Find the operating margin for Finns ’ Fridges for both years (you may assume that the net operating income is equal to the firm ’ s EBIT). Was there an increase or a decrease in the operating margin, and is this a good trend or a bad one?
> The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default: a . How much should Slice & Dice be willing to pay for a three
> Sapna would like to receive a real return of 5 percent per year on a bond investment at a time when the expected inflation rate is 2.5 percent. How much would she be willing to pay for a bond maturing in two years if it pays annual coupons at a (nominal)
> A bond with semi‐annual coupons at a rate of 10 percent will mature in one year. If the bond’s price is $1,010, use the trial‐and‐error method to find the YTM. Check your answer by using a financial calculator. What would the YTM be if the bond made annu
> A zero coupon bond has a par value of $1,000 and will mature in eight years. a . Calculate the current price of this bond if the market yield is: i) 7.75 percent; ii) 5.25 percent. b . In each case, calculate the percentage change in the price of the bon
> Consider a bond with five years to maturity, FV of $1,000, and a coupon rate of 6.5 percent (semi‐annual payments). a . Calculate the price of this bond if the market yield is: i) 7.75 percent; ii) 5.25 percent. b . In each case, calculate the percentage
> Calculate cash flow from operations for Tina’ s Business Inc. using the following information. Net income S80,000 Depreciation 6,000 Deferred income taxes 2,000 Decrease in inventories 10,000 Decrease in accounts receivable 2,000 De
> What are the scope and purpose of the auditor’s opinion?
> The Finn brothers are concerned that the financial statements for Finns ’ Fridges don ’ t reflect the true state of affairs. The company ’ s 25 customers were charged $10 for rent at the end of each month. Now that the academic year is over, five of thes
> David Finn notices that the local appliance store is now charging $210 for the same model of refrigerator his company bought for $200. Given that Finns ’ Fridges purchased 25 of these refrigerators, what should the company ’ s balance sheet show as the v
> Kash Kow Inc. pays out all its after‐tax earnings to shareholders in the form of dividends. Suppose that in 2015 the company earned $1 per share before tax. Corporate income tax was paid at a rate of 25%. Suppose a highincome shareholder receiving this d
> Suppose firms A and B have identical revenues and operating expenses, so that each has earnings before amortization and taxes of $10 million. Both firms will report amortization of $1 million on their public financial statements. On its tax return, firm
> Estimate cash flow from operations for KER Inc. using the following information. Net income $90,000 Depreciation 10,000 Deferred income taxes 5,000 Increase in inventories 20,000 Decrease in accounts receivable 1,000 Increase in accounts payable 2,00
> Calculate the receivables turnover, inventory turnover, and average collection period for a firm, given the following accounting data: accounts receivable are $600,000; accounts payable are $305,000; inventory is $550,000; gross profit is $550,000; sales
> Tina ’ s Business Inc. purchases one machine in its first year of business for $1,000,000. In year 2, it purchases another machine for $500,000. The CCA rate for these assets is 20 percent. a. Find the beginning UCC, CCA, and ending UCC in years 1 to 3 f
> Investor A just turned 20 years old and currently has no investments. She plans to invest $ 5,500 at the end of each year for eight years, beginning in five years. The rate of return on her investment is 15 percent, continuously compounded. Investor B is
> a. Determine the month‐end payment for a $ 200,000, 10‐year loan with an interest rate of 12 percent, compounded monthly, assuming there is no down payment. b. Calculate the outstanding loan amount after 18 months. c. Redo part (a), assuming it is a mort
> Five years ago, Franklin borrowed $ 250,000 to purchase a house in Sandy Lake. At the time, the quoted rate on the mortgage was 6 percent, the amortization period was 25 years, the term was five years, and the payments were made monthly. Now that the ter
> How do sinking funds work?
> Michelle is offered a loan of $ 30,000 that requires 60 monthly payments of $ 622.75. What is the effective annual interest rate on this loan? What would the quoted rate be?
> Jimmie wishes to buy a new car that will cost $29,000. a. How much will his monthly car payments be if he obtains a loan that is amortized over 60 months, and the nominal interest rate is 8.5 percent per year with monthly compounding? b. Create an amorti
> Alysha has decided to use $ 50,000 in savings to make a down payment on a house. She will live in the house for the next two years while still at university and then sell it when she graduates. The bank has offered her a mortgage rate of 5.1 percent comp
> Use the year 2 financial statements for Finns ’ Fridges to determine the company ’ s sustainable growth rate.
> Céline has just won a lottery. She will receive a payment of $ 6,000 at the end of each year for nine years. As an alternative, she can choose an immediate payment of $ 50,000. a. Which alternative should she pick if the interest rate is 5 percent? b. Wh
> How many years will it take for an investment to double in value if the rate of return is 9 percent and compounding occurs: a. annually? b. quarterly?
> Roger has his eye on a new car that will cost $ 20,000. He has $ 15,000 in his savings account, earning interest at a rate of 0.5 percent per month. a. How long (to the nearest month) will it be before he can buy the car? b. How long will it be before Ro
> Wilma would like to borrow $ 250,000 to start her own business. She would like to make monthly payments to repay the loan in 10 years. If the bank is quoting her a rate of 6 percent compounded quarterly, determine her monthly payment.
> Amanda would like to borrow $ 50,000 to pay one year ’s tuition at a private U.S. university. She would like to make quarterly payments and finish repaying the loan in five years. If the bank is quoting her a rate of 6 percent compounded monthly, determi
> Use the income statement for CP (Figure 3‐5) to calculate the average tax rate (tax paid as a percentage of net income) in 2014.
> How do callable bonds differ from retractable and extendable bonds?
> Based on CP’s balance sheet (Figure 3‐4), the firm ’s total current assets changed between the two years. Which component of the current assets changed the most? By what dollar amount and percentage did it increase or decrease?
> Other candy‐making firms have an average forward P/E ratio of 12 at this time. With a share price of $18.20, what are the expected 2017 EPS for Corine ’ s Candies if its forward P/E ratio is the same as the industry average?
> Corine ’ s Candies Inc. paid dividends of $1 million during2015. However, the company needed extra cash to open new stores, so it issued $1.4 million in new stock. What was Corine ’ s cash flow from financing in 2015?
> To achieve the target level of revenues in year 3 ($2,600), Finns ’ Fridges will have to buy some more equipment. This will increase the amortization expense to $1,422. Selling costs will be the same percentage of sales as in year 2, and the interest exp
> The Finn brothers are planning their third year of operations. As a first step in the process, create a “percentage of sales” statement of financial position for Finns ’ Fridges as of the end of year 2.
> At the end of its most recent fiscal period, the large appliance rental company mentioned in Practice Problem 19 had a working capital ratio of 4.3 percent and a current ratio of 18.2 percent. Calculate these ratios for Finns ’ Fridges at the end of year
> Prince Rupert Fly ‘n ’ Fish Inc. purchases one small plane in its first year of business for $90,000. In year 2, it purchases another plane for $100,000. Find the UCC at the end of year 3 if the CCA rate for aircraft is 25 percent.
> Determine the price‐earnings ratio, market‐to book ratio, and EBITDA ratio for year 2.
> Tina ‘ s Business Inc. bought machines some time ago for $25,000. She decided to sell all the assets from this pool at the end of this year. The pool of assets had a UCC of $5,000 before the sale, and the whole asset class was sold for $45,000. Calculate
> Suppose Prince Rupert Fly ‘ n ’ Fish Inc. (see Practice Problem 48) decides to sell its first aircraft for $50,000 in year 2 (purchased for $90,000 in year 1). As before, the second plane costs $100,000 and is bought and put in service in year 2. Find th
> What is moral hazard and why did it become the buzz word of the 2008 financial crisis?
> Determine liquidity ratios including working capital ratio, current ratio, and quick ratio for year 2. Explain the differences among the ratios.
> What is the apparent tax rate (tax paid as a percentage of net income) for firms A and B in Practice Problem 46?
> Suppose firms A and B have identical revenues and operating expenses, so that each has earnings before amortization and taxes of exactly $1 million. Both firms will report amortization of $250,000 on their public financial statements. On its tax return,
> Omar ’s business purchased several pieces of machinery some time ago for $25,000. At the beginning of the current year, this pool of assets had a UCC of $15,000. During the year, Omar decided to sell all the assets from this pool. For each of the three s
> Adam has saved C$1,000 and plans to go surfing in Australia next summer. He won’t need the money for a year, so he decides to invest it. Adam could invest the money in Canada, where a T‐bill will earn 4.5 percent, and then convert it to Australian dollar
> You are a financial advisor and one of your clients comes to you with a convertible bond that has a coupon rate of 8 percent. The market interest rate is 6 percent. The share price of the company that issued the bond is going down, and you don’t expect t
> Determine leverage ratios, including debt ratio and debt‐equity ratio, in both years. Has Excelsior Inc. improved on its leverage ratios in year 2? Year 2 Statement of Comprehensive Income (SMillion) Net sales 1,850 Taxable income
> Explain yield to maturity in terms of the spot rate.
> Calculate the fixed asset turnover for Finns ’ Fridges for years 1 and 2 (note that net fixed assets correspond to “property and equipment (net)” on the company ’ s statement of financial position). Has the company become more or less productive in terms
> How have management compensation schemes been designed to better align owner-manager interests? How well have these schemes performed in this regard?
> We can calculate cash flow from operations (CFO) as net income + non‐cash expenses + change in working capital ignoring cash. In year 2, the change in working capital for Finns ’ Fridges was -$25. Find the CFO and use this figure to calculate the cash fl
> In year 1, a firm had cash and cash equivalents of $150,000, accounts receivable of $35,000, and inventories of $23,000. In year 2, it had cash and cash equivalents of $80,000, accounts receivable of $20,000, and inventories of $15,000. Calculate the cha
> The managers of Corine ’ s Candies like to use the EBITDA multiple to value the firm. EBITDA was approximately $10 million in 2016. Use the market value of equity from Practice Problem 34 and a debt value of $20 million to find the total enterprise valu
> At maturity, each of the following zero coupon bonds (pure discount bonds) will be worth $1,000. For the following each bond, fill in the missing quantity in table. Assume semi‐annual compounding. Price Maturity (Years) Yield to Mat
> The shares of Corine ’ s Candies Inc. are currently trading at $18.20. There are four million shares outstanding. The company ’ s 2016 net income was $5.2 million. Find the market value of equity for the company and the P/E ratio of the shares.
> For each of the following YTM figures, calculate the price and current yield for a 10‐year, 5‐percent, semiannual‐ pay bond with a face value of $1,000. a . YTM = 4 percent b . YTM = 5 percent c . YTM = 6 percent
> For each of the following YTM figures, calculate the price and current yield for a two‐year, 7‐percent, annual‐pay bond with a face value of $1,000. a . YTM = 6 percent b . YTM = 7 percent c . YTM = 8 percent
> Construct a balance sheet and income statement for the business, assuming no income tax.
> Use the average dividend payout ratio from years 1 and 2, and the forecast net income figure from Practice Problem 29, to estimate the total amount of dividends that will be paid by the company in year 3.
> You bought a bond last year for $102.50 and just sold it for $98.50. What has happened to the interest rate over that period?
> How are trusts distinct from corporations?
> Stephen has learned that his great‐aunt intends to give him $ 5,000 each year he is studying at university. Tuition must be paid in advance, so Stephen would like to receive his payments at the beginning of each school year. How much will his great‐aunt
> Calculate book value per share, dividend yield, dividend payout, market‐to‐book ratio, earnings per share, and price‐to‐earnings ratio given the following information: shareholders’ equity is $945,000; number of shares outstanding is 500,000; total divid
> Explain briefly why events in the United States affected countries around the world so drastically.
> Identify and briefly describe the two major stock markets in the United States.
> Explain why global financial markets are so important to Canadians.
> Discuss how the three most important types of financial intermediaries operate.
> How is a traditional bond structured?
> Explain how to calculate the CCA expense for an asset class in a given year.
> Why would firms prefer to receive dividend income and make interest payments rather than make dividend payments and receive interest payments?
> Is the yield to call always greater than the yield to maturity?
> As the CFO of your company, it falls to you to make the final decision on large expenditures. Recently, your controller has proposed purchasing a new computer system at a cost of $50,000. He believes the system will deliver savings of $60,000 in the acco
> What is a bond indenture?
> In what ways are bonds different from mortgages?
> Which sector or sectors of the economy are net providers of financing and which are the net users of financing?
> Why does simple interest take into account the time value of money?
> Explain how simple interest payments are determined.
> Distinguish between real and financial assets.
> What is finance?
> How do cash flow statements alleviate the impact of most major accounting assumptions?
> What happens to the net income figure when a firm’s accountants make more aggressive accounting assumptions? Briefly explain.
> Why can effective rates often be very different from quoted rates?
> Summarize the main responsibilities of the finance function (including CFO, treasurer, and controller) in a non-financial company.
> How does the formula for determining the price of a T-bill resemble the formula for determining the price of a zero coupon bond? Why is this so?
> Why is a 6 percent U.S. mortgage not the same as a 6 percent Canadian mortgage?
> How do U.S. bank discount yields differ from bond equivalent yields?
> The rowboats Randy purchased (see Practice Problem 25) are a class 7 asset, so they have a CCA rate of 15 percent. Determine the amount of the capital cost allowance for each of the four years the boats will be used (include the “half‐year rule”).
> If you have a retractable bond, under what conditions will you exercise your right to sell the bond back to the bond issuer?
> Suppose that a 6‐percent, annual‐pay, Government of Canada bond that matures in two years has a yield to maturity of 6.75 percent. If inflation is expected to be 2.5 percent per year over the next two years, what coupon rate would you expect to find on a
> Why is there no simple analytical formula for the yield to maturity?
> Which types of bonds have more interest rate risk: short-term or long-term bonds?
> What is an “opportunity cost”?
> Differentiate between debits and credits with respect to assets and liabilities.
> The following two bonds are identical (FV = $1,000, 8‐ percent coupon rate paid semi‐annually), except that they mature at different times.
> Explain how loan and mortgage payments can be determined using annuity concepts.
> Why do interest rates differ between Canada and the United States?
> Why do interest rates on different-maturity Canada bonds differ?
> How does the expected rate of inflation affect nominal interest rates?
> Xiang wishes to have $1 million in 25 years. He cannot afford to make large deposits at the moment; however, he believes that he will be able to increase his deposits by 4 percent per year for the next 25 years. He will make his first deposit in one year
> Distinguish between primary and secondary markets.
