Project #68955 - Corporate Finance

Corporate Finance The text to answer these Questions are from is Principles Of managerial Finance 13th edition By: Lawerence J. Gitman and Chad J. Zutter P 16- 3 Purchases made on credit are due in full by the end of the billing period. Many firms extend a discount for payment made in the first part of the billing period. The original invoice contains a type of shorthand notation that explains the credit terms that apply. (Note: Assume a 365-day year.) cash discount cash discount period credit period Beginning of credit period 1% 15 days 45 days date of invoice 2% 10 days 30 days end of month 2% 7 days 28 days date of invoice 1% 10 days 60 days end of month a. Write the shorthand expression of credit terms for each of the following (See pg. 605): b. For each of the sets of credit terms in part a, calculate the number of days until full payment is due for invoices dated March 12. c. For each of the sets of credit terms, calculate the cost of giving up the cash discount. d. If the firm’s cost of short-term financing is 8%, what would you recommend in regard to taking the discount or giving it up in each case? P16–5 Borrow or pay cash for an asset Bob and Carol Gibbs are set to move into their first apartment. They visited Furniture R’Us, looking for a dining room table and buffet. Dining room sets are typically one of the more expensive home furnishing items, and the store offers financing arrangements to customers. Bob and Carol have the cash to pay for the furniture, but it would definitely deplete their savings, so they want to look at all their options. The dining room set costs $3,000 and Furniture R’Us offers a financing plan that would allow them to either (1) put 10% down and finance the balance at 4% annual interest over 24 months or (2) receive an immediate $200 cash rebate, thereby paying only $2,800 cash to buy the furniture. Bob and Carol currently earn 5.2% annual interest on their savings. a. Calculate the cash down payment for the loan. b. Calculate the monthly payment on the available loan. (Hint: Treat the current loan as an annuity and solve for the monthly payment.) c. Calculate the initial cash outlay under the cash purchase option. d. Assuming that they can earn a simple interest rate of 5.2% on savings, what will Bob and Carol give up (opportunity cost) over the 2 years if they pay cash? e. What is the cost of the cash alternative at the end of 2 years? f. Should Bob and Carol choose the financing or the cash alternative? P16-18 Accounts receivable as collateral, cost of borrowing Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms including a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%. a. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software? b. What is Scientific Software’s effective annual rate of interest if it borrows $100,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.) P 17-16 Evaluation of the implied price of an attached warrant Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing’s bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.5%-coupon-interest-rate bond pays annual interest and has 10 warrants attached for purchase of common stock. The theoretical value of each warrant is $12.50. The interest rate on an equal-risk straight bond is currently 13%. a. Find the straight value of Stanco Manufacturing’s bond. b. Calculate the implied price of all warrants attached to Stanco’s bond. c. Calculate the implied price of each warrant attached to Stanco’s bond. d. Compare the implied price for each warrant calculated in part c to its theoretical value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stanco’s bond price? Explain. P 18-4 Asset acquisition decision Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining assets would be sold to net $65,000. As a result of acquiring the press, Zarin would experience an increase in cash inflow of $20,000 per year over the next 10 years. The firm has a 14% cost of capital. a. What is the effective or net cost of the large press? b. If this is the only way Zarin can obtain the large press, should the firm go ahead with the merger? Explain your answer. c. If the firm could purchase a press that would provide slightly better quality and $26,000 annual cash inflow for 10 years for a price of $120,000, which alternative would you recommend? Explain your answer. P 11-10 Change in net working capital calculation Samuels Manufacturing is considering the purchase of a new machine to replace one they feel is obsolete. The firm has total current assets of $920,000 and total current liabilities of $640,000. As a result of the proposed replacement, the following changes are anticipated in the levels of the current asset and current liability accounts noted. a. Using the information given, calculate the change, if any, in net working capital that is expected to result from the proposed replacement action. B .Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure. C Would the change in net working capital enter into any of the other cash flow components that make up the relevant cash flows? Explain P 12-10 Mutually exclusive investments and risk Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 6 years. The cost of the first investment is $10,000, and Lara expects equal and consecutive year-end payments of $3,000. The second investment promises equal and consecutive payments of $3,800 with an initial outlay of $12,000 required. The current required return on the first investment is 8.5%, and the second carries a required return of 10.5%. a. What is the net present value of the first investment? b. What is the net present value of the second investment? c. Being mutually exclusive, which investment should Lara choose? Explain. d. Which investment was relatively more risky? Explain. P 13-10 Degree of operating leverage—Graphical Levin Corporation has fixed operating costs of $72,000, variable operating costs of $6.75 per unit, and a selling price of $9.75 per unit. a. Calculate the operating breakeven point in units. b. Compute the degree of operating leverage (DOL) for the following unit sales levels: 25,000, 30,000, 40,000. Use the formula given in the chapter. c. Graph the DOL figures that you computed in part b (on the y axis) against sales levels (on the x axis). d. Compute the degree of operating leverage at 24,000 units; add this point to your graph. e. What principle do your graph and figures illustrate?

Subject Business
Due By (Pacific Time) 05/01/2015 6:00 PM
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