Question: Suppose that a firm has both fixed-

> The balancing item in the Dynamic long-term planning model is borrowing. What is meant by balancing item? How would the model change if dividends were made the balancing item instead? In that case how would you suggest that planned borrowing be determine

> Corporate financial plans are often used as a basis for judging subsequent performance. What do you think can be learned from such comparisons? What problems are likely to arise, and how might you cope with these problems?

> Our long-term planning model of Dynamic Mattress is an example of a top-down planning model. Some firms use a bottom-up financial planning model, which incorporates forecasts of revenues and costs for particular products, advertising plans, major investm

> Dynamic Mattress decides to lease its new mattress-stuffing machines rather than buy them. As a result, capital expenditure in the first quarter is reduced by $50 million, but the company must make lease payments of $2.5 million for each of the four quar

> Work out a short-term financing plan for Dynamic Mattress Company, assuming the limit on the line of credit is raised from $100 to $120 million. Otherwise keep to the assumptions used in developing Table 29.7. Table 29.7: Firs

> Table 29.16 on the next page shows Dynamic Mattress’s year-end 2013 balance sheet, and Table 29.17 shows its income statement for 2014. Work out the statement of cash flows for 2014. Group these items into source

> Which items in Table 29.7 would be affected by the following events? a. Interest rates rise. b. Suppliers demand interest for late payment. c. Dynamic receives an unexpected bill in the third quarter from the Internal Revenue Service for u

> Table 29.14 lists data from the budget of Ritewell Publishers. Half the company’s sales are for cash on the nail; the other half are paid for with a one-month delay. The company pays all its credit purchases with a one-month

> What is the maximum possible growth rate for Archimedes (see Problem 10) if the payout ratio is set at 50% and (a) no external debt or equity is to be issued? (b) the firm maintains a fixed debt ratio but issues no equity? Problem 10: Abbreviated fina

> Table 29.12 summarizes the 2017 income statement and end-year balance sheet of Drake’s Bowling Alleys. Drake’s financial manager forecasts a 10% increase in sales and costs in 2018. The ratio of sales to av

> Suppose that a shareholder can gain effective control of a company with 30% of the shares. Explain how a shareholder might gain control of company Z by setting up a holding company X2 that holds shares in a second holding company X, which in turn holds s

> A year ago a bank entered into a $50 million five-year interest rate swap. It agreed to pay company A each year a fixed rate of 6% and to receive in return LIBOR. When the bank entered into this swap, LIBOR was 5%, but now interest rates have risen, so o

> True or false? a. Financial planning should attempt to minimize risk. b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings. c. Financial planning is necessary because financing and investment decisio

> Each of the following events affects one or more tables in Sections 29-2 to 29-3. Show the effects of each event by adjusting the tables listed in parentheses: a. Dynamic repays only $10 million of short-term debt in 2015. (Tables 29.2 and 29.3) b. Dyn

> Dynamic Futon forecasts the following purchases from suppliers: a. Forty percent of goods are supplied cash-on-delivery. The remainder are paid with an average delay of one month. If Dynamic Futon starts the year with payables of $22 million, what is the

> Here is a forecast of sales by National Bromide for the first four months of 2016 (figures in $ thousands): On the average 50% of credit sales are paid for in the current month, 30% are paid in the next month, and the remainder are paid in the month afte

> State how each of the following events would affect the firm’s balance sheet. State whether each change is a source or use of cash. a. An automobile manufacturer increases production in response to a forecasted increase in demand. Unfortunately, the dem

> Listed below are six transactions that Dynamic Mattress might make. Indicate how each transaction would affect (1) cash and (2) working capital. The transactions are a. Pay out an extra $10 million cash dividend. b. Receive $2,500 from a customer who p

> What effect will each of the following have on the cash cycle? a. The inventory turnover falls from 80 to 60 days. b. Customers are given a larger discount for cash transactions. c. The firm adopts a policy of reducing accounts payable. d. The firm st

> If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid in the current quarter? In the following quarter? What if the delay is 60 days?

> A firm is considering several policy changes to increase sales. It plans to increase the variety of goods it keeps in inventory, but this will increase inventory by $100,000. It will offer more liberal sales terms, but this will result in receivables inc

> What is the most common form of ownership of corporations worldwide?

> Abbreviated financial statements for Archimedes Levers are shown in Table 29.13 on the next page. If sales increase by 10% in 2017 and all other items, including debt, increase correspondingly, what must be the balancing item? What will be it

> After a record harvest, grain silos are full to the brim. Are storage costs likely to be high or low? What does this imply for the net convenience yield?

> In fiscal 2012 and 2013, Caterpillar’s financial statements included the following items. What was Caterpillar’s cash cycle? $ Millions 2012 2013 Inventory $15,547 $12,625 Receivables 20,113 18,729 Payables 14,969

> This question reviews some of the difficulties encountered in interpreting accounting numbers. a. Give four examples of important assets, liabilities, or transactions that may not be shown on the company’s books. b. How does investment in intangible as

> Look again at the balance sheet for Geomorph in Problem 10. Suppose that at year-end Geomorph had $30 in cash and marketable securities. Immediately after the year-end it used a line of credit to borrow $20 for one year, which it invested in additional m

> Consider this simplified balance sheet for Geomorph Trading: a. Calculate the ratio of debt to equity. b. What are Geomorph’s net working capital and total long-term capital? Calculate the ratio of debt to total long-term capital.

> Magic Flutes has total receivables of $3,000, which represent 20 days’ sales. Total assets are $75,000. The firm’s operating profit margin is 5%. Find the firm’s sales-to-assets ratio and return on assets.

> A firm has a long-term debt–equity ratio of .4. Shareholders’ equity is $1 million. Current assets are $200,000, and total assets are $1.5 million. If the current ratio is 2.0, what is the ratio of debt to total long-term capital?

> Keller Cosmetics maintains an operating profit margin of 8% and a sales-to-assets ratio of 3. It has assets of $500,000 and equity of $300,000. Interest payments are $30,000 and the tax rate is 35%. a. What is the return on assets? b. What is the retur

> There are no universally accepted definitions of financial ratios, but five of the following ratios are clearly incorrect. Substitute the correct definitions. a. Debt–equity ratio = (long-term debt + value of leases)/(long-term debt + value of leases + 

> German banks often control a large fraction of the shareholder votes for German businesses. How do they get that voting power?

> Look again at Table 28.10. At the end of fiscal 2014, Starbucks had 748 million shares outstanding with a share price of $81.25. The company’s weighted average cost of capital was about 9%. Calculate: a. Market value added.

> Look again at Table 28.10. Calculate a common-size balance sheet and income statement for Starbucks. Table 28.10: End of Year Start of Year Balance Sheet Assets Current assets: $ 1,844 $ 3,234 Cash and marketable securities Ac

> Residents of the northeastern United States suffered record-setting low temperatures throughout November and December 2024. Spot prices of heating oil rose 25% to over $7 a gallon. a. What effect did this have on the net convenience yield and on the rela

> Table 28.10 gives abbreviated balance sheets and income statements for Starbucks. Calculate the following using balance-sheet figures from the start of the year: a. Return on assets. b. Operating profit margin. c. Sales-to-assets ratio. d.

> Construct a balance sheet for Galactic Enterprises given the following data: Cash balances………….…………..……………$25,000 Inventories……………………………………… $30,000 Net plant and equipment…………………..$140,000 Accounts receivable…….…………...…………$35,000 Accounts payable…………………

> Take another look at Geomorph Trading’s balance sheet in Problem 10 and consider the following additional information: The “R&R reserve” covers the future costs of removal of an oil pipeline and e

> Sometimes analysts use the average of capital at the start and end of the year to calculate return on capital. Provide some examples to illustrate when this does and does not make sense.

> We noted that, when calculating EVA, you should calculate income as the sum of the after-tax interest payment and net income. Why do you need to deduct the tax shield? Would an alternative be to use a different measure of the cost of capital? Or would yo

> Suppose that you wish to use financial ratios to estimate the risk of a company’s stock. Which of those that we have described in this chapter are likely to be helpful? Can you think of other accounting measures of risk?

> How would rapid inflation affect the accuracy and relevance of a manufacturing company’s balance sheet and income statement? Does your answer depend on how much debt the firm has issued?

> If you buy a nine-month T-bill future, you undertake to buy a $1 million three-month bill in nine months’ time. Suppose that Treasury bills and notes currently offer the following yields: Months to Maturity.....................Annual Yield 3...

> Here are some data for five companies in the same industry: You have been asked to calculate a measure of times-interest-earned for the industry. Discuss the possible ways that you might calculate such a measure. Does changing the method of calculation m

> As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad (Table 28.11). Can you use the following information to work out the missing entries? (Note: For this problem,

> Sara Togas sells all its output to Federal Stores. The following table shows selected financial data, in millions, for the two firms: Calculate the sales-to-assets ratio, the operating profit margin, and the return on assets for the two firms. Now assum

> The following table shows interest rates and exchange rates for the U.S. dollar and the Lilliputian nano. The spot exchange rate is 15 nanos = $1. Complete the missing entries: 1 Month 3 Months 1 Year Dollar intere

> How would the following actions affect a firm’s current ratio? a. Inventory is sold. b. The firm takes out a bank loan to pay its suppliers. c. The firm arranges a line of credit with a bank that allows it to borrow at any time to pay its suppliers. d

> Discuss alternative measures of financial leverage. Should the market value of equity be used or the book value? Is it better to use the market value of debt or the book value? How should you treat off-balance-sheet obligations such as pension liabilitie

> Describe some alternative measures of a firm’s overall performance. What are their advantages and disadvantages? In each case discuss what benchmarks you might use to judge whether performance is satisfactory.

> True or false? a. A company’s debt–equity ratio is always less than 1. b. The quick ratio is always less than the current ratio. c. The return on equity is always less than the return on assets.

> On average, it takes Microlimp’s customers 60 days to pay their bills. If Microlimp has annual sales of $500 million, what is the average value of unpaid bills?

> Do Japanese investors play an important role in corporate financial policy and governance? If not, could they?

> Airlux Antarctica has current assets of $300 million, current liabilities of $200 million and a crash—sorry—cash ratio of .05. How much cash and marketable securities does it hold?

> A firm in the United States is due to receive payment of €1 million in eight years’ time. It would like to protect itself against a decline in the value of the euro, but finds it difficult to get forward cover for such a long period. Is there any other w

> A U.S. company has committed to pay 10 million kronor to a Swedish company in one year. What is the cost (in present value) of covering this liability by buying kronor forward? The Swedish interest rate is .6%, and exchange rates are shown in Table&Acirc

> In March 1997, the exchange rate for the Indonesian rupiah was R2,419 = $1. Inflation in the year to March 1998 was about 30% in Indonesia and 2% in the United States. a. If purchasing power parity held, what should have been the nominal exchange rate i

> “Northern Refineries does not avoid risk by selling oil futures. If prices stay above $2.40 a gallon, then it will actually have lost by selling oil futures at that price.” Is this a fair comment?

> Define each of the following theories in a sentence or simple equation: a. Interest rate parity. b. Expectations theory of forward rates. c. Purchasing power parity. d. International capital market equilibrium (relationship of real and nominal intere

> Look at Table 27.1. a. How many Japanese yen do you get for your dollar? b. What is the one-month forward rate for yen? c. Is the yen at a forward discount or premium on the dollar? d. Use the one-year forward rate to calculate the annual

> Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States, assembles them, and then sells the finished product in Germany. Omega is at the opposite extreme. It also has a plant in Hamburg, but it b

> Carpet Baggers, Inc., is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows: The spot exchange rate for euros is $1.3/

> “Last year we had a substantial income in sterling, which we hedged by selling sterling forward. In the event sterling appreciated. So our decision to sell forward cost us a lot of money. I think that in the future we should either stop hedging our curre

> What is a keiretsu? Give a brief description.

> Table 27.5 shows the annual interest rate (annually compounded) and exchange rates against the dollar for different currencies. Are there any arbitrage opportunities? If so, how would you secure a positive cash flow today, while zeroing out a

> In November 2014, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each. The exchange rates when she buys the stock are shown in

> You have bid for a possible export order that would provide a cash inflow of €1 million in six months. The spot exchange rate is $1.3549 = €1 and the six-month forward rate is $1.3620 = €1. There are two sources of uncertainty: (1) the euro could apprec

> A Ford dealer in the United States may be exposed to a devaluation of the yen if this leads to a cut in the price of Japanese cars. Suppose that the dealer estimates that a 1% decline in the value of the yen would result in a permanent decline of 5% in t

> Companies may be affected by changes in the nominal exchange rate or in the real exchange rate. Explain how this can occur. Which changes are easiest to hedge against?

> Exacta, s.a. Exacta, s.a., is a major French producer, based in Lyons, of precision machine tools. About two thirds of its output is exported. The majority of these sales is within the European Union. However, the company also has a thriving business in

> Suppose you are the treasurer of Lufthansa, the German international airline. How is company value likely to be affected by exchange rate changes? What policies would you adopt to reduce exchange rate risk?

> Penny Farthing, the treasurer of International Bicycles, Inc., has noticed that the interest rate in Japan is below the rates in most other countries. She is, therefore, suggesting that the company should make an issue of Japanese yen bonds. Does this ma

> Look at Table 27.1. If the three-month interest rate on dollars is 0.2%, what do you think is the three-month interest rate on the Brazilian real? Explain what would happen if the rate were substantially above your figure. Table 2

> Table 27.1 shows the 90-day forward rate on the South African rand. a. Is the dollar at a forward discount or premium on the rand? b. What is the annual percentage discount or premium? c. If you have no other information about the two curr

> Why are pyramids common in many countries but not in the United States or United Kingdom?

> It is the year 2021 and Pork Barrels Inc. is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows: The spot exchange rate is $1.2 = €1. The interes

> Suppose that in 2023 one- and two-year interest rates are 5.2% in the United States and 1.0% in Japan. The spot exchange rate is ¥120.22/$. Suppose that one year later interest rates are 3% in both countries, while the value of the yen has appreciated to

> An importer in the United States is due to take delivery of clothing from Mexico in six months. The price is fixed in Mexican pesos. Which of the following transactions could eliminate the importer’s exchange risk? a. Sell six-month call options on peso

> Phillip’s Screwdriver Company has borrowed $20 million from a bank at a floating interest rate of 2 percentage points above three-month Treasury bills, which now yield 5%. Assume that interest payments are made quarterly and that the entire principal of

> Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks:
On the evidence of these six mo

> “Speculators want futures contracts to be incorrectly priced; hedgers want them to be correctly priced.” Why?

> Yesterday you sold six-month futures on the German DAX stock market index at a price of 9,120. Today the DAX closed at 9,100 and DAX futures closed at 9,140. You get a call from your broker, who reminds you that your futures position is marked to market

> Is a total return swap on a bond the same as a credit default swap? Why or why not?

> Consider the commodities and financial assets listed in Table 26.5. The risk-free interest rate is 6% a year, and the term structure is flat. a. Calculate the six-month futures price for each case. b. Explain how a magnoosium producer would use a futures

> Petrochemical Parfum (PP) is concerned about a possible increase in the price of heavy fuel oil, which is one of its major inputs. Show how PP can use either options or futures contracts to protect itself against a rise in the price of crude oil. Show ho

> What kind of industries do you think should thrive in a market-based financial system? In a bank-based system?

> Price changes of two gold-mining stocks have shown strong positive correlation. Their historical relationship is Average percentage change in A = .001 + .75 (percentage change in B) Changes in B explain 60% of the variation of the changes in A (R2 = .6).

> Legs Diamond owns shares in a Vanguard Index 500 mutual fund worth $1 million on July 15. (This is an index fund that tracks the Standard and Poor’s 500 Index.) He wants to cash in now, but his accountant advises him to wait six months so as to defer a l

> A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,300 an ounce, but the price is extremely volatile and could fall as low as $1,220 or rise as high as $1,380 in the next month. The company will bring

> What is meant by “delta” (δ) in the context of hedging? Give examples of how delta can be estimated or calculated.

> Securities A, B, and C have the following cash flows:
a. Calculate their durations if the interest rate is 8%. b. Suppose that you have an investment of $10 million in A. What combination of B and C would hedge this investment against interest rate c

> In September 2020 swap dealers were quoting a rate for five-year euro interest rate swaps of 4.5% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 4.1%. Suppose that A arranges with a dealer to swap a €10 million fiv

> The following table shows 2014 gold futures prices for varying contract lengths. Gold is predominantly an investment good, not an industrial commodity. Investors hold gold because it diversifies their portfolios and because they hope its price will rise.

> Why is transparency important in a market-based financial system? Why is it less important in a bank-based system?

> Banks are not the only financial intermediary from which corporations can obtain financing. What are the other intermediaries? How much financing do they supply, relative to banks, in the United Kingdom, Germany, and Japan?

> Agency problems are inevitable. That is, we can never expect managers to give 100% weight to shareholders’ interests and none to their own. a. Why not? b. List the mechanisms that are used around the world to keep agency problems under control.

> What is tunneling? Why does the threat of tunneling impede the development of financial markets?

> What is meant by the German system of codetermination?

> In December 2014, 6-month futures on the Australian S&P/ASX 200 Index traded at 5,376. Spot was 5,442. The interest rate was 2.5%, and the dividend yield was about 4.7%. Were the futures fairly priced?