Trustco Income Fund is an income trust whose units trade on the Toronto Stock Exchange. On October 31, 2006, just before the Government of Canada announced new taxes for businesses organized as trusts, the price of each Trustco unit was $15.12. The firm had been making regular payments to its unitholders at a rate of $1.03 per year; this means that unitholders were getting a yield (or return) of 6.8 percent per year. The day after the government ’ s announcement, the unit price fell to $12.26, but there was no immediate change in the payments to unitholders. What was the yield on Trustco units on November 1, 2006? 18. (LO 2.1) Janice borrowed
> For GG. Co., calculate the degree of total leverage (DTL) and break‐even point of sales at which the firm covers all its operating and fixed costs, given the following information: sales are $5,050,000; variable cost is $1,850,000; net income is $685,750
> What is the firm’ s net working capital in year 2?
> In 2015, a firm ’ s revenue is $100,000, cost of sales is $40,000, rent is$15,000, depreciation is$3,000, and interest paid is $2,000. Its tax rate is 35 percent. a. Construct an income statement based on this information. b. If the company pays 20 perce
> Suppose that Finns’ Fridges actually pays $270 in dividends in year 3. Determine the value of the retained earnings account at the end of year 3 based on the forecast net income calculated in Practice Problem 29.
> Based on the balance sheet you created, how much working capital does Finns ’ Fridges have?
> What was the growth rate of sales at CP in 2013 and 2014? Did the sales growth rate increase or decrease?
> List the four areas of conflict of interest between shareholders and managers.
> Using the net income and earnings per common share (EPS) figures from Canadian Pacific ’ s (CP ’ s) income statement (Figure 3‐5), determine how many shares (approximately) the company had outstanding at the end of 2014 .
> The firm ’ s dividend payout ratio is 30 percent. What was the firm ’ s year 2 net income?
> If Excelsior Inc. ’ s expected sales growth rate is 5 percent, determine the external financing required. Will the corporation have a cash surplus or deficit?
> What sales growth rate must Excelsior Inc. achieve if it is to have a cash surplus? Year 1 Year 2 Year 1 Year 2 Cash 100 112 Accounts payable 400 350 Accounts 330 234 Notes payable 390 370 receivable Year 1 Year 2 Year 1 Year 2 Inventory 410 435 Sub
> What are the firm’ s changes in net working capital in year 2?
> If Excelsior Inc. keeps the same dividend payout ratio, what are the expected total dividends in year 3 if the sales growth rate is 5 percent?
> Determine valuation ratios including book value per share, dividend yield, and dividend payout for year 2.
> David and Douglas invested $500 each to capitalize Finns ’ Fridges. To allow for future flexibility (such as selling shares to other investors), they placed a “par value” of $10 on each share; thus each brother owns 50 shares. Based on the net income fig
> Determine net fixed asset turnover in year 2. Year 2 Statement of Comprehensive Income (SMillion) Net sales 1,850 Taxable income 985 Less: Cost of goods sold 605 Less: Taxes 156 Less: Depreciation 180 Net income 829 Eamings before interest 1,065 Addi
> Determine productivity ratios including inventory turnover and average days revenue in inventory in year 2.
> Suppose Janice obtains only $93,000 when she sells all the assets of the firm described in Practice Problem 18. How much money would the debt holders receive if the business were a corporation? If it were a sole proprietorship? How much would Janice rece
> Describe the main advantages and disadvantages of sole proprietorships and partnerships.
> Determine productivity ratios including receivables turnover and average collection period in year 2.
> Determine the company ’ s efficiency ratios including gross profit margin and operating margin in year 2. Explain the differences.
> Determine Excelsior Inc. ’ s efficiency ratio of times interest earned in year 2.
> The present value of a dollar to be received one year from today is 0.927644. The present value of a dollar to be received two years from today is 0.854172. What is the price of a bond that pays an annual coupon of 7 percent and matures in two years? Fin
> Use two approaches to determine ROE in year 2. (Hint: one approach is from the definition and the other is to use the DuPont system.)
> A bond has a yield to maturity of 8 percent and a current yield of 6 percent. Is the bond trading at par, at a premium, or at a discount? What can you say about the coupon rate?
> Altech Inc. has a convertible bond with a face value of $1,000 and coupon rate of 6 percent. The bond will mature in 10 years, and its current price is $950. The bond can be converted at any time into 25 shares of Altech Inc., whose current share price i
> A 90‐day U.S. T‐bill has a bank discount yield (kBDY) of 4.673 percent. Find the quoted price. Find the bond equivalent yield (kBEY) on a 90‐day Canadian T‐bill with the same quoted price.
> a . What is the value of a 10‐year, zero coupon bond with a face value of $1,000 when the market rate is 8 percent? b . Calculate the YTM of the above zero coupon bond if the current price is $760.
> Calculate the bank discount yield on a 92‐day U.S. T‐bill that is currently quoted at $97.75. Find the bond equivalent yield on a 92‐day Canadian T‐bill with the same quoted price.
> Janice borrowed $100,000 from friends and family to start her company (a sole proprietorship). Business has been poor recently, and Janice has decided to cease operations and liquidate the firm. She expects to obtain $108,000 from selling the assets of t
> Suppose Finns’ Fridges is subject to corporate income tax at a rate of 40 percent. What will the company ’s net income be after tax?
> A company is contemplating issuing new 15‐year bonds at par. The company currently has 5.5 percent coupon bonds on the market selling for $936. The bonds pay semi‐annual interest and have 15 years until maturity. What coupon rate should the company set o
> Corine ’ s Candies Inc. registered a gross profit margin of 75 percent on sales of $16 million in 2016. What would the company ’s income statement show for the cost of goods sold?
> The forecast for retained earnings (Practice Problem 31) changes the year 3 forecast for total liabilities and owners ’ equity to $4,770. With total assets forecast to be $5,177, determine how much external financing will be required in year 3.
> A nine‐year, 6.5‐percent coupon bond is selling for 106.2 percent of par. What is the bond ’ s market yield if it makes semi‐annual coupon payments?
> An 8 percent annual coupon bond with 12 years left to maturity is selling for $928. What is the YTM of the bond?
> Based on the figures in practice problems 17 and 18, how much money did the shareholders actually invest in the firm (i.e., what is the value of the capital stock)? Use the following information to answer practice problems about Finns ’
> Calculate the price change for a 1-percent decrease in market yield for the following bond: par = $1,000; coupon rate = 6 percent, paid semi-annually; market yield = 6 percent; term to maturity = 10 years.
> List the correct bookkeeping entries when a firm sells $50,000 worth of inventories for $80,000 using credit sales. (Ignore the tax effect.)
> List the major jobs available in the financial industry.
> Describe the two major types of secondary markets.
> Grace, a retired librarian, would like to donate some money to her alma mater to endow a $ 5,000 annual scholarship. The university will manage the funds and expects to earn 3 percent per year. How much will Grace have to donate so that the endowment fun
> When Jon graduates in three years, he wants to throw a big party, which will cost $800. To have this amount available, how much does he have to invest today if he can earn a compound return of 5 percent per year?
> On the advice of a friend, Gilda invests $ 20,000 in a mutual fund that has earned 10 percent per year, on average, in recent years. If this rate of return continues, determine how much her investment will be worth in: a. one year b. five years c. 10 yea
> If a bond‐rating agency downgrades the rating of a bond, how will it affect the price of that bond?
> When you hired Dan to manage your business, you agreed to pay him a bonus of 10 percent of profits at the end of each year. The company now has a choice between two projects (it can take on only one of them). Project A will generate profits of $50,000 pe
> A new Internet bank pays compound interest of 0.5 percent per month on deposits. How much interest will Khalil’ s summer savings of $ 1,200 earn in one year with this online bank account?
> Khalil’ s summer job has given him $ 1,200 more than he needs for his tuition this year. The local bank pays simple interest at a rate of 0.5 percent per month. How much interest will he earn in one year?
> Suppose the inflation rate in Canada, as measured by the CPI, has been averaging 3.5 percent in recent years. The most recent Bank of Canada announcement indicates that it expects 3.2‐percent inflation over the next year. If the real rate of return on Ca
> A bond is currently trading at $841.70. It has 15 years to maturity. If you require a rate of return of 12 percent, what should be the bond ’ s coupon rate if the bond pays semi‐annual coupons?
> State the statutory responsibilities of directors that are described in the Canada Business Corporations Act.
> Summarize the main characteristics of corporations.
> Describe the relationship between bond interest rate risk and the coupon rate, the market yield, and the term to maturity.
> Calculate the price of the following bond: FV = $1,000; coupon rate = 6 percent, paid semi-annually; market rate = 5 percent; term to maturity = 10 years.
> State the relationship between market rates and bond prices.
> Describe the difference between positive and negative bond covenants.
> Define “perpetuity”.
> What time-value-of-money formula do we need to value a bond?
> Who prescribes GAAP for U.S. companies?
> Why is the present value of $1 million in 50 years’ time worth very little today?
> Explain how to calculate the present value and future value of an ordinary annuity and an annuity due.
> Describe the causes of a “credit crunch.”
> What is the day count convention in Canada and the United States?
> What form of investment income has the highest tax rate in Canada?
> What are the main advantages and disadvantages of the corporation structure?
> What role does the board of directors serve?
> What is the primary goal of the corporation?
> Define agency costs and describe both types.
> Describe the nature of the basic owner-manager agency relationship.
> Should the Government allow one of the Big Six Canadian banks to fail if it loses money on its loan portfolio?
> Explain the cost imposed on society if firms become too big to fail, and discuss whether the government should break up large firms when they pose such risks.
> Distinguish between market and financial intermediaries.
> State the main differences and similarities between sole proprietorships and partnerships.
> Identify and briefly describe the three main channels of savings.
> What is the difference between a positive and a negative covenant provision?
> How do floaters and real return bonds provide protection against inflation?
> Explain why a firm cannot claim CCA recapture and a terminal loss for the same asset class in the same year.
> How is the balance sheet related to the income statement?
> Explain how to calculate the effective rate for any period.
> What are the major provisions of SOX?
> When market interest rates are above the coupon rate on a bond, is it a premium or discount bond?
> Why do income statements differ from tax statements? What is the major difference?
> What is the primary objective of financial reporting under IFRS?
> List and define the four major forms of business organization.
> 1. Which of the following is true about finance? a. Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers. b. Finance is different from economics because economics does not study how resources are al
> Why does money have a “time value”?
> a . Suppose the Finns believe they can increase revenues to $2,600 in year 3. Use this figure and the percentage of sales balance sheet (Practice Problem 27) to forecast the company ’ s balance sheet at the end of year 3. Remember that the “financing” co
> It is now May 1, 2015, and Peter has just purchased a five‐year U.S. government bond (FV = $1,000) with a quoted price of 93.863. This bond has a 6‐percent coupon rate, and the last semi‐annual coupon payment was made on January 1, 2015. a . How much wil
> The following is data for two bonds at a time when the market yield is 7 percent. These bonds are otherwise identical (FV = $1,000, five years to maturity, semi‐annual coupon payments). Which bond’s price will change m
> Suppose that, several years ago, the Canadian government issued three very similar bonds; each has a $1,000 face value and a 10‐percent coupon rate and will mature in five years. The only difference between the bonds is the frequency of the coupon paymen
> Calculate the price of a bond with FV of $1,000, a coupon rate of 8 percent (paid semi‐annually), and five years to maturity when: a . k b = 10 percent. b . kb = 8 percent. c . kb = 6 percent.
> In the DuPont system, there are two components of ROA. Determine whether efficiency or productivity (or both) is responsible for the increase in ROA for Finns ’ Fridges from year 1 to year 2.
> Using the Fisher relationship, calculate the exact real interest rate and the approximate real rate, given a Tbill rate of 8 percent and an expected inflation rate of 3.6 percent.
> The following values are the spread for corporate bond yields. a . One‐year T‐bills are trading with a YTM of 6 percent. What yield would you expect to find on A‐rated corporate bonds maturing in one
> Describe why financial and market intermediaries exist in our financial system.
> Calculate the cash price of the following bond, sold on September 21: par = $1,000; coupon rate = 4 percent, paid on January 1 and July 1; quoted price = $956. Explain why the cash price is different from the quoted price.
> State three of the most basic principles of IFRS.
> Find Finns ’ Fridges ’ return on equity (ROE) for years 1 and 2, using the owners ’ equity figure at the end of each year. Did this ratio improve or get worse between year 1 and year 2?
> What are secondary market transactions? How do secondary markets facilitate the primary markets?
> Identify the main components of a firm’s balance sheet and income statement.
