Expert Answer :Finance Questions

Solved by verified expert :Finance questions1. Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $95,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $35,000. The equipment would require an increased inventory of 3,000. The equipment is expected to save the company $35,000 per year in before-tax operating costs. The company’s marginal tax rate is 30 percent and its cost of capital is 10 percent.a. What is the terminal year cash flow?b. Calculate net present value. Should the machine be purchased?2. Andrews Corporation plans a $6 million expansion. The firm wants to maintain a 35 percent debt-to-total-assets ratio in itscapital structure. It also wants to maintain its past dividend policy of distributing 30 percent of last year’s net income. Last year, net income was $4 million.a. If the company changed to a residual dividend policy, how much external equity will it need?b. Is the company likely to change to a residual policy? Why or why not?3. Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company’s stock with Kern netting $210 million dollars from the offering. The expected price to the public was $25 per share.The out-of-pocket expenses incurred by the investment banker were $2,000,000.a. Is the agreement between the company and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?4. The Marcus Corporation’s financial statements are shown below. Figures are in millions. The firm is in the 30% tax bracket.Balance Sheet2008 2007Cash and equivalents 40 30Marketable securities 10 15Accounts receivable 60 50Inventory 80 70Total Current Assets 190 165Net plant and equipment 230 190Total Assets 420 3552008 2007Accounts payable 60 50Notes payable 80 90Accruals 20 15Total current liabilities 160 155Long-term debt 60 50Common stock 200 150Total liabilities and equity 420 355Income Statement2008 2007Net sales 550 490Costs other than depreciation 390 350Depreciation 100 97Total operating costs 490 447Earnings before interest and taxes 60 43Less interest 10 7Earnings before taxes 50 36Taxes 15 11Net income 35 25a. Calculate net operating income after taxesb. Calculate net operating working capital for 2007 and 2008c. Calculate total operating capital for 2007 and 2008?d. Calculate free cash flow for 2008e. Why is free cash flow important? Is it critical that the company always maintain positive free cash flow? Explain