Explain what the net present value represents.


Spring 2, 2013

(20 pts) 1. As a financial analyst, you have been asked to analyze certain
aspects of working capital management for The Wendys Company (WEN); McDonalds
Corporation (MCD); and Chipotle Mexican Grill, Inc. (CMG). In your analysis you should consider the

Cash conversation cycle.


Net working capital.

Short-term financing versus long-term

Provide analysis for the computations.

pts) 2. Explain what you believe is
the dividend policy for The Wendys Company (WEN); McDonalds Corporation
(MCD); and Chipotle Mexican Grill, Inc. (CMG)
In answering this question, discuss the concepts that were examined in
class. The points earned depend on the depth of the discussion along with the
supporting computations.

(10 pts) 3. You are considering a radical change to your life after
winning $10,000,000 after taxes in the Florida State Lottery. You have decided to move to China and you are
considering the purchase of a Chipotle Mexican Grill, Inc. franchise. Explain how you would decide whether or not
you should open the franchise. Your discussion should be in the context of
this course. No computations are

(7 pts) 4.
Rho Corporation has 200,000 shares outstanding and plans to pay $1.50 in

dividends next year. Rho has a capital budget of $1,000,000 for next
year and plans

to maintain its present
debt ratio of 40 percent. If earnings are expected to be $4.50

per share, how much external equity must Rho raise?

pts) 5. Sigma 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 $800,000.

Fixed assets are $300,000.

The debt ratio is 50 percent.

EBIT is $80,000.

Tax rate is 40 percent.

With an aggressive policy, current
assets will be 20 percent of sales; with a conservative policy, current assets
will be 35 percent of sales.

With an aggressive financing policy,
short-term debt will be 75 percent of the total debt; with a conservative
financing policy, short-term debt will be 30 percent of the total debt.

Interest rate for short-term debt is 6
percent. Interest rate for long-term
debt is 11 percent.

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

pts) 6. Gamma
Corporation currently processes seafood with a machine it purchased several
years ago. The machine, which originally
cost $750,000, currently has a book value of $250,000. Gamma is considering replacing the machine
with a newer, more efficient one. The
new machine will cost $900,000 and will require an additional $100,000 for
delivery and installation. The new
machine will also require Gamma to increase its investment in receivables and
inventory by $100,000. The new machine
will be depreciated on a straight-line basis over five years to a zero
balance. Gamma expects to sell the
existing machine for $300,000. Gammas
marginal tax rate is 40 percent and the required rate of return for Gamma is 10

If Gamma purchases the
new machine, annual revenues are expected to increase by $125,000 and annual
operating costs (exclusive of depreciation) are expected to decrease by
$30,000. 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
$50,000. (Assume that the existing unit
is being depreciated at a rate of $50,000 per year.)


Determine the payback period for this

Using net present value recommend whether or not Gamma should
purchase the new machine.

Explain what
the net present value represents.

whether the internal rate of return is more, less or the same as the required
rate of return. No computations are necessary.

(10 pts) 7. The
Kappa Company is in the volatile garment business. The firm has annual revenues of $250 million
and operates with a 30% gross margin on sales.
Bad debt losses average 3% of revenues.
Kappa 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 $20 million a year in this manner with an increase in inventory investment
of $2,000,000. Opportunity costs for inventory is 15%; however, the collections
department estimates that bad debt losses on the new business would run four
times the normal level, and that internal collection efforts would cost an
additional $1 million a year.

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

(18 pts) 8. The
Zeta Manufacturing Company is considering investing in a factory in Vietnam.
The CEO is concerned about making such a large commitment of money for this
factory. This investment will require $70 million, which is roughly two-thirds
the size of the company today.

The CEO has launched the firms first-ever
cost of capital estimation, as an integral part of this analysis Zetas current
balance sheet reflects the following:

Bonds (9%, $1,000 par,
20-year maturity) 27% of
capital structure

Preferred stock
($50 par, $2.00 dividend) 9% of capital structure

Common stock
64% of capital structure

The firm paid dividends to its common stockholders
of $1.28 per share last year, and the projected growth rate is 9% per year for
the indefinite future. Zetas current common stock price is $25 per share. In
addition, the firms bonds have an Baa rating. These bonds are currently
yielding 11%. The current market price for the preferred stock is $15 per
share. The plant is expected to have an IRR of 16 percent. Zetas tax rate is
38 percent.


to determine the weighted average cost of capital.

Explainif they
should purchase the plant.

(10 pts) 9. The
Delta Company is evaluating whether a lockbox it is currently using is worth
keeping. Management estimates that the lockbox reduces the mail float by 1.8
days and the processing by half a day. The remittances average $50,000 per day,
with the average check amount being $500. The bank charges 34 cents per check
processed. Assume that there are 270 business days in a year and that the
firms opportunity cost for these funds is 6 percent. Should the firm continue
to use the lockbox? Show computations.

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