Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to change its credit policy. Terms are currently 2/10, net 60 and would be changed to net 30. Currently, 60% of the customers on average pay at the end of the credit period (60 days) and the remaining customers would pay in 10 days to take advantage of the discount. Under the new policy, it is anticipated that customers will pay on average in 35 days and 50% of the customers will pay in 10 days to take advantage of the discount. All sales are credit sales and will remain so with the change of policy. Average annual sales of $8,000,000 a year are expected to fall to $6,000,000. Bad debt losses will drop from 3% of total sales to 2% of total sales. Variable production costs will remain at 80%. The opportunity cost of financing is 8%. Should Mountain Home Systems change its credit policy? Show all calculations. Access Excel Here.

An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm’s common stock is 12%. What is the preferred stock price if the required rate of return is 10%?

The coupon rate on a debt issue is 13%. If the yield to maturity on the debt is 10%, what is the after tax cost of debt (for a cost of capital calculation) if the firm’s tax rate is 34%?

Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt.

A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because:

ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm’s Degree of Combined Leverage?

A police officer is on patrol in a neighborhood. She sees a motorist drive by that she suspects was involved in a crime that had been reported to police earlier in the evening. The motorist commits a minor traffic violation. The police officer pulls over the motorist. The police officer testifies that her actual motivation for pulling over the motorist was because she believed she might find evidence of the earlier crime. Was the search of the motorist constitutional?

When a firm issues new shares, it always results in dilution of earnings in the long run.

Projects that are negatively correlated:

Systematic risk can be diversified away. However, unique risk cannot be diversified away.