The Miller Milk Company has just come up with a new lactose free dessert product for people who can’t eat or drink ordinary dairy products. Management expects the new product to fuel sales growth at 30% for about two years. After that competitors will copy the idea and produce similar products, and growth will return to about 3% which is normal for the dairy industry in the area. Miller recently paid an annual dividend of $2.60, which will grow with the company. The return on stocks like the Miller Company is typically around 10%. What is the most you would pay for a share of Miller?
> Capital budgeting is based on the idea of identifying incremental cash flows, so overheads aren't generally included. Does this practice create a problem for a firm that over a long period of time takes on a large number of projects that are just barely
> What is the general (in words) relationship between risk and return?
> Interest is said to drive the stock market. But interest is paid on bonds and loans while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock market. Explain this apparent contradiction.
> The payback technique is criticized for not using discounted cash flows. Under what conditions will this matter most? That is, under what patterns of cash flow will payback and NPV or IRR be likely to give different answers?
> Because of the advances in computer technology, inventory management is a precise science, and there's no excuse for not having the optimal quantity on hand at all times. Is that statement true or false? Explain.
> Inventory management is a shared responsibility between finance and manufacturing just as receivables management involves both sales and finance. Right or wrong? Explain.
> Outline the costs and benefits involved in the trade-off between a tighter versus a looser receivables policy.
> Why does stock-based compensation create a moral hazard for executives?
> Describe insider trading. Why is it illegal?
> You're the cash manager for Huge Inc., which has factories and stores all over the country. Each operation has several bank accounts to receive deposits and pay vendors, so the company's cash is spread all over the country under the control of divisiona
> What argument was made against adopting FASB 13?
> What do we mean when we say businesses spend two kinds of money? Where does each kind come from? How is each used?
> What, in general, is meant by off balance sheet financing?
> Define term and maturity. Is there a difference?
> Factoring may involve interest even though it isn't a loan. How can this come about?
> Describe the concept of the breakeven point in words by using the concept of contribution and fixed costs. (Short answer.)
> Explain the idea of breakeven analysis in a brief paragraph.
> What information are we likely to be interested in that’s contained in a loan amortization schedule?
> You're a new member of the planning staff within the finance department at Bertram Enterprises, a large manufacturer of household goods. The firm does an annual operating plan and a long range plan every year. You've just received a note from the CFO a
> Is the IPO Pop experienced by most new stocks likely to be a reflection of market forces driving shares toward their intrinsic values?
> In a retail store a discount is a price reduction. What's a discount in finance? Are the two ideas related?
> The risk added by financing is small and insignificant relative to the inherent risk in most businesses. Is that statement true or false? Discuss.
> Why are time value concepts crucial in determining what a bond or a share of stock should be worth?
> What is the primary purpose of financial markets?
> What's the difference between a direct and an indirect transfer of money between investors and firms?
> Exchange transactions between two currencies neither of which is the U.S. dollar have to be made by changing one currency into dollars and then changing the dollars into the other currency. This procedure is necessary, because the exchange tables are al
> When you want to buy something from another country, you have to find a seller who's willing to take dollars, but that isn't too hard because the U.S. dollar is widely accepted. Comment on this statement.
> Hostile acquisitions create real animosities between the stockholders of the acquired and acquiring companies. Comment on the truth of this statement.
> The Highland Instrument Company has revenues of about $300 million per year. Its management is interested in expanding into a new type of product manufactured primarily by Lowland Gauge Inc., a firm with sales of about $200 million annually. Both firms
> When an annuity begins several time periods into the future, how do we calculate its present value today? Describe the procedure in a few words.
> What generates the supply of and the demand for foreign exchange? Why do the supply and demand curves have the shape they do? What makes the supply and demand curves and hence the exchange rate move around?
> Kneelson and Botes Inc. (K&B) is a construction company that does road and bridge work for the state highway authority. The state government solicits bids on construction projects from private contractors. The winning contractor is chosen based on
> Segwick Corp manufactures men's shoes that it sells through its own chain of retail stores. The firm is considering adding a line of women's shoes. Management considers the project a new venture because there are substantial differences in marketing an
> Hudson Furniture specializes in office furniture for self-employed individuals who work at home. Hudson’s furniture emphasizes style rather than utility, and has been quite successful. The firm is now considering entering the more competitive industria
> Calculate the NPV at 12% and the IRR for the following projects. Find IRR's to the nearest whole percent. a. An initial outflow of $10,000 followed by three inflows of $4,000. b. An initial outflow of $10,000 followed by inflows of $3,000, $4,000, and
> Resolve the previous problem assuming Voxland uses the 5-year Modified Accelerated Cost Recovery System (MACRS) with no salvage value to depreciate the computer. Continue to assume the machine is sold after five years for $1,000. (Hint: Apply the MACRS
> Should the project being considered in the previous problem be accepted or rejected based on IRR? (Hint: Start by guessing 11% for IRR) Does the IRR method seem to give a more definite result? If so, would your recommendation, after considering all four
> Tomatoes Inc. is planning a project that involves machinery purchases of $100,000. The new equipment will be depreciated over five years, straight line. It will replace old machinery that will be sold for an estimated $36,000 and has a book value of $2
> The Rapscallion Company’s stock is selling for $43.75. Dave Jones has done some research on the firm and its industry, and thinks it will pay dividends of $5 next year and $7 the following year. After those two years Dave thinks its market price will p
> Blackstone Inc manufactures western boots and saddles. The company is considering replacing an outmoded leather-processing machine with a new, more efficient model. The old machine was purchased for $48,000 six years ago and was expected to have an eig
> The Catseye Marble Co. is thinking of replacing a manual production process with a machine. The manual process requires three relatively unskilled workers and a supervisor. Each worker makes $17,500 per year while the supervisor earns $24,500. The new
> Discuss the idea of capitalizing a stream of earnings in perpetuity. Where is this idea useful? Is there a financial asset that makes use of this idea?
> Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway’s Cost of capital is 12%. a. Calculate each project’s NPV and IRR. b. Which project should be undertaken? Why? Projec
> Bagel Pantry Inc. is considering two mutually exclusive projects with widely differing lives. The company's cost of capital is 12%. The project cash flows are summarized as follows: a. Compare the projects by using Payback. b. Compare the projects by
> Island Airlines, Inc. needs to replace a short haul computer plane on one of its busier routes. Two aircraft that satisfy the general requirements of the route are on the market. One is more expensive than the other but has better fuel efficiency and l
> Calculate the IRR, NPV, and PI for projects with the following cash flows. Do each NPV and PI calculation at costs of capital of 8% and 12%. Calculate IRRs to the nearest whole percent. a. An initial outlay of $5,000 and inflows of $1,050 for seven yea
> The Leventhal Baking Company is thinking of expanding its operations into a new line of pastries. The firm expects to sell $350,000 of the new product in the first year and $500,000 each year thereafter. Direct costs including labor and materials will
> Sam Dozier, a very bright computer scientist, has come up with an idea for a new product. He plans to form a corporation to develop the idea and market the resulting product. He has estimated that it will take him and one employee about a year to devel
> Oxbow Inc. is contemplating a new venture project and has done a detailed five-year cash flow estimate with the following result ($000): The firm’s cost of capital is 12%. a. Use a financial calculator to compute the projectâ
> Gander, Inc. is considering two projects with the following cash flows. Gander uses the payback period method of capital budgeting and accepts only projects with payback periods of 3 years or less. a. If the projects are presented as standalone oppor
> Calculate the NPV at 9% and the IRR for the following projects: a. An initial outlay of $69,724 and an inflow of 15,000 followed by four consecutive inflows of $17,000. b. An initial outlay of $25,424 followed by two zero cash years and then four years o
> Discuss mortgage loans in terms of the time value of money and loan amortization. What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting the mortgage paid off.)
> Clancy Inc. is considering a project with the following cash flows. a. Clancy has a policy of rejecting all projects that don’t pay back within three years outright, and analyzing those that do more carefully with time value-based met
> Huron Valley Homes is considering a project requiring a $1 million initial investment. Expected cash inflows will be $25,000 in the first year, $100,000 in the second year, and $200,000 per year for the next six years. a. Calculate the project’s IRR and
> Koski and Hass (K&H) just paid a $2 dividend which is expected to grow at 5% indefinitely. The return on comparable stocks is 9%. What percent of the intrinsic value of K&H stock is derived from dividends paid more than 20 years into the future?
> Provide the missing information for the following projects using the present value of an annuity function [time value of money (TVM) keys rather than the cash flow (CF) function keys]. (Hint: The present value of the annuity of the annual cash flows min
> Tutak Industries is considering a project requiring an initial investment of $200,000 followed by annual cash inflows of $45,000 for the next six years. A second six-year project has an initial outlay of $325,000. a. How much would the second project ha
> The Sampson Company is considering a project that requires an initial outlay of $75,000 and produces cash inflows of $20,806 each year for five years. Sampson's cost of capital is 10%. a. Calculate the project's payback period by making a single divis
> Project Alpha requires an initial outlay of $35,000 and results in a single cash inflow of $56,367.50 after five years. a. If the cost of capital is 8% what are Alpha's NPV and PI? Is the project acceptable under each of these techniques? b. What is pro
> Hamstring Inc. is considering a project with the following cash flows: The company is reluctant to consider projects with paybacks of more than three years. If projects pass the payback screen, they are considered further by means of the NPV and IRR m
> Cavanaugh Construction specializes in designing and building custom homes. Business has been excellent, and Cavanaugh projects a 10% growth rate for the foreseeable future. The company just paid a $3.75 dividend to its stockholders. Comparable stocks
> The Anderson Pipe Co. just paid an annual dividend of $3.75 and is expected to grow at 8% for the foreseeable future. Harley Bevins generally demands a return of 9% when he invests in companies similar to Anderson. a. What is the most Harley should be
> How does High Frequency Trading (HFT) work? How do regulators feel about HFT?
> Nu-Mode Fashions Inc. manufactures quality women’s wear, and needs to borrow money to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO has asked you to estimate the interest rate Nu-Mode sho
> Suppose dice had four sides instead of six, so rolling a single die would produce equally likely numbers from one to four, and rolling two dice would produce numbers from two to eight. a. Compute the probability distribution of outcomes from rolling tw
> Wayne Merritt drives from Cleveland to Chicago frequently and has noticed that traffic and weather make a big difference in the time it takes to make the trip. As a result, he has a hard time planning activity around his arrival time. To better plan hi
> Lipson Ltd. expects a constant growth rate of 5% in the future. Treasury bills yield 8% and the market is returning 13% on an average issue. Lipson's last annual dividend was $1.35. The company's beta has historically been .9. The introduction of a ne
> Broken Wing Airlines just paid an annual dividend of $2, has a beta of 1.3, and a growth rate of 6% for the foreseeable future. The current return on the market is 10% and Treasury bills earn 4%. If the rate on Treasury bills drops by 0.5% and the mark
> Weisman Electronics of the previous problem is considering acquiring an unrelated business. Management thinks the move could change the firm’s stock price by moving its beta up or down and decreasing its growth rate. A consultant has estimated that We
> Bergman Corp. has experienced zero growth over the last seven years paying an annual dividend of $2.00 per share. Investors generally expect this performance to continue. Bergman stock is currently selling for $24.39. The risk-free rate is 3.0% and Ber
> Seattle Software Inc. recently paid an annual dividend of $1.95 per share and is expected to grow at a 15% rate indefinitely. Short term federal government securities are paying 4% while an average stock is earning its owner 11%. Seattle is a very vola
> Whole Foods Inc. paid a quarterly dividend of $0.47 recently. Treasury bills are yielding 4%, and the average stock is returning about 11%. Whole Foods is a stable company. The return on its stock responds to changes in the political and economic envir
> Seth Harris is an avid investor who likes to speculate on stock price changes. Lately he’s become bored with the slow movement of most stock prices and thinks options might be more exciting. He’s been following the stock of Chelsea Club Inc., a women’s
> Describe the underlying meaning of compounding and compounding periods. How does it relate to time value? Include the idea of an effective annual rate (EAR). What is the annual percentage rate (APR)? Is the APR related to the EAR?
> The CFO of Ramekin Pottery Inc. is concerned about holding up the price of the company’s stock. He’s asked you to do an analysis starting with an estimate of the return investors are likely to require before they will invest in the firm. The overall st
> Erin Behlen has a three-stock portfolio and is interested in estimating its overall return next year. She has $25,000 invested in Forms Corp., which has a beta of 1.3; $75,000 in Crete Corp. with a beta of .8 and $20,000 in Stalls Corp, which has a beta
> You have recently purchased stock in Topical Inc. which has returned between 7% and 9% over the last three years. Your friend, Bob, has criticized your purchase and insists that you should have invested in Combs Inc., as he did, because it’s been return
> The return on Holland-Wilson Inc. (HWI) stock over the last three years is shown below along with the market’s return for the same period. Plot HWI’s return against that of the market in each of the three years. Mak
> Garrett Corp. has been going through a difficult financial period. Over the past three years, its stock price has dropped from $50.00 to $18.00 per share. Throughout this downturn, Garrett has managed to pay a $1.00 dividend each year. Management feel
> The stocks in the problem 11 have the following betas. Calculate Laurel’s portfolio beta for last year and for this year. Assume that the changes in investment (value) come from changing stock prices rather than buying and selling
> Threads Inc. manufactures stylish clothing for teenagers. The firm has a beta of 1.4 and earned a return on equity of 20% last year. However, a new financial crisis has just hit the stock market and Wall Street experts think the return on an average st
> Charles Jackson, the founder and president of the Jackson Company is concerned about his firm’s image in the financial community. The concern arose when he went to the bank for a one-year loan and was quoted a rate of 12% which was considerably more tha
> Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Compute the dividend yield, capital gains yield, and total one-year return implie
> Describe the sectors into which economists divide an industrialized economy and outline the financial flows between them.
> Calculate the market price of a $1,000 face value bond under the following conditions. Coupon Time Until Rate 12% Current Maturity Market Rate 15 уrs 5 yrs 25 yrs 30 уrs б уrs a. 10% b. 7% 12% с. 9% 6% d. 14% 9% е. 5% 8%
> Suppose Wings and Nantucket of the last problem agree to assume a $300,000 residual value for the plane at the end of the lease. How much will wings have to pay monthly to give Nantucket its 12% return?
> Wings Inc. is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is fifteen years, and no residual value is expected at its end. a. What monthly lease payment must Nantucket
> The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate. a. What is the bond's price today if the interest rate on comparable new issues is 12%? b. What is the price tod
> Taunton Manufacturing Inc. is a machine shop in Taunton Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year-end. No residual value was assumed in the lease, which is clearly a financin
> Henderson Engineering Ltd. just leased a computer aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Henderson to purchase the machine at its fair market value a
> Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet. The firm is interested in acquiring a fleet of ten company cars for its sales staff. The cars have an economic life of seven years, but Caruthers plans to kee
> Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago it issued 10,000, 8% coupon, 30 year convertible debentures at a par value of $1,000. The conversion price was set at $25, the price of th
> Lindstrom Corp. reported earnings after tax of $2,160,000 last year along with basic EPS of $3.00. All of Lindstrom’s bonds are convertible, and if converted, would increase the number of shares of the firm’s stock outstanding by 15%. Lindstrom is subj
> Jake Cornwall just bought a $1,000 par value, 8% coupon rate, 30-year bond of the Pristine Corp. Interest rates had risen somewhat between the time the coupon rate was set and the bond was issued, so Jake got it at a discount paying only $950. The bond
> What problems does an institutional investor face when it places a very large buy or sell order for a block of stock through an exchange.
> The Rollins Metal Company is engaged in a long-term planning process and is trying to choose among several strategic options, which imply different future growth rates for the company. Management feels that the main benefit of higher growth is that it e
> A $1,000 par value, 30-year bond is 5 years old. It pays interest once a year at an annually compounded coupon rate of 12% The market is returning 8% on comparable bonds. What is the bond’s market price?
> The following preferred stocks are returning 8.5% to their owners: Calculate the prices at which they were issued. Dividend % Current Price $14.71 $41.18 $129.41 Stock A B C 5% 7% 11%
> Apollo’s Alpha-1 bond was issued at a time when interest rates were even higher. It has a coupon rate of 22%, a $1,000 face value, an initial term of 30 years, and is now 13 years old. Calculate its price if interest rates are now 12%, compare it with
> Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1,000. Interest rates were very high at the time, and the bond's coupon rate is 20%. The interest rate is now 10%. a. At what price should an Alpha bond sell? b. At what pri
