a)
To discuss: The impact when firm reduces its inventories by $500,000 and invests in marketable securities.
a)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
b)
To discuss: The impact, when firm purchases 20 new trucks with $500,000 paying through by selling the marketable securities.
b)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
c)
To discuss: The impact, when firm borrows the amount of $500,000 from bank as a short-term loan and invests on inventory.
c)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
d)
To discuss: The impact, when company borrows the amount of $2,000,000 from bank as a five-year loan and has invested to expand its plant.
d)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
e)
To discuss: The impact, when company sale its common stock amounted to $2,000,000 and used the proceeds to expand its plant.
e)
Explanation of Solution
Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:
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Chapter 3 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
- you have developed the following pro forma income statement for your? corporation: it represents the most recent? year’s operations, which ended yesterday. a.if sales should increase by 25 ?percent, by what percent would earnings before interest and taxes and net income? increase? b.if sales should decrease by 25 ?percent, by what percent would earnings before interest and taxes and net income? decrease? q c.if the firm were to reduce its reliance on debt financing such that interest expense were cut in? half, how would this affect your answers to parts a and b?? sales $ 45,750,000 variable costs -22,800,000 revenue before fixed costs $ 22,950,000 fixed costs -9,200,000 ebit $ 13,750,000 interest expense -1,350,000 earnings before taxes $ 12,400,000 taxes (50%) -6,200,000 net income $ 6,200,000arrow_forwardWindham Corporation has current assets of $440,000 and current liabilities of $550,000. Windham Corporation's current ratio would be increased by: Multiple Choice the purchase of $140,000 of inventory on account. the payment of $140,000 of accounts payable. the collection of $140,000 of accounts receivable. refinancing a $140,000 long-term loan with short-term debt.arrow_forwardUse the following information to find the external financing needed (EFN): Current sales: $6,000; Current costs: $4,000; Total Assets: $20,000; Total Debt: $8,000; Total equity: $12,000; Projected sales: $9,600. Total assets and costs are proportional to sales. The firm does not plan to distribute any dividends. The level of debt and equity is independent of the level of salesarrow_forward
- Medallion Cooling Systems, has total assets of $10,900,000, EBIT of $1,990,000, and preferred dividends of $205,000and is taxed at a rate of 40%.In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment: Capital structure debt ratio Cost of debt, rd Number of common stock shares Required return, rs 0% 0% 198,000 12.1% 15 7.9 171,000 13.2 30 8.9 141,000 13.8 45 12.1 107,000 16.1 60 14.9 76,000 20.1 a. Calculate earnings per share for each level of indebtedness. Debt Ratio 0% EBIT $ 1,990,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferreddividends $ Profits available to common stockholders $…arrow_forwardYou have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?arrow_forwardHome Demo reports the following: Total liabilities = $38,633 million and Total assets = $42,966 million.(a) Compute Home Demo’s debt ratio.(b) Assuming Lows Hardware (a competitor) has a debt ratio of 60%, which company has higher risk from financial leverage?arrow_forward
- Selected financial data for Bahama Bay and Caribbean Key are as follows:Required:1. Calculate the debt to equity ratio for Bahama Bay and Caribbean Key for the most recent year. Which company has the higher ratio?2. Calculate the return on assets for Bahama Bay and Caribbean Key. Which company appears more profitable?3. Calculate the times interest earned ratio for Bahama Bay and Caribbean Key. Which company is better able to meet interest payments as they become due?arrow_forward(Financial forecasting-discretionary financing needs) J. T. Jarmon, Inc. has been in business for only 1 year, and the CFO expects that the relationship between firm sales and its operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year, Jarmon had $18,400,000 in sales and net income of $552,000. The firm anticipates that next year's sales will reach $21,160,000, with net income rising to $634,800. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments. The firm's balance sheet for 2018 is found in the popup window: total assets for 2019 and its discretionary financing needs (DFN). Using the information provided, make an estimate of Jarmon's financing requirements or What are Jarmon's financing requirements or total assets for 2019? (Round to the nearest dollar.) What are Jarmon's discretionary financing needs (DFN) for 2019? $ (Round to the…arrow_forwardPayne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of…arrow_forward
- The activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O Falsearrow_forwardPayne Products had $2.4 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $2 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 10%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 14% of sales. Payne's tax rate is 35%, a. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Tight policy % 76.77 Moderate policy Relaxed policy 9.04 5.05 1% b. In this problem, we have assumed that the level of expected sales is…arrow_forwardThis is an example prioblem. I need help understanding the math that is being done?arrow_forward
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