16. Which of the following is true regarding the sensitivity of the Free Cash Flow valuation model to errors? a. The future terminal (continuation) cash flow is extremely sensitive to forecasting and growth rate errors. b. All else being equal, a terminal (continuation) value computed 10 years from today with a 3% overstatement in the growth rate will bias the intrinsic valuation more than if the terminal (continuation) value computation were made in 6 years with a 3% overstatement in growth. c. Financial statements after the year 2002 provide less accurate information regarding the market value of debt than financial statements prepared in the late 1980’s. d. Cash flow based statements provide more forward looking information than do accrual based statements and valuation methods. e. Free Cash Flow valuations are riddled with errors and do a poorer job of explaining and forecasting stock prices that the Discounted Dividends model.

which area of concern in corporate finance is the most difficult to address

(Accounts receivable collection policy​) The Cowboy Bottling Company will generate ​$16 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The​ firm's employees work 300 days a year.​ Currently, the​ firm's processing system ties up 6 ​days' worth of remittance checks. A recent report from a financial consultant indicated procedures that will enable Cowboy Bottling to reduce processing float by 1 full days. If Cowboy invests the released funds to earn 11 ​percent, what will be the annual​ savings?

The annual savings on the new processing system will be ​$

A store has 5 years remaining on its lease in a mall. Rent is $1,900 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

1. should the new lease be accepted
2. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.
3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.

A young couple buying their first home borrow $85,000 for 30 years at 7.1%, compounded monthly, and make payments of $571.23. After 2 years, they are able to make a one-time payment of $2,000 along with their 24th payment.

(a) Find the unpaid balance immediately after they pay the extra $2,000 and their 24th payment. (Round your answer to the nearest cent.) $

(b) How many regular payments of $571.23 will amortize the unpaid balance from part (a)? Give the answer to one decimal point. payments

(c) How much will the remaining debt be after the number of full payment periods in part (b) is made? (Round your answer to the nearest cent.) $ How much extra must be included with the last full payment to pay off the debt? (Round your answer to the nearest cent.) $

(d) How much will the couple pay over the life of the loan by paying the extra $2,000? (Round your answer to the nearest cent.) $ (e) How much will the couple save over the life of the loan by paying the extra $2,000? (Use your answer from part (b). Round your answer to the nearest cent.) $

(Cash management​) As CFO of Portobello Scuba Diving​ Inc., you are asked to look into the possibility of implementing a system to expedite cash receipts from clients. Portobello receives check remittances totaling ​$24 million in a year. The firm records and processes 15,000 checks in the same period. The National Bank of Brazil has informed you that it could provide the service of expediting checks and associated documents for a unit cost of $ 0.15 per check. After conducting an​ analysis, you project that the cash freed up by the adoption of the system can be invested in a portfolio of​ near-cash assets that will yield an annual​ before-tax return of 11 percent. The company usually uses a​ 365-day year in its financial calculations.

a. What reduction in check collection time is necessary for Portobello to be neither better nor worse off for having adopted the proposed​ system?

b. How would your solution to part a be affected if Portobello could invest the​ freed-up balances at an expected annual return of only 6 ​percent?

c. What is the logical explanation for the differences in your answers to part a and part b​?

​(Trade credit discounts​) Determine the effective annualized cost of forgoing the trade credit discount on the following​ terms:

a. 2​/9​, net 40

b. 1​/6​, net 45

c. 2​/6​, net 25

d. 5​/5​, net 80

e. 4​/7​, net 60

f. 3​/10​, net 90

1. A corporate bond being seriously considered for purchase by Oasis for RM975 in today’s market will mature 10 years from today and promises a coupon payment of 5% made semi-annually.  

          Given that the redemption value of this bond is RM1,000. Compute the annual yield-to-maturity (YTM) which range from 0% to 10% using the ‘trial-and-error’ method.

(Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for the Crimson Mfg. Company​ follows:

   2014   2015   2016   2017   2018
Sales   4,346   5,220   7,947   11,699   18,461
Receivables   602   811   1,086   1,368   2,268
Acounts payable   443   683   682   1,554   2,409
Inventories   341   456   655   378   354

a. Calculate​ Crimson's days of sales​ outstanding, days of payables​ outstanding, and days of sales in inventory for each of the 5 years. ​(Assume a​ 365-day year. Hint​: Assume that the​ firm's cost of goods sold equals​ 70% of​ sales.) What has Crimson accomplished in its atempts to better manage its investments in account receivable and​ inventory? ​(Round to two decimal​ places.)

b. Calculate​ Crimson's cash conversion cycle for each of the 5 years. Evaluate the​ firm's overall management of its working capital. Assume a​ 365-day year.

Days of sales outstanding​ (DSO)

2014........2015........2016........2017.......2018
? ? ? ? ?

Annual percentage yield​) Compute the cost of the following trade credit terms using the compounding​ formula, or effective annual rate. Note​: Assume a​ 30-day month and​ 360-day year.

a. 2​/5​, net 45

b. 4​/10​, net 30

c. 2​/10​, net 60

d. 4​/10​, net 30

Chad was offered two options for a car he was purchasing:

• Lease option: Pay lease amounts of $400 at the beginning of every month for 4 years. At the the end of 4 years, purchase the car for $10,500.

• Buy option: Purchase the car immediately for $23,500.

The money is worth 7.70% compounded monthly.

a. What is the Discounted Cash Flow (DCF) for the lease option?

b. Which is the better option?

Lease Option or Buy Option

15.In a limited liability partnership (LLP)

a.a partner may avoid liability for the malpractice of other partners.

b.a partner who commits malpractice is automatically expelled from the partnership under the UPA.

c.the maximum number of partners is limited by the law of most states.

d.it is deemed unethical to employ non-professionals.

17.A limited liability company

a.is presumed to be member managed.

b.is presumed to be manager managed.

c.may not have members who are foreign nationals under federal law.

d.can have a duration of no more than 25 years under the law of most states.

19.A syndicate

a.cannot be incorporated under the law of most states.

b.is a type of criminal(organized crime) organization.

c.is an investment group formed to finance a particular project.

d.is an income tax avoidance device.

A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,200 per month for the next three years and then $1,200 per month for two years after that. If the bank is charging customers 10.25 percent APR, how much would it be willing to lend the business owner? (Do not round intermediate calculations and round your final answer to 2 decimal places.) What is the present value?

STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 8 million shares of common stock outstanding. The stock currently trades at $37.80 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $85 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $14.125 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 23 percent corporate tax rate (state and federal).

1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2. Suppose Stephenson decides to issue debt to finance the purchase. What will the market value of the Stephenson Real Estate Company be if the purchase is financed with debt?

3. What is the price per share of the firm’s stock? (Hint: Stock price per share = Total equity / # of outstanding shares)