a)
To discuss: The impact when firm reduces its inventories by $500,000 and invests in marketable securities.
a)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
b)
To discuss: The impact, when firm purchases 20 new trucks with $500,000 paying through by selling the marketable securities.
b)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
c)
To discuss: The impact, when firm borrows the amount of $500,000 from bank as a short-term loan and invests on inventory.
c)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
d)
To discuss: The impact, when company borrows the amount of $2,000,000 from bank as a five-year loan and has invested to expand its plant.
d)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
e)
To discuss: The impact, when company sale its common stock amounted to $2,000,000 and used the proceeds to expand its plant.
e)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
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Chapter 3 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?arrow_forwardYou are considering two possible companies for investment purposes. The following data is available for each company. Additional Information: Company A: Bad debt estimation percentage using the income statement method is 6%, and the balance sheet method is 10%. The $230,000 in Other Expenses includes all company expenses except Bad Debt Expense. Company B: Bad debt estimation percentage using the income statement method is 6.5%, and the balance sheet method is 8%. The $140,000 in Other Expenses includes all company expenses except Bad Debt Expense. A. Compute the number of days sales in receivables ratio for each company for 2019 and interpret the results (round answers to nearest whole number). B. If Company A changed from the income statement method to the balance sheet method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). C. If Company B changed from the balance sheet method to the income statement method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). D. What benefits do each company gain by changing their method of bad debt estimation? E. Which company would you invest in and why? Provide supporting details.arrow_forwardPayne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 40%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of the firm vary under each policy?arrow_forward
- Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Uptons balance sheet as of December 31, 2019, is shown here (millions of dollars): Sales for 2019 were 350 million, and net income for the year was 10.5 million, so the firms profit margin was 3.0%. Upton paid dividends of 4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2020. a. If sales are projected to increase by 70 million, or 20%, during 2020, use the AFN equation to determine Uptons projected external capital requirements. b. Using the AFN equation, determine Uptons self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? c. Use the forecasted financial statement method to forecast Uptons balance sheet for December 31, 2020. Assume that all additional external capital is raised as a line of credit at the end of the year. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Assume Uptons profit margin and dividend payout ratio will be the same in 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You dont need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition to retained earnings for the balance sheet without actually constructing a full income statement.)arrow_forwardGeneral Electric Capital, a division of General Electric, uses long-term debt extensively. In a recent year, GE Capital issued 11 billion in long-term debt to investors, then within days filed legal documents to prepare for another 50 billion long-term debt issue. As a result of the 50 billion filing, the price of the initial 11 billion offering declined (due to higher risk of more debt). Bill Gross, a manager of a bond investment fund, denounced a lack in candor related to GEs recent debt deal. It was the most recent and most egregious example of how bondholders are mistreated. Gross argued that GE was not forthright when GE Capital recently issued 11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as 50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date. In your opinion, did GE Capital act unethically by selling 11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another 50 billion debt offering? Source: Jennifer Ablan, Gross Shakes the Bond Market; GE Calms It, a Bit, Barrons, March 25, 2002.arrow_forward
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