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Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $180,000 if credit is extended to these new customers. Of the new accounts receivable generated, 6 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. The firm is in the 25 percent tax bracket. A) Compute the incremental income after taxes. B) What will Johnson’s incremental return on sales be if these new credit customers are accepted? C) If the accounts receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?
Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for stone corp.
The tax rate is 40 percent. What discount rate should API apply to the cash flows from "new" projects in the Financial Services Division?
A bank borrows money at the 5 year CD rate found in the WSJ with daily compounding. It loans money at the 15 year mortgage rate in the paper which is compounded monthly. Calculate the net interest margin (the difference in the effective rate on the 1..
A firm has an issue of $1,000 par value bonds with a 11 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's b..
Maximization of shareholder wealth
Assume the market has a Treynor Index of 4.00%. What is the treynor index of your portfolio consisting of the risk free asset and the market portfolio weight on the market is 17% (and the balance is in the risk free security)? the Treynor Index of yo..
Suppose that four college students check their FICO scores and discover the information listed below. Describe how lenders might price loans to the borrowers with lower scores versus the borrowers with higher scores in terms of rates and fees charged..
Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the nex..
Stock Y has a beta of 1.4 and an expected return of 17.0 percent. Stock Z has a beta of 0.7 and an expected return of 10.1 percent. If the risk-free rate is 6.0 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks ..
Common sources of short-term financing include:
“Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan – a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan’s onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of..
You purchase a $100,00 life insurance policy for a single payment of $35,000. If you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior alternative? If you die within ten years, what is the return..
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