Question 1
Foundations of Financial Management Edition 14 (Block, Hirt, Danielsen) Chapter 17 pg. 559-560 Problem 20 Preferred Stock Dividends in Arrears (LO5) Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 850,000 preferred shares outstanding, and the annual dividend is $6.50 per share. The vice-president of finance sees no real hope of paying the dividends in arrears. She is devising a plan to compensate the preferred stockholders for 90 percent of the dividends in arrears. a. how much should the compensation be? b. Robbins will compensate the preferred stockholders in the form of bonds paying 12 percent interest in a market environment in which the going rate of interest is 14 percent for similar bonds. The bonds will have a 15-year maturity. Using the bond valuation table in Chapter 16 (16-3 on page 500), indicate the market value of a $1,000 par value bond. c. Based on market value, how many bonds must be issued to provide the compensation determined in part a? (Round to the nearest whole number.) Comprehensive Problem Crandall Corporation (rights offering and the impact on shareholders) (LO3) The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice-president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10 percent, 20 percent, and 40 percent have been suggested. Common stock is the sole means of financing for the Crandall Corporation. a. For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share. (Round to one place after the decimal point where necessary.) b. Determine the value of one right under each of the plans. (Round to two places after the decimal point.) c. Compute the earnings per share before and immediately after the rights offering under a 10 percent discount from the market price. d. by what percentage has the number of shares outstanding increased? e. Stockholder X has 100 shares before the rights offering and participated by buying 20 new shares. Compute his total claim to earnings both before and after the rights offering (that is, multiply shares by the eatings per share figures computed in part c). f. Should Stockholder X be satisfied with this claim over a longer period of time?
Question 2
I need help on these problems WEEK 5 PROBLEM SETS Chapter 17 A1. (Coverage ratio) A firm?s latest 12 months? EBIT is $30 million, and its interest expense for the same period is $10 million. Calculate the interest coverage ratio. A4. (WACC with rebalancing) Nathan?s Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan?s rebalances its capital structure each year to a target of L = 0.52. T * = 0.20. Nathan?s can borrow currently at a rate of rd = 26%. What is Nathan?s WACC? Chapter 18 A2. (Extra dividend) Sensor Technologies pays a regular dividend of $0.10 per quarter plus an extra dividend in the fourth quarter equal to 40% of the amount that annual earnings per share exceeds $2.00. a. If annual earnings per share are $2.80, what is the fourth-quarter extra dividend? b. If annual earnings per share are $1.75, what is the fourth-quarter extra dividend? B6. (Extra dividends) Alcoa recently announced a new dividend policy. The firm said it would pay a base cash dividend of 40 cents per common share each quarter. In addition, the firm said it would pay 30% of any excess in annual earnings per share above $6.00 as an extra year-end dividend. a. If Alcoa earns $7.50 per share next year, what percentage of next year?s earnings would it pay out as cash dividends under the new policy? b. For what types of firms would Alcoa?s new dividend policy be appropriate? Explain. Chapter 20 A1. (Bond covenants) Dallas Instruments has a large bond issue whose covenants require: (1) that DI?s interest coverage ratio exceeds 4.0; (2) that DI?s ratio of tangible assets to longterm debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds. DI has earnings before interest and taxes of $70 million and interest expense of $14 million. Tangible assets are $400 million and long-term debt is $175 million. Since the bonds were issued, DI has earned $200 million, paid dividends of $40 million, and repurchased $40 million of common stock. Is DI in compliance with its bond covenants? Chapter21 A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000. The machine has a five-year life and would be depreciated straight line to a $100,000 salvage value. Hibernia Leasing will lease the same machine to AI for five annual $300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the project would be 12%. a. What cash flows does AI realize if it leases the machine instead of buying it? b. What is the net advantage to leasing (NAL)?
Question 3
Please answer all nine questions. At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2010 and all future years. At the end of 2010, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account Balance Deferred tax liability $52,000 Deferred tax asset $78,000 Deferred tax asset $52,000 Deferred tax liability $78,000 Click here if you would like to Show Work for this question Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is $375,000 noncurrent. $375,000 current. $75,000 current. $0. Click here if you would like to Show Work for this question Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. The deferred tax liability?current to be recognized is $225,000. $150,000. $300,000. $75,000. Click here if you would like to Show Work for this question On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%. In 2011, Sauder should record interest expense of $29,151. $20,849. $15,849. $34,151. Click here if you would like to Show Work for this question On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%. In 2012, Sauder should record interest expense of $12,434. $15,849. $17,434. $10,849. Click here if you would like to Show Work for this question Emporia Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease? $90,000 $60,000 $50,000 $80,000 Click here if you would like to Show Work for this question On January 15, 2011, Vancey Company paid property taxes on its factory building for the calendar year 2011 in the amount of $560,000. In the first week of April 2011, Vancey made unanticipated major repairs to its plant equipment at a cost of $1,400,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Vancey's quarterly income statements? Three Months Ended 3/31/11 6/30/11 9/30/11 12/31/11 a. $140,000 $606,667 $606,667 $606,667 b. $140,000 $1,540,000 $140,000 $140,000 c. $560,000 $1,400,000 $ -0- $ -0- d. $490,000 $490,000 $490,000 $490,000 b c d a Fina Corp. had the following transactions during the quarter ended March 31, 2011: Loss from hurricane damage $350,000 Payment of fire insurance premium for calendar year 2011 500,000 What amount should be included in Fina's income statement for the quarter ended March 31, 2011? Extraordinary Loss Insurance Expense a. $350,000 $500,000 b. $350,000 $125,000 c. $87,500 $125,000 d. $0 $500,000 b c d a Click here if you would like to Show Work for this question On November 1, 2010, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2015, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2010, balance sheet at $622,080. $632,000. $600,000. $623,000. Click here if you would like to Show Work for this question Backup copy is attached.
Question 4
1. Answer question 15-4: ?One type of leverage affects both EBIT and EPS. The other type affects only EPS.? Explain this statement. 2. Answer question 15-6: Why do public utility companies usually have capital structures that are different from those of retail firms? 3. Answer question 15-7: Why is EBIT generally considered to be independent of financial leverage? Why might EBIT actually be influenced by financial leverage at high debt levels? 4. Answer question 16-6: From the borrower?s standpoint, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates? Problems ? Chapter 16 1. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm?s cash conversion cycle. Using the following information and a 365-day year, what is the firm?s present cash conversion cycle? Average inventory = $75,000 Annual sales = $600,000 Annual cost of goods sold = $360,000 Average accounts receivable = $160,000 Average accounts payable = $25,000 2. Van Den Borsh Corp. has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year? 3. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much ?free? trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.) 4. Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit ? free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.) 5. Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.) 6. Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver? 7. Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm?s annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
Question 5
Capwell Corporation uses a periodic inventory system. The company's ending inventory on December 31, 2013, its fiscal-year end, based on a physical count, was determined to be $326,000. Capwell's unadjusted trial balance also showed the following account balances: Purchases, $620,000; Accounts payable; $210,000; Accounts receivable, $225,000; Sales revenue, $840,000. The internal audit department discovered the following items: 1. Goods valued at $32,000 held on consignment from Dix Company were included in the physical count but not recorded as a purchase. 2. Purchases from Xavier Corporation were incorrectly recorded at $41,000 instead of the correct amount of $14,000. The correct amount was included in the ending inventory. 3. Goods that cost $25,000 were shipped from a vendor on December 28, 2013, terms f.o.b. destination. The merchandise arrived on January 3, 2014. The purchase and related accounts payable were recorded in 2013. 4. One inventory item was incorrectly included in ending inventory as 100 units, instead of the correct amount of 1,000 units. This item cost $40 per unit. 5. The 2012 balance sheet reported inventory of $352,000. The internal auditors discovered that a mathematical error caused this inventory to be understated by $62,000. This amount is considered to be material. 6. Goods shipped to a customer f.o.b. destination on December 25, 2013, were received by the customer on January 4, 2014. The sales price was $40,000 and the merchandise cost $22,000. The sale and corresponding accounts receivable were recorded in 2013. 7. Goods shipped from a vendor f.o.b. shipping point on December 27, 2013, were received on January 3, 2014. The merchandise cost $18,000. The purchase was not recorded until 2014. Required: 1. Determine the correct amounts for 2013 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable. Ending inventory $ Purchases $ Accounts payable $ Accounts receivable $ Sales revenue $ 2. Calculate cost of goods sold for 2013. Cost of goods sold $ 3. What was the effect of the error in ending inventory on 2012 before-tax income? (Input the amount as positive value.) 2012 before-tax income was by $
