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    Finance questions

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    1. Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $95,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $35,000. The equipment would require an increased inventory of 3,000. The equipment is expected to save the company $35,000 per year in before-tax operating costs. The company's marginal tax rate is 30 percent and its cost of capital is 10 percent.

    a. What is the terminal year cash flow?
    b. Calculate net present value. Should the machine be purchased?

    2. Andrews Corporation plans a $6 million expansion. The firm wants to maintain a 35 percent debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 30 percent of last year's net income. Last year, net income was $4 million.

    a. If the company changed to a residual dividend policy, how much external equity will it need?
    b. Is the company likely to change to a residual policy? Why or why not?

    3. Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company's stock with Kern netting $210 million dollars from the offering. The expected price to the public was $25 per share.

    The out-of-pocket expenses incurred by the investment banker were $2,000,000.

    a. Is the agreement between the company and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?

    4. The Marcus Corporation's financial statements are shown below. Figures are in millions. The firm is in the 30% tax bracket.

    Balance Sheet
    2008 2007
    Cash and equivalents 40 30
    Marketable securities 10 15
    Accounts receivable 60 50
    Inventory 80 70
    Total Current Assets 190 165
    Net plant and equipment 230 190
    Total Assets 420 355

    2008 2007

    Accounts payable 60 50
    Notes payable 80 90
    Accruals 20 15
    Total current liabilities 160 155
    Long-term debt 60 50
    Common stock 200 150
    Total liabilities and equity 420 355

    Income Statement
    2008 2007
    Net sales 550 490
    Costs other than depreciation 390 350
    Depreciation 100 97
    Total operating costs 490 447
    Earnings before interest and taxes 60 43
    Less interest 10 7
    Earnings before taxes 50 36
    Taxes 15 11
    Net income 35 25

    a. Calculate net operating income after taxes
    b. Calculate net operating working capital for 2007 and 2008
    c. Calculate total operating capital for 2007 and 2008?
    d. Calculate free cash flow for 2008
    e. Why is free cash flow important? Is it critical that the company always maintain positive free cash flow? Explain

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    The solution explains various finance questions