$53,699 
$396 $0 
1 pound = $1.8000 
7.83% 
$794.01 
$3.76 
$16.25 
7.4% 
A pays a fixed rate of 9%, B pays LIBOR + 1.5%.

$78.00 
Question 11.11.
Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm’s average accounts payable balance? Assume a 365day year. (Points : 30)

Question 12.12.
Delamont Trucking Company (DTC) is evaluating a potential lease for a truck with a 4year life that costs $40,000 and falls into the MACRS 3year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck’s 4year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC’s tax rate is 40%. Should the firm lease or buy? Show all computations. (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.) (Points : 30)

Question 13.13.
McGovern Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straightdebt issue would require a 10% coupon. What coupon rate should be set on the bondswithwarrants so that the package would sell for $1,000? (Points : 30)

Question 14.14.
Palmer Company has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations–assume that the firm’s tax rate is zero.
The company’s decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds? (Points : 30)

Question 15.15.
Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, South Georgia Parts (SGP). Brau’s analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values:
Year 1 2 3 4 Free cash flow $1 $3 $3 $7 Unlevered horizon value 75 Tax shield 1 1 2 3 Horizon value of tax shield 32
Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP’s premerger beta is 2.0, and its postmerger tax rate would be 34%. The riskfree rate is 8% and the market risk premium is 4%. What is the value of SGP to Brau? (Points : 30)
