Questions Set 69:

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Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, and (c) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?

Original

Revised

Annual sales: unchanged
Cost of goods sold: unchanged
Average inventory: lowered by $4,000
Average receivables: lowered by $2,000
Average payables: increased by $2,000
Days in year

$110,000
$80,000
$20,000
$16,000
$10,000
365

$110,000
$80,000
$16,000
$14,000
$12,000
365

a. 34.0
b. 37.4
c. 41.2
d. 45.3
e. 49.8

2) Bumpas enterprises purchases $4, 562 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discounts, what is the effective annual percentage cost of its non free tread credit?

3) Daves inc. recently hired you as a consultant to estimate the company’s WACC. You have obtained the following information (1) the firms non callable bonds mature in 20 years. Have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050. (2) The company’s tax rate is 40% (3) The risk free rate is 4.50%. The market risk premium is 5.50% and the stocks beta is 1.20 (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

4) Based on the corporate valuation model, the value of a company operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short term investments that are unrelated to operations, 20 million in accounts payable, 110 millions in notes payable, 90 million in long term debt, 20 million in preferred stock, 140 million in retained earnings, and 280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

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