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?
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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