Question 1. Baxter Box Company's balance sheet showed the following amounts as of December 31st:
Cash $ 10 Accounts payable $ 15
Accounts receivable 40 Accruals 5
Inventory 50 Notes payable 20
Net fixed assets 100 Long-term debt 20
Common stock 20
Retained earnings 120
Total assets $200 Total liabilities and equity $200
Last year the firm's sales were $2,000, and it had a profit margin of 10 percent and a dividend payout ratio of 50 percent. Baxter Box operated its fixed assets at 80 percent of capacity during the year. The company expects to increase next year's sales by 37.5 percent, to $2,750, but the profit margin is expected to fall to 3 percent, and the dividend payout ratio is expected to rise to 60 percent. What is Baxter Box's additional funds needed (AFN) for next year?
Question 2. Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10 percent. What would its stock price be if it changes to the new capital structure?
Question 3. Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm's production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end-of-year lease payments of $2,100,000. The firm's tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000. What is the net advantage to leasing (NAL)?
Question 4. Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison’s annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. If the company follows a restricted policy, its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.
a) If the firm adopts a restricted policy, how much will it save in interest expense (relative to what it would be if Callison were to adopt a relaxed policy)?
b) What is the difference in the projected ROEs between the restricted and relaxed policies?
c) Assume now the company expects that if it adopts a restricted policy, its sales will fall by 15 percent, EBIT will fall by 10 percent, but its total assets turnover, debt ratio, interest rate, and tax rate will remain the same. In this situation, what is the difference in the projected ROEs between the restricted and relaxed policies?
Question 5. Solartech Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Solartech agreed to make the bill payable in yen, thus agreeing to take on exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Solartech actually receive after it exchanged yen for U.S. dollars?
Question 6. What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter of the Bankruptcy Act?
A) Trustees' costs to administer and operate the firm.
B) Common stockholders.
C) General, or unsecured, creditors.
D) Secured creditors who have claim to the proceeds from the sale of a specific property pledged for a mortgage.
E) Taxes due to federal and state governments.