Define the term cost of capital.
> What different types of businesses operate in the international environment? Why are the techniques and strategies available to these firms different?
> How can we accommodate the effects of compounding in our calculation of the effective cost of short-term credit?
> How can the formula “interest = principle * rate * time” be used to estimate the cost of short-term credit?
> Define the following terms: a. Permanent asset investments b. Temporary asset investments c. Permanent sources of financing d. Temporary sources of financing e. Spontaneous sources of financing
> Define the hedging principle. How can this principle be used in the management of working capital?
> Explain what is meant by the statement “The use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of illiquidity.”
> What advantages and disadvantages are generally associated with the use of short-term debt? Discuss.
> Discuss the risk–return relationship involved in the firm’s asset-investment decisions as that relationship pertains to its working capital management.
> Nealon Energy Corporation engages in the acquisition, exploration, development, and production of natural gas and oil in the continental United States. The company has grown rapidly over the last 5 years as it has expanded into horizontal drilling techni
> Define and contrast the terms working capital and net working capital.
> Define the following: a. Line of credit b. Commercial paper c. Compensating balance d. Prime rate
> What is meant by the following trade credit terms: 2/10, net 30? 4/20, net 60? 3/15, net 45?
> There are three major sources of unsecured short-term credit other than accrued wages and taxes. List and discuss the distinguishing characteristics of each.
> Dell Computer Corporation (DELL) has long been recognized for its innovative approach to managing its working capital. Describe how Dell pioneered the management of net working capital to free up resources in the firm.
> What would be the probable effect on a firm’s cash position of each of the following events? a. Rapidly rising sales b. A delay in the payment of payables c. A more liberal credit policy on sales (to the firm’s customers) d. Holding larger inventories
> Discuss the shortcomings of the percent of sales method of financial forecasting.
> United Parcel Service (UPS) provides package delivery services throughout the United States and the world. Discuss the impact of seasonal variations in the delivery business for forecasting the firm’s financing requirements.
> What is the primary weakness of using EBIT-EPS analysis as a financing decision tool?
> Define the following terms: a. Financial structure b. Capital structure c. Optimal capital structure d. Debt capacity
> You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing the money: • A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par value in interest, sells for $1,
> Break-even analysis assumes linear revenue and cost functions. In reality, these functions may not always be linear over large output and sales levels. Why?
> A manager in your firm decides to employ break-even analysis. Of what shortcomings should this manager be aware?
> Distinguish between business risk and financial risk. What each type of risk?
> Explain how the financial manager might use industry norms in the design of the company’s financing mix.
> Many CFOs believe that the firm’s composite cost of capital is saucer-shaped or U-shaped. What does this mean?
> Why might firms whose sales levels change drastically over time choose to use debt only sparingly in their capital structures?
> In the chapter introduction we learned that AT&T (T) borrowed $3 billion by issuing bonds in the public bond market. Although this may sound like a lot of money, AT&T owed almost $65 billion in corporate debt at the end of 2011. The company had over $27
> Explain how simulation works. What is the value in using a simulation approach?
> Use the concept of real options to explain why large restaurant chains often introduce new concept restaurants that have negative NPVs.
> How do sunk costs affect the determination of cash flows associated with an investment proposal?
> Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following questions. a. Assuming interest is paid annually, calculate the values of the bonds if you
> If a project requires an additional investment in working capital, how should this be treated when calculating the project’s cash flows?
> If depreciation is not a cash-flow expense, does it affect the level of cash flows from a project in any way? Why?
> Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions? Why are we interested only in incremental cash flows rather than total cash flows?
> When might two mutually exclusive projects having unequal lives be incomparable? How should managers deal with this problem?
> What causes the time-disparity ranking problem? What reinvestment rate assumptions are associated with the NPV and IRR capital-budgeting criteria?
> What are common reasons for capital rationing? Is capital rationing rational?
> What are mutually exclusive projects? Why might the existence of mutually exclusive projects cause problems in the implementation of the discounted cash flow capital-budgeting criteria?
> Briefly compare and contrast the NPV, PI, and IRR criteria. What are the advantages and disadvantages of using each of these methods?
> In some countries, the expropriation (seizure) of foreign investments is a common practice. If you were considering an investment in one of these countries, would the use of the payback period criterion seem more reasonable than it otherwise might? Why o
> What are the disadvantages of using the payback period as a capital- budgeting technique? What are its advantages? Why is it so frequently used?
> This Mini Case is available in My Finance Lab. Note: Although not absolutely necessary, you are advised to use a computer spreadsheet to work the following problem. a. Use the price data from the table that follows for the Standard & Poorâ€
> Why is capital budgeting such an important process? Why are capital budgeting errors so costly?
> What might we expect to see in practice regarding the relative costs of different sources of capital?
> a. Distinguish between internal common equity and new common stock. b. Why is there a cost associated with internal common equity? c. Describe two approaches that could be used in computing the cost of common equity.
> How does a firm’s tax rate affect its cost of capital? What is the effect of the flotation costs associated with a new security issue on a firm’s weighted average cost of capital?
> In computing the cost of capital, which sources of capital should be considered?
> Why do firms calculate their weighted average cost of capital?
> In 2009, ExxonMobil (XOM) announced its intention to acquire XTO Energy for $41 billion. The acquisition provided ExxonMobil an opportunity to engage in the development of shale and unconventional natural gas resources within the continental United State
> The corporate treasurer of Aggieland Fireworks is considering the purchase of a BBB-rated bond that carries a 9 percent coupon. The BBB-rated security is taxable, and the firm is in the 46 percent marginal tax bracket. The face value of this bond is $1,0
> Compute the annual depreciation for an asset that costs $250,000 and is in the 5-year property class. Use the MACRS in your calculation.
> Interpret the following information regarding Westlake Corporation’s cash flows. Net income……………………………………………………$680 Depreciation expense………………………………………..125 Profits before depreciation………………………………..805 Increase in accounts receivable……………………... (200) I
> If the real risk-free rate of interest is 4.8% and the rate of inflation is expected to be constant at a level of 3.1%, what would you expect 1-year Treasury bills to return if you ignore the cross product between the real rate of interest and the inflat
> You are considering an investment in Minnix Petroleum’s preferred stock. The preferred stock pays a dividend of $2.31. Your required return is 12 percent. Value the stock.
> Explain the three factors that determine the intrinsic, or economic, value of an asset.
> Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years. She has found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If Sarah were a finance major and
> Assume the expected inflation rate to be 4%. If the current real rate of interest is 6%, what ought the nominal rate of interest to be?
> What would you expect the nominal rate of interest to be if the real rate is 4% and the expected inflation rate is 7%?
> a. Compute an appropriate rate of return for Intel common stock, which has a beta of 1.2. The risk-free rate is 2 percent, and the market portfolio (NYSE stocks) has an expected return of 11 percent. b. Why is the rate you computed an appropriate rate?
> Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 5 percent and the expected return for the market is 12 percent. STOCK……………..BETA A………………………..0.75 B………………………..0.90 C…………
> To buy a new house you must borrow $150,000. To do this you take out a $150,000, 30-year, 10 percent mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principal and 10 percent interest on the d
> On December 31, Son-Nan Chen borrowed $100,000, agreeing to repay this sum in 20 equal end-of-year installments at 15 percent interest on the declining balance. How large must the annual payments be?
> You plan on buying some property in Florida 5 years from today. To do this, you estimate that you will need $20,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pay
> What is the value of a preferred stock when the dividend rate is 14 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent.
> A firm borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal installments at the end of each year over the next 5 years. How much will each annual payment be?
> What are the basic differences among book value, liquidation value, market value, and intrinsic value?
> This Mini Case is available in My Finance Lab. For your job as the business reporter for a local newspaper, you are given the task of putting together a series of articles that explain the power of the time value of money to your readers. Your editor wo
> You lend a friend $30,000, which your friend will repay in five equal annual end-of-year payments of $10,000, with the first payment to be received 1 year from now. What rate of return does your loan earn?
> On December 31, Beth Klemkosky bought a yacht for $50,000, paying $10,000 down and agreeing to pay the balance in 10 equal end-of year installments at 10 percent interest on the declining balance. How big will the annual payments be?
> The Aggarwal Corporation needs to save $10 million to retire a $10 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the end of each year for 10 years, with the first payment oc
> In 10 years you are planning on retiring and buying a house in Oviedo, Florida. The house you are looking at currently costs $100,000 and is expected to increase in value each year at a rate of 5 percent annually. Assuming you can earn 10 percent annuall
> To pay for your child’s education, you wish to have accumulated $15,000 at the end of 15 years. To do this, you plan on depositing an equal amount into the bank at the end of each year. If the bank is willing to pay 6 percent compounded annually, how muc
> Mr. Bill S. Preston, Esq., purchased a new house for $80,000. He paid $20,000 down and agreed to pay the rest over the next 25 years in 25 equal end-of-year payments plus 9 percent compound interest on the unpaid balance. What will these equal payments b
> Suppose you purchased 16 shares of Disney stock for $24.22 per share on May 1, 2012. On September 1 of the same year, you sold 12 shares of the stock for $25.68 per share. Calculate the holding-period dollar gain for the shares you sold, assuming no divi
> MFI, Inc. has a beta of 0.86. If the expected market return is 11.5 percent and the risk-free rate is 3 percent, what is the appropriate required return of MFI (using the CAPM)?
> Levine Manufacturing, Inc. is considering several investments. The rate on Treasury bills is currently 2.75 percent, and the expected return for the market is 12 percent. What should be the required rates of return for each investment using the CAPM? S
> Aylward, Inc. currently has $2,145,000 in current assets and $858,000 in current liabilities. The company’s managers want to increase the firm’s inventory, which will be financed by a short-term note with the bank. What level of inventories can the firm
> What factors determine a bond’s rating? Why is the rating important to the firm’s manager?
> Lisa Simpson wants to have $1 million in 45 years by making equal annual end-of-the-year deposits into a tax-deferred account paying 8.75 percent annually. What must Lisa’s annual deposit be?
> Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $398,930 due in 28 years. Toni Flanders, the company’s CEO, is scrambling to discount the liability to the present to assist in valuing the firm’s stock.
> Jack asked Jill to marry him, and she has accepted under one condition: Jack must buy her a new $330,000 Rolls-Royce Phantom. Jack currently has $45,530 that he may invest. He has found a mutual fund that pays 4.5 percent annual interest in which he will
> Kirk Van Houten, who has been married for 23 years, would like to buy his wife an expensive diamond ring with a platinum setting on their 30-year wedding anniversary. Assume that the cost of the ring will be $12,000 in 7 years. Kirk currently has $4,510
> Bob Terwilliger received $12,345 for his services as financial consultant to the mayor’s office of his hometown of Springfield. Bob says that his consulting work was his civic duty and that he should not receive any compensation. So, he has invested his
> Garret Industries has a price/earnings ratio of 16.29X. a. If Garret’s earnings per share are $1.35, what is the price per share of Garret’s stock? b. Using the price per share you found in part (a), determine the price/book ratio if Garret’s equity-book
> If you were offered $1,079.50 ten years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the offer?
> In September 1963, the first issue of the comic book X-MEN was issued. The original price for that issue was $0.12. By September 2016, 53 years later, the value of the near-mint copy of this comic book had risen to $35,000. What annual rate of interest w
> You lend a friend $10,000, for which your friend will repay you $27,027 at the end of 5 years. What interest rate are you charging your “friend”?
> If the 10-year Treasury bond rate is 4.9%, the inflation premium is 2.1%, and the maturity-risk premium on 10-year Treasury bonds is 0.3%, assuming that there is no liquidity-risk premium on these bonds, what is the real risk-free interest rate?
> a. How does a bond’s par value differ from its market value? b. Explain the differences among a bond’s coupon interest rate, current yield, and required rate of return.
> If ABC Company earned $280,000 in net income and paid cash dividends of $40,000, what are ABC’s earnings per share and dividends per share if it has 80,000 shares outstanding?
> This morning, you noticed the following information in your financial newspaper: 1 British pound = 103.25 yen ( JPY) 1 U.S. dollar = 81.23 yen 1 U.S. dollar = 0.77 euro s Given this information, how many euro s did the newspaper likely state could be con
> Suppose the exchange rate between U.S. dollars and Japanese yen is $1 US = ¥79.1 JPY, and the exchange rate between the U.S. dollar and the British pound is $1 US = £0.64 GBP. What is the cross rate of Japanese yen to British pounds? (In other words, how
> If one euro buys 1.32 U.S. dollars, how many euros can you purchase for 3 U.S. dollars?
> Compute the Canadian dollar/yen and the yen/Swiss franc spot rates from the data in the preceding table. COUNTRY CONTRACT S/FOREIGN CURRENCY Canada dollar Spot 0.8437 30-day 0.8417 90-day 0.8395 Japan yen Spot 0.004684 30-day 0.004717 90-day 0.004
> An American business pays $10,000, $15,000, and $20,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive? COUNTRY CONTRACT $/FOREIGN CURRENCY Canada dollar Spot 0.8437 30-day 0.
> An American business needs to pay (a) 10,000 Canadian dollars, (b) 2 million yen, and (c) 50,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries? COUNTRY CONTRACT S/FOREIGN CURRENCY Canada dollar Spot 0.
> Identify each of the following sources of short-term credit in terms of whether they are secured (include some type of collateral) or are unsecured: ◆ Line of credit ◆ Pledging of accounts receivable ◆ Trade credit ◆ Factoring of accounts receivable ◆ In
> Simpson Energy earned $3 million in net income last year and for the first time ever paid its common stockholders a cash dividend of $0.12 per share. The firm has 10 million shareholders. What was Simpson’s dividend payout ratio?
> The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5, whereas project B will prod
> Describe the bondholder’s claim on the firm’s assets and income.
