day, on average, a company writes checks totaling $17,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $
> In a world of corporate taxes only, show that the WACC can be written as WACC = RU × [1 − TC(D/V)]
> Cheap Money Bank offers your firm a discount interest loan at 8.25 percent for up to $25 million and, in addition, requires you to maintain a 5 percent compensating balance against the amount borrowed. What is the effective annual interest rate on this l
> In exchange for a $300 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.85 percent per quarter on any funds actually borrowed.2. Maintain a 4.5 percent compensating balance on any funds actually borrowed.3. Pay a
> If you deposit $4,500 at the end of each of the next 20 years into an account paying 9.7 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?
> What is the value today of $4,400 per year, at a discount rate of 8.3 percent, if the first payment is received 6 years from today and the last payment is received 20 years from today?
> Rework Problem 15 assuming:Problem 15:Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the following year are projected at $180 million. Accounts receivable at the beginning of the year
> Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the following year are projected at $180 million. Accounts receivable at the beginning of the year were $71 million. Wildcat has a 45-da
> A bank offers your firm a revolving credit arrangement for up to $50 million at an interest rate of 1.65 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be
> Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $6,500
> Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that
> No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.5 million in collections per day and requires a $340,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region s
> In a typical month, the Monk Corporation receives 80 checks totaling $113,000. These are delayed four days on average. What is the average daily float? Assume 30 days in a month
> The Torrey Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales
> Sexton Corp. has projected the following sales for the coming year:a. Calculate payments to suppliers assuming that the company places orders during each quarter equal to 30 percent of projected sales for the next quarter. Assume that the company pays im
> Your company will generate $47,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.1 percent, what is the present value of the savings?
> Your firm has an average collection period of 31 days. Current practice is to factor all receivables immediately at a discount of 1.25 percent. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely
> Consider a firm with a contract to sell an asset for $145,000 four years from now. The asset costs $91,700 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make a profit on this asset? At what rate does the firm just
> Consider the following financial statement information for the Newk Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
> Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $365. The company has a 45-day collection period. Calculate cash collections in each of the four q
> Simmons Mineral Operations, Inc. (SMO), currently has 530,000 shares of stock outstanding that sell for $68 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. SMO has a five-for-three stock split?b. SM
> For the company in Problem 2, show how the equity accounts will change if:Problem 2:The owners’ equity accounts for Vidi International are shown here:Common stock ($.50 par value) ……………………………………………………… $ 25,000Capital surplus …………………………………………………………………………
> Cori’s Corp. has an equity value of $13,315. Long-term debt is $8,200. Net working capital, other than cash, is $2,750. Fixed assets are $17,380. How much cash does the company have? If current liabilities are $2,025, what are current assets?
> Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash and the amount:,,,
> Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2018:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale
> The following is the sales budget for Profit, Inc., for the first quarter of 2018:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 percent in the second month after the saleThe accounts rec
> If you put up $41,000 today in exchange for a 5.1 percent, 15-year annuity, what will the annual cash flow be?
> Ginger, Inc., has declared a $5.35 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The company’s stock sells for $74.20 p
> In Problem 8, suppose the company instead decides on a four-for-one stock split. The firm’s 65 cent per-share cash dividend on the new (postsplit) shares represents an increase of 10 percent over last year’s dividend o
> You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30- year mortgage loan for 80 percent of the $3,400,000 purchase price. The monthly payment on this loan will be $16,500. What is the APR on this loan? The EAR?
> The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $53 per share. What effects will the distribution of the stock dividend have on the equity accounts?Common stock ($1 par
> The market value balance sheet for Bobaflex Manufacturing is shown here. The company has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 12,
> In Problem 5, suppose the company has announced it is going to repurchase $18,200 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase
> The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the
> The owners’ equity accounts for Vidi International are shown here:Common stock ($.50 par value) ……………………………………………………… $ 25,000Capital surplus ………………………………………………………………………………. 215,000Retained earnings …………………………………………………………………………… 642,700Total owners’ equi
> The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms d
> Change Corporation expects an EBIT of $31,200 every year forever. The company currently has no debt, and its cost of equity is 11 percent.a. What is the current value of the company?b. Suppose the company can borrow at 6 percent. If the corporate tax rat
> An investment offers $4,350 per year for 15 years, with the first payment occurring one year from now. If the required return is 6 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?
> After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 3 percent or paying the cash out to investors who would invest in the
> As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not n
> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $375,000 per year. Thus, in one year, you receive $1.375 million. In two years, you get $1.75 million, and so on. If the appropriate interest
> The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whe
> Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $17,500 would be spent. Current earnings are $1.89 per share, and the stock currently sells for $64 per share. There are 2,000 shares outstanding. Ignore taxes a
> In Problem 10, suppose you want only $1,500 total in dividends the first year. What will your homemade dividend be in two years?Problem 10:You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In
> You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In two years, the company will pay a liquidating dividend of $57 per share. The required return on the company’s stock is 15 percent. What is
> ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $720,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $360,000 and the interest rate on its debt is 7 perc
> FCOJ, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 5,800 shares outstanding, and the price per share is $57. EBIT is expected to remain at $
> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $55,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. Y
> Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Problem 6:Bellwood Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock
> Bellwood Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt.The interest rate on the debt is 10 percent.a. Ignoring t
> In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Problem 4:Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered
> Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstand
> The present value of the following cash flow stream is $7,500 when discounted at 9 percent annually. What is the value of the missing cash flow? Year …………………………………………………………………….. Cash Flow1 ………………………………………………………………………………. $1,7002 ………………………………………………………………
> Suppose the company in Problem 1 has a market-to-book ratio of 1.0 and the stock price remains constant.Problem 1:Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29
> Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.(a) and (b) in Problem 1:a. Calculate earnings per share (EPS) under each of the three economic s
> Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21 percent. The firm has $126,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered cost of capital is 9.6 percent. What is the value of the firm
> In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Problem 14:Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 per
> Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. If the tax rate is 24 percent, what is the value of the firm? What will the value be
> You have just won the lottery and will receive $1,500,000 in one year. You will receive payments for 30 years, and the payments will increase by 2.7 percent per year. If the appropriate discount rate is 6.8 percent, what is the present value of your winn
> Citee Corp. has no debt but can borrow at 6.1 percent. The firm’s WACC is currently 9.4 percent, and the tax rate is 21 percent.a. What is the company’s cost of equity?b. If the firm converts to 25 percent debt, what will its cost of equity be?c. If the
> Blitz Industries has a debt-equity ratio of 1.25. Its WACC is 8.3 percent, and its cost of debt is 5.1 percent. The corporate tax rate is 21 percent.a. What is the company’s cost of equity capital?b. What is the company’s unlevered cost of equity capital
> In Problem 10, suppose the corporate tax rate is 22 percent. What is EBIT in this case? What is the WACC? Explain.Problem 10:Thrice Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $16.
> Thrice Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $16.3 million and there are no taxes, what is EBIT?
> Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent
> You need a 30-year, fixed-rate mortgage to buy a new home for $235,000. Your mortgage bank will lend you the money at an APR of 5.35 percent for this 360-month loan. However, you can afford monthly payments of only $925, so you offer to pay off any remai
> Wayne, Inc., wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $64 per share, but the book value per share is $19. Net income is currently $11.5 million. The new facility will cost $3
> Nemesis, Inc., has 165,000 shares of stock outstanding. Each share is worth $77, so the company’s market value of equity is $12,705,000. Suppose the firm issues 30,000 new shares at the following prices: $77, $73, and $65. What effect will each of these
> The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $21.39 for each of the 20 million shares sold. The initial offering price was $23 per share, and the stock rose to $28.41 per share in the first few minutes of trading.
> In Problem 5, if the SEC filing fee and associated administrative expenses of the offering are $1.2 million, how many shares need to be sold?Problem 5:The Whistling Straits Corporation needs to raise $60 million to finance its expansion into new markets.
> Given the following information for Bowie Pizza Co., calculate the depreciation expense: Sales = $64,000; Costs = $30,700; Addition to retained earnings = $5,700; Dividends paid = $1,980; Interest expense = $4,400; Tax rate = 22 percent
> The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 4.7 percent, how much will you pay for the policy?
> The Whistling Straits Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $21 per share and the company’
> The Woods Co. and the Spieth Co. have both announced IPOs at $40 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is un
> Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share pric
> Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 22 percent, what is the aftertax cost of the company’s debt?,,,
> Being Human, Inc., recently issued new securities to finance a new TV show. The project cost $35 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued had a flotation cost of 7 percent of the amount raised, whereas
> Sommer, Inc., is considering a project that will result in initial aftertax cash savings of $2.3 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .6
> You want to borrow $115,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $2,250, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?
> The Clifford Corporation has announced a rights offer to raise $35 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $5,000 per page. The stock c
> Cully Company needs to raise $80 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 70 percent common stock,
> Suppose your company needs $24 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by bor
> You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn an annual return of 9.7 percent? How much do you have to save each month if you wait 10 years before you begin your deposits? 20 years?
> An all-equity firm is considering the following projects:The T-bill rate is 4 percent, and the expected return on the market is 11 percent.a. Which projects have a higher expected return than the firm’s 11 percent cost of capital?b. Whi
> Titan Mining Corporation has 7.5 million shares of common stock outstanding, 250,000 shares of 4.2 percent preferred stock outstanding, and 140,000 bonds with a semiannual coupon of 5.1 percent outstanding, par value $1,000 each. The common stock current
> Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $35. At the close of business, the day before the ex-rights day, the compa
> Prahm Corp. wants to raise $4.7 million via a rights offering. The company currently has 530,000 shares of common stock outstanding that sell for $55 per share. Its underwriter has set a subscription price of $30 per share and will charge the company a s
> Show that the value of a right just prior to expiration can be written as:Value of a right=PRO PX = (PRO Ps) / (N + 1)where PRO, PS, and PX stand for the rights-on price, the subscription price, and the ex-rights price, respectively, and N is the number
> Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $63. The current price is $68 per share, and there are 26 million shares outstanding. The rights offer would raise a total of $70 million. What is
> In Problem 10, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the NPV of this investment? Does any dilution take place?Problem 10:The Metallic
> Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,560,000; the new one will cost $1,872,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $
