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Questions and Answers of Finance

The Kumar Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction
The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction
The C Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction
If the price of a gallon of regular gasoline is $2.49 and the anticipated rate of inflation in energy prices is such that this cost of gasoline is expected to rise by 5 percent per year, what is the
On June 1, 2003, the average price of a gallon of gasoline in San Francisco, California, was $1.80. Just three years later the price of that same gallon of gas was $3.20. What was the rate of
Carlyle Chemicals is evaluating a new chemical compound used in the manufacture of a wide range of consumer products. The firm is concerned that inflation in the cost of raw materials will have an
After reporting your findings to the company management (Study Problem), the company CFO suggested that they could purchase raw materials in advance for future delivery. This would involve paying for
Madrano’s Wholesale Fruit Company located in McAllen, Texas, is considering the purchase of a new fleet of tractors to be used in the delivery of fruits and vegetables grown in the Rio Grand Valley
The Minot Kit Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a cutter that it purchased used four
The Louisiana Land and Cattle Company (LL&CC) is one of the largest cattle buyers in the country. It has buyers at all the major cattle auctions throughout the U.S. Southeast who buy on the
The owner of the Crusik Distribution Company is evaluating the expected annual sales for a new line of facial care products and estimates that there is a 50 percent chance that the product line will
Peterson Trucking is contemplating the acquisition of Armour Transport, a competing trucking firm, and estimates that during the next year Armour Transport’s flows from the acquisition will vary
Simpkins Trucking of Stillwater, Oklahoma, is also considering the acquisition of Armour Transport. Simpkins has analyzed the annual cash flows for Armour Transport and come up with these estimates
Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into
Management at the Doctors Bone and Joint Clinic is considering whether to purchase a newly developed MRI machine that they feel will provide the basis for better diagnoses of foot and knee problems.
Family Security is considering introducing tiny GPS trackers that can be inserted in the sole of a child’s shoe, which would then allow for the tracking of that child if he or she was ever lost or
Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average
The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $600,000 and it is expected to have a six-year life with annual
a. Calculate the missing information for each of the above projects.b. Note that Projects C and D share the same accounting break-even. If sales are above the break-even point, which project would
Farrington Enterprises runs a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business
Niece Equipment Rentals of Del Valle, Texas, has recently been approached about the prospect of purchasing a large construction crane. The crane rents for $500 an hour but operator, fuel, insurance,
Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If sales increase by 18 percent, by how much will NOI increase? What would happen to NOI if sales decreased by 20 percent?
Brackets, Inc. currently anticipates that if it had a 10 percent increase in sales, net operating profits would increase by 60 percent. If Brackets’ NOI is $14 million, what level of fixed costs
Hurricane Katrina brought unprecedented destruction to New Orleans and the Mississippi Gulf Coast in 2005. Notably, the burgeoning casino gambling industry along the Mississippi coast was virtually
You are considering introducing a new Tex-Mex–Thai fusion restaurant. The initial outlay on this new restaurant is $6 million and the present value of the free cash flows (excluding the initial
Go-Power Batteries has developed a high-voltage nickel-metal hydride battery that can be used to power a hybrid automobile and it can sell the technology immediately to Toyota for $10 million.
Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Because the primary asset of this business is real estate, Templeton’s management
In August of 2009 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) appeared as follows:What weights should Emerson use when computing the
Compute the cost of capital for the firm for the following:a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. Interest payments are $55.00 and
Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:a.
You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation.a. Cost of debt: Because Mindflex’s bonds do not trade very
Compute the cost of capital for the firm for the following:a. Currently bonds with a similar credit rating and maturity as the firm’s outstanding debt are selling to yield 8 percent while the
Salte Corporation is issuing new common stock at a market price of $27. Dividends last year were $1.45 and are expected to grow at an annual rate of 6 percent, forever. What is Salte’s cost of
Falon Corporation is issuing new common stock at a market price of $28. Dividends last year were $1.30 and are expected to grow at an annual rate of 7 percent, forever. What is Falon’s cost of
Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 8 percent annual interest and matures in 15 years. Investors are willing to pay $950 for the bond and Temple faces a tax rate of 35
Belton Distribution Company is issuing a $1,000 par value bond that pays 7 percent annual interest that is paid semiannually and matures in 15 years. Investors are willing to pay $958 for the bond.
The preferred stock of Walter Industries Inc. currently sells for $36 a share and pays $2.50 in dividends annually. What is the firm’s cost of capital for the preferred stock?
The preferred stock of Gator Industries sells for $35 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 500,000 more preferred shares just
The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity at a price of $950 that
Your firm is planning to issue preferred stock. The stock is expected to sell for $98 a share and will have a $100 par value on which the firm will pay a 14 percent dividend. What is the cost of
The common stock for Oxford, Inc. is currently selling for $22.50, and the firm paid a dividend last year of $1.80. The dividends and earnings per share are projected to have an annual growth rate of
The common stock for the Bestsold Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4 percent per year into the indefinite future. If
The common stock for the Hetterbrand Corporation sells for $60, and the last dividend paid was $2.25. Five years ago the firm paid $1.90 per share, and dividends are expected to grow at the same
Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an 8 percent annual coupon rate (with interest paid
Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 10 percent annual coupon rate with interest paid
Use Figure 14.3 to estimate the yield to maturity on a firm that plans to issue 30-year bonds and whose debt is rated BB+. What is the spread to Treasury for the debt issue in basis points?
Tellington Inc. recently discussed issuing a 10-year-maturity bond issue with the firm’s investment banker. The firm was advised that it would have to pay 8 to 9 percent on the bonds. Using Figure,
The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt. If the cost of common equity for the firm is 18 percent, the cost of
In the spring of last year, Tempe Steel learned that the firm would need to reevaluate the company’s weighted average cost of capital following a significant issue of debt. The firm now has
Crypton Electronics has a capital structure consisting of 40 percent common stock and 60 percent debt. A debt issue of $1,000 par value, 6 percent bonds that mature in 15 years and pay annual
The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 20 percent, the cost
Bane Industries has a capital structure consisting of 60 percent common stock and 40 percent debt. The firm’s investment banker has advised the firm that debt issued with a $1,000 par value, 8
As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment
As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market
The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $200 million in the coming year. The firm plans on financing the expansion through the retention of
The Pandora Internet Radio Company was started in 2000 to provide a personalized radio listening experience over your computer or iPhone and is privately owned. However, its success could easily lead
Two-Foot Tools, Inc. sells and distributes work footwear and other clothing for people who work under extreme cold conditions such as in the Arctic or Antarctica. The company recently borrowed $10
Webb Solutions, Inc. has the following financial structure:Accounts payable ..........$ 500,000Short-term debt .......... 250,000Current liabilities .......... $ 750,000Long-term debt ..........
The common stock of Moe’s Restaurant is currently selling for $80 per share has a book value of $60 per share, and there are 1 million shares of common stock outstanding. In addition, the firm
Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai’s balance sheet indicates that the firm has $50 million in total liabilities. Ojai has only $40 million in
Curley’s Fried Chicken Kitchen operates two southern cooking restaurants in St. Louis, Missouri, and has the following financial structure:Accounts payable ........$ 100,000Short-term debt ........
Home Depot, Inc. (HD) operates as a home improvement retailer primarily in the United States, Canada, and Mexico. The balance sheet for Home Depot, Inc. (HD) for February 3, 2008, included the
Lowe’s Companies, Inc. (LOW) and its subsidiaries operate as a home improvement retailer in the United States and Canada. As of February 1, 2008, it operated 1,534 stores in 50 states and Canada.
Dharma Supply has earnings before interest and taxes (EBIT) of $500,000, interest expenses of $300,000, and faces a corporate tax rate of 35 percent.a. What is Dharma Supply’s net income?b. What
Presently, H. Swank, Inc. does not use any financial leverage and has total financing equal to $1 million. It is considering refinancing and issuing $500,000 of debt that pays 5 percent interest and
The income statements for Home Depot, Inc. (HD) spanning the period 2006â€“2008 (just before the housing crash, so these are representative years) are as follows:a. Calculate the times interest
Abbreviated income statements for Loweâ€™s Companies, Inc. (LOW) spanning the period 2006â€“2008 (just before the housing crash, so these are representative years) are as follows:a.
You have developed the following pro forma income statement for your corporation. It represents the most recent year’s operations, which ended yesterday.Sales ..............$45,750,000Variable
Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets
Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the
Home Depot, Inc. (HD) had 1.7 billion shares of common stock outstanding in 2008, whereas Lowe’s Companies, Inc. (LOW) had 1.46 billion shares outstanding. Given both firms’ 2008 earnings levels
Calculate the cash dividend paid per share for each of the firms in the following table using their earnings per share and dividend payoutratio:
The Costco Wholesale Corporation (COST) operates membership warehouses that offer a wide variety of branded and private-label products in no-frills, self-service warehouse facilities. In 2008 the
Paylin Enterprises has declared a $3 dividend for its common stock. On the day before the ex-dividend date the firm’s shares are trading for $28 a share. What do you expect the price of Paylin’s
Elco Electric Corporation has a stock price of $150 per share and is contemplating the payment of a large one-time cash dividend of $40 per share. The underlying motivation for the large payout comes
The stock price of Alpine Inc. is currently $30 a share. If the firm pays a 10 percent stock dividend, what would you expect the ex-dividend stock price to be? What about a 20 percent stock dividend?
Templeton Care Facilities, Inc. is contemplating a stock dividend. The firm’s stock price had risen over the last three years and was trading at $150 per share. The firm’s board of directors felt
Reconsider the problem faced by Templeton Care Facilities, Inc. from Study Problem. If the firm’s board of directors decided to use a stock split rather than a stock dividend, how many new shares
Chaney’s Fatburner Gyms, Inc. operates a chain of exercise facilities throughout the Midwest. The firm appeals to middle-aged men who suffer from obesity problems and want to improve their health
Marshall Pottery Barn is a privately owned importer of Mexican pottery and garden supplies. The firm plans on paying a $1.50 per share dividend on each of its 5,000 shares of common stock. The
The Barryman Drilling Company is planning on repurchasing $1 million worth of the company’s 500,000 shares of stock, which is currently trading at a price of $10 per share. Stan Barryman is the
The Barryman Drilling Company from Study Problem is reconsidering its plan to repurchase $1 million of its common stock and instead plans to pay a $1 million cash dividend, which amounts to $2 per
The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000 available for distribution as a cash dividend immediately
After more than 40 years of operation, the Tyler Brick Mfg. Company has decided it is time to shut down the business. The firm has $125,000 available for distribution as a cash dividend immediately
Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its CFO predicts that the firmâ€™s operating expenses,
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
Tulley Appliances, Inc. projects next year’s sales to be $20 million. Current sales are at $15 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit
Use the following industry average ratios to construct a pro forma balance sheet for Carlos Menza,Inc.
Which of the following accounts would most likely vary directly with the level of firm sales? Discuss eachbriefly.
The balance sheet of the Thompson Trucking Company (TTC) follows:Thompson Trucking Company Balance Sheet, December 31, 2013 ($ millions)TTC had sales for the year ended 12/31/13 of $50 million. The
The most recent balance sheet for the Armadillo Dog Biscuit Co. is shown in the following table. The company is about to embark on an advertising campaign that is expected to raise sales from the
Fishing Charter, Inc. estimates that it invests 30 cents in assets for each dollar of new sales. However, 5 cents in profits are produced by each dollar of additional sales, of which 1 cent can be
Harrison Electronics, Inc. operates a chain of electrical lighting and fixture distribution centers throughout northern Arizona. The firm is anticipating expansion of its sales in the coming year as
In the spring of 2013 the Caswell Publishing Company established a custom publishing business for its business clients. These clients consisted principally of small- to medium-size companies in Round
The Sharpe Corporationâ€™s projected sales for the first eight months of 2014 are as follows:Of Sharpeâ€™s sales, 10 percent is for cash, another 60 percent is collected in the month
Harrison Printing has projected its sales for the first eight months of 2014 as follows:Harrison collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale,
The following table contains current asset and current liability balances for Deere and Company (DE):a. Measure the liquidity of Deere & Co. for each year using the companyâ€™s net working
The following table contains current asset and current liability balances for Microsoft Corporation (MSFT):a. Assume that you are the lead banker for the syndicate of banks that manages Microsoft
Classify each of the investments in assets as either permanent or temporary (explain):a. A seasonal increase in a card shop’s inventory of Valentine cards.b. The acquisition of a new forklift truck
Classify each of the following sources of new financing as spontaneous, temporary, or permanent (explain):a. A manufacturing firm enters into a loan agreement with its bank that calls for annual

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