Question: State the assumptions underlying the M&M

> Consider the following estimated trend models. Use them to make a forecast for t = 21. a. Linear Trend: ŷ = 13.54 + 1.08t b. Quadratic Trend: ŷ = 18.28 + 0.92t – 0.012 = 1.8 + 0.09t; se = 0.01 Inly) %3D c. Exponential Trend:

> The accompanying table shows a portion of monthly data on seasonally adjusted inflation and unemployment rates in the United States from January 2009 to November 2010. a. Use the 3-period moving average and exponential smoothing with α =

> Consider the following table, which shows a portion of the closing prices of the S&P 500 Index for 21 trading days in November 2010. Date …………………………………………………………………………………………… S&P Price 1-Nov …………………………………………………………………………………………… 1184.38 2-Nov …………………………………

> According to the Census Bureau, the number of people below the poverty level has been steadily increasing (CNN, September 16, 2010). This means many families are finding themselves there for the first time. The following table shows a portion of the perc

> Refer to the previous exercise for a description of the data set. Previous exercise: Rock and roll is a form of music that evolved in the United States and quickly spread to the rest of the world. The interest in rock music, like any other genre, has

> Rock and roll is a form of music that evolved in the United States and quickly spread to the rest of the world. The interest in rock music, like any other genre, has gone through ups and downs over the years. The Recording Industry Association of America

> The following data were drawn from two independent populations. a. Specify the competing hypotheses to determine whether the median of Population 1 is greater than the median of Population 2. b. Find the unadjusted sum of ranks, W. c. The p-value for

> The accompanying data file contains 20 observations for t and yt. a. Use the 3-period moving average to make in-sample forecasts and compute the resulting MSE and MAD. b. Use the exponential smoothing method to make in-sample forecasts with α = 0.4. Co

> The accompanying data file contains 20 observations for t and yt. a. Plot the series and discuss the presence of random variations. b. Use the exponential smoothing method to make in-sample forecasts with α = 0.2. c. Compute the resulting MSE and MAD. R

> The accompanying data file contains 20 observations for t and yt. a. Construct the 5-period moving average and plot it along with the actual series. Comment on smoothing. b. Use the 5-period moving average to make in-sample forecasts and compute the re

> The accompanying data file contains 10 observations for t and yt. a. Construct the 3-period moving average and plot it along with the actual series. Comment on smoothing. b. Use the 3-period moving average to make in-sample forecasts and compute the re

> Gary Martin is a research analyst at an investment firm in Chicago. He follows the oil industry and has developed a pretty sophisticated model that forecasts an oil company’s stock price. However, given the recent strife in the Middle E

> Madelyn Davis is a research analyst for a large investment firm. She has been assigned the task of forecasting sales for Walmart Stores, Inc., for fiscal year 2011. She collects quarterly sales for Walmart Stores, Inc. (in $ millions) for the 10-year per

> Fried dough is a popular North American food associated with outdoor food stands at carnivals, amusement parks, fairs, festivals, and so on. Usually dusted with powdered sugar and drenched in oil, it is not particularly good for you but it sure is tasty!

> An investor bought 1,000 shares of Citigroup in January 2009 for $3.55 a share. She sold all of her shares in December 2009 for $3.31 a share. a. What annual rate of return did the investor earn? b. Use the CPI information from Exercise 40 to compute t

> The adjusted closing stock prices of Wendy’s/Arby’s Group, Inc., for the first three months of 2008 are presented in the following table. Assume that these adjusted closing prices are computed at the end of the month.

> Consider the following consumer price index (CPI) and producer price index (PPI) for 2006–2009. a. Use the relevant price index to deflate the data on net revenue of Citigroup, given in the previous exercise. b. Use the relevant pric

> The following data were drawn from two independent populations. a. Specify the competing hypotheses to determine whether the median of Population 1 is less than the median of Population 2. b. Find the unadjusted sum of ranks, W. c. The p-value for th

> Citigroup, Inc., is a major financial services company based in New York. It suffered huge losses during the global financial crisis and was rescued in November 2008 in a massive bailout by the U.S. government. Consider the following table, representing

> Lindsay Kelly bought 100 shares of Google, 300 shares of Microsoft, and 500 shares of Nokia in January 2005. The adjusted closing prices of these stocks over the next three years are shown in the accompanying table. a. Compute and interpret the unweigh

> Let the quantities corresponding to the prices in the previous exercise be given by the following table. a. Compute the Laspeyres price index, using 2009 as the base year. b. Compute the Paasche price index, using 2009 as the base year. c. Comment on

> Consider the following price data from 2009 to 2011. a. Compute and interpret the simple price index for each product, using 2009 as the base year. b. Compute and interpret the unweighted aggregate price index, using 2009 as the base year. Year Pr

> Consider the following price data from 2002 to 2010. a. Compute the simple price index using 2002 as the base year. b. Update the index numbers with a base year revised from 2002 to 2005. c. Plot the index numbers with a base year of 2002 and a base

> Toyota Motor Corp., once considered a company synonymous with reliability and customer satisfaction, has been engulfed in a perfect storm with millions of cars recalled (BBC News, March 19, 2010). The following table shows the monthly adjusted closing pr

> Kim Baek invested $20,000 for a year in corporate bonds. Each bond sold for $1,000 and earned a coupon payment of $80 each during the year. The price of the bond at the end of the year has dropped to $980. a. Calculate Kim’s investment return. b. Calcu

> According to Fisher College of Business at The Ohio State University, the starting salary of their graduates in the MBA program in 2008 was $89,156. What must be the starting salary of the MBAs in 2009 if the salary increase makes the exact cost of livin

> According to the New Hampshire Department of Education, the average teacher salary in public school districts in New Hampshire was $46,797 in 2006, $48,310 in 2007, and $46,797 in 2008. Comment on the percentage change in the dollar value (nominal) as we

> The total revenue for The Walt Disney Company was $35,510,000 for 2007, $37,843,000 for 2008, and $36,149,000 for 2009. a. Deflate the total revenue with the relevant price index. b. Discuss the revenue trend during the 2007–2009 per

> The following table lists a portion of the data derived from a matched-pairs sample. a. Specify the competing hypotheses that determine whether the population median difference differs from zero. b. Assuming that T is normally distributed, determine t

> Each month the Current Employment Statistics (CES) program surveys numerous businesses and government agencies in order to obtain detailed data on earnings of workers. Consider the following data on the national average of hourly earnings for 2008. Also

> Japan was the first Asian country to challenge the dominance of the United States in the 1980s. However, since then, its economy has been in a slow but relentless decline (The New York Times, October 16, 2010). This country has been trapped in low growth

> Economists often look at retail sales data to gauge the state of the economy. This is especially so in a recession year, when consumer spending has decreased. Consider the following table, which shows U.S. monthly nominal retail sales for 2009. Sales are

> The following table represents the nominal values of an item and the corresponding price index from 2009 to 2011. a. Compare the percentage change in the nominal values with the corresponding real values from 2009 to 2010. b. Compare the percentage ch

> The following table represents the nominal values of an item and the corresponding price index for 2007 and 2008. a. Compute the inflation rate for 2008. b. Compute the annual percentage change of the item in real terms. Year Nominal Value Price I

> Let revenues increase by 10% from $100,000 to $110,000. Calculate the percentage change in real terms if the relevant price index increases by 4% from 100 to 104.

> An item increases in value from 240 to 280 in one year. What is the percentage change in the value of this item? Compute the percentage change in real terms if overall prices have increased by 5% for the same period.

> The nominal values for four years are given by 32, 37, 39, and 42. Convert these values to real terms if the price index values for the corresponding years are given by 100, 102, 103, and 108.

> Consider the following table, which reports the sale of homes (in 1,000s) by region for 2007, 2008, and 2009. Use this information, along with the price data provided in the previous exercise, to a. Compute and interpret the Laspeyres aggregate home p

> With the collapse of house prices that occurred during the Great Recession, the American Dream became a nightmare for many of the 75 million Americans who owned a home (CBS Evening News, February 2, 2010). However, the drop in house prices was not unifor

> The following table lists a portion of the data containing information on a matched-pairs sample. a. Specify the competing hypotheses that determine whether the median difference between Population 1 and Population 2 is less than zero. b. At the 5% si

> Consider the following sample data. Assume the normal approximation for T. a. Specify the competing hypotheses to determine whether the median differs from 100. b. Calculate the value of the test statistic and the p-value. c. At the 10% significance

> What is the ROE indifference point of these two financing strategies of Arctic Inc.: Strategy 1: debt-equity ratio = 0.6. Strategy 2: debt-equity ratio = 1.5? Arctic Inc.’s tax rate is 25 percent and its pre-tax cost of debt is 8 percent.  

> What is the intercept and slope of the financial leverage (ROE‐ROI) line in Practice Problem 17? Explain the meaning of the slope.

> Calculate ROE if R OI 15%, R D 10%, B $300,000, S E $500,000, and T 30%. Identify the business risk and financial risk.

> What are the practical difficulties associated with the implications of M&M’s corporate tax model?

> How do taxes affect the M&M argument?

> In this ideal M&M world, what will affect firm value?

> What is the basic argument that M&M use to arrive at the irrelevancy result?

> Explain the importance of this theory.

> Kumar expected his firm to earn $1,000 per year forever, with no growth. Given a cost of capital of 10 percent, the value of the firm is $10,000. Kumar identified a new project, which costs $1,000 but would earn 11 percent per year forever. To invest in

> State the principle of the optimal cash balance.

> The current stock price of Abacus is $50. For the past 20 years, the firm has paid an annual dividend of $5. On July 26, it announced a dividend of $6 payable on September 10 to shareholders of record at the close of business on September 1. a. What do y

> A dividend‐paying company has a current dividend yield of 8 percent and a stock price of $100. The company has paid the same dividend for the past 15 years and it is not expected to change. Alice believes that the company is an excellent investment oppor

> MCC Corporation currently has cash flow from operations of $10 million, capital expenditures of $8 million, and pays a dividend of $2 million (all are perpetuities). The firm has no growth prospects or debt, and shareholders expect an annual return of 5

> A firm’s next‐period market value of equity is $3 million and there are 100,000 shares outstanding, with K = 12%. a. What is the current stock price if the firm pays $600,000 in cash dividends? b. What is the number of shares outstanding if a firm spends

> Assume that the shareholders of a firm pay a net tax of 30 percent on cash dividends received. After‐tax earnings have been constant at $10 per share. The firm pays out all earnings in dividends at the end of each year. The market requires a 15 percent r

> A firm has one million shares outstanding. After‐tax earnings have been constant at $8 per share. The firm pays out all earnings in dividends at the end of each year. The shareholders’ required rate of return is 15 percent. a. Calculate the current share

> CGC Company is considering its dividend policy. Currently CGC pays no dividends, has cash flows from operations of $10 million per year (perpetual), and needs $8 million for capital expenditures. The firm has no debt and there is no tax. The firm has 2 m

> Describe the implication of releasing the assumptions of no transactions costs.

> How do personal taxes affect preference for high versus low dividend yields?

> According to John Lintner, what is the adjustment factor ß? Interpret the calculated adjustment factor.

> Explain the transactions motive.

> Discuss the “bird in the hand” argument in support of dividend payments.

> Explain the implications of M&M’s homemade dividend argument.

> Describe the difference between a stock dividend and a cash dividend plus a DRIP.

> What does real-world evidence imply about how firms manage their dividend payments?

> Explain the similarities and differences of DRIPs, stock dividends, and stock splits.

> Define four important dates that arise with respect to dividend payments.

> What obvious question arises when we examine cross-sectional patterns in the dividend payouts of individual companies?

> What obvious question arises when we examine historical patterns in aggregate dividend payouts?

> List the main reasons why firms repurchase shares.

> A company has announced an increase in its quarterly dividend from $0.30 to $0.42 per share. If an investor who owns 1,500 shares is in the 25 percent tax bracket, calculate the amount by which the investor ’ s tax would increase annually due to the divi

> Why do securitizations require credit enhancements?

> Describe possible reactions from the market of the following dividend payout changes. a. Dividend initiation b. Dividend increase c. Dividend decrease

> What factors may influence a firm’s decision to enter into share repurchases?

> Why can share repurchases be viewed as an alternative to paying a cash dividend?

> Calculate the cash conversion cycle (CCC) for the company examined in questions 4 to 6. Round to the nearest day. Cash $ 500,000 Marketable securities 800,500 Accounts receivable 700,000 Inventory 1,003,000 Short-term loans 100,000 Accounts payable 8

> How is net working capital calculated?

> State the characteristics of sound net working capital management.

> Reconcile the predictions of M&M with Gordon’s arguments about dividend policy.

> Explain the “bird in the hand” argument about dividends.

> MB Corporation has a receivables turnover of 10, an inventory turnover of 15, and a payables turnover of 5. Calculate its cash conversion cycle. What does a negative cash conversion cycle tell you about MB Corporation’s business?

> Atlantic Transport collects 75 percent of its monthly sales immediately and the rest at the end of the month; has production costs that are 60 percent of sales; pays 50 percent of its bills immediately and the rest at the end of the month; and has four m

> What is the cost of 3/15 net 60 trade credit?

> A firm collects 60 percent of its monthly sales immediately and the rest a month later; its production costs are 80 percent of sales, and it holds two months of sales in inventory. It pays 40 percent of its bills immediately and the remainder after 30 da

> A firm has estimated its sales, purchases from suppliers, and wages and miscellaneous operating cash outlays for the first four months of next year as follows: It estimates that 50 percent of its sales will be for cash, and that it will receive the remai

> Christmas Inc. is a wholesaler of Christmas decorations and wrapping paper. It is a seasonal business and, due to the timing of cash inflows and outflows, it frequently experiences a cash shortfall in the fourth quarter of the year, before it can liquida

> Use the information in the financial statements below to answer the following. a. Calculate the current ratio, quick ratio, and net working capital. b. Calculate the inventory turnover (using revenues), receivable turnover, and payables turnover. c. Calc

> Determine the operating cycle and cash conversion cycle for a company with inventory turnover of 6.25 times per year, receivables turnover of 8 times per year, and an average days of revenues in payables (ADRP) of 40 days.

> Manitoba Services is considering undertaking a new order that would cause its average days of revenues in payables (ADRP) to decrease from 58 days to 48 days, while its average collection period (ACP) will remain at 90 days and its average days revenues

> Great Northern Manufacturing presently has net working capital of $100,000 and sales of $125,000. It is considering entering into a new project that would increase next year’s sales by $15,000. The project would result in a decrease in the average collec

> Explain the difference between the quick ratio and the current ratio.

> Explain the difference between the operating cycle (OC) and the cash conversion cycle (CCC).

> Discuss measures businesses can implement to improve working capital management.

> What are the drawbacks to using the turnover ratio to measure inventory policy?

> Explain the difference between the receivables turnover ratio and the average collection period (ACP).

> a. What can you conclude if a firm’s planned sales growth exceeds its break‐even sales growth rate? b. What can you conclude if a firm’s planned sales growth is less than its break‐even sales growth rate?

> Would each of the following changes increase or decrease the break‐even sales growth rate? a. An increase in the amount of inventory held b. An increase in the proportion of invoices that are paid immediately c. A decrease in the amount of inventory held

> Calculate the ending cash balance of the current month for the following opening cash balance and current month’s cash flows: Beginning cash $ 20,000 Prior month sales 50,000 Current month sales 100,000 Current purchases 35,000 Prio

> For 2012, Ontario Manufacturing Company provided the following accounting information: a. Which of the above are sources of funds? b. Which of the above are uses of funds? c. What is the overall increase or decrease in cash? Net operating income $60,