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essentials managerial finance

Questions and Answers of Essentials Managerial Finance

=+d. Discuss the pros and cons of each dividend policy described in parts a through c.
=+LG 4 P14–8 Alternative dividend policies Steel Enterprises’ earnings per share for the period 2013–2020 are summarized in the table below. Use this information to calculate the dividends per
=+a. For positive earnings only, pay out 40% of earnings.b. Pay $0.75 per share and increase to $0.85 per share when earnings per share exceed $1.60 per share.c. Pay $0.75 per share and pay an extra
=+LG 5 P14–9 Stock dividend: Firm The stockholders’ equity account for Paper Manufacturers is shown below. The firm’s common stock has a current market price of $20 per share.Preferred stock
=+a. How will the stockholders’ equity account change if Paper Manufacturers pays a 5% stock dividend?b. How will the stockholders’ equity account change if Paper Manufacturers pays(1) a 10%, and
=+c. What are the effects of stock dividends on stockholders’ equity?
=+P14–10 Cash versus stock dividend Luxottica, an Italian eyewear company, has the following stockholders’ equity account. The firm’s common stock currently sells for €40 per share.Preferred
=+a. Show the effects on the firm of a cash dividend of €0.1, €0.5, €1.0, and €2.0 per share.b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.
=+c. Compare the effects in parts a andb. What are the most significant differences between the two methods of paying dividends?Personal Finance Problem
=+LG 5 P14–11 Stock dividend: Investor John McKay holds 500 common shares of Smart Life Corporation. The corporation has 50,000 shares outstanding. The current price per share is $25. Smart Life
=+a. Calculate the current earnings per share.b. What is John’s percentage of ownership of Smart Life Corporation before the stock dividend?
=+c. What is John’s percentage of ownership of Smart Life Corporation after the stock dividend?d. What do you expect the market price of the stock to be after the stock dividend?Personal Finance
=+LG 5 P14–12 Stock dividend: Investor Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for
=+a. Determine the firm’s current earnings per share.b. If Sam Waller currently owns 500 shares of the firm’s stock, determine his proportion of ownership currently and under each of the
=+d. For each of the proposed stock dividends, calculate the earnings per share after payment of the stock dividend.
=+e. What is the value of Sam’s holdings under each of the plans? Explain.
=+f. Should Sam have any preference with respect to the proposed stock dividends?Why or why not?
=+P14–13 Stock split: Firm The stockholders’ equity account of Paper Weight Company is as follows:Preferred stock $300,000 Common stock (200,000 shares at $5 par) $1,000,000 Paid-in capital in
=+a. How will the stockholders’ equity account change if Paper Weight Company declares a 2-for-1 stock split?b. How will the stockholders’ equity account change if Paper Weight Company declares a
=+c. Indicate the change, if any, expected if the firm declares a 3-for-1 stock split.d. How will the stockholders’ equity account change if Paper Weight Company declares a 1-for-4 reverse stock
=+e. Discuss your observations based on your answers in parts a to d.Personal Finance Problem
=+LG 6 P14–14 Stock splits Brembo, an Italian automotive braking-systems supplier, announced that it was going to split the stock 5-for-1. Brambilla Fumagalli owns 100 shares of the company, which
=+a. How many shares of Brembo will Brambilla own after the stock split?
=+b. Immediately after the split, what do you expect the value of Brembo to be?
=+c. Compare the total value of Brambilla’s stock holdings before and after the split, given that the price of Brembo stock immediately after the split was €12.8. What do you find?
=+d. Does Brambilla experience a gain or loss on the stock as a result of the 5-for-1 split?
=+e. What is Brambilla’s tax liability from the event?
=+LG 5 LG 6 P14–15 Stock split versus stock dividend Distilled Water Corporation is a company specializing in water purification and distributing bottled water to retailers. The corporation is
=+a. What changes will occur in the stockholders’ equity account from the 3-for-2 stock split?
=+b. What change would you expect in the stock price as a result of the stock split?
=+c. Calculate the maximum cash dividend per share that the firm could pay on common stock before and after the stock split, assuming that legal capital includes all paid-in capital.
=+d. A stockholder owns 200 shares. Based on the maximum dividends payable (see part c), would the stockholder prefer the 3-for-2 stock split?e. Differentiate between stock splits and stock dividends.
=+LG 5 LG 6 P14–16 Stock dividend versus stock split: Firm The board of Diamantis Masoutis S.A. is considering increasing the number of shares, and making the price more appealing to investors. It
=+a. Show the effect on the equity accounts and per-share data of a 30% stock dividend.b. Show the effect on the equity accounts and per-share data of a 2-for-1 stock split.
=+c. Which option is going to accomplish Masoutis’ goal of reducing the current stock price while maintaining a stable level of retained earnings?
=+d. What legal constraints might encourage the firm to choose a stock split over a stock dividend?
=+LG 6 P14–17 Stock Repurchase The following data are available on Volkswagen AG as of December 22, 2017:Earnings available to stockholders €3,631,450,000 Number of shares of common stock
=+a. Calculate the approximate number of shares the firm can repurchase at the €170.20 per share price, using the funds that would have gone to pay the cash dividend.
=+b. What is the EPS after the repurchase? Explain your calculations.
=+c. If the stock still sells at 13.82 times earnings, what will the market price be after the repurchase?
=+d. Compare the pre- and post-repurchase earnings per share.e. Compare the stockholders’ positions under the dividend and repurchase alternatives. What are the tax implications under each
=+LG 6 P14–18 Stock repurchase Heidelberg Cement, one of the world’s largest building materials companies is concerned about preserving the wealth of its stockholders during a cyclical downturn
=+a. How many shares should the company have outstanding in 2018 if its earnings available for common stockholders in that year are €900,000,000 and it pays a dividend of €2.5 given a target
=+b. How many shares would the company have to repurchase to have the level of shares outstanding in part a?
=+One way to lower the market price of a firm’s stock is via a stock split. Rock-O Corporation finds itself in a different situation: Its stock has been selling at relatively low prices. To
=+a. The stockholders’ equity section of the balance sheet before the reverse stock split.
=+b. The stockholders’ equity section of the balance sheet after the reverse stock split.
=+a. Over the relevant ranges noted in the following table, calculate the after-tax cost of each source of financing needed to complete the table.Source of capital Range of new financing After-tax
=+b. (1) Determine the break point associated with common equity. A break point represents the total amount of financing that the firm can raise before it triggers an increase in the cost of a
=+debt, its share in the total is the desired 25%). From Table 3, we see that after the firm raises $700,000 in long-term debt, the cost of this financing source begins to rise. Therefore, the firm
=+(2) Using the break points developed in part (1), determine each of the ranges of total new financing over which the firm’s weighted average cost of capital(WACC) remains constant.
=+3) Calculate the weighted average cost of capital for each range of total new financing. Draw a graph with the WACC on the vertical axis and total money raised on the horizontal axis, and show how
=+c. (1) Sort the investment opportunities described in Table 2 from highest to lowest return, and plot a line on the graph you drew in part (3) above, showing how much money is required to fund the
=+(2) Which, if any, of the available investments would you recommend that the firm accept? Explain your answer.
=+d. (1) Assuming that the specific financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% longterm debt, 10% preferred stock, and
=+e. (1) What type of dividend policy does the firm appear to employ? Does it seem appropriate given the firm’s recent growth in sales and profits and given its current investment opportunities?
=+(2) Would you recommend an alternative dividend policy? Explain. How would this policy affect the investments recommended in part c(2)?
=+15–3 Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital?
=+How do changes in the ratio of current liabilities to total assets affect profitability and risk?
=+15–4 What is the difference between the firm’s operating cycle and its cash conversion cycle?
=+15–7 Why is it important for a firm to minimize the length of its cash conversion cycle?
=+15–10 What factors make managing inventory more difficult for exporters and multinational companies?
=+15–11 What is the role of the five C’s of credit in the credit selection activity?
=+15–13 What are the basic tradeoffs in a tightening of credit standards?
=+15–15 Why do a firm’s regular credit terms typically conform to those of its industry?
=+15–17 What is float, and what are its three components?
=+15–18 What are the firm’s objectives with regard to collection float and to payment float?
=+15–19 What are the three main advantages of cash concentration?
=+In the chapter opener, you learned that U.S. companies had been building up their inventory and receivables balances after the financial crisis while simultaneously borrowing at low interest
=+ST15–1 Cash conversion cycle Hurkin Manufacturing Company pays accounts payable on the 10th day after purchase. The average collection period is 30 days, and the average age of inventory is 40
=+LG 3 ST15–2 EOQ analysis Thompson Paint Company uses 60,000 gallons of pigment per year.The cost of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1 per
=+a. Calculate the EOQ.b. Assuming that it takes 20 days to receive an order once it has been placed, determine the reorder point in terms of gallons of pigment. (Note: Use a 365-day year.)
=+VE15–1 Everdeen Inc. has a 90-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its
=+LG 3 E15–3 Cohen Industrial Products uses 2,100 switch assemblies per month and then reorders another 2,100. The carrying cost per switch assembly is $20 per year, and the fixed order cost is
=+LG 4 E15–4 Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a perunit sale price of
=+LG 5 E15–5 Klein’s Tools is considering offering a discount to speed up the collection of accounts receivable. Currently, the firm has an average collection period of 65 days, annual sales are
=+what minimum average collection period is necessary to approve the discount plan?
=+P15–1 Cash conversion cycle Metal Supplies is concerned about its cash management. On average, the day’s sales in inventory (duration of inventory on shelf) is 90 days.Accounts receivable are
=+a. Calculate Metal Supplies’ operating cycle.b. What is Metal Supplies’ cash conversion cycle?
=+c. Calculate the amount of resources needed to support Metal Supplies’ cash conversion cycle.d. Discuss how Metal Supplies might be able to reduce its cash conversion cycle.
=+LG 2 P15–2 Changing cash conversion cycle The Furniture Corporation turns over its inventory 7 times a year, has an average collection period of 45 days, and has an average payment period of 30
=+a. What is the firm’s operating cycle and cash conversion cycle?b. Calculate the dollar value of inventory held by the firm.
=+c. Suppose the firm could reduce the average age of its inventory from 73 days to 63 days. By how much would it reduce its dollar investment in working capital?
=+LG 2 P15–3 Multiple changes in cash conversion cycle Antonio is an analyst at Barrilla Group.The firm turns over its inventory 5 times each year. It has an average collection period of 50 days
=+a. Calculate the firm’s cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion cycle.b. Find the firm’s cash conversion
=+c. If the firm pays 15% for its resource investment, by how much, if anything, could it increase its annual profit as a result of changes in part b?
=+d. If the annual cost of achieving the profit in part c is €50,000, what action should Antonio recommend to Barrilla? Why?
=+LG 2 P15–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.X MyLab PROBLEMS
=+a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
=+b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that,
=+c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies
=+d. Discuss the profitability–risk tradeoffs associated with the aggressive strategy and those associated with the conservative strategy.
=+LG 3 P15–5 EOQ analysis Enviro Exhaust Company purchases 1,200,000 units per year of a component with a purchase price of $50. The fixed cost is $15 per order, and the carrying cost is 30% of the
=+a. Calculate the EOQ based on the data given.b. Calculate the EOQ if the order cost is zero. What is the implication to the firm if there is a decrease in the order cost?
=+LG 3 P15–6 EOQ, reorder point, and safety stock Outdoor Living Manufacturers uses 1,000 units of a product per year. Its fixed cost is $28 per order, while the carrying cost is $5 per unit per
=+a. Calculate the EOQ and the average inventory.b. How many orders will Outdoor Living Manufacturers place during 1 year?
=+c. When should Outdoor Living Manufacturers place its orders?d. Suppose Outdoor Living Manufacturers does not keep safety stock. Explain the changes, if any, which will occur in (1) order cost, (2)
=+LG 3 P15–7 Marginal costs Alessandro is a successful soccer player. He is considering buying a new Porsche. There are two options available: the new Porsche Panamera and the Porsche Boxter.
=+a. Calculate the total “true” cost for each car over the 4-year ownership period.
=+b. Calculate the total fuel cost for each car over the 4-year ownership period.

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