An investor bought 10 Ellis Industries, Inc. long-term bonds one year ago, when they were first issued by the company. In addition, he bought 200 shares of the company’s common stock at the same time for $30 per share. He paid $1,000 each for the bonds, and today, the bonds are selling at $950 each (long-term interest rates have increased slightly over the past year). The bonds have a stated interest rate of 12 percent per year. The investor received an interest payment equaling $60 per bond six months ago and has just received another $60 per bond interest payment. Calculate the investor’s percentage holding period return for the one year he has held the bonds.
> Zabberer Corporation bonds pay a coupon rate of interest of 12 percent annually and have a maturity value of $1,000. The bonds are scheduled to mature at the end of 14 years. The company has the option to call the bonds in 8 years at a premium of 12 perc
> Dooley, Inc., has outstanding $100 million (par value) bonds that pay an annual coupon rate of interest of 10.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 20 years. Because of Dooley’s increased risk, investors now re
> Hooks Athletics, Inc., has outstanding a preferred stock with a par value of $30 that pays a dividend of $2.50. The preferred stock is redeemable at the option of the stockholder in 10 years at a price equal to $30. The stock may be called for redemption
> BCC has bonds that trade frequently, pay a 7.75 percent coupon rate, and mature in 2021. The bonds mature on March 1 in the maturity year. Suppose an investor bought this bond on March 1, 2016, and assume interest is paid annually on March 1. Calculate t
> Consider again the BCC 8⅛ percent debentures that mature on July 15, 2036 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2022, at $1,016.55.
> Why should each of the following be familiar with compounding and present value concepts? a. A marketing manager b. A personnel manager
> What is the relationship between EVA and MVA?
> Determine the value of a share of DuPont Series A $4.50 cumulative preferred stock, no par, to an investor who requires a 9 percent rate of return on this security. The issue is callable at $120 per share plus accrued dividends. However, the issue is not
> Determine the value of a share of DuPont Series A $3.50 cumulative preferred stock to an investor who requires the following rates of return: a. 9 percent b. 10 percent c. 12 percent
> In 2006, BCC issued 8⅝ percent debentures that will mature on December 1, 2046. a. If an investor purchased one of these bonds ($1,000 denomination) on December 1, 2016, for $1,050, determine the yield-to-maturity. Explain why investors would be willing
> If you purchase a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest 1/ 10 = of 1 percent)?
> Consider the Leverage Unlimited, Inc., zero coupon bonds of 2020. The bonds were issued in 2002 for $100. Determine the yield-to-maturity (to the nearest 1 10 = of 1 percent) if the bonds are purchased at the: a. Issue price in 2002. (Note: To avoid a f
> BCC has issued 8⅛ percent debentures that will mature on July 15, 2036. Assume that interest is paid and compounded annually. If an investor purchased a $1,000 denomination bond for $1,025 on July 15, 2016, determine the bond’s yield to-maturity. Explain
> Adams Food Service has issued 7⅜ percent bonds that mature on July 15, 2048. The bonds are callable at $1,037.08 on July 15, 2023. Assume that interest is paid and compounded annually. Determine the yield-to-maturity (to the nearest 10th of 1 percent) if
> Creative Financing, Inc., is planning to offer a $1,000 par value 15-year maturity bond with a coupon interest rate that changes every 5 years. The coupon rate for the first 5 years is 10 percent, 10.75 percent for the next 5 years, and 11.5 percent for
> Consider Fulton Manufacturing Company’s 8¾ percent bonds that mature on April 15, 2028. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Fulton bond as of April 15, 2016, to an investor
> Recently the high and low market prices of Canadian Pacific Limited’s debentures (see problem 1) were $790 and $475, respectively. Determine the yield-to-maturity of one of these debentures if it was purchased under the following conditions: a. At the h
> The Farmers State Bank recently has been earning an “above average” (compared to the overall banking industry) return on total assets of 1.50 percent. The bank’s return on common equity is only 12 percent, compared with an industry average of 15 percent.
> What effect does more frequent compounding have on present values?
> Determine the value of a $1,000 Canadian Pacific Limited perpetual 4 percent debenture (bond) at the following required rates of return: a. 4 percent b. 5 percent c. 6 percent
> Compare the potential for agency problems in sole proprietorships, partnerships, and corporations. In light of your analysis, why is the corporate form of organization so popular?
> How can the adherence to high standards of ethical business practice contribute to the goal of shareholder wealth maximization?
> In 2012 Kodak declared bankruptcy. How can you reconcile a bankruptcy declaration with a management pledged to maximize shareholder wealth?
> Under pressure from outside investors including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this a
> What are the major factors that determine the value of a firm’s stock?
> Metropolitan Life Insurance Company, Swiss Bank Corporation, and several other holders of RJR Nabisco bonds filed suit against the company to prevent it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the b
> Why is EPS not a consistently good measure of a firm’s performance?
> Explain the relationship between financial management and (a) microeconomics and (b) macroeconomics.
> Many large corporations, such as General Motors, have written off large amounts of their nonperforming (or poorly performing) assets as they have shrunk their operations. What is the impact of these asset write-offs on the future return on assets, future
> Explain the differences in the responsibilities of the treasurer and the controller in a large corporation.
> What type of contract might require the use of annuity due computations?
> What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
> Give some examples of agency costs incurred by shareholders in the agency relationship between the shareholders (owners) and management of a firm.
> Explain what is meant by agency relationships and agency costs.
> Explain why management may tend to pursue goals other than shareholder wealth maximization.
> It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain why t
> Is the shareholder wealth maximization goal a short- or long-term goal? Explain your answer.
> Which type of corporation is more likely to be a shareholder wealth maximizer— one with wide ownership and no owners directly involved in the firm’s management, or one that is closely held?
> What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.
> Why would you anticipate a lower P/E ratio for a typical natural gas utility than for a computer technology firm, such as Apple?
> Define shareholder wealth. Explain how it is measured.
> Japanese Motors exports cars and trucks to the U.S. market. On February 25, 2013, its most popular model was selling (wholesale) to U.S. dealers for $20,000. What price must Japanese Motors charge for the same model on November 18, 2015, to realize the s
> Which would you prefer to invest in: a savings account paying 6 percent compounded annually, or a savings account paying 6 percent compounded daily? Why?
> The stock of Tips, Inc., a new firm operating a chain of sports betting parlors, has just been sold in an initial public offering at a price of $25 per share. One week after this offering, the stock has risen in value to $35. You believe the stock will r
> Six months ago, you purchased a tract of land in an area where a new industrial park was rumored to be planned. This land cost you $110,000, and the seller offered you an interest-free loan for 70 percent of the land cost. Today, the industrial park proj
> One year ago, you purchased a rare Indian-head penny for $14,000. Because of the recession and the need to generate current income, you plan to sell the coin and invest in Treasury bills. The Treasury bill yield now stands at 8 percent, although it was 7
> a. National Telephone and Telegraph (NTT) Company common stock currently sells for $60 per share. NTT is expected to pay a $4 dividend during the coming year, and the price of the stock is expected to increase to $65 a year from now. Determine the expect
> Suppose a Midwest Telephone and Telegraph (MTT) Company bond, maturing in one year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000 (principal) plus 6 percent interest (that is, 0.06 × $100
> Suppose a U.S. Treasury bill, maturing in 30 days, can be purchased today for $99,500. Assuming that the security is held until maturity, the investor will receive $100,000 (face amount). Determine the percentage holding period return on this investment
> Discuss the general factors that influence the quality of a company’s reported earnings and its balance sheet.
> An investor bought 100 shares of Venus Corporation common stock one year ago for $40 per share. She just sold the shares for $44 each, and during the year, she received four quarterly dividend checks for $40 each. She expects the price of the Venus share
> Using the data contained in Figure 2.3, what 52-week rate of return, excluding dividend yields, would an investor have received by purchasing the following portfolios of stocks? • a. The stocks in the Dow Jones Industrial Average b. T
> Over the past 10 years, your $15,000 in gold coins has increased in value by 200 percent. You plan to sell these coins today. You have paid annual storage and insurance costs of $500 per year. Assay expenses at the time of sale are expected to total $400
> What happens to the present value of an annuity as the interest rate increases? What happens to the future value of an annuity as the interest rate increases? Table III: Continue to next pages……
> Determine the percentage change in the value of the following currencies relative to the U.S. dollar between February 25, 2013 and November 18, 2015. (Refer to Table 2.1.) • a. Rupee b. Pound c. Yen d. Euro e. Canadian dollar Tabl
> Valley Stores, a U.S. department store chain, annually negotiates a contract with Alpine Watch Company, located in Switzerland, to purchase a large shipment of watches. On February 25, 2013, Valley purchased 10,000 watches for a total of 1.26 million Swi
> Define the following terms: a. Multinational corporation b. Spot exchange rate c. Forward exchange rate d. Direct quote versus indirect quote e. Option f. LIBOR g. Euro
> If a capital market is not efficient, what is the impact on a firm seeking to raise capital in that market? Why?
> Describe the concept of market efficiency. In what sense is this concept an important part of the shareholder wealth maximization objective?
> What is the primary distinction between the trading process on the New York Stock Exchange and the OTC markets?
> What is the relationship between a firm’s P/E multiple and that firm’s risk and growth potential?
> How do primary and secondary financial markets differ?
> What factors need to be considered when determining the optimal form of organization for a business enterprise?
> Describe the various types of financial intermediaries, including the sources of their funds and the types of investments they make.
> How do money and capital markets differ?
> Which is greater: the future value interest factor (FVIF) for 10 percent and two years, or the present value interest factor (PVIF) for 10 percent and two years?
> What roles do financial middlemen and financial intermediaries play in the operation of the U.S. financial system? How do the two differ?
> Describe and discuss the saving-investment cycle.
> Armbrust Corporation is the maker of fine fitness equipment. Armbrust’s bank has been pressuring the firm to improve its liquidity. Which of the following actions proposed by the CFO do you believe will actually achieve this objective? Why or why not? a
> The Southwick Company has the following balance sheet ($000): Financial Ratios Current ratio…………………â€
> Fill in the balance sheet for the Jamestown Company based on the following data (assume a 365-day year): Sales = $3,650,000 Total asset turnover = 4× Current ratio = 3:1 Quick ratio = 2:1 Current liabilities to net worth = 30% Average c
> How can inflation affect the comparability of financial ratios between firms?
> The balance sheet and income statement of Eastland Products, Inc., are as follows: Income Statement for Year Ended December 31, 2016 (in Millions of Dollars) Sales…………&acir
> Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 10 percent debt outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket
> Hoffman Paper Company, a profitable distributor of stationery and office supplies, has an agreement with its banks that allows Hoffman to borrow money on a short-term basis to finance its inventories and accounts receivable. The agreement states that Hof
> The stock of Jenkins Corporation, a major steel producer, is currently selling for $50 per share. The book value per share is $125. In contrast, the price per share of Dataquest’s stock is $40, compared to a book value per share of $10. Dataquest, a lead
> Palmer Chocolates, a maker of chocolates that specializes in Easter candy, had the following inventories over the past year: Month……………………………………………Inventory Amount January……………….………...………………………$25,000,000 February………………..……….………………………60,000,000 March………
> Which would you rather receive: the proceeds from a 2-year investment paying 5 percent simple interest per year, or from one paying 5 percent compound interest? Why?
> Keystone Resources has a net profit margin of 8 percent and earnings after taxes of $2 million. Its current balance sheet is as follows: a. Calculate Keystone’s return on stockholders’ equity. b. Industry average ra
> If a company sells additional common stock and uses the proceeds to increase its inventory level and to increase its cash balances, what is the near-term (immediate) impact (increase, decrease, no change) of this transaction on the following ratios? a.
> Given the following data for Profiteers, Inc., and the corresponding industry averages, perform a trend analysis of the return on investment and the return on stockholders’ equity. Plot the data and discuss any trends that are apparent.
> Using the following data for Jackson Products Company, answer Parts a through g: Income Statement for the Year Ended December 31, 2016 Net sales (all on credit) …………â
> Describe the basic features of each of the following types of bonds: a. Floating rate bonds b. Original issue deep discount bonds c. Zero coupon bonds d. Extendable notes (put bonds)
> What specific effects can the use of alternative accounting procedures have on the validity of comparative financial analyses?
> What are the three most important determinants of a firm’s return on stockholders’ equity?
> What factors limit the use of the fixed-asset turnover ratio in comparative analyses?
> What problems may be indicated by an inventory turnover ratio that is substantially above or below the industry average?
> What problems may be indicated by an average collection period that is substantially above or below the industry average?
> What is the major limitation of the current ratio as a measure of a firm’s liquidity? How may this limitation be overcome?
> Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of $600,000. Its current balance sheet follows: a. Calculate Gulf’s return on stockholders’ equity. b. The industry average ratios
> What are the primary limitations of ratio analysis as a technique of financial statement analysis?
> Appalachian Registers, Inc. (ARI) has current sales of $50 million. Sales are expected to grow to $75 million next year. ARI currently has accounts receivable of $10 million, inventories of $15 million, and net fixed assets of $20 million. These assets a
> Berea Resources is planning a $75 million capital expenditure program for the coming year. Next year, Berea expects to report to the IRS earnings of $40 million after interest and taxes. The company presently has 20 million shares of common stock issued
> In the Industrial Supply Company example (Table 4.4), it was assumed that the company’s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase proportionately as sales increased. Alternativ
> Explain how a bond can be classified as a fixed-income security when the yield to-maturity can fluctuate significantly over time, depending on the market price of the bond.
> Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earnings after taxes during the next year to equal $400,000. During the past several years, the company has been paying $50,000 in dividends to its
> The Podrasky Corporation is considering a $200 million expansion (capital expenditure) program next year. The company wants to know approximately how much additional financing (if any) will be required if it decides to go through with the expansion progr
> Prepare a cash budget for Elmwood Manufacturing Company for the first three months of 2017 based on the following information: The company has found that approximately 40 percent of sales are collected during the month the sale is made and the remainin
> Prepare a cash budget for Atlas Products, Inc., for the first quarter of 2017, based on the following information: The budgeting section of the corporate finance department of Atlas Products has received the following sales estimates from the marketing d
> Consider the Industrial Supply Company example (Table 4.4) again. Assume that the company plans to maintain its dividend payments at the same level in 2017 as in 2016. Also assume that all of the additional financing needed is in the form of short-term n
