Hello I need explanation for these Q:
32. Morton Starley Investment Banking is working with the management of Kell Inc. in order
to take the company public in an initial public offering. Selected information for the year
just ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity: Par value ($1 per share) 3,000,000
Additional paid-in-capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell’s industry are trading at a market to book ratio of 1.5, what is
the estimated value per share of Kell?
a. $13.50.
b. $16.50.
c. $21.50.
d. $27.50.
37. The capital structure of four corporations is as follows.
Corporation
Sterling Cooper Warwick Pane
Short-term debt 10% 10% 15% 10%
Long-term debt 40% 35% 30% 30%
Preferred stock 30% 30% 30% 30%
Common equity 20% 25% 25% 30%
Which corporation is the most highly leveraged?
a. Sterling.
b. Cooper.
c. Warwick.
d. Pane.
57. Burke Industries has a revolving credit arrangement with its bank which specifies that
Burke can borrow up to $5 million at an annual interest rate of 9% payable monthly. In
addition, Burke must pay a commitment fee of 0.25% per month on the unused portion of
the line, payable monthly. Burke expects to have a $2 million cash balance and no
borrowings against this line of credit on April 1, net cash inflows of $2 million in April,
net outflows of $7 million in May, and net inflows of $4 million in June. If all cashflows
occur at the end of the month, approximately how much will Burke pay to the bank
during the second quarter related to this revolving credit arrangement?
a. $47,700.
b. $52,600.
c. $60,200.
d. $62,500.
62. Harson Products currently has a conservative credit policy and is in the process of
reviewing three other credit policies. The current credit policy (Policy A) results in sales
of $12 million per year. Policies B and C involve higher sales, accounts receivable and
inventory balances, as well as higher bad debt and collection costs. Policy D grants
longer payment terms than Policy C, but charges customers interest if they take
advantage of the lengthy payment terms. The policies are outlined below.
P o l i c y (000)
A B C D
Sales $12,000 $13,000 $14,000 $14,000
Average accounts receivable 1,500 2,000 3,500 5,000
Average inventory 2,000 2,300 2,500 2,500
Interest income 0 0 0 500
Bad debt expense 100 125 300 400
Collection cost 100 125 250 350
If the direct cost of products is 80% of sales and the cost of short-term funds is 10%,
what is the optimal policy for Harson?
a. Policy A.
b. Policy B.
c. Policy C.
d. Policy D.