Ask Question, Ask an Expert


Ask Basic Finance Expert

1) Penn Steelworks is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 30 days. Sales are evenly distributed over its 10 sales regions throughout the United States. Delinquent accounts are no problem. The company has recently undertaken an analysis aimed at improving its cash management procedures. Penn determined that it takes another full day in processing time prior to depositing the checks with a local bank. Annual sales average $4.8 million for each regional office. Reasonable investment opportunities can be found that yield 7 percent per year.

To alleviate the float problem confronting the firm, the use of a lockbox system in each of the 10 regions is being considered. This would reduce mail float by 1.2 days. One day in processing float would also be eliminated, plus a full day in transit float. The lockbox arrangement would cost each region $250 per month.

a) Determine the net cost or savings from use of the proposed cash acceleration technique? Should Penn adopt the system?

2. Far Out Tech (FOT) has a debt ratio of 0.3 and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows:

Project Net Investment IRR

1 $3,000,000 13.5%
2 $1,500,000 18.0%
3 $2,000,000 12.6%
4 $1,600,000 16.0%

FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10 percent a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a floatation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. Any debt over $2 million will carry a 12 percent coupon rate and should be sold at par. If FOT has a marginal tax rate of 40 percent, in which projects should it invest?

3. Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When CMC's founder, who was also its research director and most successful inventor, retired unexpectedly to the South Pacific in late 2008, CMC was left suddenly and permanently with materially lower growth expectations and relatively few attractive new investment opportunities. Unfortunately, there was no way to replace the founder's contributions to the firm. Previously, CMC found it necessary to plow back most of its earnings to finance growth, which averaged 12% per year. Future growth at a 6% rate is considered realistic, but that level would call for an increase in the dividend payout. Further, it now appears that new investment projects with at least the 14% rate of return required by CMC's stockholders (r9 = 14%) would amount to only $800,000 for 2009 compared to a projected $2,000,000 of net income. If the existing 20% dividend payout was continued , retained earnings would be $1.6 million in 2009; but as noted, investments that yield the 14% cost of capital would amount to only $800,000.

The one encouraging point is that the high earnings from existing assets are expected to continue, and net income of $2 million is still expected for 2009. Given the dramatically changed circumstances, CMC's management is reviewing the firm's dividend policy.

a) Assuming that the acceptable 2009 investment projects would be financed entirely by earnings retained during the year and assuming that CMC uses the residual dividend model, find out DPS in 2009.

b) What payout ratio does your answer to Part a imply for 2009?

4. Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting and you must evaluate the new project.

The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plant; Allied owns the building, which is fully depreciated. The required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by $25,000, while accounts payable would increase by $5,000. All of these costs would be incurred at t = 0. The machinery would be depreciated on a straight-line basis.

The project is expected to operate for 4 years, at which time it will terminated. The cash inflows are assumed to begin 1 year after the project is undertaken, or at t=1, and to continue out to t= 4. At the end of the projects life (t=4), the equipment is expected to have a salvage value of $25,000.

Unit sales are expected to total 100,000 units per year, and the expected sales price is $2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 40%, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets.

You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected.

5. Cover's, Inc. (CI) sells its stainless steel products on terms of "2/10, net 40". CI is considering granting credit to retailers with total assets as low as $500,000. Currently the lowest asset limit is $750,000. CI believes sales will increase $7 million from the new credit group but the average collection period for this new group will be 60 days versus the current average collection period of 35 days. If management estimates that 40% of the new customers will take the cash discount but 10% of the new business will be written off as bad-debt loss, should CI lower its credit standards? Assume CI's variable cost ratio is 0.7 and its required pretax rate of return on current assets investment is 15%. CI also estimates that an additional investment in inventory of $850,000 is necessary for the anticipated sales increase.

6. Eraser Dust Company currently has $30 million of gross working capital. They wish to increase this to $40 million. Currently their liabilities and capital consist of:

Current liabilities (short term debt) $20 million
Long Term debt $10 million
Common equity $30 million

They are considering financing the additional working capital in three different ways; interest costs depend on the method of financing chosen. Relevant facts are summarized as:

Policy Increase STD Increase LTD Cost STD Cost LTD

A $2 million $8 million 10.5 percent 12.5 percent
B 5 million 5 million 10.0 percent 12.0 percent
C 8 million 2 million 9.5 percent 11.5 percent

Assume an EBIT of $10 million and a 40% tax rate.

a) Determine the return in equity for each policy.
b) Indicate which policy you would recommend.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M929117

Have any Question? 

Related Questions in Basic Finance

What do you think about the following statement i am going

What do you think about the following statement? "I am going to receive $100 two years from now and $200 three years from now, so I am getting a $300 future value." How could the two cash flows be compared or combined?

Explain the process by which a mortgage- backed security is

Explain the process by which a mortgage- backed security is created. What roles do Ginnie Mae, Fannie Mae, and Freddie Mac play?

Assume the readings on thermometers are normally

Assume the readings on thermometers are normally distributed with a mean of 0 degrees °C and a standard deviation of 1.00 degrees °C. Find the probability that a randomly selected thermometer reads between -1.38 and -0.0 ...

Bridget jones has a contract in which she will receive the

Bridget Jones has a contract in which she will receive the following payments for the next five years: $1,000, $2,000, $3,000, $4,000, and $5,000. She will then receive an annuity of $8,500 a year from the end of the 6th ...

Explain the procedure for conversion of private company in

Explain the procedure for conversion of private company in to public company and also explain provision of new companies act in respect of CSR.

Suppose that you are a trader at a large trading firm you

Suppose that you are a trader at a large trading firm. You have just received a sell order from a mutual fund for 1 million shares of stock that has an average daily volume of 250,000 shares. What alternatives do you hav ...

Use the following results from a test for marijuana use

Use the following results from a test for marijuana use, which is provided by a certain drug testing company. Among 148 subjects with positive test results, there are 20 false positive results; among 153 negative results ...

Davenport corporations last dividend was 700 and the

Davenport Corporation's last dividend was $7.00 and the directors expect to maintain the historic 3 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase ...

Problem 1you just inherited some money and a broker offers

Problem 1 You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the ...

Sitttsl309 amp sitttsl310 source airfares for domestic

SITTTSL309 & SITTTSL310 Source airfares for domestic flights & Construct normal international airfares Learning Outline - Within this resource, you will be covering the following key topics: Interpret domestic airfare in ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate