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# McDowell Industries sells on terms of 3/10, net 30. total sales for the year are \$912,500. 0!

of the customers "ay on the 10th day and ta#e discounts, the other \$0! "ay, on a%era&e, 0 days after their "urchases. a. what is the days sales outstandin&' (. what is the a%era&e amount of recei%a(le' c. what would ha""en on a%era&e recei%a(le if McDowell tou&hened u" on its collection "olicy with the result that all nondiscount customers "aid on the 30th day' a. 0. )10* + 0.\$) 0* , 2- days. (. \$912,500/3\$5 , \$2,500 sales "er day. \$2,500)2-* , \$.0,000 , /%era&e recei%a(les. c. 0. )10* + 0.\$)30* , 22 days. \$912,500/3\$5 , \$2,500 sales "er day. \$2,500)22* , \$55,000 , /%era&e recei%a(les. 0ales may also decline as a result of the ti&hter credit. 1his would further reduce recei%a(les. /lso, some customers may now ta#e discounts further reducin& recei%a(les. the 2occo 3or"oration has an in%entory con%ersion "eriod of .5 days, a recei%a(le collection "eriod of 3- days, and a "aya(le deferral "eriod of 30 days. (. if 2occo annual sales are \$3, 21,-.5 and all sales are on credit, what is the firms in%estment in accounts recei%a(le' c. how many times "er year does 2occo turn o%er its in%entory'

(. /%era&e sales "er day , \$3, 21,-.5/3\$5 , \$9,3.5. In%estment in recei%a(les , \$9,3.5 3- , \$35\$,250. c. In%entory turno%er , 3\$5/.5 , .-.. a. if a firm (uys under terms of 3/15, net 5, (ut actually "ays on the 20th day and still ta#es the discount, what is the nominal cost of its nonfree trade credit'
3 3\$5 , 5.15!. 9. 5 4 20

3arter cor"orations sales are e5"ected to incredse from \$5 million in 200 to \$\$ million in 2005 , or (y 20 "ercent. Its assets totaled \$ million at the end of 200 . carter is at full ca"acity6so its assets must &row at same rate as "ro4 7ected sales. /t the end of 200 , cussent lia(ilities were \$1 million, consistin& of \$250.000 of accounts "ata(le, \$500.000of notes "aya(le ,and \$250.000 of accruals . 1he after4ta5 "rofit mar&in is forecasted to (e 5 "ercent 8se the /9: formula to forecast 3arter;s additional funds needed for the comin& year. /9: ,
\$ ,000,000 \$1,000,000 < )0.1*)\$1,000,000* < )\$300,000*)0.3* \$5,000,000

## , )0.-*)\$1,000,000* 4 \$100,000 4 \$90,000 , \$-00,000 4 \$190,000 , \$\$10,000.

1he =i%oli 3om"any has no4de(t outstandin&, and its financial "osition is &i%en 3a"ital 0trut (y the followin& data> /ssets )(oo# mar#et* ?@I1 3ost of eAuity, r0 0toc# "rice, BC 0hares outstandin& 1a5 rate, 1 )federal4"lus4state* \$3,000,000 \$500,000 10! \$15 200.000 0!

1he firm is considerin& sellin& (onds and simultaneously re"urchasin& some of its stoc#. If it mo%es to ca"ital structure with 30 "ercent de(t (ased on mar#et %alues ,its cost of eAuity, r0, will increase to ii "ercent to reflect the increased ris#. @onds can (e sold at a cost, rd, of . "ercent. =i%oli is a no4&rowth firm. Dence, all its earnin&s ate "aid out as di%idends, and earnin&s are e5"ectationally constant o%er time. a. Ehat effect would this use of le%era&e ha%e on the %alue of the firm' (. Ehat would (e the "rice of =i%oliFs stoc#'
1\$43 a. Cri&inal %alue of the firm )D , \$0*> G , D + 0 , 0 + )\$15*)200,000* , \$3,000,000. Cri&inal cost of ca"ital> E/33 , wd rd)141* + wers , 0 + )1.0*)10!* , 10!. Eith financial le%era&e )wd,30!*> E/33 , wd rd)141* + wers , )0.3*).!*)140. 0* + )0..*)11!* , -.9\$!. @ecause &rowth is Hero, the %alue of the com"any is>

G 939 ) ?@I1 *)1 1 * )\$500,000*)1 0. 0* = = =\$3,3 -,21 .2-\$. . E/33 E/33 0.0-9\$

Increasin& the financial le%era&e (y addin& \$900,000 of de(t results in an increase in the firmFs %alue from \$3,000,000 to \$3,3 -,21 .2-\$. (. 8sin& its tar&et ca"ital structure of 30! de(t, the com"any must ha%e de(t of> D , wd G , 0.30)\$3,3 -,21 .2-\$* , \$1,00 , \$ .2-\$. 1herefore, its de(t %alue of eAuity is> 0 , G < D , \$2,3 3,.50. /lternati%ely, 0 , )14wd*G , 0..)\$3,3 -,21 .2-\$* , \$2,3 3,.50. 1he new "rice "er share, B, is> B , I0 + )D < D0*J/n0 , I\$2,3 3,.50 + )\$1,00 , \$ .2-\$ < 0*J/200,000 , \$1\$.. 1.

(16-4) Betrit Brintin& 3om"any has a total mar#et %alue of \$100 million, consistin& of 3a"ital 0tructure 1 million shares sellin& for \$50 "er share and \$50 million of 10 "ercent "er"etual (onds now sellin& at "ar. 1he com"anyFs ?@I1 is \$13.2 million, and its ta5 rate is increasin& its de(t to .0 "ercent )(ased on mar#et %alues* or decreasin& it to 30 "ercent. If it decides to increase its use of le%era&e, it must call its old (onds and issue new ones with a 12 "ercent cou"on. If it decides to decrease its le%era&e, it will call in its old (onds and re"lace them with new - "ercent cou"on (onds. 1he com"any will sell or re"urchase stoc# at the new eAuili(rium "rice to com"lete the ca"ital structure chan&e. 1he firm "ays out all earnin&s as di%idendsK hence, its stoc# is a Hero &rowth stoc#. Its current cost of eAuity rs, is 1 "ercent. If it increases le%era&e, rs will (e 13 "ercent. Ehat is the firmFs E/33 and total cor"orate %alue under each ca"ital structure'

1\$4

a. Bresent situation )50! de(t*> E/33 , wd rd)141* + wers , )0.5*)10!*)140.15* + )0.5*)1 !* , 11.25!. G,
939 ) ?@I1 *)1 1 * )\$13.2 *)1 0.15* = = , \$100 million. E/33 E/33 0.1125

.0 "ercent de(t> E/33 , wd rd)141* + wers , )0..*)12!*)140.15* + )0.3*)1\$!* , 11.9 !. G million. 30 "ercent de(t> E/33 , wd rd)141* + wers , )0.3*)-!*)140.15* + )0..*)13!* , 11.1 !. G million. ,
939 ) ?@I1 *)1 1 * )\$13.2 *)1 0.15* = = , E/33 E/33 0.111

\$9 .255

\$101.023

## (16.5* @ec#man ?n&ineerin& and /ssociates )@?/* is

considerin& a chan&e in its ca"ital structure. @?/ currently has \$20 million in de(t carryin& a rate of "ercent, and its stoc# "rice is \$ 0 "er share with 2 million shares outstandin&. @?/ is a Hero &rowth firm and "ays out all of its earnin&s as di%idends. ?@I1 is \$1 .933 million, and @?/ faces a 0 "ercent federal4 "lus4state ta5 ra%e. 1he mar#et ris# "remium Is "ercent, and the ris# free rate is \$ "ercent. @?/ is considerin& increasin& its de(t le%el to a ca"ital structure with 0 "ercent de(t, (ased on mar#et %alues, and re"urchasin& shares with the e5tra money that it (orrows. @?/ will ha%e to retire. . the old de(t in order to issue new de(t, and the rate on the new de(t will (e 9 "ercent. @?/ has a (eta of 1.0. a. Ehat is @?/Fs unle%ered (eta' 8se mar#et %alue DI0 when unle%erin&. (. Ehat are @?/Fs new (eta and cost of eAuity if it has 0 "ercent de(t'

c. Ehat are @?/Fs E/33 and total %alue of the firm with 0 "ercent d1
\$45 a. @?/Fs unle%ered (eta is (8,(L/)1+ )141*)D/0**,1.0/)1+)14 0. 0*)20/-0** , 0.-.0. (. (L , (8 )1 + )141*)D/0**. /t 0 "ercent de(t> (L , 0.-. )1 + 0.\$) 0!/\$0!** , 1.21-. r0 , \$ + 1.21-) * , 10.-.2! c. E/33 , wd rd)141* + wers , )0. *)9!*)140. * + )0.\$*)10.-.2!* , -.\$-3!. G million.
Marsland Industries follows a strict residual dividend policy. The company has a capital budget of \$4,000,000. It has a target capital structure which consists of 40 percent debt and 60 percent e uity. Marsland forecasts that its net income will be \$!,000,000. "hat will be the company#s e\$pected dividend payout ratio this year% a. 20% b. 30% c. 35% d. 40% e. 45%

\$103.1--