week 1Week 1 Problem Set

Answer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_1_Problem_Set.docx, where flastname is your first

initial and you last name, and submit it to the appropriate dropbox.

Chapter 1 (page 19)

1.

What is the most important difference

between a corporation and all other organizational forms?

2.

What does the phrase limited

liability mean in a corporate context?

3.

Which organizational forms give their

owners limited liability?

4.

What are the main advantages and

disadvantages of organizing a firm as a corporation?

5.

Explain the difference between an S

corporation and a C corporation.

Chapter

2

The following is provided for use in

answering the next set of questions. You may also find table 2.5 on page 53 of

your text and all questions on pages 5657.

TABLE 2.5 20092013

Financial Statement Data and Stock Price Data for Mydeco Corp.

Mydeco Corp. 20092013

(All data as of fiscal year end; in $ million)

Income

Statement

2009

2010

2011

2012

2013

Revenue

Cost of Goods Sold

404.3

(188.3)

363.8

(173.8)

424.6

(206.2)

510.7

(246.8)

604.1

(293.4)

Gross Profit

Sales and Marketing

Administration

Depreciation and

Amortization

216.0

(66.7)

(60.6)

(27.3)

190.0

(66.4)

(59.1)

(27.0)

218.4

(82.8)

(59.4)

(34.3)

263.9

(102.1)

(66.4)

(38.4)

310.7

(120.8)

(78.5)

(38.6)

EBIT

Interest Income (Expense)

61.4

(33.7)

37.5

(32.9)

41.9

(32.2)

57.0

(37.4)

72.8

(39.4)

Pretax Income

Income Tax

27.7

(9.7)

4.6

(1.6)

9.7

(3.4)

19.6

(6.9)

33.4

(11.7)

Net Income

Shares outstanding (millions)

Earnings per share

18.0

55.0

$0.33

3.0

55.0

$0.05

6.3

55.0

$0.11

12.7

55.0

$0.23

21.7

55.0

$0.39

Balance

Sheet

2009

2010

2011

2012

2013

Assets

Cash

Accounts Receivable

Inventory

48.8

88.6

33.7

68.9

69.8

30.9

86.3

69.8

28.4

77.5

76.9

31.7

85.0

86.1

35.3

Total

Current Assets

Net Property, Plant, and

Equip.

Goodwill and Intangibles

171.1

245.3

361.7

169.6

169.6

243.3

184.5

309

361.7

186.1

345.6

361.7

206.4

347.0

361.7

Total

Assets

Liabilities

and Stockholders Equity

Accounts Payable

Accrued Compensation

778.1

18.7

6.7

774.6

17.9

6.4

855.2

22.0

7.0

893.4

26.8

8.1

915.1

31.7

9.7

Total

Current Liabilities

Long-term Debt

25.4

500.0

24.3

500.0

29.0

575.0

34.9

600.0

41.4

600.0

Total

Liabilities

Stockholders Equity

525.4

252.7

524.3

250.3

604.0

251.2

634.9

258.5

641.4

273.7

Total

Liabilities and Stockholders Equity

778.1

774.6

855.2

893.4

915.1

Statement

of Cash Flows

2009

2010

2011

2012

2013

Net Income

Depreciation and

Amortization

Chg. in Accounts

Receivable

Chg. in Inventory

Chg. in Payables and

Accrued Comp.

18.0

27.3

3.9

(2.9)

2.2

3.0

27.0

18.8

2.8

(1.1)

6.3

34.3

(0.0)

2.5

4.7

12.7

38.4

(7.1)

(3.3)

5.9

21.7

38.6

(9.2)

(3.6)

6.5

Cash from Operations

Capital Expenditures

48.5

(25.0)

50.5

(25.0)

47.8

(100.0)

46.6

(75.0)

54.0

(40.0)

Cash from Investing Activities

Dividends Paid

Sale (or purchase) of

stock

Debt Issuance (Pay Down)

(25.0)

(5.4)

(25.0)

(5.4)

(100.0)

(5.4)

75.0

(75.0)

(5.4)

25.0

(40.0)

(6.5)

Cash from Financing Activities

(5.4)

(5.4)

69.6

19.6

(6.5)

Change

in Cash

18.1

20.1

17.4

(8.8)

7.5

Mydeco

Stock Price

$7.92

$3.30

$5.25

$8.71

$10.89

29.

In fiscal year 2011, Starbucks Corporation

(SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net

income of $1.25 billion. Peets Coffee and Tea (PEET) had revenue of $372

million, gross profit of $72.7 million, and net income of $17.8 million.

a. Compare the gross margins for Starbucks and Peets.

b. Compare the net profit margins for Starbucks and

Peets.

c. Which firm was more profitable in 2011?

31.

SeeTable 2.5showing financial statement data and

stock price data for Mydeco Corp.

a.How did Mydecos accounts receivable days change over this period?

b.How did Mydecos inventory days change over this period?

c.Based on your analysis, has Mydeco improved its management of its

working capital during this time period?

32.

SeeTable 2.5showing financial statement data and

stock price data for Mydeco Corp.

a.Compare Mydecos accounts payable days in 2009 and 2013.

b.Did this change in accounts payable days improve or worsen

Mydecos cash position in 2013?

33.

SeeTable 2.5showing financial statement data and

stock price data for Mydeco Corp.

a. By how much did Mydeco increase its debt from 2009 to

2013?

b. What was Mydecos EBITDA/Interest coverage ratio in

2009 and 2013? Did its coverage ratio ever fall below 2?

c. Overall, did Mydecos ability to meet its interest

payments improve or decline over this period?

42.

For fiscal year 2011, Starbucks Corporation

(SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total

assets of $7.36 billion, and total shareholders equity of $4.38 billion.

a. Calculate the Starbucks ROE directly, and using the

DuPont Identity.

b. Comparing with the data for Peets in Problem 41, use

the DuPont Identity to understand the difference between the two firms

ROEs.

Berk, J., & DeMarzo, P. (2014). Corporate

Finance. Boston, MA: Pearson.week 2Week 2 Problem SetAnswer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_2_Problem_Set.docx, where flastname is your first

initial and you last name, and submit it to the appropriate dropbox.Chapter 4 (pages 132136):3. Calculate

the future value of $2000 in a. five years at an interest rate of 5% per year;b. ten years at an interest rate of 5% per year; andc. five years at an interest rate of 10% per year.d. Why is the amount of interest earned in part (a) less than

half the amount of interest earned in part (b)?4.What is

the present value of $10,000 received a. twelve years

from today when the interest rate is 4% per year;b. twenty

years from today when the interest rate is 8% per year; andc. six

years from today when the interest rate is 2% per year?5.Your

brother has offered to give you either $5,000 today or $10,000 in 10 years. If

the interest rate is 7% per year, which option is preferable?6.Consider

the following alternatives.i. $100

received in 1 yearii. $200

received in 5 yearsiii. $300

received in 10 yearsa. Rank the

alternatives from most valuable to least valuable if the interest rate is 10%

per year.b. What is

your ranking if the interest rate is only 5% per year?c. What is

your ranking if the interest rate is 20% per year?8.Your

daughter is currently 8 years old. You anticipate that she will be going to

college in 10 years. You would like to have $100,000 in a savings account to

fund her education at that time. If the account promises to pay a fixed

interest rate of 3% per year, how much money do you need to put into the

account today to ensure that you will have $100,000 in 10 years?9.You are

thinking of retiring. Your retirement plan will pay you either $250,000

immediately on retirement or $350,000 5 years after the date of your

retirement. Which alternative should you choose if the interest rate isa. 0% per

year;b. 8% per

year; andc. 20% per

year?14.You have

been offered a unique investment opportunity. If you invest $10,000 today, you

will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10

years from now.a. What is

the NPV of the opportunity if the interest rate is 6% per year? Should you take

the opportunity?b. What is

the NPV of the opportunity if the interest rate is 2% per year? Should you take

it now?36.You are

thinking of purchasing a house. The house costs $350,000. You have $50,000 in

cash that you can use as a down payment on the house, but you need to borrow

the rest of the purchase price. The bank is offering a 30-year mortgage that

requires annual payments and has an interest rate of 7% per year. What will

your annual payment be if you sign up for this mortgage?37.You

would like to buy the house and take the mortgage described in Problem 36. You

can afford to pay only $23,500 per year. The bank agrees to allow you to pay

this amount each year, yet still borrow $300,000. At the end of the mortgage

(in 30 years), you must make a balloon payment; that is, you

must repay the remaining balance on the mortgage. How much will this balloon

payment be?38.You have

just made an offer on a new home and are seeking a mortgage. You need to borrow

$600,000.a. The bank

offers a 30-year mortgage with fixed monthly payments and an interest rate of

0.5% per month. What is the amount of your monthly payment if you take this

loan?b. Alternatively,

you can get a 15-year mortgage with fixed monthly payments and an interest rate

of 0.4% per month. How much would your monthly payments be if you take this

loan instead?*A.1. This problem is from the Appendix

to Chapter 4.Your grandmother bought an annuity from

Rock Solid Life Insurance Company for $200,000 when she retired. In exchange

for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The

interest rate is 5%. How long must she live after the day she retired to come

out ahead (that is, to get more in value than what she paid

in)?Top of

FormWeek 2 Problem SetAnswer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_2_Problem_Set.docx, where flastname is your first

initial and you last name, and submit it to the appropriate dropbox.Chapter 4 (pages 132136):3. Calculate

the future value of $2000 in a. five years at an interest rate of 5% per year;b. ten years at an interest rate of 5% per year; andc. five years at an interest rate of 10% per year.d. Why is the amount of interest earned in part (a) less than

half the amount of interest earned in part (b)?4.What is

the present value of $10,000 received a. twelve years

from today when the interest rate is 4% per year;b. twenty

years from today when the interest rate is 8% per year; andc. six

years from today when the interest rate is 2% per year?5.Your

brother has offered to give you either $5,000 today or $10,000 in 10 years. If

the interest rate is 7% per year, which option is preferable?6.Consider

the following alternatives.i. $100

received in 1 yearii. $200

received in 5 yearsiii. $300

received in 10 yearsa. Rank the

alternatives from most valuable to least valuable if the interest rate is 10%

per year.b. What is

your ranking if the interest rate is only 5% per year?c. What is

your ranking if the interest rate is 20% per year?8.Your

daughter is currently 8 years old. You anticipate that she will be going to

college in 10 years. You would like to have $100,000 in a savings account to

fund her education at that time. If the account promises to pay a fixed

interest rate of 3% per year, how much money do you need to put into the

account today to ensure that you will have $100,000 in 10 years?9.You are

thinking of retiring. Your retirement plan will pay you either $250,000

immediately on retirement or $350,000 5 years after the date of your

retirement. Which alternative should you choose if the interest rate isa. 0% per

year;b. 8% per

year; andc. 20% per

year?14.You have

been offered a unique investment opportunity. If you invest $10,000 today, you

will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10

years from now.a. What is

the NPV of the opportunity if the interest rate is 6% per year? Should you take

the opportunity?b. What is

the NPV of the opportunity if the interest rate is 2% per year? Should you take

it now?36.You are

thinking of purchasing a house. The house costs $350,000. You have $50,000 in

cash that you can use as a down payment on the house, but you need to borrow

the rest of the purchase price. The bank is offering a 30-year mortgage that

requires annual payments and has an interest rate of 7% per year. What will

your annual payment be if you sign up for this mortgage?37.You

would like to buy the house and take the mortgage described in Problem 36. You

can afford to pay only $23,500 per year. The bank agrees to allow you to pay

this amount each year, yet still borrow $300,000. At the end of the mortgage

(in 30 years), you must make a balloon payment; that is, you

must repay the remaining balance on the mortgage. How much will this balloon

payment be?38.You have

just made an offer on a new home and are seeking a mortgage. You need to borrow

$600,000.a. The bank

offers a 30-year mortgage with fixed monthly payments and an interest rate of

0.5% per month. What is the amount of your monthly payment if you take this

loan?b. Alternatively,

you can get a 15-year mortgage with fixed monthly payments and an interest rate

of 0.4% per month. How much would your monthly payments be if you take this

loan instead?*A.1. This problem is from the Appendix

to Chapter 4.Your grandmother bought an annuity from

Rock Solid Life Insurance Company for $200,000 when she retired. In exchange

for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The

interest rate is 5%. How long must she live after the day she retired to come

out ahead (that is, to get more in value than what she paid

in)?Top of

Formweek 3Week 3 weekProblem SetAnswer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_3_Problem_Set.docx, where flastname is your first

initial and you last name, and submit it to the appropriate dropbox.Chapter 7 (pages 225228):1.Your brother wants to borrow $10,000 from

you. He has offered to pay you back $12,000 in a year. If the cost of capital

of this investment opportunity is 10%, what is its NPV? Should you undertake

the investment opportunity? Calculate the IRR and use it to determine the

maximum deviation allowable in the cost of capital estimate to leave the

decision unchanged.8.You are considering an investment in a

clothes distributor. The company needs $100,000 today and expects to repay you

$120,000 in a year from now. What is the IRR of this investment opportunity?

Given the riskiness of the investment opportunity, your cost of capital is 20%.

What does the IRR rule say about whether you should invest?19.You are a real estate agent thinking of

placing a sign advertising your services at a local bus stop. The sign will

cost $5,000 and will be posted for one year. You expect that it will generate

additional revenue of $500 per month. What is the payback period?21.You are deciding between two mutually

exclusive investment opportunities. Both require the same initial investment of

$10 million. Investment A will generate $2 million per year (starting at the

end of the first year) in perpetuity. Investment B will generate $1.5 million

at the end of the first year and its revenues will grow at 2% per year for

every year after that.

a. Which investment has the higher IRR?

b. Which investment has the higher NPV when the cost of

capital is 7%?

c. In this case, for what values of the cost of capital

does picking the higher IRR give the correct answer as to which investment

is the best opportunity?

Chapter

8 (260262)1.Pisa Pizza, a seller of frozen pizza, is considering

introducing a healthier version of its pizza that will be low in cholesterol

and contain no trans fats. The firm expects that sales of the new pizza will be

$20 million per year. While many of these sales will be to new customers, Pisa

Pizza estimates that 40% will come from customers who switch to the new,

healthier pizza instead of buying the original version.a. Assume

customers will spend the same amount on either version. What level of

incremental sales is associated with introducing the new pizza?b. Suppose

that 50% of the customers who will switch from Pisa Pizzas original pizza to

its healthier pizza will switch to another brand if Pisa Pizza does not

introduce a healthier pizza. What level of incremental sales is associated with

introducing the new pizza in this case?6.Cellular Access, Inc. is a cellular

telephone service provider that reported net income of $250 million for the

most recent fiscal year. The firm had depreciation expenses of $100 million,

capital expenditures of $200 million, and no interest expenses. Working capital

increased by $10 million. Calculate the free cash flow for Cellular Access for

the most recent fiscal year.12.A bicycle manufacturer currently produces

300,000 units a year and expects output levels to remain steady in the future.

It buys chains from an outside supplier at a price of $2 a chain. The plant

manager believes that it would be cheaper to make these chains rather than buy

them. Direct in-house production costs are estimated to be only $1.50 per

chain. The necessary machinery would cost $250,000 and would be obsolete after

10 years. This investment could be depreciated to zero for tax purposes using a

10-year straight-line depreciation schedule. The plant manager estimates that

the operation would require $50,000 of inventory and other working capital

upfront (year 0), but argues that this sum can be ignored because it is

recoverable at the end of the 10 years. Expected proceeds from scrapping the

machinery after 10 years are $20,000.If the company pays tax at a rate of 35%

and the opportunity cost of capital is 15%, what is the net present value of

the decision to produce the chains in-house instead of purchasing them from the

supplier?week 4Week 4 Problem SetAnswer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_4_Problem_Set.docx, where flastname is your first initial and your last name, and submit it to the appropriate dropbox.Bonds-1.Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.Bonds-2.A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?Bonds-4.A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?Bond-5.A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?Bond-6.A given bond has five years left to maturity. Interest is paid annually and the annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells for $1,000. What is the yield to maturity?Chapter 9 (pages 303203):1.Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in 1 year in order to justify its current price?5.NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?6.Summit Systems will pay a dividend of $1.50 this year. If you expect Summits dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?7.Dorpac Corporation has a dividend yield of 1.5%. Dorpacs equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.a. What is the expected growth rate of Dorpacs dividends?b. What is the expected growth rate of Dorpacs share price?12.Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firms equity cost of capital is 8%?week 5Week 5 Problem SetAnswer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_5_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox.Chapter 10 (pages 345348):4.You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.a. What was your realized return?b. How much of the return came from dividend yield and how much came from capital gain?20.Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?22.Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move togetherin good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independentone stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.30.What does the beta of a stock measure?TABLE 10.6 Betas with Respect to the S&P 500 for Individual Stocks (based on monthly data for 20072012)CompanyTickerIndustryEquity BetaGeneral MillsGISPackaged Foods0.20Consolidated EdisonEDUtilities0.28The Hershey CompanyHSYPackaged Foods0.28Abbott LaboratoriesABTPharmaceuticals0.31Newmont MiningNEMGold0.32Wal-Mart StoresWMTSuperstores0.35CloroxCLXHousehold Products0.39KrogerKRFood Retail0.42Altria GroupMOTobacco0.43AmgenAMGNBiotechnology0.44McDonaldsMCDProcter & GamblePGHousehold Products0.47PepsicoPEPSoft Drinks0.51Coca-ColaKOSoft Drinks0.54Johnson & JohnsonJNJPharmaceuticals0.59PetSmartPETMSpecialty Stores0.75Molson Coors BrewingTAPBrewers0.78NikeNKEFootwear0.91MicrosoftMSFTSystems Software1.01Southwest AirlinesLUVAirlines1.09IntelINTCSemiconductors1.09Whole Foods MarketWFMFood Retail1.10Foot LockerFLApparel Retail1.11OracleORCLSystems Software1.12Amazon.comAMZNInternet Retail1.13GoogleGOOGInternet Software and Services1.14StarbucksSBUXRestaurants1.20Walt DisneyDISMovies and Entertainment1.21Cisco SystemsCSCOCommunications Equipment1.23AppleAAPLComputer Hardware1.26PulteGroupPHMHomebuilding1.28DellDELLComputer Hardware1.41salesforce.comCRMApplication Software1.47Marriott InternationalMARHotels and Resorts1.48eBayEBAYInternet Software and Services1.48CoachCOHApparel and Luxury Goods1.60MacysMJuniper NetworksJNPRCommunications Equipment1.71Williams-SonomaWSMHome Furnishing Retail1.72Tiffany & Co.TIFApparel and Luxury Goods1.80CaterpillarCATConstruction Machinery1.85Ethan Allen InteriorsETHHome Furnishings1.95AutodeskADSKApplication Software2.14Harley-DavidsonHOGMotorcycle Manufacturers2.23Advanced Micro DevicesAMDSemiconductors2.24Ford MotorFAutomobile Manufacturers2.38SothebysBIDAuction Services2.39Wynn Resorts Ltd.WYNNCasinos and Gaming2.41United States SteelXSteel2.52SaksSKSDepartment Stores2.57Source: CapitalIQ35.Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6 (also shown above), calculate the expected return of investing ina. Starbucks stock.b. Hersheys stock.c. Autodesks stock.Chapter 11 (pages 390396):2.You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.a. What are the portfolio weights of the three stocks in your portfolio?b. What is the expected return of your portfolio?c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?d. Assuming the stocks expected returns remain the same, what is the expected return of the portfolio at the new prices?50.Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?Chapter 12 (page 431):26.Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unidas equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%. a. What is Unidas unlevered cost of capital? b. What is Unidas after-tax debt cost of capital? c. What is Unidas weighted average cost of capital?27.You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?Week 6Problem SetAnswer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_6_Problem_Set.docx (where flastname is your first

initial and your last name), and submit it to the appropriate Dropbox.Chapter

29 (pages 983-984):1.What

inherent characteristic of corporations creates the need for a system of checks

on manager behavior?2.What are

some examples of agency problems?3.What are

the advantages and disadvantages of the corporate organizational structure?4.What is

the role of the board of directors in corporate governance?

week 7Week 7 Problem SetAnswer the following questions and solve

the following problems in the space provided. When you are done, save the file

in the format flastname_Week_7_Problem_Set.docx (where flastname is your first

initial and your last name), and submit it to the appropriate Dropbox.Chapter 26 (page 903):1.

Answer the following

questions:a. What is the difference between a firms cash

cycle and its operating cycle?b. How will a firms cash cycle be affected if a

firm increases its inventory, all else being equal?c. How will a firms cash cycle be affected if a

firm begins to take the discounts offered by its suppliers, all else being

equal?4.The Greek Connection had sales of $32 million in 2012, and a cost

of goods sold of $20 million. A simplified balance sheet for the firm appears

below:

THE GREEK CONNECTION

Balance Sheet

As of December 31, 2012 (in $ thousand)

Assets

Liabilities and Equity

Cash

Accounts receivable

Inventory

$ 2,000

3,950

1,300

Accounts payable

Notes payable

Accruals

$ 1,500

1,000

1,220

Total current assets

$ 7,250

Total current liabilities

Long-term debt

$ 3,720

3,000

Net plant, property,

and equipment

$ 8,500

Total liabilities

Common equity

$ 6,720

9,030

Total assets

$ 15,750

Total liabilities and equity

$ 15,750

a. Calculate The Greek Connections net working

capital in 2012.b. Calculate the cash conversion cycle of The

Greek Connection in 2012.c. The industry average accounts receivable days

is 30 days. What would the cash conversion cycle for The Greek Connection have

been in 2012 if it had matched the industry average for accounts receivable

days?5.

Assume the credit terms

offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of

the trade credit if your firm does not take the discount and pays on day 30.Chapter 27 (page 925):1. Which of the following companies are likely to

have high short-term financing needs? Why?a. A clothing retailerb. A professional sports teamc. An electric utilityd. A company that operates toll roadse. A restaurant chain2. Sailboats Etc. is a retail company specializing

in sailboats and other sailing-related equipment. The following table contains

financial forecasts as well as current (month 0) working capital levels. During

which months are the firms seasonal working capital needs the greatest? When

does it have surplus cash?

Month

($000)

0

1

2

3

4

5

6

Net Income

$10

$12

$15

$25

$30

$18

Depreciation

2

3

3

4

5

4

Capital Expenditures

1

0

0

1

0

0

Levels of Working Capital

Accounts Receivable

$2

3

4

5

7

10

6

Inventory

3

2

4

5

5

4

2

Accounts Payable

2

2

2

2

2

2

2