26. With its current leverage, Impi Corporation will have net income next year of 4.5 million. If Impi’s corporate tax rate is 35% and pay 8% interest on its debt, how much additional debt can Impi issue this year and still receive of the benefit of the interest tax shield next year? 

29. Mapor industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of finance distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Marpor’s expected free cash flows with debt will be only $15 million per year. Suppose Marpor’s tax rate is 35%, the risk free rate is 5%, the expected return of the market is 15%, and the beta of Marpor’s free cash flows is 1.10( with or withoutleverage).

1. Estimate Marpor’s value without leverage.
2. Estimate Marpor’s value with the new leverage.

31. Dynron Corporation’s primary business is natural gas transportation using its vast gas pipeline network. Dynron’s assets currently have a market value of 150 million. The firm is exploring the possibility of raising $50 million by selling part of its pipeline network and investing the $50 million in a fibre-optic network to generate revenue by selling high0speed network bandwidth. Whereas this new investment is expected to increase profit , it will also substantially increase Dynron’s risk. If Dynron is levered, would this investment be more or less attractive to equity holders than if Dynron had no debt?

32.Consider an firm whose only asset is a plot of vacant land and whose only liability is debt of 15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternatively, the firm can develop the land for an upfront cost of $20 million. The developed land will be worth $35 million in one year. Suppose the risk- free interest rate is 10%, all cash flows are risk free, and there are no taxes.

1. If the firm chooses not to develop the land, what is the value of the firm’s equity today? What is the value of the debt today?
2. What is the NPV of developing the land?
3. Suppose the firm raises $20 million from equity holders to develop the land. If the firm develops the land, what is the value of the firm’s equity today? What is the value of the firm’s debt today?
4. Given your answer to part©, would equity holders be willing to provide the $20 million needed to develop the land?

1. ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 3, 2006. It takes three business days after a purchase for the new owner of a share of stock to be registered.

1. What was the date of the ex-dividend day?
2. When was the last day an investor could have purchased ABC stock and still received the dividend payment?

1. ECB Co. has 1 million shares outstanding selling at $20 per share. It plans to repurchase 100,000 shares at the market price. What will its market capitalization be fter the repurchase? What will its stock price be?

7. Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one -time dividend.

1. What si the ex-dividend price of a share in a perfect capital market?
2. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete?
3. In a perfect capital market, which policy in part(a) or (b) makes investors in the firm better off?

9. The HNH Corporation will pay a constant dividend of $ 2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in HNH stock is 12%.

1. What is the price of a share of HNH stock?
2. Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a shre of HNH stock now?

11. Clovix Corporation has $50 million in cash. 10 million shares outstanding, and a current share price of $30. Clovis is deciding whether to use the $50 million to pay an immediate special dividend of $5 per share, or to retain and invest it at the risk-free rate of 10% and use the 5 million in interest earned to increase its regular annual dividend of $0.50 per share. Assume perfect capital markets.

1. Suppose Clovis pays the special dividend. How can a shareholder who would prefer an increase in the regular create it on her own?
2. Suppose Clovis increase its regular dividend. How can a shareholder who would prefer the special dividend create it on her own

22. FCF Co. has 20,000 shares outstanding and a total market value of $1 million, $300,000 of which is debt and the other $700,000 is equity. It is planning a 10% stock dividend.

1. What is the stock price before the dividend, and what will it be after the dividend?
2. If and investor owns 1000 shares before the dividend, what will the total value of her investment in FCF be before and after the dividend?

25. After the market close on May 11,2001, Adaptec, Inc. distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received a 0.1646 share of Roxio stock per share of Adaptec stock owned. At the time, Adaptec a 0.1646 share of Roxio stock per share of Adaptec stock owned. At the time, Adaptec stock was trading at a price of $10.55 per share(cum-dividend),and Roxio’s share price was $14.23 per share. In a perfect market, what would Adaptec’s ex dividend share price be after this transaction?

1. Your company has sales of $100,000 this year and goods sold of $72,000. You forecast sales to increase to $110,000 next year. Using the percent of sales method, forecast

next year’s cost of goods sold.

1. For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 10%. Your beginning stockholder’s equity is $300,000 and your beginning total liabilities are $120,000. Your non-debt liabilities, such as accounts payable, are forecasted to increase by $10,000. What is your net new financing needed for next year?

Income Statement		Balance Sheet
Sales	200,000	(Assets)
Costs Except Depreciation	(100,000)	Cash and Equivalents	15,000
EBITDA	100,000	A/R	2,000
Depreciation	(6,000)	Inventories	4,000
EBIT	94,000	Total Current Assets	21,000
Interest Expense(net)	(400)	PPE	10,000
Pre-tax Income	(32,760)	Total Assets	31,000
Net Income	60,840
		(Liabilities and Equity
		A/P	1,500
		Dept	4,000
		Total Liabilities.	5,500
		Stockholder’s equity	25,500
		Total Liabilities and Equity	31,000

1. Jim’s Espresso expects sales to grow by 10% next year. Using the percent of sales method, forecast the following:
2. Casts
3. Depreciation
4. Net income
5. Cash
6. A/R
7. Inventory
8. PPE

5.Assume that Jim’s Espresso pay out 90% of its net income. Use the prevent of sales method to forecast the following:

1. Stockholder’s equity
2. A/P

Figures in $ millions
Net Sales	186.7	Assets
Costs Expect Depreciation	-175.1	Cash
EBITDA	11.6	A/R	-18.5
Depreciation and Amortization	-1.2	Inventories	15.3
EBIT	10.4	Total Current Assets	557
Interest income (Expense)	-7.7
Pre-tax income	2.7	Net PPE	113.1
Taxes	-0.7	Total Assets	170.1
Net Income	2.0
		Liabilities and Equity
		A/P	34.7
		Long-term Debt	113.2
		Total Liabilities	147.9
		Total Stockholders’ Equity	22.2
		Total Liabilities and Equity	170.1

8. Global Corp. expects sales to grow by 8% next year. Using the percent sales method, forecast the following:

1. Costs
2. Depreciation
3. Net income
4. Cash
5. A/R
6. Inventory
7. PPE
8. A/P

Assignment 10

1.Home Boats has accounts payable days of 20, inventory days of 50, and accounts receivable days of 30. What is its operating cycle?

3.The following finance information is for Westerly Industries:

Sales	$100,000
Cost of goods sold	$80,000
A/R	$30,000
Inventory	$15,000
A/P	$40,000

What is Westerly’s cash conversion cycle?

4.Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that plan will require an initial investment of $2 million in net working capital today. The plant will last 10 years, at which point the full investment in net working capital will be recovered. Given an annual discount rate of 6%, what is the net present value of this working capital investment?

11. The Manana Corporation ha d sales of 60 million this year. Its accounts receivable balance averaged $ 2 million, How ling on average, does I take the firm to collect on its sales?

12.The Mighty Power Tool company has the following accounts on its books:

Customer	Amounts Owed	Age(days)
ABC	50,000	35
DEF	35,000	5
GHI	15,000	10
KLM	75,000	22
NOP	42,000	40
QRS	18,000	12
TUV	82,000	53
WXY	36,000	90

The firm extends credit on terms of 1-15,net 30.Develop an aging schedule using 15-day increments through 60 days , and then indicate any accounts that have been outstanding for more than 60 days.

17.Happy Valley Homecare Suppliers Inc(HVHS) had $ 20million in sales this past year, Its cost of goods sold was $8millon, and its average inventory balance was $2,000,000.

1. Calculate the average number of days inventory outstanding ratios for HVHS.
2. The average days of inventory in the industry is 73 days. By how much would HVHS reduce its investment in inventory If could improve its inventory days to meet the industry average?

1.Sailboats Etc, is a retail company specializing in sailboats and other sailing- related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels.

				Months
	0	1	2	3	4	5	6
Net Income		10	12	15	25	30	18
Depreciation		2	3	3	4	5	4
Capital Expenditures		1	0	0	1	0	0
Level of Working Capital
A/R	2	3	4	5	7	10	6
Inventory	3	2	4	5	5	4	2
A/P	2	2	2	3	2	2	2

1. During which month are the firm’s seasonal working capital need s the greatest?
2. When does the firm have surplus cash?

	Quarter
	1	2	3	4
Cash	100	100	100	100
A/R	200	100	100	600
Inventory	200	500	900	50
A/P	100	100	100	100

3.What are the permanent working capitals of your company? What are the temporary needs

5.If you hold only $100 in cash at any time, What is your maximum short-term borrowing and when?

9. Your firm has a committed line of credit with your bank with a commitment fee of 0.5%( EAR) and an interest rate of 6% (EAR). The total line is $500,000 and you borrowed $300,000 at the beginning of the year. If you repay the $300,000 at the end of the year, what is your total cost, in dollars of the interest and commitment fee? What is this cost as a percentage of the amount you borrowed?

10. Your firm’s bank has offered you two options for short-term financing in the amount of $400,000. The first option is a committed line of credit with a commitment fee of 0.5%(EAR) and an interest rate of 8% (APR) compounded quarterly). The second option is a loan with a 5% compensating balance and an interest rate of 8.6%(APR compounded quarterly). If you need $380,000 in financing at the beginning of the year and plan to pay it back at the end of the year, which option has a lower effective annual rate of interest?

14. The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?

19. The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR annual compounding) to be paid at the end of the year. The warehouse charges 1 % of the dace value of the loan, payable at the beginning of the year. What is the effective annual rate of this warehousing arrangement?