Twice Lucky, Inc. was planning a 10-year bond issue with a 6% coupon rate. Just prior to the issue, a major credit rating agency announced a surprise upgrade in its rating. How might this announcement impact the planned bond issue? Explain.
> Suppose Fastest Company’s current balance sheet showed book value weights of 32 percent debt, 11 percent preferred shares, and 57 percent common equity. Assuming its cost of debt was 3 percent, the cost of preferred shares was 5 percent, and the cost of
> How would your answer in question 13 change if the current long-term government bond yield was 3 percent and Fastest Company’s beta was 1.5? Ke (CAPM method) = Rf + β x MRP = 2.00% + 1.15 x 5.00% = 7.75%
> Suppose the current long-term government bond yield is 2 percent and the estimated market risk premium is 5 percent. Fastest Company’s beta is estimated to be 1.15. Using CAPM, estimate Fastest Company’s cost of common equity.
> How would your answer in question 9 change if the dividend was expected to be $1.80 and the perpetual growth of the dividend 4 percent? Based on the constant growth dividend discount model: Ke = DIV1/Po + g DIV1 = $2.00 P0 = $30.00 g = 5%
> Consider the same estimated costs as in question 15. Fastest Company is not planning to issue preferred shares in the future but anticipates a target capital structure of 40 percent debt and 60 percent common equity. Reestimate Fastest Companyâ
> What is the internal rate of return for the project in question 2? discount rate = 8.0% initial investment = ($12,000) CF1 = $15,000 NPV = $1,889 = -$12,000 + $15,000/(1.08) = -$12,000 + $13,888.89
> What is the fair value today of a common share with expected annual dividends of $1.00, $1.05, and $1.10 in each of the next three years and an expected share price of $20 in three years, assuming a required return of 9 percent?
> Calculate the present value (PV) of a cash inflow of $500 in one year and a cash inflow of $1,000 in five years, assuming a discount rate of 15 percent.
> Consider two bonds, Bond C and Bond D, both with a yield to maturity of 10 percent and with 5 years to maturity. These are standard bonds with semiannual coupon payments. Bond C has a coupon rate of 10 percent (with semiannual coupon payments); Bond D do
> Jesters-R-Us, Inc. is a publicly traded company that has assets on its balance sheet of $125 million and liabilities of $75 million. The firm also has 4 million common shares that are currently trading for $21 per share. Estimate the firm’s market-to-boo
> Bigco’s balance sheet one year ago indicated retained earnings of $450 million. This year, Bigco’s net income was $35 million. It paid its preferred shareholders a dividend of $5 million and paid its common shareholders a regular dividend of $6 million,
> Explain why a company may have deferred income taxes on its balance sheet.
> If a firm has goodwill on its balance sheet, what, if anything, does this imply about the firm’s previous acquisition activities?
> Why do we refer to depreciation and amortization as “noncash items”?
> Consider the bonds in question 5. Suppose interest rates decline, causing the yield to maturity for each bond to immediately decline to 9 percent. What is the new price of each bond? (Consider the semiannual yield to maturity.)
> Explain why equity is not the same as cash.
> Describe the two hypotheses that explain the shape of the yield curve.
> What is deflation?
> Why is low and steady inflation important?
> What are the three goals of the Federal Reserve?
> What are the four key components of gross domestic product?
> Describe the four stages of the business cycle.
> What information would need to be gathered in order to assess the economy’s current position within the business cycle?
> Develop a list of factors that would result in a firm having high supply risk and high demand risk.
> Develop a list of key success factors in the auto manufacturing industry.
> Wally Wholesale has revenue of $487,000, end-of year receivables of $112,000, account payables of $70,000, and inventory of $91,000. Assume purchases equal cost of sales of $372,000. Estimate Wally Wholesale’s age of inventory, age of receivables, and ag
> Describe Porter’s Five Forces that govern the competition within an industry. Compare and contrast the Porter analysis for the utilities industry and for the jewelry industry (part of the consumer discretionary industry).
> Compare the typical profitability of a stage 2 firm versus a stage 3 firm.
> Describe the three shapes of the yield curve that tend to be associated with different business cycle stages.
> What are the two key drivers of value?
> What is the primary goal of an enterprise?
> How do sole proprietorships, general partnerships, limited liability companies, S corporations, and C corporations differ?
> How is a recession typically measured?
> Describe the three key cash-related activities of a firm.
> Identify the sources of cash and uses of cash for each year. Create sources and uses statement. Ace Inc. Income Statements ($000s) Year 1 Year 2 Sales $250,000 $290,000 Cost of goods sold 165,000 173,000 Gross margin 85,000 117,000 Selling & admin e
> Explain the difference between real assets and financial assets.
> According to the pecking-order model of capital structure, firms will tend to raise capital in which of the following orders? a. Equity, debt, internal financing b. Internal financing, debt, equity c. Equity, internal financing, debt d. Debt, internal fi
> According to the trade-off model of capital structure, why is there an optimal capital structure for a particular firm?
> Explain why a hotel company might have a higher proportion of debt in its capital structure relative to a drug company.
> What would you expect to happen to the price of Fastest Company’s preferred shares if inflation increased and the Fed increased interest rates, with banks following suit?
> Explain what we mean by diversification and how it relates to firm-specific (unsystematic) risk and market (systematic) risk?
> Based on the chart of betas in Figure 10-16, how would you describe the relative riskiness of investing in Bank of America? Procter & Gamble Co. 0.28 The Home Depot Inc. 1.03 Kraft Foods Inc. 0.30 Chevron Corporation 1.06 McDonald's Corp. 0.30 Americ
> Based on the chart of betas in Figure 10-16, if an investment in the overall stock market was expected to return 10 percent over the next year, what return would you expect if you invested in IBM? Procter & Gamble Co. 0.28 The Home Depot Inc. 1.03 Kr
> Explain how the cash flow cycle works.
> Explain the relationship between the cost of raising funds from the firm’s perspective and the required return on bonds, preferred shares, and common shares from the investor’s perspective.
> What factors would impact the price of preferred shares?
> Historical U.S. market returns tend to approximately follow a normal distribution, which implies that returns are plus or minus one standard deviation from the mean (arithmetic return) two-thirds of the time and are plus or minus two standard deviations
> What is the average arithmetic return over two years for a stock that goes from $10 to $20, then back to $10?
> What is the average annual compound (geometric) return over two years for a stock that goes from $10 to $20, then back to $10?
> All things being equal, would you expect to receive a higher or lower interest payment if a bond had a call provision?
> Suppose a firm is involved in major litigation and is expected to lose its case, which would cost the firm millions of dollars. Surprisingly the firm wins the case and immediately the stock price jumps. Is the observation of the price increase consistent
> Suppose an investor uncovers a strategy by which she or he is able to predict future stock prices by observing trends in past prices. What form of the efficient market hypothesis would this be evidence against?
> If research employs an event study, what form of the efficient market hypothesis is it most likely testing?
> Given the “stylized facts” related to IPO performance, if you were able to obtain IPO shares at the issue price, when might be the best time to sell the shares: after the first day of trading or three-to-five years later?
> What type of investor is most likely to purchase a private placement?
> All things being equal, would you expect to receive a higher or lower interest payment if a bond had a sinking fund?
> What is the highest discount rate at which the project would still be acceptable (i.e., a zero NPV)?
> What is the profitability index for the project in question 2? discount rate = 8.0% initial investment = ($12,000) CF1 = $15,000 NPV = $1,889 = -$12,000 + $15,000/(1.08) = -$12,000 + $13,888.89
> Estimate the age of accounts receivable for each year.
> From a lender’s (or an investor’s) perspective, which is safer and why: commercial paper or banker’s acceptances? Ace Inc. Income Statements ($000s) Year 1 Year 2 Sales $250,000 $290,000 Cost of
> Which financial statement presents information related to changes in retained earnings and share repurchase?
> Indicate whether each of the following is a source or use of cash: a. An increase in accounts receivable b. A decrease in inventories c. An increase in accounts payable d. A decrease in a bank loan e. An increase in retained earnings
> Nextime Ltd. has operating profits (EBIT) of $87 million, a tax rate of 35 percent, net working capital of $129 million, and fixed assets of $285 million. Calculate Nextime’s return on invested capital, or ROIC. Then describe three methods by which a fir
> Number One Retail, Inc. has a gross profit of $55 million, operating expenses of $22 million (which includes $6 million in depreciation and amortization), and interest expenses of $8 million. Its corporate tax rate is 35 percent. Calculate the firm’s ear
> Which of the following would not be a characteristic of a firm that would tend to have a high proportion of debt in its capital structure: a. Steady profitability b. A large amount of fixed assets c. Many growth opportunities d. In a regulated industry
> Repeat the cost of capital calculations in Figure 12.8, assuming market value weights instead of book value weights.
> Calculate the cash flow coverage ratio based on the following information: EBIT = $540,000; depreciation and amortization = $65,000; interest payments = $180,000; principal repayment = $75,000; and tax rate = 35 percent.
> Calculate an EBIT breakeven between a debt firm (DF) and an all-equity firm (EF) based on the following information: DF interest = $40,000; DF number common shares = 6,000; EF number of common shares = 10,000; and tax rate = 35 percent. Check your answer
> Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital structure. The projected EPS would then be $2.50. In a world with no financial distress, determine what the stock price should be and explain why in the
> Now suppose the firm in question #9 has a payout ratio of 30 percent. Given the earnings retention, what will be next year’s dividend, at what rate will the firm be able to grow the dividend, and what will be the value of the firm? Compare your answer to
> On the basis of the following stock information, describe the features of the stock and assess its performance: dividends per share = $0.80, current share price = $28.50, current dividend yield = 2.8 percent, current P/E multiple = 24.5, share price one
> On the basis of the following bond information, describe the features of the bond and explain the timing of the expected cash flows (assuming today is January 1, 2014): coupon = 6.4 percent; maturity date = January 1, 2024; price = $103.42; yield = 5.94
> 1. Calculate the projected gross profit for Top-A1. 2. Calculate the projected purchases for Top-A1. 3. Create an entire pro forma income statement for Top-A1. Be sure to calculate the projected net earnings. 4. Assume Top-A1 has a dividend payout of 40
> What is the payback period for the project in question 6? discount rate = 10.0% initial investment = ($40,000) CF1 = $15,000 CF2 = $20,000 CF3 = $25,000 NPV = $8,948.16 = -$40,000 + $15,000/(1.10) + $20,000/(1.10)2 + $25,000/(1.10)3
> Consider the bonds in question 7. Suppose interest rates decline, causing the yield to maturity for each bond to immediately decline to 9 percent. What is the new price of each bond? (Consider the semiannual yield to maturity.)
> Consider two bonds, Bond A and Bond B, both with a coupon rate of 10 percent and a yield to maturity of 10 percent. These are standard bonds with semiannual coupon payments. Bond A matures in 5 years; Bond B matures in 10 years. What is the price of each
> Again, assume Top-A1’s sales in the subsequent year increase by 15 percent. If all the other relationships remain the same, what will be the pro forma loan requirement in two years?
> Now, assume Top-A1’s sales in the subsequent year increase by 15 percent. If all the other relationships remain the same, what will be the pro forma net earnings in two years?
> What would be the impact on Top-A1’s pro forma long-term debt if sales were to change to $200,000 and the age of payables were to change to 45 days?
> Identify the sources and uses of cash for Home Depot by comparing the 2011 and 2012 balance sheets.
> Smallco has cash from operating activities of $220 million, cash from investing activities of ($93 million), cash from financing activities of ($107 million), and a beginning cash balance of $27 million. What will Smallco’s ending cash balance be?
> Using Home Depot’s 2010 and 2011 balance sheets in Figure 3.2 and statements of earnings in Figure 3.3 in Chapter 3, set up the ratios presented in Figure 4.4 for Home Depot for 2010 and 2011, indicating the numerator and denominator of
> What would be the impact on Top-A1’s pro forma net earnings if sales were to change to $200,000?
> Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and equity of $40 million, as well as year 2 revenues of $87 million, net income of $22 million, assets of $70 million, and equity of $50 million. Calculate St
> The ledger of Columbia, Inc. on March 31, 2014, includes the following selected accounts before adjusting entries. An analysis of the accounts shows the following. 1. Insurance expires at the rate of $300 per month. 2. Supplies on hand total $900. 3. Th
> The accounting equation is Assets 5 Liabilities 1 Stockholders’ Equity. Appendix A, at the end of this textbook, reproduces Tootsie Roll’s financial statements. Replacing words in the equation with dollar amounts, what is Tootsie Roll’s accounting equati
> Selected transactions for Perez Company are presented below in journal form (without explanations). Post the transactions to T-accounts. Date Account Title Debit Credit May 5 Accounts Receivable 3,800 Service Revenue 3,800 12 Cash 1,600 Accounts Rece
> Joel Blocker recorded the following transactions during the month of April. Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,900. Apr. 3 Cash 3,400
> Foley Advertising Company’s trial balance at December 31 shows Supplies $8,800 and Supplies Expense $0. On December 31, there are $1,100 of supplies on hand. Prepare the adjusting entry at December 31 and, using T-accounts, enter the balances in the acco
> Use the data in BE3 and journalize the transactions. (You may omit explanations.) Data in BE-3: Transactions for Grover Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction. June 1 Iss
> Transactions for Grover Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction. June 1 Issues common stock to investors in exchange for $5,000 cash. 2 Buys equipment on account for $1,100
> During 2014, Comstock Company entered into the following transactions. 1. Purchased equipment for $286,176 cash. 2. Issued common stock to investors for $137,590 cash. 3. Purchased inventory of $68,480 on account. Using the following tabular analysis, sh
> Kathy Gannon is the new owner of Kathy’s Computer Services. At the end of July 2014, her first month of ownership, Kathy is trying to prepare monthly financial statements. She has the following information for the month. 1. At July 31, Kathy owed employe
> After closing revenues and expense, Alomar Company shows the following account balances. Dividends ………………………………………………………. $22,000 Retained Earnings ……………………………………………70,000 Income Summary ……………………36,000 (credit balance) Prepare the remaining closing entri
> At the beginning of the year, Goren Company had total assets of $800,000 and total liabilities of $500,000. (Treat each item independently.) (a) If total assets increased $150,000 during the year and total liabilities decreased $80,000, what is the amoun
> Use the basic accounting equation to answer these questions. (a) The liabilities of Jantz Company are $90,000 and the stockholders’ equity is $230,000. What is the amount of Jantz Company’s total assets? (b) The total assets of Foley Company are $170,000
> Transactions made by Huddleston Co. for the month of March are shown below. Prepare a tabular analysis that shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 3-3 (page 110). 1. The company
> The financial statements of Tootsie Roll are presented in Appendix A at the end of this textbook. Instructions: (a) Using the consolidated income statement and balance sheet, identify items that may result in adjusting entries for deferrals. (b) Using t
> Purpose: This activity provides information about career opportunities for CPAs. Address: www.startheregoplaces.com/why-accounting, or go to www.wiley.com/college/kimmel Steps 1. Go to the address shown above and click on Students/Educators. 2. Click on
> The financial statements of The Hershey Company appear in Appendix B, following the financial statements for Tootsie Roll in Appendix A. (b) Identify the other account ordinarily involved when: (1) Accounts Receivable is increased. (2) Notes Payable is
