1. Shares in Raven Products are selling for $48 per share. There are 1 million shares outstanding. What
will be the share price in each of the following situations? Ignore taxes. (Do not round intermediate
calculations.)
Share Price
a.
The stock splits six for five.
$ 40
b.
The company pays a 33% stock dividend.
40
c.
The company repurchases 100,000 shares.
48
Explanation:
a. The stock price will fall to $48 × 5/6 = $40.
b. The stock price will fall by a factor of 1.20 to $48/1.20 = $40.
c. A share repurchase will have no effect on price per share.
2. The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $0.80 per share, and there are 22,000
shares of stock outstanding. The market-value balance sheet for Payout is shown on the following table. Ignore taxes.
Assets
Cash
Fixed assets
Liabilities and Equity
$
200,000
Equity
$1,210,000
1,010,000
a. What price is Payout stock selling for today?
Price
$ 55
b. What price will it sell for tomorrow? (Round your answer to 2 decimal places.)
Price
$ 54.20
Explanation:
a. P = $1,210,000/22,000 = $55
b.The price tomorrow will be $0.80 per share lower, or $54.20.
3. Good Values, Inc., is all-equity-financed. The total market value of the firm currently is $150,000, and there are
3,000 shares outstanding. Good Values plans to repurchase $15,000 worth of stock. Ignore taxes.
a. What will be the stock price before and after the repurchase?
Stock Price
Before
$ 50
After
50
per share
per share
Explanation:
a.
The repurchase will have no tax implications. Because the repurchase does not create a tax obligation for the shareholders, the
value of the firm today is the value of the firm’s assets ($150,000) divided by 3,000 shares, or $50 per share. The firm will
repurchase 300 shares for $15,000. After the repurchase, the stock will sell at a price of $135,000/2,700 = $50 per share.
The price is the same as before the repurchase.
4. Investors require an after-tax rate of return of 10% on their stock investments. Assume that the tax rate on
dividends is 30% while capital gains escape taxation. A firm will pay a $5 per share dividend 1 year from now, after
which it is expected to sell at a price of $40.
a.
Find the current price of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Current price
b.
$ 39.86
Find the expected before-tax rate of return for a 1-year holding period. (Do not round intermediate calculations.
Round your answers to 2 decimal places.)
Before-tax rate of return
c.
Price
d-1.
Now suppose that the dividend will be $6 per share. If the expected after-tax rate of return is still 10%, and investors
still expect the stock to sell at $40 in 1 year, at what price must the stock now sell?(Do not round intermediate
calculations. Round your answer to 2 decimal places.)
$ 40.56
What is the before-tax rate of return? (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Before-tax rate of return
d-2.
13.79 %
14.48%
Why is it now higher than in part (b)?
The before-tax return is higher because the larger
greater
dividend creates a
tax burden.
5. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.40; profit
margin = 5%; payout ratio = 25%; equity/assets = 0.20. (Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Sustainable growth rate
9.00
%
Internal growth rate
1.80
%
Explanation:
Sustainable growth rate = plowback ratio × ROE = 0.75 × (2.40 × 5%) = 9.00%
equity
Internal growth rate = plowback ratio × ROE ×
assets
= 0.75 × (2.40 × 5%) × 0.20 = 1.80%
6.
Here are the abbreviated financial statements for Planners Peanuts:
INCOME STATEMENT, 2012
Sales
$ 4,500
Cost
3,500
Net income
$ 1,000
BALANCE SHEET, YEAR-END
Assets
2011
2012
$ 6,500
$ 11,000
Debt
Equity
Total
$ 6,500
$ 11,000
Total
2011
2012
$ 833
$ 1,000
5,667
10,000
$ 6,500
$ 11,000
If sales increase by 10% in 2013 and the company uses a strict percentage of sales planning model (meaning that all items on
the income and balance sheet also increase by 10%).
The balancing item is dividends
. If net income next year is $1,100
and equity increases by $1,000,
then dividends
must be $100
.
7. Here are the abbreviated financial statements for Planners Peanuts:
Explanation:
In 2013, assets will increase by 10% of $11,000, or $1,100. Therefore, debt and equity each must increase by 10%. Equity will
increase to $11,000, and debt will increase to $1,100. Net income will increase to $1,100.
INCOME STATEMENT, 2012
Sales
$ 2,500
Cost
1,900
Net income
$ 600
BALANCE SHEET, YEAR-END
Assets
2011
2012
$ 2,500
$ 3,000
Debt
2011
2012
$ 853
$
Equity
Total
$ 2,500
$ 3,000
1,647
Total
1,000
2,000
$ 2,500
$
3,000
8. If the dividend payout ratio is fixed at 50%, calculate the required total external financing for growth rates in 2013
of 15%, 20%, and 25%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
External
Financing
15%
105.00
20%
240.00
25%
375.00
Explanation:
15%
Growth in assets
$
Less: Retained earnings
External financing
450.00
20%
$
345.00
$
105.00
600.00
25%
$
360.00
$
240.00
750.00
375.00
$
375.00
Net income = $600 × (1 + growth rate)
Retained earnings = net income × 0.5
9. ABC company financial manager believes that sales in 2012 could rise by as much as 20% or by as little as 10%.
a.
Recalculate the first-stage pro forma financial statements under these two assumptions and calculate the required external
financing. (All figures are in thousands.) (Enter your answers in thousands.)
Base Case
20% Growth
10% Growth
INCOME STATEMENT
Revenue
$ 6,500
$
7,800
$
7,150
Cost of goods sold
5,850
7,020
6,435
EBIT
650
780
715
Interest
130
130
130
Earnings before taxes
520
650
585
State and federal tax
208
260
234
Net income
312
390
351
Dividends
208
260
234
Retained earnings
$ 104
$
130
$
117
BALANCE SHEET
Assets
Net working capital
$ 650
Fixed assets
2,600
Total assets
$ 3,250
$
780
$
3,120
$
3,900
715
2,860
$
3,575
Liabilities and shareholders' equity
Long-term debt
Shareholders' equity
Total liabilities and shareholders' equity
Required external financing
b.
$ 1,300
1,300
1,300
1,950
2,080
2,067
$ 3,250
$
$
3,380
520
$
$
3,367
208
Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to
retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.)
BALANCE SHEET
Base
Case
Assets
20% Growth
5% Growth
$ 650
Net working capital
2,600
$
780
$
3,120
Fixed assets
Total assets
$ 3,250
$
3,900
715
2,860
$
3,575
Liabilities and shareholders' equity
Long-term debt
$ 1,300
1,820
1,508
1,950
2,080
2,067
Shareholders' equity
Total liabilities and shareholders' equity
$ 3,250
$
3,900
$
3,575
Explanation:
a.
Shareholders' equity increases by earnings retained in 2012
Required external financing = increase in net assets − retained earnings.
b.
Long-term debt, the balancing item, increases by required external financing.
10. Plank’s Plants had net income of $10,000 on sales of $100,000 last year. The firm paid a dividend of $400. Total
assets were $600,000, of which $300,000 was financed by debt.
a.
What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Round your answer to 1 decimal
place.)
Sustainable growth rate
b.
%
If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate
calculations.)
New debt
c.
3.2 ± 1%
$
9,600 ± 0.1%
What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round
intermediate calculations. Round your answer to 1 decimal place.)
1.6 ± 1%
Maximum growth rate
%
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual
calculations.
a.
9,600
g = plowback ratio
10,000
× ROE =
×
10,000
= 0.032 = 3.2%
300,000
b.
If g = 0.032, assets will grow by 0.032 × $600,000 = $19,200.
If the debt-equity ratio is constant, then debt must grow by 0.50 × $19,200 = $9,600.
Equity grows by $9,600. Thus, the firm will issue $9,600 in new debt.
c.
If no debt is issued, the maximum rate of growth is constrained by profits. If the firm retains all earnings (i.e., is willing to
reduce dividends to zero), assets will grow by $10,000, which provides a growth rate of 2%. If it maintains the dividend
payout ratio of 0.96, then the maximum growth rate would be:
equity
Plowback ratio
× ROE ×
9,600
=
assets
10,000
×
10,000
× 0.5
= 0.0160
= 1.6%
300,000
1. A firm’s profit margin is 24%, and its asset turnover ratio is 0.5. It has no debt, has net income of $15 per share,
and pays dividends of $6 per share. What is the sustainable growth rate? (Do not round intermediate calculations.
Round your answer to 1 decimal place.)
Sustainable growth rate
7.2 ± 1%
%
Explanation:
g = plowback ratio × ROE = plowback ratio × profit margin × asset turnover
= 0.60 × 0.24 × 0.5 = 0.072 = 7.2%
Income statement data:
Sales
$ 6,900
Cost of goods sold
6,100
Balance sheet data:
Inventory
$ 680
Accounts receivable
300
Accounts payable
460
2. Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the above
firm: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 1 decimal place.)
a.
Accounts receivable period
15.8 days
b.
Accounts payable period
27.5 days
c.
Inventory period
40.7 days
d.
Cash conversion cycle
29.0 days
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual
calculations.
300
a. Accounts receivable period =
= 15.9 days
6,900/365
460
b. Accounts payable period =
= 27.5 days
6,100/365
680
c. Inventory period =
= 40.7 days
6,100/365
d. Cash conversion cycle = 15.9 + 40.7 − 27.5 = 29.0 days
3. A firm sells its $1,130,000 receivables to a factor for $1,073,500. The average collection period is 1 month. What is the
effective annual rate on this arrangement? (Round your intermediate calculations to 4 decimal places. Round your answer to 2
decimal places.)
Effective annual rate 85.84 %
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual
calculations.
The discount is 5% but the firm is collecting 1 month earlier than it would otherwise. The implicit monthly interest rate (r) is
defined by:
$1,073,500 × (1 + r) = $1,130,000 ==> r = 0.0526
Therefore, the effective annual rate is determined as follows:
1 + rEAR = (1 + rmonthly)12 = (1.0526)12 = 1.8500 ==> rEAR = 0.8500 = 85.00%
4. A firm is considering several policy changes to increase sales. It will increase the variety of goods it keeps in inventory, but
this will increase inventory by $11,000. It will offer more liberal sales terms, but this will result in average receivables increasing
to $66,000. These actions are expected to increase sales to $810,000 per year, and cost of goods will remain at 70% of sales.
Because of the firm’s increased purchases for its own production needs, average payables will increase to $36,000. What effect
will these changes have on the firm’s cash conversion cycle? (Use 365 days in a year. Do not round intermediate calculations.
Round your answer to 2 decimal places.)
The cash conversion cycle will increase by 13.65 .
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual
calculations.
The additional sales of $810,000 increase costs of goods by $810,000 × 0.70, or $567,000.
The inventory period will change by $11,000/($567,000/365) = 7.08.
The receivables period will change by $66,000/($810,000/365) = 29.74.
The accounts payable period will change by $36,000/($567,000/365) = 23.17.
Δ Cash conversion cycle = (Δ inventory period + Δ receivables period) − Δ accounts payable period
= (7.08 + 29.74) − 23.17 = 13.65
The cash conversion cycle will increase by 13.65 as the result of these policy changes to increase sales.
5.
Net income
$1,700
Dividends
900
Additions to inventory
140
Additions to receivables
170
Depreciation
110
Reduction in payables
570
Net issuance of long-term debt 320
Sale of fixed assets
80
Sources
Issued long-term debt
$ 320
Sale of fixed assets
80
Cash from operations:
Net income
1,700
Total sources
$ 2,210
Uses
Additions to inventory
$ 140
Increase in accounts receivable 170
Decrease in accounts payable
570
Payment of dividends
900
Total uses
$ 1,780
6. Products places orders for goods equal to 75% of its sales forecast in the next quarter. What will be orders in each quarter of
the year if the sales forecasts for the next five quarters are as follows:
Quarter in Coming Year
First
Sales forecast
Quarter
$432
Second
$420
Third
$396
Following Year
Fourth
$444
First Quarter
$444
Order
1
$ 315
2
297
3
333
4
333
Explanation:
The order is 0.75 times the following quarter's sales forecast:
Quarter
Order
1
0.75 × $420 = $315
2
0.75 × $396 = $297
3
0.75 × $444 = $333
4
0.75 × $444 = $333
6. Paymore Products places orders for goods equal to 80% of its sales forecast in the next quarter. The sales
forecasts for the next five quarters are as follows:
Quarter in Coming Year
First
Sales forecast
$510
Second
$500
Third
$470
Following Year
Fourth
$520
First Quarter
$520
Calculate Paymore’s cash payments to its suppliers under the assumption that the firm pays for its goods with a 1-month delay.
Therefore, on average, three-fourths of purchases are paid for in the quarter that they are purchased, and one-fourth are paid in
the following quarter. (Do not round intermediate calculations.)
Quarter
1
Payment
402 ± 1%
$
2
382 ± 1%
3
406 ± 1%
4
416 ± 1%
Explanation:
The order is 0.80 times the following quarter's sales forecast:
Quarter
Order
1
0.80 × $500 = $400
2
0.80 × $470 = $376
3
0.80 × $520 = $416
4
0.80 × $520 = $416
Since the first quarter's sales forecast was $510, orders placed during the fourth quarter of the preceding year would have been
0.80 × $510 = $408.
Quarter
Payment*
1
(1/4 × $408) + (3/4 × $400) = $402
2
(1/4 × $400) + (3/4 × $376) = $382
3
(1/4 × $376) + (3/4 × $416) = $406
4
(1/4 × $416) + (3/4 × $416) = $416
*Payment = [(1/4) × previous period order] + [(3/4) × current period order].
7. Paymore Products places orders for goods equal to 80% of its sales forecast in the next quarter. The sales forecasts for the next
five quarters are as follows:
Quarter in Coming Year
First
Sales forecast
$550
Second
$540
Third
$520
Following Year
Fourth
$560
First Quarter
$560
Now suppose that Paymore’s customers pay their bills with a 2-month delay. What is the forecast for Paymore’s cash receipts in
each quarter of the coming year? Therefore, on average, two-fourths of sales are collected in the quarter that they are sold, and
two-fourths are collected in the following quarter. Assume that sales in the last quarter of the previous year were $520. (Do not
round intermediate calculations. Round your answer to the nearest dollar amount.)
Quarter
1
Collections
535 ± 1%
$
2
545 ± 1%
3
530 ± 1%
4
540 ± 1%
Explanation:
Quarter
Collections*
1
(2/4 × $520) + (2/4 × $550) = $535
2
(2/4 × $550) + (2/4 × $540) = $545
3
(2/4 × $540) + (2/4 × $520) = $530
4
(2/4 × $520) + (2/4 × $560) = $540
*Collections = [(2/4) × previous period sales] + [(2/4) × current period sales].
8. Paymore Products places orders for goods equal to 75% of its sales forecast in the next quarter. The sales forecasts for the next
five quarters are as follows:
Quarter in Coming Year
First
Sales forecast
$432
Second
$420
Third
$396
Following Year
Fourth
First Quarter
$444
$444
The firm pays for its goods with a 1-month delay. Therefore, on average, two-thirds of purchases are paid for in the quarter that
they are purchased, and one-third are paid in the following quarter.
Paymore’s customers pay their bills with a 2-month delay. Therefore, on average, one-third of sales are collected in the quarter
that they are sold, and two-thirds are collected in the following quarter. Assume that sales in the last quarter of the previous year
were $396.
Paymore’s labor and administrative expenses are $73 per quarter and that interest on long-term debt is $46 per quarter, work out
the net cash inflow for Paymore for the coming year. (Negative amounts should be indicated by a minus sign. Do not round
intermediate calculations.)
Quarter
First
Second
Third
Fourth
Sources of cash
Collections on accounts
receivable
Uses of cash
$
408
$
428
$
412
$
412
Payments of accounts payable
318
303
321
333
Labor & administrative expenses
73
73
73
73
Interest on long-term debt
46
46
46
46
Total uses of cash
Net cash inflow
$
$
437
-29
$
$
422
6
$
$
440
-28
$
$
452
-40
Explanation:
The order is 0.75 times the following quarter's sales forecast:
Quarter
Order
1
0.75 × $420 = $315
2
0.75 × $396 = $297
3
0.75 × $444 = $333
4
0.75 × $444 = $333
Since the first quarter's sales forecast was $432, orders placed during the fourth quarter of the preceding year would have been
0.75 × $432 = $324.
Quarter
Payment*
1
(1/3 × $324) + (2/3 × $315) = $318
2
(1/3 × $315) + (2/3 × $297) = $303
3
(1/3 × $297) + (2/3 × $333) = $321
4
(1/3 × $333) + (2/3 × $333) = $333
*Payment = [(1/3) × previous period order] + [(2/3) × current period order].
Quarter
Collections*
1
(2/3 × $396) + (1/3 × $432) = $408
2
(2/3 × $432) + (1/3 × $420) = $428
3
(2/3 × $420) + (1/3 × $396) = $412
4
(2/3 × $396) + (1/3 × $444) = $412
*Collections = [(2/3) × previous period sales] + [(1/3) × current period sales].
9. Paymore Products places orders for goods equal to 80% of its sales forecast in the next quarter. The sales forecasts for the next
five quarters are as follows:
Quarter in Coming Year
First
Sales forecast
$510
Second
$500
Third
$470
Following Year
Fourth
$520
First Quarter
$520
The firm pays for its goods with a 1-month delay. Therefore, on average, three-fourths of purchases are paid for in the quarter
that they are purchased, and one-fourth are paid in the following quarter.
Paymore’s customers pay their bills with a 2-month delay. Therefore, on average, two-fourths of sales are collected in the quarter
that they are sold, and two-fourths are collected in the following quarter. Assume that sales in the last quarter of the previous year
were $470.
Paymore’s labor and administrative expenses are $70 per quarter and that interest on long-term debt is $42 per quarter.
Suppose that Paymore’s cash balance at the start of the first quarter is $40 and its minimum acceptable cash balance is $50. Work
out the short-term financing requirements for the firm in the coming year. The firm pays no dividends. (Negative amounts should
be indicated by a minus sign. Do not round intermediate calculations.)
Quarter
First
Second
Third
Fourth
Sources of cash
Cash at start of period
$
40
16
$
$
27
Net cash inflow
-24
11
-33
Cash at end of period
16
27
-6
Minimum operating cash balance
50
50
50
Cumulative financing required
$
34
$
23
$
56
$
-6
-33
$
-39
50
$
89
Explanation:
The order is 0.80 times the following quarter's sales forecast:
Quarter
Order
0.80 × $500 = $400
2
0.80 × $470 = $376
3
0.80 × $520 = $416
4
0.80 × $520 = $416
Since the first quarter's sales forecast was $510, orders placed during the fourth quarter of the preceding year would have been
0.80 × $510 = $408.
Quarter
Payment*
1
(1/4 × $408) + (3/4 × $400) = $402
2
(1/4 × $400) + (3/4 × $376) = $382
3
(1/4 × $376) + (3/4 × $416) = $406
4
(1/4 × $416) + (3/4 × $416) = $416
*Payment = [(1/4) × previous period order] + [(3/4) × current period order].
Quarter
Collections*
1
(2/4 × $470) + (2/4 × $510) = $490
2
(2/4 × $510) + (2/4 × $500) = $505
3
(2/4 × $500) + (2/4 × $470) = $485
4
(2/4 × $470) + (2/4 × $520) = $495
*Collections = [(2/4) × previous period sales] + [(2/4) × current period sales].
Quarter
First
Second
Third
Fourth
$
$
$
$
Sources of cash
Collections on accounts receivable
490
505
485
495
Uses of cash
Payments of accounts payable
402
382
406
416
Labor & administrative expenses
70
70
70
70
Interest on long-term debt
42
42
42
42
Total uses of cash
Net cash inflow
$
514
$
494
$
518
$
528
$
−24
$
+11
$
−33
$
−33
Recalculate Dynamic Mattress’s financing plan assuming that the firm wishes to mainta10. in a minimum cash balance of $10
million instead of $5 million. Assume the firm can convince the bank to extend its line of credit to $50 million. (Negative
amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round
intermediate calculations. Enter your answers in millions rounded to 2 decimal places.)
Quarter
First
Second
Third
Fourth
A. Cash requirements
Cash required for operations
55.00 ± .01
$
$ 20.00
$ −24.00
$ −32.00
Interest on bank loan
0
1.00 ± .01
1.00 ± .01
0.98 ± .01
Interest on stretched payables
0
0
1.05 ± .01
0
Total cash required
55.00 ± .01
$
21.00 ± .01
$
-21.95 ± .01
$
-31.02 ± .01
$
B. Cash raised in quarter
Bank loan
50.00 ± .01
0
0
0
Stretched payables
0
21.00 ± .01
0
0
Securities sold
5.00 ± .01
0
0
0
Total cash raised
55.00 ± .01
$
21.00 ± .01
$
0
$
0
$
C. Repayments
Of stretched payables
0
0
21.00 ± .01
0
Of bank loan
0
0
0.95 ± .01
31.02 ± .01
5.00 ± .01
0
0
0
0
50.00 ± .01
50.00 ± .01
49.05 ± .01
D. Addition to cash balances
E. Bank Loan
Beginning of quarter
End of quarter
$
50.00 ± .01
$
50.00 ± .01
$
49.05 ± .01
$
18.03 ± .01