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Water Mills has a market value equal to its book value. Currently, the company has excess cash of $1,368, other assets of $35,807, and equity valued at $23,750. There are 2,500 shares of stock outstanding and net income is $470. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

$.19 P = $23,750/2,500 P = $9.50 Number of shares repurchased = .25($1,368)/$9.50 Number of shares repurchased = 36 New EPS = $470/(2,500 − 36) New EPS = $.19

Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 112,000 shares of stock outstanding. Under Plan II, there would be 75,000 shares of stock outstanding and $600,000 in debt. The interest rate on the debt is 6.7 percent and there are no taxes. What is the break-even EBIT?

$121,686 EBIT/112,000 = [EBIT − .067($600,000)]/75,000EBIT = $121,686

Delaware Trust has 2,400 shares of common stock outstanding at a market price per share of $63. Currently, the firm has excess cash of $3,500, total assets of $728,900, and net income of $41,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after this dividend is paid?

$17.22 EPS = $41,320/2,400 EPS = $17.22

Nadine's Boutique has an accounts payable period of 30 days. Sales of $3,300, $3,400, $4,600, and $4,100 are expected for Quarters 1 through 4, respectively. The cost of goods sold is equal to 62 percent of the next quarter's sales. The accounts payable balance is $975 as of the beginning of Quarter 1. What is the amount of the projected cash disbursements for accounts payable for Quarter 2 of next year? Assume a year has 360 days.

$2,604 DisbursementsQ2 = (30/90)(.62)$3,400 + (60/90)(.62)$4,600 DisbursementsQ2 = $2,604

Hanover Tech is currently an all-equity company that has 145,000 shares of stock outstanding with a market price of $22 a share. The current cost of equity is 13.9 percent and the tax rate is 21 percent. The company is considering adding $1.5 million of debt with a coupon rate of 7.5 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?

$2.005 million VL = 145,000($22) + .21($1,500,000) VL = $3,505,000 VE = $3,505,000 − 1,500,000 VE = $2,005,000, or $2.005 million

Verbal Communications has 18,400 shares of stock outstanding with a par value of $1 per share and a market value of $43 per share. The firm just announced a stock dividend of 100 percent. What is the market value per share after the dividend?

$21.50 Market value per share = [18,400($43)]/[18,400(2)] Market value per share = $21.50

The Sports Store has a beginning receivables balance on January 1 of $2,640. Sales for January through April are $3,440, $3,590, $2,690, and $4,720, respectively. The accounts receivable period is 45 days. How much did the store collect in the month of April? Assume a year has 360 days.

$3,140 April collections = (15/30)$3,590 + (15/30)$2,690 April collections = $3,140

The market value balance sheet for Apple Pie Corp. reflects cash of $42,000, fixed assets of $319,000, and equity of $237,000. There are 7,500 shares of stock outstanding with a par value of $1 per share. The company has declared a dividend of $1.03 per share. The stock goes ex dividend tomorrow. Ignore any tax effects. What will be the price of the stock tomorrow morning?

$30.57 PEx dividend = ($237,000/7,500) − $1.03 PEx dividend = $30.57

L.A. Clothing has expected earnings before interest and taxes of $63,300, an unlevered cost of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company?

$334,101 VU = [$63,300(1 − .23)]/.147 VU = $331,571 VL = $331,571 + .23($11,000) VL = $334,101

Aaron purchased 500 shares of KMP stock on May 8. On May 16, he purchased another 200 shares and then on May 20 he purchased a final 100 shares of KMP stock. The company declared a dividend of $.94 a share on May 6 to holders of record on Friday, May 22. The dividend is payable on June 12. How much dividend income will Steve receive on June 12?

$658 D = $.94(500 + 200) D = $658

The June Bug has a $565,000 bond issue outstanding. These bonds have a coupon rate of 6.65 percent, pay interest semiannually, and sell at 98.7 percent of face value. The tax rate is 21 percent. What is the amount of the annual interest tax shield?

$7,890 Annual interest tax shield = $565,000(.0665)(.21)Annual interest tax shield = $7,890

Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 60,000 shares of stock. The debt and equity option would consist of 45,000 shares of stock plus $250,000 of debt with an interest rate of 7.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes

$72,500 EBIT/60,000 = [EBIT − $250,000(.0725)]/45,000EBIT = $72,500

The Dog House expects sales of $770, $860, $950, and $960 for the months of May through August, respectively. The company collects 84 percent of sales in the month of sale, 13 percent in the month following the month of sale, and 1 percent in the second month following the month of sale. The remaining sales are never collected. How much money does the company expect to collect in the month of July?

$918 July collections = .84($950) + .13($860) + .01($770) July collections = $918

Roy's Welding has a cost of equity of 14.1 percent and a pretax cost of debt of 7.7 percent. The required return on the assets is 13.2 percent. What is the debt-equity ratio based on M&M II with no taxes?

.164 RE = .141 = .132 + (.132 − .077)D/E D/E = .164

KN Stitches has debt of $26,000, a leveraged value of $78,400, a pretax cost of debt of 7.05 percent, a cost of equity of 15.3 percent, and a tax rate of 21 percent. What is the weighted average cost of capital?

12.07 percent WACC = [($78,400 − 26,000)/$78,400](.153) + ($26,000/$78,400)(.0705)(1 − .21) WACC = .1207, or 12.07%

The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.2 percent. The average collection period is 36 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement?

13.02 percent EAR = {1 + [.012/(1 − .012)]}365/36 − 1 EAR = .1302, or 13.02%

Ignoring taxes, Pewter & Glass has a weighted average cost of capital of 10.82 percent. The company can borrow at 7.4 percent. What is the cost of equity if the debt-equity ratio is .68?

13.15% RE = .1082 + (.1082 − .074)(.68) RE = .1315, or 13.15%

Johnson Tire Distributors has debt with both a face and a market value of $35,000. This debt has a coupon rate of 6.6 percent and pays interest annually. The expected earnings before interest and taxes are $8,300, the tax rate is 21 percent, and the unlevered cost of capital is 10.9 percent. What is the cost of equity?

14.56 percent VU = [$8,300(1 − .21)]/.109 VU = $60,15 VL = $60,156 + .21($35,000) VL = $67,506 VE = $67,506 − 35,000 VE = $32,506 RE = .109 + [(.109 − .066)($35,000/$32,506)(1 − .21)] RE = .1456, or 14.56%

Winter's Toyland has a debt-equity ratio of .57. The pretax cost of debt is 8.2 percent and the required return on assets is 14.7 percent. What is the company's cost of equity if you ignore taxes?

18.41 percent RE = .147 + (.147 − .082)(.57) RE = .1841, or 18.41%

Morning Star has credit sales of $1,032,800, costs of goods sold of $662,350, average accounts receivable of $86,300, and average accounts payable of $92,600. On average, how long does it take Morning Star's credit customers to pay for their purchases?

30.50 days Receivables turnover = $1,032,800/$86,300 Receivable turnover = 11.97 Receivables period = 365/11.97 Receivables period = 30.50 days

TJ's has a market value equal to its book value. Currently, the firm has excess cash of $218,500, other assets of $897,309, and equity of $547,200. The firm has 40,000 shares of stock outstanding and net income of $59,800. Management has decided to spend 15 percent of the excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

37,604 P = $547,200/40,000 P = $13.68 Number of shares repurchased = [.15($218,500)]/$13.68 Number of shares repurchased = 2,395.83 New shares outstanding = 40,000 − 2,395.83 New shares outstanding = 37,604

New Products has sales of $749,500 and cost of goods sold of $368,600. Beginning inventory is $54,700 and ending inventory is $58,200. What is the length of the inventory period?

55.90 days Inventory turnover = $368,600/[($54,700 + 58,200)/2] Inventory turnover = 6.53 Inventory period = 365/6.53 Inventory period = 55.90 days

Metal Products Co. has an inventory period of 94.2 days, an accounts payable period of 40.4 days, and an accounts receivable turnover rate of 17.6. What is the length of the cash cycle?

74.54 days Cash cycle = 94.2 + (365/17.6) − 40.4 Cash cycle = 74.54 days

Bradley's has an inventory turnover rate of 7.6, a payables turnover rate of 11.4, and a receivables turnover rate of 12.6. How long is the operating cycle?

76.99 days Operating cycle = 365/7.6 + 365/12.6 Operating cycle = 76.99 days

Mid-Western Markets has sales of $1,389,400 and costs of goods sold of $892,700. Beginning inventory is $94,300 and ending inventory is $110,200. What is the inventory turnover rate?

8.73 times Inventory turnover = $892,700/[($94,300 + 110,200)/2] Inventory turnover = 8.73 times

Which one of these affects the length of the cash cycle but not the operating cycle?

Accounts payable period

Which one of the following is the equity risk that is most related to the daily operations of a firm?

Business risk

Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?

Date of record

Which one of these actions will increase the operating cycle? Assume all else held constant.

Decreasing the receivables turnover rate

Which one of the following actions will tend to increase the accounts receivable period from its current 14 days?

Eliminating the discount for early payment by credit customers

If you ignore taxes and costs, a stock repurchase will:

Increase the earnings per share.

Which one of the following will decrease the operating cycle?

Increasing the accounts receivable turnover rate

Which one of these will decrease the cash cycle, all else held constant?

Increasing the accounts receivable turnover rate

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?

Interest tax shield

Which form of financing do companies prefer to use first according to the pecking-order theory?

Internal funds

A decrease in which one of the following will increase the cash cycle, all else held constant?

Inventory turnover rate

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?

Kate is entitled to the dividend but Ted is not.

The Lumber Mart recently replaced its management team. As a result, they are implementing a restrictive short-term financial policy in place of the flexible policy under which they had been operating. Which one of the following should the employees expect as a result of this policy change?

Loss of credit customers

Which one of the following statements is correct?

Maintaining a steady dividend is a key goal of most dividend-paying companies.

Which one of the following is a result of a stock repurchase?

PE ratio equal to that resulting from a comparable cash dividend

Which one of the following actions will increase net working capital? Assume the current ratio is greater than 1.0.

Selling inventory at a profit on credit

Which one of the following involves a payment in shares that increases the number of shares a shareholder owns but also decreases the value per share

Stock dividend

HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?

Stock repurchase

Which one of the following does not affect the total equity of a company but does increase the number of shares outstanding?

Stock split

What is the information content effect?

The financial market's reaction to a change in the amount of a company's dividend

Which one of the following statements is correct concerning the cash cycle?

The longer the cash cycle, the more likely a company will need external financing.

Which one of these statements is correct?

The optimal capital structure maximizes shareholder value.

Bailey's decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Thursday, March 20

You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:

company is earning just enough to pay for the cost of the debt.

Based on M&M Proposition I with taxes, the weighted average cost of capital:

decreases as the debt-equity ratio increases.

Financial risk is:

dependent upon a company's capital structure.

A flexible short-term financial policy:

increases the need for long-term financing.

A flexible short-term financial policy:

incurs more carrying costs than a restrictive policy.

The information content of a dividend increase generally signals that:

management believes earnings growth will be strong going forward.

Webster United is paying a dividend of $1.09 per share today. There are 225,000 shares outstanding with a market price of $31.17 per share prior to the dividend payment. Ignore taxes. Before the dividend, the company had earnings per share of $2.11. As a result of this dividend, the:

price-earnings ratio will be 14.26. PEEx-dividend = ($31.17 − 1.09)/$2.11 PEEx-dividend = 14.26

M&M Proposition I with taxes is based on the concept that:

the value of a taxable company increases as the level of debt increases.

Josh's Inc. has 4,800 shares of stock outstanding with a par value of $1 per share and a market value of $19 a share. The balance sheet shows $149,000 in the capital in excess of par account, $4,800 in the common stock account, and $192,800 in the retained earnings account. The firm just announced a stock dividend of 10 percent. What is the value of the capital in excess of par account after the dividend?

$157,640 Change in capital in excess of par = 4,800(.10)($19 − 1) Change in capital in excess of par = $8,640 New capital in excess of par = $149,000 + 8,640 New capital in excess of par = $157,640

If a company has the optimal amount of debt, then the:

value of the levered company will exceed the value of the unlevered company.

The value of a firm is maximized when the:

weighted average cost of capital is minimized.

The equity of Blooming Roses has a total market value of $148,900. Currently, the firm has excess cash of $4,200 and net income of $21,400. There are 1,100 shares of stock outstanding. What will be the percentage change in the stock price per share if the company pays out all of its excess cash as a cash dividend?

−2.82 percent PPre-dividend = $148,900/1,100 PPre-dividend = $135.36 PPost-dividend = ($148,900 − 4,200)/1,100 PPost-dividend = $131.55 %Δ in price = ($131.55 − 135.36)/$135.36 %Δ in price = −.0282, or −2.82%