Finance-related Problem Solving

1. The financial managers of a firm have options when it comes to the capital structure of the firm. The usual components include short term debt, long term debt, preferred stock, and common stock. Effectively discuss (be thorough) the key characteristics and impact of each from the viewpoint of the firm.

2. Lincoln Inc. has monthly fixed cost of $ 18000 and a contribution margin ration of 55%. Management is considering several changes to the firm's cost and revenue structure and is concerned about the potential impact on sales dollars breakeven point and profitability. Assist management by answering the following questions and show your calculations.

a. What is the dollar amount of monthly breakeven revenue_________.
b. What is the dollar amount of monthly revenue necessary to earn a net operating income (EBIT) equal to 10% monthly revenue________.
c. What is the dollar amount of monthly net income if monthly revenue equals $100000 and Lincoln's tax rate is 30%________.
d. Management is considering increasing monthly fixed cost by buying more advertising at a cost of $3000 per month. This is forecasted to increase revenue by $5200 monthly. If these changes are made what is the revised amount of monthly sales needed to breakeven and the revised monthly net income if monthly sales increase from $100000 to $105200.
______________ Revised breakeven sales
______________Revised net income on sales of $150200.
e. What are the inherent risks/potential rewards of increasing monthly fixed costs (assuming no corresponding reduction in variable costs)

3. Calculate the value of each of the following financial instruments:
a. Washington Inc. issued a corporate bonds 5 year ago (normal characteristics apply). 15 years remain in the bond's term. The coupon (stated) rate is 6% and the bond is priced to provide a yield to maturity of 8%.

What is the current market value of the bond (use normal bond characteristics and valuation methods)?
b. Washington Inc. has an issue of preferred stock outstanding. The issue was originally sold for $50 per share. The stated divided amount is $8 per share annually. The preferred stock now sells in the market to provide a 5% rate of return to investors.

What is the current market value of a share of the preferred stock?
c. Washington Inc. paid a dividend per share of $1.80 on its common stock over the past twelve months. The firm just announced a new product line and analysts are excited that the EPS growth rate for the firm will increase from the previously expected 6% to 8%. Investors expect (require) a 12% annual return on their investment in Washington common stock.

What is the current market value of a share of common stock if the newly revised growth estimate is used (the 8%)? What was the change in value?

4. CSNY Company uses the following capital structure to finance its $1,000,000 total asset investment.
a. Debt $400,000 - average before tax cost of debt is 8% and the firm is in the 35% combined federal and state income tax bracket. Assume no transaction fees.
b. Preferred stock $50,000 - stock was issued to the public at a $40 per share. The issue calls for a $4 annual dividend. Floatation costs were/would be $2 per share.
c. Common stock $3000,000 - stock was issued to the public at $40 per share. The dividend paid this past year was $1 per share. The firm's EPS has been growing at an annual rate of 9%. Floatation costs were and would be $3per share.
d. Retained earnings $250,000.

Calculate CSNY's weighted average cost of capital (carry all decimal calculations to 4 places). ____________ WACC

5. Mr. and Mrs. Smith's first child was just born. The expectation is that in 18 years the child will attend college. The current average cost of one year of college is $18000. College costs are expected to increase by an average of 5% annually over the next 18 years. The Smith's plan on beginning a college savings plan wherein they will invest the same dollar amount, at the end of each year, for the next 18 years. The expectation is that the invested money will earn an average annual rate of return of 8%. The back-up plan is to reach into their accumulated savings to date and make a one-time investment, today, with the expectation being to earn an average annual rate of return of 8% over the next 18 years.
a. The forecasted of the first year of college (in 18 years) for the child is nearest to____.
i) $ 43,300
ii) $43,200
iii) $18,900
iv) $46,000
b. In order to have a college savings investment account balance that reaches the amount needed to pay for the first year of college, the Smith's will need to save the amount nearest to ____ annually (use the nearest amount even if that amount doesn't quite get you exactly to the amount needed)
i) $1,230
ii) $1,000
iii) $900
iv) $1,150
c. In order to have a college savings investment account balance that reaches the amount needed to pay for the first year of college, the Smith's will need to invest the amount nearest to_____ today (use the nearest amount even if that amount does not quite get you exactly to the amount needed).
i) $11,500
ii) $18,000
iii) $10,800
iv) $8,500

6. Adventure Inc.'s retained earning account balance was $40,000 on 1.1.12. The 12.31.12 balance was $42000. During 2012 the firm paid $8000 in dividends and sold an additional $5000 of common stock. The amount of net income/net loss for the year was:
a. $10,000 net income
b. $5000 net loss
c. $5000 net income
d. $10000 net loss

7. Adventure Inc reported retained earnings per share for 2011 of $4.00. The firm's price earnings ratio has averaged a value of 10 for the past 5 years (including today). The firm's CFO believes that t a more diversified product line will increase that stability of earnings per share and increase the firm's price earnings ratio to 12. If earnings become more stable and continue to average $4 per share but the price earnings ratio does increase from 10 to 12, owners should see their per share stock value increase to____.
a. $4
b. $8
c. $40
d. $48

8. If a firm's debt ratio is 45%, the equity ration must be
a. Less than 45%
b. 145%
c. 55%
d. Need more information to calculate

9. Sales for ABC Inc are forecasted to be $80,000 in December, $40,000 in January, $70,000 February, $50,000 in March, and $30,000 in April. The firm averages collecting 40% of sales in the month of sale, 50% in the month following sale, and 10% two months following the sale. March cash collections are forecasted to be
a. $59000
b. $56000
c. $48000
d. $67000

10. ABC Inc. has a current ratio of 2.5. The firm use $20000 in cash to pay off a $20000 accounts payable balance. The value of the current ratio, as a result of this payoff will
a. Increase
b. Decrease
c. Remain the same

11. If a firm's accounts receivable turnover equals 10 times, its average collection period is approximately
a. 10 days
b. 36 days
c. 30 days
12. ABC Inc currently sells to customers on terms of net 30 days. Changing to net 45 days will likely
a. Decrease the firm's AR turnover
b. Decrease the firm's average AR balance
c. Decrease the firm's bad debt expense
d. None of the above
e. More than one of the above (of A, B, C)

13. For an investment period that spans 10 years which of the following time value of money factors will have the largest value assuming that each factor is driven by 10 years and 8%.
a. Present value of $1 (single sum)
b. Future value of $1 (single sum)
c. Present value of an annuity
d. Future value of an annuity

14. DEF Inc reports the following information for 2012: sales $900000, fixed cost $400000, net operating income $120000. The amount of total variable costs for 2012 is______.
a. $500000
b. $780000
c. $380000
d. $520000
15. You are considering an investment in a new automated warehouse material handling system. The cost of the system is expected to be $1800000. The system is expected to produce average annual income net of tax.....cash flow of $300000. The system is expected to last (and provide this annual $300000) for 10 years. Should this investment be made if the required annual rate of return is 10%
a. Yes
b. No

16. The best measures of the financial reward provided to common stock shareholders of a publicly traded company are most often
a. Earning par share and total company revenue
b. The ratio return on equity and return on assets
c. The ratios return on equity and net income to sales
d. Dividend yield and stock price appreciation

17. An invested dollar amount, earning an annual rate of return of 9% will double in values in approximately_____years.
a. 7
b. 8
c. 9
d. 10

18. Shareholders provide________capital and creditors provide_____capital to a firm.
a. Gain, loss
b. Debt, equity
c. Equity, debt
d. Income, expense

19. A firm's debt ratio is "too high" if
a. The value is greater than 50%
b. The times interest earned is less than 10
c. The current ratio is lower than 4
d. The value is higher than the firm's cash flow can support the principal and interest payments on

20. EFG Inc. sells chairs for $200 each. The variable cost per chair is $140. The firm's contribution margin ratio is nearest to
a. $60
b. 60%
c. $140
d. 30%