Weighted Average Cost of Capital and Marriott Corporation
Butler Lumber Company
1. Why does Mr. Butler have to borrow so much money to support this profitable business?
2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)
3. As Mr. Butler’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
Toy World
1. What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan?
2. What savings would be involved?
3. Estimate the amount of added funds required and the timing of the needs under level production. Prepare pro forma income statements and balance sheets (rather than cash budget) to make this estimate. Ignore interest expense in making these estimates.
4. Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?
Hampton Machine Tool
1. Why can’t a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation?
2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.
3. Review the results of your forecast. Do the cash budgets and the pro forma financial statements yield the same results? Why?
4. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
5.
1. Why does Mr. Butler have to borrow so much money to support this profitable business?
2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)
3. As Mr. Butler’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
Toy World
1. What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan?
2. What savings would be involved?
3. Estimate the amount of added funds required and the timing of the needs under level production. Prepare pro forma income statements and balance sheets (rather than cash budget) to make this estimate. Ignore interest expense in making these estimates.
4. Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?
Hampton Machine Tool
1. Why can’t a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation?
2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.
3. Review the results of your forecast. Do the cash budgets and the pro forma financial statements yield the same results? Why?
4. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
5.