Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 17, Problem 9CQ
Bankruptcy and Corporate Ethics Finns sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy Jaws “as a sword rather than a shield.” Is this an ethical tactic?
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(Related to Checkpoint 17.1) (Forecasting discretionary financing needs) Huang Electronics, Inc., operates a chain of electrical lighting and
fixture distribution centers throughout northern Arizona. The firm is anticipating expansion of its sales in the coming year as a result of recent
population growth trends. The firm's financial analyst has prepared pro forma balance sheets that reflect three different rates of growth in firm sales for
the coming year and the corresponding non-discretionary sources of financing the firm expects to have available, as follows:
a. What are the firm's discretionary financing needs under each of the three growth scenarios?
b. What potential sources of financing are there for Huang Electronics to fulfill its needs for discretionary financing?
a. The discretionary financing needs for a 10% growth scenario are $ (Round to the nearest dollar.)
(Related to Checkpoint 17.1) (Forecasting discretionary financing needs) In the spring of 2023, the Caswell Publishing Company established a
custom publishing business for its business clients. These clients consisted principally of small- to medium-size companies in Round Rock,
Texas. However, the company's plans were disrupted when it landed a large printing contract which it expects will run for several years. Specifically,
the new contract will increase firm revenues by 100 percent. Consequently, Caswell's managers know they will need to make some significant changes
in firm capacity, and quickly. The following balance sheet for 2023 and pro forma balance sheet for 2024 reflect the firm's estimates of the financial
impact of the 100 percent revenue growth:
a. How much new discretionary financing will Caswell require based on the above estimates?
b. Given the nature of the new contract and the specific needs for financing that the firm expects, what recommendations might you offer…
(Related to Checkpoint 17.1) (Forecasting discretionary financing needs) Bates Fabricators, Inc. estimates that it invests 25 cents in assets for
each dollar of new sales. However, 4 cents in profits are produced by each dollar of additional sales, of which 1 cent(s) can be reinvested in the firm. If
sales rise by $773,000 next year from their current level of $5.36 million, and the ratio of spontaneous liabilities to sales is 0.17, what will be the firm's
need for discretionary financing? (Hint: In this situation, you do not know what the firm's existing level of assets is, nor do you know how those assets
have been financed. Thus, you must estimate the change in financing needs and match this change with the expected changes in
spontaneous liabilities, retained earnings, and other sources of discretionary financing.)
The discretionary financing needs will be $
(Round to the nearest dollar.)
Chapter 17 Solutions
Corporate Finance
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
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