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Chapter 4: 5DQ (page 405)

Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement

Short Answer

Expert verified

Rapid expansion may appear like the business owner's ideal scenario, but depending on its pace, timing, and management, it may be more harmful than beneficial. The company will be under a lot of strain due to its rapid expansion, and any of these pressures could trigger other stresses to fall into place. It will be easier for the management team to identify and address rapid expansion's drawbacks if they understand it.

Step by step solution

01

 Financing problem

A sudden surge in sales may result in a sizable number of payables due before the business receivables are collected. Credit can become more expensive if a company uses it to finance an expansion because it can affect its credit score. Higher interest rates reduce your profits.

02

Resource drain

The company's manufacturing, labor, and administrative resources will be strained as they try to increase sales. As a result, there may be issues with team member morale, turnover among staff members who are overworked or underpaid

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Most popular questions from this chapter

The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm鈥檚 cost of capital is 10 percent. It will only invest \(77,000 this year. It has determined the internal rate of return for each of the following projects:

Project

Project size

Internal rate of return

A

\)10,500

21%

B

30,500

22

C

25,500

18

D

10,500

13

E

10,500

20

F

20,500

11

G

10,500

16

a. Select the projects that the firm should accept.

b. If Projects A and B are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $77,000?

Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent:

a. What is the bond price at 11 percent?

b. What is the bond price at 8 percent?

c. What would be your percentage return on investment if you bought when rates were 11 percent and sold when rates were 8 percent?

What type of dividend pattern for common stock is similar to the dividend payment for the preferred stock?

If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if she could earn 13 percent on her money?

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

c. If the yield on the Standard & Poor鈥檚 Preferred Stock Index declines, how will the price of the preferred stock be affected?
See all solutions

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