Reference no: EM132362926

Introduction to Managerial Finance Problems - Complete the following problems in Principles of Managerial Finance.

Part A -

1. Liability comparisons - Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Merideth in each of the following situations.

a. Southwest Development Company is a sole proprietorship owned by Ms. Harper.

b. Southwest Development Company is a 50-50 partnership of Merideth Harper and Christopher Black.

c. Southwest Development Company is a corporation.

2. Cash flows - It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account, and her bank loans money at 6% per year while it offers short-term investment rates of 5%. Jane's cash flows during August were as follows:

a. Determine Jane's total cash inflows and cash outflows.

b. Determine the net cash flow for the month of August.

c. If there is a shortage, what are a few options open to Jane?

d. If there is a surplus, what would be a prudent strategy for her to follow?

3. Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today's dollars) over the next S years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following:

a. The marginal benefits of the proposed new robotics.

b. The marginal costs of the proposed new robotics.

c. The net benefit of the proposed new robotics.

d. What should Ken recommend that the company do? Why?

e. What factors besides the costs and benefits should be considered before the final decision is made?

4. Identifying agency problems, costs, and resolutions Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be handled short of firing the individual(s) involved.

a. The front desk receptionist routinely takes an extra 20 minutes of lunch time to run personal errands.

b. Division managers are padding cost estimates to show short-term efficiency gains when the costs come in lower than the estimates.

c. The firm's chief executive officer has had secret talks with a competitor about the possibility of a merger in which she would become the CEO of the combined firms.

d. A branch manager lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year's branch profit. The manager's bonus is based on profitability.

Part B -

1. Over the past 100 years, the level of government regulation of financial institutions and markets has ebbed and flowed or, as some economists might argue, has ebbed and flooded. Although the laws and regulatory agencies created by the government have various defined and not-so-well-defined goals, what, might you argue, is the single biggest benefit of government regulation?

2. Transaction costs - You would like to purchase one Class A share of Berkshire Hathaway through your Scottrade brokerage account. Scottrade charges a $7 commission for online trades. You log into your account, check the real-time quotes for Berk¬shire Hathaway (you see a bid price of $262,850 and an ask price of $263,770) and submit your order.

a. What is the current bid/ask spread for Berkshire Hathaway Class A shares?

b. If Scottrade routes your buy order to the NYSE, where Berkshire Hathaway is listed, what's the potential minimum your total transaction costs will be?

c. If, instead, Scottrade routes your buy order to the Nasdaq, where Berkshire Hathaway is not listed, what's the potential maximum your total transaction costs will be?

d. Regardless of how your trade is executed, based on the bid/ask spread what is the market value of your trade?

3. Transaction costs - In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your 1,200 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades and for broker-assisted trades there is an additional $25.00 service charge, so the total commission is $29.95.

a. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed?

b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not.

c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed?

d. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?

4. Initial public offering - A Brazilian Company called Netshoes completed its IPO on April 12, 2017, and listed on the NYSE. Netshoes sold 8,250,000 shares of stock to primary market investors at an IPO offer price of $18, with an underwriting discount of 6.5%. Secondary market investors, however, were paying only $16.10 per share for Netshoes' 31,025,936 shares of stock outstanding.

a. Calculate the total proceeds for Netshoes' IPO.

b. Calculate the dollar amount of the underwriting fee for Netshoes' IPO.

c. Calculate the net proceeds for Netshoes' IPO.

d. Calculate market capitalization for Netshoes' outstanding stock.

e. Calculate IPO underpricing for Netshoes' IPO.

f. Explain the IPO underpricing for Netshoes.

Part C -

1. What is the goal of the firm and, therefore, of managers and employees? Discuss how one measures achievement of this goal.

2. For what three main reasons is profit maximization potentially inconsistent with wealth maximization?

3. What is risk? Why must financial managers consider risk as well as return when they evaluate a decision alternative or action?

4. Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm's other stakeholders?