QUESTION 1 - The Globe Theatre Company is negotiating a line of credit with a large bank. The bank is willing to provide credit up to the minimum of 65% of the values of receivables or 70% of the inventory value. If the firm currently has receivables valued at $50 million and inventory valued at $60 million, what is the maximum credit limit available to this firm?
QUESTION 2 - A) Firms can grow faster by decreasing their cash conversion cycle. Do you agree or disagree with this statement? Why?
B) Explain what the cash conversion cycle entails and the methods in which firms can achieve fast growth.
QUESTION 3 - Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm's cost of capital before he makes a decision. This diversification plan will require the firm to raise $400 million. A share of common stock is currently selling for $50, and the amount of the last dividend paid was $1.25. The company's earnings and dividends have been growing at about 12%; however, this is expected to drop to 9% per year in the future. Flotation costs of new common will be $4.00 per share. The firm can raise $150 million internally through retained earnings. The firm's investment dealer has informed Mr. Saven that this amount of equity can support $100 million in 12% coupon bonds. The company's tax rate is 46%.
A) Calculate the costs of the various components of Saven Travel Corporation.
B) Compute the weighted average cost of capital on the first $250 million of funds.
C) Saven Travel will need to raise $150 of additional capital for expansion. Flow much of this will be debt and equity?