GEN CMB LL CORP FINC; CNCT
11th Edition
ISBN: 9781259724145
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 2, Problem 3MC
Summary Introduction
Case summary:
W Incorporation was founded by Person N. Person N and his friends made investments in the form of equity and short- and long-term debt. Recently, the company has developed a virtual keyboard with more advanced technology. The VK was more advanced and beneficial compared to the current developments.
The company needs more outside investments to introduce the VK to the open market. Person N decides to seek outside financing in the form of new equity and bank loans. A LLC, the outside financer, asked Person X to analyze the financial statements of W incorporation to know the financial position of W Incorporation.
Characters in the case:
Person N: The founder of W Incorporation and a computer programmer.
Person X: The employee of A LLC.
A LLC: The new investor
To discuss: Person N’s expansion plan.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Garnett Jackson, the founder, and CEO of Tech Tune-Ups, stared out the window as he finished his customary peanut butter and jelly sandwich, contemplating the dilemma currently facing his firm. Tech Tune-Ups is a start-up firm, offering a wide range of computer services to its clients, including online technical assistance, remote maintenance, and backup of client computers through the Internet, and virus prevention and recovery. The firm has been successful in the 2 years since it was founded; its reputation for fair pricing and good service is spreading, and Mr. Jackson believes the firm is in a good position to expand its customer base rapidly. But he is not sure that the firm has the financing in place to support that rapid growth.
Tech Tune-Ups’ main capital investments are its own powerful computers, and its major operating expense is salary for its consultants. To a reasonably good approximation, both of these factors grow in proportion to the number of clients the firm serves.…
To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst, and he has covered the HVAC industry. Josh has examined the company’s financial statements as well as those of its competitors. Although Ragan currently has a technological advantage, Josh’s research indicates that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Josh believes that Ragan’s technological advantage will last for only the next five years. After that period, the company’s growth will likely slow to the industry average. Additionally, Josh believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Josh’s assumptions, what is the estimated stock price?
Suppose you and a friend developed a new technology for home computer systems. However, you both need to raise a large amount of capital to build the production and support facilities to market the product successfully. Explain which of the business type would be best suited to help the company raise the necessary capital to begin production.
Chapter 2 Solutions
GEN CMB LL CORP FINC; CNCT
Ch. 2 - Prob. 1CQCh. 2 - Prob. 2CQCh. 2 - Prob. 3CQCh. 2 - Prob. 4CQCh. 2 - Prob. 5CQCh. 2 - Cash Flow from Assets Why is it not necessarily...Ch. 2 - Operating Cash flow Why is it not necessarily bad...Ch. 2 - Net Working Capital and Capital Spending Could a...Ch. 2 - Cash Flow to Stockholders and Creditors Could a...Ch. 2 - Prob. 10CQ
Ch. 2 - Building a Balance Sheet Sankey, Inc., has current...Ch. 2 - Building an Income Statement Shellon, Inc., has...Ch. 2 - Market Values and Book Values Klingon Cruisers,...Ch. 2 - Prob. 4QPCh. 2 - Calculating OCF Barrell, Inc., has sales of...Ch. 2 - Calculating Net Capital Spending Gordon Driving...Ch. 2 - Building a Balance Sheet The following table...Ch. 2 - Cash Flow to Creditors The 2014 balance sheet of...Ch. 2 - Cash. Flow to Stockholders The 2014 balance sheet...Ch. 2 - Prob. 10QPCh. 2 - Cash Flows Ritter Corporations accountants...Ch. 2 - Financial Cash flows The Stancil Corporation...Ch. 2 - Building an Income Statement During the year, the...Ch. 2 - Calculating total Cash Flows Schwert Corp. shows...Ch. 2 - Using Income Statements Given the .following...Ch. 2 - Prob. 16QPCh. 2 - Marginal versus Average Tax Rates (Refer to Table...Ch. 2 - Prob. 18QPCh. 2 - Accounting Values versus Cash Flows In Problem 18,...Ch. 2 - Calculating Cash Flows Cusic Industries had the...Ch. 2 - Prob. 21QPCh. 2 - Use the following information for Ingersoll, Inc.,...Ch. 2 - Prob. 23QPCh. 2 - Prob. 24QPCh. 2 - Net Fixed Assets and Depreciation On the balance...Ch. 2 - Prob. 26QPCh. 2 - Prob. 1MCCh. 2 - Prob. 2MCCh. 2 - Prob. 3MC
Knowledge Booster
Similar questions
- Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues. What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time? The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and “tax effect” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain these terms, and briefly describe each theory. What do the three theories indicate regarding the actions management should take with respect to dividend payouts? What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?arrow_forwardIntegrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues. What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time? The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and “tax effect” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain these terms, and briefly describe each theory. What do the three theories indicate regarding the actions management should take with respect to dividend payouts? What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?arrow_forwardJade Ltd is now considering how to obtain a computer software. The director of Jade Ltd has noticed that over the last 20 years, many companies have spent a great deal of money internally developing new intangible assets, such as software. You have been asked by the director to provide your advice on the accounting treatments of the two possibilities below: (i) Employ its own programmers to write software that the company will use (ii) Purchase computer software externally, including packages for payroll and general ledger. Required: In accordance with IAS 38 / AASB 138 Intangible Assets, discuss whether internally developed intangible assets should be recognised, and explain the differ in the accounting treatments for the two possible options.arrow_forward
- Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange. As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table: Source of capital weight Long term debt 30 % Preferred stock 20 % Common stock equity 50 % Total 100 % At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5%…arrow_forwardEco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange. As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table: Source of capital weight Long term debt 30 % Preferred stock 20 % Common stock equity 50 % Total 100 % At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5%…arrow_forwardIntegrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so…arrow_forward
- The Faster Modem Corporation was founded by two engineers whomanaged to capitalize their firm with $150,000. They were able to raisethis money because their test model performed much faster than currentmodems on the market, and they received an initial commitment from anational firm to market their modem. However, a national modem manufacturerbeat them to the market, and they found that they had invested$150,000 in obsolete technology. They now find that they have no sales,$500 in cash, and a $2,000 payment due to their creditor on the first of nextmonth. What are the owners’ options?arrow_forwardZumo Wang came to Northern Ireland from China six years ago to study at university for a degree in Computing and Electronics. After graduating he worked as an information technology manager for a computer company and saved his wages to build up the capital needed to invest in his own business. Zumo’s friend Charles Wu, had recently put his computing consultancy business up for sale – ‘PC: IT’. PC: IT was set up ten years ago, and seemed quite successful. The premises were located on a busy street in the town centre of Enniskillen, and operated a ‘collect and return’ service, enabling computers to be serviced without the customer having to leave their home. Upon purchase of the business from Charles, Zumo acquired a number of fixed assets for use in the business. These included a personal computer, a laptop computer and various machines facilitating welding and electronic engineering to be carried out on computer circuit boards, rebuilding computers and other assembly activities. The…arrow_forwardZumo Wang came to Northern Ireland from China six years ago to study at university for a degree in Computing and Electronics. After graduating he worked as an information technology manager for a computer company and saved his wages to build up the capital needed to invest in his own business. Zumo’s friend Charles Wu, had recently put his computing consultancy business up for sale – ‘PC:IT’. PC:IT was set up ten years ago, and seemed quite successful. The premises were located on a busy street in the town centre of Enniskillen, and operated a ‘collect and return’ service, enabling computers to be serviced without the customer having to leave their home. Upon purchase of the business from Charles, Zumo acquired a number of fixed assets for use in the business. These included a personal computer, a laptop computer and various machines facilitating welding and electronic engineering to be carried out on computer circuit boards, rebuilding computers and other assembly activities. The main…arrow_forward
- Paul Sabin organized Sabin Electronics 10 years ago in order to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the cash account and $400,000 of which will be used to modernize certain key items of equipment. The company’s financial statements for the two most recent years follow: SABIN ELECTRONICS Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 70,400 $ 124,000 Marketable securities — 15,200 Accounts receivable, net 495,800 248,000 Inventory 995,000 496,000 Prepaid expenses 19,800 17,800 Total current assets 1,581,000 901,000 Plant and equipment, net 1,200,000…arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago in order to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the cash account and $400,000 of which will be used to modernize certain key items of equipment. The company’s financial statements for the two most recent years follow: SABIN ELECTRONICS Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 70,400 $ 124,000 Marketable securities — 15,200 Accounts receivable, net 495,800 248,000 Inventory 995,000 496,000 Prepaid expenses 19,800 17,800 Total current assets 1,581,000 901,000 Plant and equipment, net 1,200,000…arrow_forwardCarson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rates on those loans are tied to market interest rates and are adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to interest rate movements. The company has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Carson Company has assets valued at approximately $50 million and generates sales of nearly $100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because it expects the economy to be strong in the future, Carson plans to grow by expanding its business and…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...
Accounting
ISBN:9781305080577
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:South-Western College Pub