1. Explain what you believe is the dividend policy for Krispy Kreme Doughnuts, Inc. (KKD),
and The Cheesecake Factory Incorporated (CAKE). In answering this question, discuss the
concepts that were examined in class. The points earned depend on the depth of the
discussion of the dividend policy for each of these two companies. Provide financial
metrics as necessary.
2. In your role as a financial analyst, you have been asked to analyze certain aspects of
working capital management for Krispy Kreme Doughnuts, Inc. (KKD), and The
Cheesecake Factory Incorporated (CAKE). In your analysis, you should consider the
a) Cash conversion cycle.
c) Short-term financing versus long-term financing.
Be sure that your computations are accompanied by discussion that relates to the
material discussed in class.
3. You have just been hired as a financial analyst for The Cheesecake Factory. Your boss has
asked you to work on the project for The Cheesecake Factory to acquire Krispy Kreme
Doughnuts. Upper management believes that this company would be a good complement to
Cheesecake Factory’s current operations. Discuss the concepts that were learned in this
course to make a determination as to whether or not Krispy Kreme should be acquired by
The Cheesecake Factory. Make sure to discuss all aspects including the analysis for
determining an acquisition price. No calculations are necessary.
4. Greenleaf Corporation has compiled the data shown in the following table for the current
costs of its three basic sources of capital-long term debt, preferred stock, and common
equity-for various ranges of new financing.
Source of capital Range of new financing After-tax cost
Long term debt $0 and above 7%
Preferred stock $0 and above 12%
Common stock equity $0 and above 20%
The company's capital structure weights used in calculating its weighted average cost of
capital are shown in the following table.
Source of capital Weight
Long-term debt 35%
Preferred stock 10
Common stock equity 55
Greenleaf has the following investment opportunities available.
Investment Internal rate of Initial
Opportunity return investment
A 19% $300,000
B 15 200,000
C 22 300,000
D 14 500,000
E 17 700,000
F 13 200,000
G 21 800,000
H 17 100,000
I 16 500,000
Projects C, E, and G are considered to be higher in risk than those in which it typically takes
on. For such projects, Greenleaf adds a premium of 5% to its WACC.
Determine the optimal capital budget. Show computations.
5. Gustavo Corporation predicts that net income in the coming year will be $180 million.
There are 20 million shares of common stock outstanding and Gustavo maintains a debtequity ratio of 1.5. The current market price per share for Gustavo is $75.
a) If Gustavo wishes to maintain its present debt-equity ratio, calculate the maximum
investment funds available without issuing new equity and the increase in borrowing that
goes along with it.
b) Suppose that the firm uses a residual dividend policy. Planned capital expenditures total $80
million. Based on this information, what will be the dividend yield and the dividend per
c) Suppose Gustavo plans no capital outlays for the coming year. What will be the dividend
yield and the dividend per share, assuming that Gustavo uses the residual dividend policy?
6. Mattias Corporation is considering whether to pursue an aggressive or conservative current
asset policy, as well as an aggressive or conservative financing policy. The following
information is available:
Annual sales are $4,000,000.
Fixed assets are $2,200,000.
The debt ratio is 50 percent.
EBIT is $480,000.
Tax rate is 35 percent.
With an aggressive policy, current assets will be 15 percent of sales; with a conservative
policy, current assets will be 30 percent of sales.
With an aggressive financing policy, short term debt will be 70 percent of the total debt;
with a conservative financing policy, short term debt will be 20 percent of the total debt.
Interest rate for short-term debt is 4 percent. Interest rate for long-term debt is 11 percent.
Determine the return on equity for the aggressive approach and for the conservative
Discuss which approach you would choose.
7. Your company, Dawg’s “R” Us, is evaluating a new project involving the purchase of a new
oven to bake your hotdog buns. If purchased, the new oven will replace your existing oven,
which was purchased seven years ago for a total installed price of $1.2 million.
You have been depreciating the old oven on a straight-line basis over its expected life of 15
years to an ending book value of zero. The new oven will cost $1.8 million with installation
costs of $200,000 and will be straight-lined depreciated over its eight year life. At the end of
those eight years, you expect to be able to sell it for $200,000. (Note that both of the ovens,
old and new, therefore have an effective remaining life of eight years at the time of your
analysis.) If you do purchase the new oven, you estimate that you can sell the old one for
$400,000, which is $240,000 less than its current book value.
The advantages of the new oven are twofold: not only do you expect it to reduce the beforetax costs on your current baking operations by $85,000 per year, but you will also be able to
produce new types of buns. The sales of the new buns are expected to bring your company
$300,000 per year throughout the eight-year life of the new oven, while associated costs of
the new buns are expected to be $180,000 per year.
Since the new oven will allow you to sell these new products, you anticipate that Net
Working Capital will have to increase immediately by $50,000 upon purchase of the new
oven. It will then remain at that increased level throughout the life of the new oven to
sustain the new higher level of operations.
Your company uses a required rate of return of 15 percent for such projects, and your
incremental tax rate is 39 percent. Should the company undertake the project? Explain.
8. The Vegas Fashion Company is in the volatile garment business. The firm has annual
revenues of $350 million and operates with a 35% gross margin on sales. Bad debt losses
average 4% of revenues. Vegas is contemplating an easing of its credit policy in an attempt
to increase sales. The loosening would involve accepting a lower-quality customer for credit
sales. The average collection period for these new customers is 60 days. It is estimated that
sales could be increased by $40 million a year in this manner with an increase in inventory
investment of $4,000,000. Opportunity costs for current assets investments is 15%. The
collections department estimates that bad debt losses on the new business would run five
times the normal level, and that internal collection efforts would cost an additional $1.2
million a year.
Show computations to explain if the change in policy should be made.
9. Penn Steelworks is a distributor of cold-rolled steel products to the automobile industry. All
of its sales are on a credit basis, net 30 days. Sales are evenly distributed over its 10 sales
regions throughout the United States. Delinquent accounts are no problem. The company
has recently undertaken an analysis aimed at improving its cash management procedures.
Penn determined that it takes an average of 3.2 days for customers’ payments to reach the
head office in Pittsburgh from the time they are mailed. It takes another full day in
processing time prior to depositing the checks with a local bank. Transit float typically
averages two days. Annual sales average $4.8 million for each regional office. Reasonable
investment opportunities can be found that yield 7 percent per year. To alleviate the float
problem confronting the firm, the use of a lockbox system in each of the 10 regions is being
considered. This would reduce mail float by 1.2 days. One day in processing float would
also be eliminated, plus a full day in transit float. The lockbox arrangement would cost each
region $250 per month.
Should Penn adopt the lockbox system?
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