1/ A company's fixed operating costs are $630,000, its variable costs are $2.60 per unit, and the product's sales price is $4.25. What is the company's break-even point; that is, at what unit sales volume will its income equal its costs? Round your answer to the nearest whole number.
units
2/ Hartman Motors has $20 million in assets, which were financed with $6 million of debt and $14 million in equity. Hartman's beta is currently 1, and its tax rate is 30%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.
bU =
3/ FINANCIAL LEVERAGE EFFECTS
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $13 million in invested capital, has $2.6 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure.
Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.
ROIC for firm LL is
%
ROIC for firm HL is
%
Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.
ROE for firm LL is
%
ROE for firm HL is
%
Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places.
%
4/ BREAK-EVEN ANALYSIS
The Warren Watch Company sells watches for $28, fixed costs are $195,000, and variable costs are $12 per watch.
What is the firm's gain or loss at sales of 9,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
$
What is the firm's gain or loss at sales of 17,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
$
What is the break-even point (unit sales)? Round your answer to the nearest whole number.
units
What would happen to the break-even point if the selling price was raised to $33?
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Item 4
What would happen to the break-even point if the selling price was raised to $33 but variable costs rose to $23 a unit? Round your answer to the nearest whole number.
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5/FINANCIAL LEVERAGE EFFECTS
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $19 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.4 million with a 0.2 probability, $2.3 million with a 0.5 probability, and $0.3 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
RÔE =
%
σ =
%
CV =
Debt/Capital ratio is 10%, interest rate is 9%.
RÔE =
%
σ =
%
CV =
Debt/Capital ratio is 50%, interest rate is 11%.
RÔE =
%
σ =
%
CV =
Debt/Capital ratio is 60%, interest rate is 14%.
RÔE =
%
σ =
%
CV =
CH 15
1/ CASH CONVERSION CYCLE
Parramore Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 65% of sales, and it finances working capital with bank loans at an 9% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.
What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.
days
If Parramore could lower its inventories and receivables by 8% each and increase its payables by 8%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places.
days
How much cash would be freed up, if Parramore could lower its inventories and receivables by 8% each and increase its payables by 8%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
$
By how much would pretax profits change, if Parramore could lower its inventories and receivables by 8% each and increase its payables by 8%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
$
2/ RECEIVABLES INVESTMENT
Leyton Lumber Company has sales of $11 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $2.2 million. Assume 365 days in year for your calculations.
What is Leyton's DSO? Round your answer to two decimal places.
days
What would DSO be if all customers paid on time? Round your answer to two decimal places.
days
How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
$
3/COST OF TRADE CREDIT AND BANK LOAN
Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 40; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.
If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
$
What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
%
What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
%
If the company could get the funds from a bank at a rate of 8%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places.
%
Should Lancaster use bank debt or additional trade credit?
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Item 5
4/RECEIVABLES INVESTMENT
McEwan Industries sells on terms of 3/10, net 40. Total sales for the year are $1,272,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 68 days after their purchases. Assume 365 days in year for your calculations.
What is the days sales outstanding? Round your answer to two decimal places.
days
What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.
$
What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
%
What is the percentage cost of trade credit to customers who do not take the discount and pay in 68 days? Round your answers to two decimal places. Do not round intermediate calculations.
What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 40th day? Round your answers to two decimal places. Do not round intermediate calculations.
Days sales outstanding (DSO) =
days
Average receivables = $
Nominal cost:
%
Effective cost:
%
5/CURRENT ASSETS INVESTMENT POLICY
Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 40% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 13% of total sales, and the federal-plus-state tax rate is 40%.
What is the expected return on equity under each current assets level? Round your answers to two decimal places.
In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?
No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.
Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.
Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
How would the firm's risk be affected by the different policies?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
Restricted policy
%
Moderate policy
%
Relaxed policy
%
-Select-
Item 4
Sample Solution