Reference no: EM133204801

Financial Management Questions -

Question 1 - Explain what you believe is the dividend policy for Costco Wholesale Corporation (COST). In answering this question, discuss the concepts that were examined in class. The points earned depend on the depth of the discussion of the dividend policy for Costco. Provide financial metrics as necessary.

Question 2 - Go to gurufocus website to find the weighted average cost of capital for Costco Wholesale Corporation (COST).

Required -

a) Explain how the WACC is calculated.

b) Explain the WACC in the context of a hurdle rate, return on invested capital (ROIC), an optimal capital structure, and an optimal capital budget.

Question 3 -  Wade Inc. predicts that earnings in the coming year will be $100million. There are 10 million shares.Wade maintains a debt-equity ratio of 2.

Required -

a) Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

b) Suppose the firm uses a residual dividend policy. Planned capital expenditures total $150 million. Based on this information, what will the dividend per share be?

c) Suppose Wade plans no capital outlays for the coming year. What will the dividend be under a residual policy? What will new borrowing be?

Question 4 - Ohio Valley Steelworks (OVS) is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 40 days. Sales are evenly distributed over its 10 sales regions throughout the United States. Delinquent accounts are not a problem. The company has recently undertaken an analysis aimed at improving its cash management procedures. OVS determined that it takes an average of 5.0 days for customers' payments to reach the head office in Columbus, OH from the time they are mailed. It takes another full day in processing time prior to depositing the checks with a local bank. Transit float typically averages two days. Annual sales average $20 million for each regional office. Reasonable investment opportunities can be found that yield 10 percent per year. To alleviate the float problem confronting the firm, the use of a lockbox system in each of the 10 regions is being considered. This would reduce mail float by 2.0 days. One-half day in processing float would also be eliminated, plus a full day in transit float. The lockbox arrangement would cost each region $4,000 per month. Additionally, OVS will save $200,000 in accounting costs, if the lockbox system is implemented.

Should OVS adopt the lockbox system? Show computations.

Question 5 - Explain the significance of financing with accounts payable. Also, explain the rationale of taking a cash discount, such as 2/10, net/30. Additionally, determine the approximate balance of accounts payable, if a company stretches its payables to 45 days and on average, they make purchases of $1,000,000 per day from their vendors. Explain what the stretching accomplishes if the vendors should be paid in 30 days.

Question 6 - The BAM Corporation is in the volatile garment business. The firm has annual revenues of $300 million and operates with a 40% gross margin on sales. Bad debt losses average 4% of revenues. BAM is contemplating an easing of its credit policy in an attempt to increase sales. The loosening would involve accepting a lower-quality customer for credit sales. It is estimated that sales could be increased by $50 million a year. An increase in inventory investment of $3,000,000 will be required. Opportunity costs for inventory is 12%; however, the collections department estimates that bad debt losses on the new business would run five times the normal level, and that internal collection efforts would cost an additional $2 million a year.

Show computations to explain if the change in policy should be made.

Question 7 - SPO Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available:

Annual sales are $1,000,000.

Fixed assets are $500,000.

The debt ratio is 40 percent.

EBIT is $100,000.

Tax rate is 30 percent.

With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 50 percent of sales.

With an aggressive financing policy, short-term debt will be 80 percent of the total debt; with a conservative financing policy, short-term debt will be 40 percent of the total debt.

Interest rate for short-term debt is 5 percent. Interest rate for long-term debt is 10percent.

Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.

Question 8 - Robinson Corporation currently processes seafood with a machine it purchased several years ago. The machine, which originally cost $1,000,000, currently has a book value of $400,000. Robinson is considering replacing the machine with a newer, more efficient one. The new machine will cost $1,400,000 and will require an additional $100,000 for delivery and installation. The new machine will also require Robinson to increase its investment in receivables and inventory by $400,000. The new machine will be depreciated on a straight-line basis over five years to a zero balance. Robinson expects to sell the existing machine for $300,000. Robinson's marginal tax rate is 25 percent and the required rate of return for Robinson is 12 percent.

If Robinson purchases the new machine, annual revenues are expected to increase by $200,000 and annual operating costs (exclusive of depreciation) are expected to decrease by $50,000. Annual revenue and operating costs are expected to remain constant at this new level over the five-year life of the project. After five years, the new machine will be completely depreciated and is expected to be sold for $200,000. (Assume that the existing unit is being depreciated at a rate of $80,000 per year.)

Required -

a) Determine the net present value of the project.

b) Determine the payback period of the project.

c) Determine the internal rate of return of the project.

d) Do you recommend that the project be undertaken? Explain.