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Corporate Finance (The Mcgraw-hill/Irwin Series in Finance Insurance and Real Estate)
- Relaxing Collection Efforts The Boyd Corporation has annual credit sales of 1.6 million. Current expenses for the collection department are 35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to 22,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to 1,625,000 per year. Should the firm relax collection efforts if the opportunity cost of funds is 16%, the variable cost ratio is 75%, and taxes are 40%?arrow_forwardResidual Distribution Policy Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a 3 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows: Project A: Cost of capital = 17%; IRR = 20% Project B: Cost of capital = 13%; IRR = 10% Project C: Cost of capital = 7%; IRR = 9% Harris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected to be 4,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?arrow_forwardH5. Use the following information to find the external financing needed (EFN): Current sales: $6,000; Current costs: $3,000; Total Assets: $20,000; Total Debt: $8,000; Total equity: $12,000; Projected sales: $9,600. Total assets and costs are proportional to sales. The firm does not plan to distribute any dividends. The level of debt and equity is independent of the level of sales. Options: A) $3,200 B) $1,450 C) $8,800 D) $7,200 E) $12,000arrow_forward
- Differential analysis involving opportunity costs On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternative the company could use the funds to invest in $740,000 of 5% U.S Treasury bonds that mature in 14years the bonds could be purchased at face value. The following data have been assembled: Instructions 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14yrs(Alternative 1) as compared with investing in U.S Treasury bonds 2.Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the praposal is accepted, what is the total estimated operating income of the warehouse for the 14years?arrow_forwardvv. Axis Wells and Excavation(AWE) currently generates 55,000 in annual sales. AWE sells on terms of net 50, and it’s accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to 36,000, and accounts receivable will average 12,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days ina a year. Round your answer to the nearest whole number. DSO existing: Days DSO new: Daysarrow_forward[EXCEL]Cash Flow DOL: The degree of pretax cash flow operating leverage at Rackit Corporation is 2.7 when it sells 100,000 units of its new tennis racket and its EBITDA is $95,000. Ignoring the effects of taxes, what are the fixed costs for Rackit Corporation?arrow_forward
- RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: REFER IMAGE The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 25×, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 25×); if the funds generated are used to reduce common equity (stock can be repurchased at bookvalue); and if no other changes occur, by how much will the ROE change? What will be the firm’s new quick ratio?arrow_forwardTOPIC 3: LEVERAGE & CAPITAL STRUCTURE FANSA manufactures high quality zippers for designer handbags and luggage. The wholesale price of each zip is $5.00, the operating cost per zip is $2.80, while total fixed operating costs are $40,000 per year. FANSA pays $10,400 interest and preferred dividends of $6,000 per year. The company currently sells 35,000 zippers per year and is taxed at a rate of 30%. a. Calculate FANSA’s operating breakeven point. b. On the basis of the firm’s current sales of 35,000 units per year and its interest and preferred dividend costs, calculate its Earnings Before Interest and Taxes (EBIT) and Earnings Available for Common Stockholders (EACS).arrow_forwardTransfer Pricing; Ethics Zen Manufacturing Inc. is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retailunit in country Y for $300,000. The unit in country X has manufacturing costs of $150,000 for theseproducts. The retail unit in country Y sells the product to final customers for $450,000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability.Required1. Assume that both country X and country Y have corporate income tax rates of 40% and that no specialtax treaties or benefits apply to Zen. What would be the effect on Zen’s total tax burden if the manufacturing unit raises its price from $300,000 to $360,000?2. What would be the effect on Zen’s total taxes if the manufacturing unit raised its price from $300,000 to$360,000 and the tax rates in countries X and Y are 20% and 40%, respectively?3. Comment on any ethical issues you observe in this casearrow_forward
- CH11_HW_QA3_PIR Required 1: Compute the company’s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.) Margin not attempted % Turnover not attempted ROI not attempted % Required 2: Using Lean Production, the company is able to reduce the average level of inventory by $96,000. (The released funds are used to pay off short-term creditors.) (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 3: The company achieves a cost savings of $14,000 per year by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 4: The…arrow_forward[EXCEL]Cash Flow DOL: The degree of pretax cash flow operating leverage at Rackit Corporation is 2.7 when it sells 100,000 units of its new tennis racket and its EBITDA is $95,000. Ignoring the effects of taxes, what are the fixed costs for Rackit Corporation? Please use excelarrow_forward1. A Cost Reduction Investment in capital will cost your company $1 million. Which of the options below provides the best return on investment? a. Current sales units 20,000. Prime Cost reduced from $185 to $134. b. Current sales units 40,000. Prime Cost reduced from $99 to $63. c. Current sales units 6,000. Prime Cost reduced from $600 to $487. d. Current sale units 10,000. Prime Cost reduced from $487 to $424 2. What is the primary reason for the higher cost of finance from shareholders than debt? a. Shareholders receive dividends every year, so the company has to factor this in, whereas interest payments on loans are optional. b. The assumption in the question is incorrect - banks always charge businesses more than shareholders. c. Shareholders are greedy d. Shareholders take on more risk and therefore require a higher return on their investmentarrow_forward
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