Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 26, Problem 1MC
Summary Introduction
Case summary:
Company H is a hardware chain, focused in “do it yourself” equipment rentals and materials. The one method to utilize excess fund is an acquisition. Company H’s boss and person Z decided to value the potential target of company L. For the purpose of this person Z conducted certain estimation regarding the company L.
To discuss: The economically justifiable and not justifiable reasons and suitable reason for this condition.
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Smitty’s Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda Wade, Smitty’s treasurer and your boss, has been asked to place a value on a potential target, Hill’s Hardware, a small chain that operates in an adjacent state, and she has enlisted your help. Table 1 indicates Wade’s estimates of Hill’s earnings potential if it comes under Smitty’s management (in millions of dollars). The interest expense listed here includes the interest (1) on Hill’s existing debt,(2) on new debt that Smitty’s would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new “H division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the H division to help finance its growth. Hill’s…
Smitty’s Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda Wade, Smitty’s treasurer and your boss, has been asked to place a value on a potential target, Hill’s Hardware, a small chain that operates in an adjacent state, and she has enlisted your help. Table below indicates Wade’s estimates of Hill’s earnings potential if it comes under Smitty’s management (in millions of dollars). The interest expense listed here includes the interest (1) on Hill’s existing debt, (2) on new debt that Smitty’s would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new “H division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the H division to help finance its growth.…
Zachary Delivery is a small company that transports business packages between New York and Chicago, It operates a fleet of small
vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between
the depots in the two cities. Zachary Delivery recently acquired approximately $5.6 million of cash capital from its owners, and its
president, George Hay, is trying to identify the most profitable way to invest these funds.
Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of
$730,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the
revenue base. More specifically, he expects cash inflows to increase by $280,000 per year. The additional vans are expected to have
an average useful life of four years and a combined salvage value of $103,000. Operating the vans will require additional working…
Chapter 26 Solutions
Intermediate Financial Management (MindTap Course List)
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