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Questions and Answers of Finance

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
Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 4% and the expected market return is 12%, what is the cost of equity for Stan if the
Stan had to delay the sale of the common stock as outlined in Problem 9 for six months. When he finally did sell the stock, the risk-free rate had fallen to 3%, but the expected return on the market
Compare Trout Inc. with Salmon Enterprises using the balance sheet of Trout and the market data of Salmon for the weights in the weighted average cost of capital.Salmon EnterprisesBonds Outstanding
The CFO of DMI is trying to determine the company€™s WACC. Brad, a promising MBA, says that the company should use book value to assign the components percentage for the WACC. Angela, a
Lewis runs an outdoor adventure company and wants to know what impact a tax change will have on his WACC. Currently Lewis has the following borrowing pattern:Equity: 35% and cost of 14%Preferred
Clark Explorers Inc., an engineering firm has the following capital structure:Using market value and book value (separately, of course), find the adjusted WACC for Clark Explorers at the following
Brawn Blenders has the following incremental cash flows for its new project:Should Brawn Blenders accept or reject this project at an adjusted WACC of 6%, 8%, or10%?
Leeward Sailboats is reviewing the following new boat line:At what adjusted WACCs will the company accept thisproject?
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
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
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.
Hollydale’s will issue an additional 5,000 bonds with the help of an investment banker. The bonds will be semiannual bonds with thirty years to maturity. The coupon rate will be 8% and the par
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
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 itchoose?
This case provides a comprehensive and realistic review of WACC computations and some of the theoretical questions related to the WACC and its uses.1. Compute the yield to maturity and the after-tax
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
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
T.J. Enterprises is trying to determine the weights to be used in estimating their cost of capital. The firmâ€™s current balance sheet and market information regarding the price and number of
New Ideas Inc. currently has 30,000 of its 9% semi-annual coupon bonds outstanding (Par value =1000). The bonds will mature in 15 years and are currently priced at $1,340 per bond. The firm also has
Quick Start Ventures, Incorporated is has received 6 excellent funding proposals, but is only able to fund up to $2,500,000Project A: Cost $700,000, NPV $50,000Project B: Cost $800,000, NPV
What are a company’s main sources of cash for a company? What are a company’s main uses of cash?
What is a line of credit? Why would a bank require a company with a line of credit to have a zero balance for at least sixty days a year in its line of credit?
For the prior three years, sales for National Beverage Company have been $21,962,000 (2007), $23,104,000 (2008), and $24,088,000 (2009). The company uses the prior two year’s average growth rate to
For the prior three years, sales for California Cement Company have been $20,011,000 (2009), $21,167,000 (2010), and $22,923,000 (2011). CCC uses the prior two year’s average growth rate to predict
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
National Beverage Company anticipates the following first-quarter sales for 2010: $1,800,000 (January), $1,600,000 (February), and $2,100,000 (March). It posted the following sales figures for the
California Cement Company anticipates the following fourth-quarter sales for 2009: $1,800,000 (October), $1,600,000 (November), and $2,100,000 (December). It posted the following sales figures for
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
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
Given the income statement below for National Beverage Company for 2009, and the sales forecast from Problem 1, prepare a pro forma income statement for 2010.National Beverage CompanyIncome Statement
Given the income statement below for California Cement Company for 2009, and the sales forecast from Problem 2, prepare a pro forma income statement for CCC for 2010.California Cement CompanyIncome
Next year, National Beverage Company will increase its Plant, Property, and Equipment (PPE) by $4,000,000 with a plant expansion. The inventories will grow by 30%, accounts receivable will grow by
Next year, California Cement Company will increase its Plant, Property, and Equipment (PPE) by $6,000,000 with a plant expansion. The inventories will grow by 80%, accounts receivable will grow by
In this mini-case, both the importance and the techniques of cash flow budgeting are emphasized by focusing on a business with highly seasonal cash flow patterns. The nature of the business is such
You have been asked to forecast sales for the coming year. Being convinced that the compound average growth rate is the best way to forecast growth, you collect data for the prior three years as
The financial manager of Hearty Cereals is in the process of preparing a cash budget for the first quarter of 2010. The firm typically sells 1/3 of its monthly sales on cash terms and the rest on
The Creative Products Corporation produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 15% of the
Given the income statement below for Imperial Products Corporation for 2009, and a 20% growth in sales for 2010, prepare a pro forma income statement.Imperial Products Corp.Income Statement for
The Global Growth Corporation is planning for next year and wants you to help them prepare a Pro Forma Balance Sheet for 2011. Their current Balance Sheet is shown below along with some
Explain the three components of the cash conversion cycle.
What is credit screening? When would it be appropriate for a company to use credit screening? When would it be appropriate for a company to not use credit screening?
What is the float? Why does it take time between when you write a check and when the funds come out of the account?
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.
Kolman Kampers has a production cycle of thirty-five days, a collection cycle of twenty-one days, and payment cycle of fourteen days. What are Kolman’s business operating cycle and cash conversion
Stewart and Company currently has a production cycle of forty days, a collection cycle of twenty days, and a payment cycle of fifteen days. What are Stewart’s current business operating cycle and
Find the average production cycle for Rian Company.Use the below information for solving the question2008 Selected Income Statement Items for Rian CompanyCash Sales ..... $ 298,000Credit Sales ......
For the coming year, Rian Company wants to reduce its average production cycle to thirty days. If the target-ending inventory for 2009 is $61,000, what cost of goods sold will the company need to
What is the average collection cycle for Rian Company?Use the below information for solving the question2008 Selected Income Statement Items for Rian CompanyCash Sales ..... $ 298,000Credit Sales
Rian Company had a target of twenty days for the collection cycle for the year 2008. If total sales had remained at $970,000, how much of the sales revenue would have needed to be cash sales for the
Calculate Rian Company€™s average accounts payable cycle.Use the below information for solving the question2008 Selected Income Statement Items for Rian CompanyCash Sales ..... $
Rian Company had a target of fifteen days for its payment (accounts payable) cycle. What would the ending balance in the accounts payable account need to be to reach this target (holding all other
Myers and Associates, a famous law office in California, bills it clients on the first of each month. Clients pay in the following fashion: 40% pay at the end of the first month, 30% pay at the end
Myers and Associates (from Problem 9) has hired a new accountant, who promises to increase the speed of payment by clients. The new collection times will be 60% at the end of the first month, 25% at
Tennindo Inc. is starting up its new, cost-efficient gaming system console, the yuu. Tennindo currently has 4,000 cash-paying customers and makes a profit of $60 per unit. Tennindo wants to expand
Screendoor Inc. is a credit-screening consulting firm. Screendoor advises Tennindo Inc. (from Problem 11) that it can offer a credit-screening device that is 90% accurate and costs $5.00 per customer
As manager of Fly-by-Night Airlines, you decide to allow customers 90 days to pay their bills. To encourage early payment, though, you allow them to reduce their bills by 1.5% if paid within the
Find the effective annual rate of the following credit terms:a. 2% discount if paid within ten days or net within thirty daysb. 1% discount if paid within thirty days or net within sixty daysc. 0.5%
Tinnendo Inc. believes it will sell 4 million zen-zens, an electronic game, this coming year (note that this figure is for annual sales). The inventory manager plans to order zen-zens forty times
It turns out that the marketing manager in Problem 15 has underestimated the zen-zen market. The zen-zens are a smash, and current estimates are that the company will sell 8 million of them per year.
Farbuck’s Tea Shops is thinking about opening another tea shop. The incremental cash flow for the first five years is as follows:Initial capital cost = $3,500,000Operating cash flow for each year =
Working capital investment is 25% of the anticipated first year sales for Wally’s Waffle House. The first-year sales are currently projected at $4,300,000. The incremental cash flow (not including
This case is designed to offer a comprehensive review of working capital management and policy issues. Greatest emphasis is on the cash conversion cycle and associated computations, but collections
John Gray is really concerned that his companyâ€™s working capital is not being managed efficiently. He decides to take a look at the firmâ€™s operating and cash conversion cycles to see
Mid-West Marine Products currently sells its light-weight boat lifts for $3,500 each. The unit cost of each lift is $2,600. On average, the firm sells 2000 lifts a year on a cash basis. Consumer
Your raw material supplier has been accepting payments on 30 day terms with no interest penalty. Recently, you received an invoice which stated that the supplier would offer terms of 1/10, net 30.
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 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?
What are the three components of the DuPont identity? What do they analyze?
Fill in the missing numbers on the following annual income statements for Barron Pizza Inc.
Construct the Barron Pizza Inc. income statement for the year ending 2011 with the following information:Shares outstanding: 16,740,000Tax rate: 37.5%Interest expense: $6,114Revenue:
Fill in the missing information on the annual Balance Sheets Statements for Barron Pizza Inc.
Construct the Barron Pizza Inc. balance sheet statement forDecember 31, 2011, with the following information:Retained earnings: $43,743Accounts payable: $74,633Accounts receivable: $34,836Common
Below is an abbreviated income statement for Wal-Mart. Predict the net income for the period ending January 31, 2010, by determining the growth rates of sales, COGS, SG&A, and interest expense. Use a
Below is an abbreviated income statement for Starbucks. Predict the net income for the period ending September 30, 2009, by determining the growth rates of sales, COGS, depreciation, and SG&A. Use a
Prepare common-size income statements for Wal-Mart and Starbucks using the January 2009 and September 2008 information provided in Problems 5 and 6.Which Company is doing a better job of getting
Below is the balance sheet information on two companies. Prepare a common-size balance sheet for each company. Review each company's percentage of total assets. Are these companies operating with
Calculate the current ratio, quick ratio, and cash ratio for Tyler Toys for 2010 and 2011. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or
Calculate the debt ratio, times interest earned ratio, and cash coverage ratio for 2010 and 2011 for Tyler Toys. Should any of these ratios or the change in a ratio warrant concern for the managers
Calculate the inventory turnover, days€™ sales in inventory, receivables turnover, days€™ sales in receivables, and total asset turnover ratios for 2010 and 2011 for Tyler Toys.
Calculate the profit margin, return on assets, and return on equity for 2010 and 2011 for Tyler Toys. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler
For the following firms, find the return on equity using the three components of the DuPont identity: operating efficiency, as measured by the profit margin (net income/sales); asset management
Go to a Web site such as Yahoo.com and find the sales, net income, total assets, and total equity of the following five actively traded companies: Microsoft (MSFT), Boeing (BA),Wal-Mart (WMT),
Go to a Web site such as Yahoo.com and find the financial statements of Disney (DIS) and McDonald’s (MCD). Compare these two companies using the following financial ratios: times interest earned,
Go to a Web site such as Yahoo.com and find the financial statements of General Motors (GM) and Ford Motor Company (F). Compare these two companies using the following financial ratios: times
This case requires students to prepare and interpret a Statement of Cash Flows or Sources and Uses, Common Size Statements, and Financial Ratios for a straightforward manufacturing firm which is
Using the income and expense account information for Tri-Mark Products Inc. listed below, construct an income statement for the year ended 31st December, 2011.Shares outstanding: 16,740,000Tax rate:
Construct Tri-Mark Incorporated’s 2011 year-end Balance Sheet using the asset, liability, and equity accounts listed below:Retained Earnings $60,500,000Accounts Payable $57,000,000Accounts
Re-state Tri-Mark Incorporated’s 2011 financial statements as common-size statements and comment on them?
Using the 2011 income statement and balance sheet of Trimark Products Inc., as constructed in problems 1 and 2 above, compute its financial ratios. How is the firm doing relative to its industry in
Based on the ratios calculated in problem 4 above, and in conjunction with the industry averages given, conduct a DuPont analysis on Trimark’s key profitability ratios.
What is the function of the Small Business Administration in regard to business loans? Who receives the guaranty on the loans?
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 role of an investment bank in selling stock?
What is commercial paper? Why does it not need SEC approval?
What is the difference between Chapter 7 and Chapter 11 bankruptcies? Why might Chapter 11 be better for claimants than Chapter 7?
Blue Angel Investors has a success ratio of 10% with its venture funding. Blue Angel requires a rate of return of 20% for its portfolio of lending, and the average length on its loan is five years.
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,
Left Bank has a standing rate of 8% (APR) for all bank loans, and requires monthly payments. What is a monthly payment if a loan is for(a) $100,000 for five years,(b) $250,000 for ten years, or(c)
Right Bank offers EAR loans of 9.38% and requires a monthly payment on all loans. What is the APR for these monthly loans? What is the monthly payment for(a) a loan of $200,000 for six years,(b) a

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