Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2016 earnings of $200,000, has 100,000 shares of outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2016 earnings of $800,000, has 200,000 shares of outstanding, and expects its earnings to grow at 3% per year.
a. Calculate the expected earnings per share (EPS) for Graham & Sons for each of the next 5 years (2017–2021) without the merger.
b. What would Graham’s stockholders earn in each of the next 5 years (2017– 2021) on each of their Graham shares swapped for RCN shares at a ratio of (1) 0.6 and (2) 0.8 share of RCN for 1 share of Graham?
c. Graph the premerger and postmerger EPS figures developed in parts a and b with the year on the x-axis and the EPS on the y-axis.
d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer.
Float Simon has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 3.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it takes an average of 2.5 days for these receipts to clear the banking system.
a. How much collection float (in days) does the firm currently have?
b. If the firm’s is 9%, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 2 days? Explain why or why not.
c. What would the company’s have to be to make the $16,500 fee worthwhile?
Gardner Company currently makes all sales on credit and offers no discount. The firm is considering offering a 2% discount for payment within 15 days. The firm’s current average collection period is 60 days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm’s required rate of return on equal-risk investments is 10%, should the proposed discount be offered? (Note: Assume a 365- day year.)