Purchase Solution

Capital structure, credit, ratios, interest rates

Not what you're looking for?

Ask Custom Question

1-Gatwick Ltd. has after tax profits of $500,000 and no debt. The owners have $6 million invested in the business. If they borrow $2 million at 10% and use it to retire stock, how will the return on their investment change if operating income remains the same ? Assume a flat 40% tax rate and that the loan reduces equity dollar for dollar.

2-Partridge Inc. sells about $45 million a year on credit. Good credit and collections performance in the industry result in a 35-day ACP. ( calculate with ending balance only).

A) What is the maximum receivables balance Partridge can tolerate and still receive a good rating with respect to credit and collections?
B) If Partridge is now collecting an average receivable in 40 days , by how much will it have to lower the receivables balance to achieve a good rating?

3-Sweet Tooth Cookies, Inc. has the following ratios.
ROE = 15%
T/A turnover = 1.2
ROS = 10%
What percentage of its assets are financed by equity?

4-you are given the following selected financial information for The Blatz Corporation. Assume ratios are calculated by using only year-end balance.

Income statement
COGS $750
Net Income $160

Balance Sheet
Cash $250
Net Fixed assets $850

ROS 10%
Current ratio 2.3
Inventory turnover 6.0X
ACP 45 days
Debt ratio 49.12%

Calculate accounts receivable , inventory, current assets, current liabilities, debt, equity, ROA, and ROE.

5-The Habender Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. Habender estimates its default risk premium at about 1.5% and its maturity risk premium at about .5% . because it's a relatively small and unknown firm, its liquidity risk premium is about 2% even on relatively short debt like this. What pure interest rate is implied by these assumptions?

6-inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government debt yield 9% whereas two-year debt yield 11%.

A) What is the real risk free rate and the maturity risk premium for two-year debt?
B) Forecast the nominal yield on one-and two-year government debt issued at the beginning of the second year.

Purchase this Solution

Solution Summary

Answers questions on capital structure, credit, ratios, interest rates.

Purchase this Solution

Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations