Question

1.      Here are book- and market-value balance sheets of the United Frypan Company: />                                    Book-Value Balance SheetNet working capital                      $50                    Debt       $70Long-term assets                          50                    Equity      30                                                    $100                                 $100
                              Market-Value Balance SheetNet working capital                        $50                Debt             $70Long-term assets                           200                Equity          180                                                      $250                                 $250
Assume that MM’s theory holds except for taxes. There is no growth, and the $70 of debt is expected to be permanent. Assume a 32% corporate tax rate. a. How much of the firm’s market value is accounted for by the debt-generated tax shield?
pv tax shield ——
b. What is United Frypan’s after-tax WACC if r_Debt = 7.4% and r_Equity = 15.6%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
WACC —-%
c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new value of the firm, other things equal? Assume a borrowing rate of 7.4%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
New value of the firm ———

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Question

1.  Microbiotics currently sells all of its frozen dinners cash on delivery

but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $180, and the cost per carton is $105. The unit sales will increase from 1,130 cartons to 1,190 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.

a. If the interest rate is 1% per month, what will be the change in the firm’s total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If the interest rate is 1.5% per month, what will be the change in the firm’s total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. Assume the interest rate is 1.5% per month but the firm can offer the credit only as a special deal to new customers, while existing customers will continue to pay cash on delivery. What will be the change in the firm’s total monthly profits on a present value basis under these conditions? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

2. Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1,220 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,070. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p = 0.97, answer the following.

a. What is the expected profit of granting credit? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)

3. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 500 payments a day will be made to lock boxes with an average payment size of $3,500. The bank’s charge for operating the lock boxes is $0.50 a check. The interest rate is 0.012% per day.

a. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)

b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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