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Chapter 4: 4DQ (page 405)
Explain the relationship between inventory turnover and purchasing needs.
There is direct relationship between the inventory turnover and purchasing needs. When the inventory turnover ratio is higher, purchasing need also become higher.
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Question: What is the present value of a 10-year annuity of $3,000 per period in which payments come at the beginning of each period? The interest rate is 12 percent.
Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).
a. Compute the anticipated value of the dividends for the next three years (D1, D2, and D3).
b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.
c. Compute the price of the stock at the end of the third year (P3).
P3 = D4/ (Ke - g)
d. After you have computed P3, discount it back to the present at a discount rate of 12 percent for three years.
e. Add together the answers in part b and part d to get the current value of the stock. (This answer represents the present value of the first three periods of dividends plus the present value of the price of the stock after three periods.)
Assume a \(90,000 investment and the following cash flows for two alternatives:
Year | Investment A | Investment B |
1 | \)25,000 | \(40,000 |
2 | 30,000 | 40,000 |
3 | 25,000 | 28,000 |
4 | 19,000 | -- |
5 | 25,000 | -- |
a. Calculate the payback for investments A and B.
b. If the inflow in the fifth year for Investment A was \)25,000,000 instead of $25,000, would your answer change under the payback method?
KeySpan Corp. is planning to issue debt that will mature in 2035. In many respects, the issue is similar to currently outstanding debt of the corporation. a. Using Table 11-3, identify the yield to maturity on similarly outstanding debt for the firm in terms of maturity. b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 percent higher than the value determined in part a. Add this factor to the answer in a. (New issues sold at par sometimes requirea slightly higher yield than older seasoned issues because there are fewer tax advantages and more financial leverage that increase company risk.) c. If the firm is in a 30 percent tax bracket, what is the aftertax cost of debt?
Question: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?
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