Question

Answer the following questions:

1) Carter corporation’s sales are expected to increase from $ 5 million in 2012 to $ 6 million in 2013,or by 20%.Its assets totaled $ 3 million at the end of 2012.
Carter is at full capacity, so its assets must grow in proportions to projected sales.
At the end of 2012, current liabilities, are $1 million, consisting of $ 250,000 of accounts payable,$ 500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%.Use the AFN equation to forecast the additional funds Carter will need for the coming year.

2) Refer to problem 1. What additional funds would be needed if the company’s year end 2012 assets had been $ 4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in problem 1? Is the company’s capital intensity ‘’ the same or different? Explain.

3) Refer to problem 1 and assume that the company had $ 3 million in assets at the end of 2012.However now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in problem 1)

4) Jasper Furnishing has $ 300 million in sales. The company expects that its sales will increase 12% this year. Jaspers CEO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales(in millions of dollars) is as follows:

Inventories=$25+0.125(sales)

Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company’s year end inventory level and its inventory turnover ratio?

5) A call option on Bedrock Boulders stock has a market price of $ 7.The stock sells for $ 30 a share, and the option has an exercise price of $ 25 a share.

a.)What is the exercise value of the call option?
b.)What is the premium on the option?

6) The exercise price on one of Flanagan Company’s call options is $ 15, its exercise value is $22
and its premium is $ 5.What are the option’s market value and the stock’s current price?

7) Which of the following events are likely to increase the market value of a call option on a common stock? Explain.
a.) an increase in the stocks price
b.) an increase in the volatility of the stock price
c.) an increase in the risk free rate.
d.) a decrease in the time until the option expires.


8) Assume that you have been given the following information on Purcell industries:

current stock price=$15
Time until expiration of option= 6 months
Varience of stock price=0.12
D2 =0.08165
N(d2)=0.53252
Exercise price of option=$ 15
Risk free rate =10%
D1=0.32660
N(d1)=0.62795
Using the black Scholes option pricing model what is the value of the option?

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4) Jasper Furnishing has $ 300 million in sales. The company expects that its sales will increase 12% this year. Jaspers CEO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales(in millions of dollars) is as follows:

Inventories=$25+0.125(sales)

Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company’s year end inventory level and its inventory turnover ratio?

Sales1 = Sales0*(1.12) = 300m(1.12) = 336m
Inventories=$25m+0.125(sales1)
Inventories=$25m+0.125(336m)
Inventories=$25m+42m = $67m
Inventory Turnover Ratio = COGS/Inventory OR Sales/Inventory = 336/67 = 5...

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