# Expert Answers

1) The following market information was gathered for the Blender Corporation. The firm has 1,000 bonds outstanding, each selling for $1,100.00 with a required rate of return of 8.00%. Blenders has 5,000 shares of preferred stock outstanding, selling for $40.00 per share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return of 11.00% and the common stock requires a 14.00% return, and the firm has a corporate tax rate of 30%, then calculate the firm's

WACC adjusted for taxes. 26) ______

A) 6.77% B) 9.53% C) 10.73%

D) There is not enough information to answer.

2) Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the optimal order quantity for the t-shirt inventory (rounded to the nearest dollar)?

A) 15,841 B) 31,623 C) 1,581 D) 8,333

3) Oregon Saw Mills Inc. has credit terms of 2/10 net 60. Customers should take the discount and pay in 10 days if they CANNOT earn more than ________ (APR) or ________ (EAR) on their investments. 28) ______

A) 13.08% APR or 12.42% EAR B) 15.89% APR or 14.90% EAR C) 12.42% APR or 13.08% EAR D) 14.90% APR or 15.89% EAR)

4) Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount. If the firm borrows the maximum amount for one year, what is the EAR on this loan? 29) ______

A) 6.87% B) 7.22% C) 6.50% D) 7.39%

5) Firewall Corp. is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm with $900,000 in assets and 100,000 shares outstanding. The market value of each share is $9.00. The CEO of Firewall is thinking of leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares, leaving 70,000 shares outstanding. The cost of debt is 6% annually, and the current corporate tax rate for Donat is 30%. The CEO believes that Donat will earn $100,000 per year before interest and taxes. Which of the statements below is TRUE? A) All-equity EPS is $0.70.

B) Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is all-equity.

C) 50/50 debt-to-equity EPS is $0.838.

D) Statements (A) through (C) are all true.

6) Complete the equal-payments three-year amortization table.

7) Complete the following zero-coupon amortization schedule.

b) What is the EAR of this loan? 34) _____________

8) Describe the principal-agent relationship. In your answer, give an example of how a principal-agent problem arises in the corporate world. Can such a problem become costly? Please explain.

9) Consider the information below from a firm's balance sheet for 2012 and 2013.

a) What is the Net Working Capital for 2013? What is it for 2012?

b) What is the Change in Net Working Capital (NWC)?

c) Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372,what is the Cash Flow from Assets?

Net Working capital

2012

2011

Change

current Assets

Cash

$1,561

$1,800

($239)

Short term investment

$1,052

$3,010

-1958

Accounts receivable

$3,616

$3,129

487

Inventories

$1,816

$1,543

273

other current Assets

$707

$601

106

Total current Assets

$8,752

$10,083

-1331

current Liabilities

Accounts Payable

$5,173

$5,111

62

Short term Debt

$288

$277

11

other current liabilities

$1,401

$1,098

303

Total current liabilities

$6,862

$6,486

376

Net Working capital

$1,890

$3,597

-1707

d) Why is an understanding of cash flow so important in the study of finance?

10) Amistad Inc manufactures custom golf clubs and orders 250,000 graphite shafts per year from its manufacturer. The CEO at Amistad wishes to know the optimal EOQ. The carrying cost is $0.45 per shaft per year. The order cost is $750 per order.a) What is the EOQ for Amistad?

a) What is the EOQ for Amistad?

b) W

11) Assume the following risk: risk free rate is 2.5%, inflation Year 1 is 2.5%, Year 2 is 3.5% and Year 3 is 4.5%. You have invested in a three-year bond with an annual interest rate of 7.8%

Required: Calculate the default risk premium for your investment – show your work.

7.8-2.5-4.5 = 0.8% is the default risk premium

WACC adjusted for taxes. 26) ______

A) 6.77% B) 9.53% C) 10.73%

D) There is not enough information to answer.

2) Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the optimal order quantity for the t-shirt inventory (rounded to the nearest dollar)?

A) 15,841 B) 31,623 C) 1,581 D) 8,333

3) Oregon Saw Mills Inc. has credit terms of 2/10 net 60. Customers should take the discount and pay in 10 days if they CANNOT earn more than ________ (APR) or ________ (EAR) on their investments. 28) ______

A) 13.08% APR or 12.42% EAR B) 15.89% APR or 14.90% EAR C) 12.42% APR or 13.08% EAR D) 14.90% APR or 15.89% EAR)

4) Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount. If the firm borrows the maximum amount for one year, what is the EAR on this loan? 29) ______

A) 6.87% B) 7.22% C) 6.50% D) 7.39%

5) Firewall Corp. is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm with $900,000 in assets and 100,000 shares outstanding. The market value of each share is $9.00. The CEO of Firewall is thinking of leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares, leaving 70,000 shares outstanding. The cost of debt is 6% annually, and the current corporate tax rate for Donat is 30%. The CEO believes that Donat will earn $100,000 per year before interest and taxes. Which of the statements below is TRUE? A) All-equity EPS is $0.70.

B) Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is all-equity.

C) 50/50 debt-to-equity EPS is $0.838.

D) Statements (A) through (C) are all true.

6) Complete the equal-payments three-year amortization table.

7) Complete the following zero-coupon amortization schedule.

b) What is the EAR of this loan? 34) _____________

8) Describe the principal-agent relationship. In your answer, give an example of how a principal-agent problem arises in the corporate world. Can such a problem become costly? Please explain.

9) Consider the information below from a firm's balance sheet for 2012 and 2013.

a) What is the Net Working Capital for 2013? What is it for 2012?

b) What is the Change in Net Working Capital (NWC)?

c) Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372,what is the Cash Flow from Assets?

Net Working capital

2012

2011

Change

current Assets

Cash

$1,561

$1,800

($239)

Short term investment

$1,052

$3,010

-1958

Accounts receivable

$3,616

$3,129

487

Inventories

$1,816

$1,543

273

other current Assets

$707

$601

106

Total current Assets

$8,752

$10,083

-1331

current Liabilities

Accounts Payable

$5,173

$5,111

62

Short term Debt

$288

$277

11

other current liabilities

$1,401

$1,098

303

Total current liabilities

$6,862

$6,486

376

Net Working capital

$1,890

$3,597

-1707

d) Why is an understanding of cash flow so important in the study of finance?

10) Amistad Inc manufactures custom golf clubs and orders 250,000 graphite shafts per year from its manufacturer. The CEO at Amistad wishes to know the optimal EOQ. The carrying cost is $0.45 per shaft per year. The order cost is $750 per order.a) What is the EOQ for Amistad?

a) What is the EOQ for Amistad?

b) W

11) Assume the following risk: risk free rate is 2.5%, inflation Year 1 is 2.5%, Year 2 is 3.5% and Year 3 is 4.5%. You have invested in a three-year bond with an annual interest rate of 7.8%

Required: Calculate the default risk premium for your investment – show your work.

7.8-2.5-4.5 = 0.8% is the default risk premium

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