What is the financial cycle?
> Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model
> Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose
> Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in it and pays an 8% interest rate. a. How much money would
> Your mom is thinking of retiring. Her retirement plan will pay her either $250,000 immediately on retirement or $350,000 five years after the date of her retirement. Which alternative should she choose if the interest rate is a. 0% per year? b. 8% per ye
> Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 4% per year,
> Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
> What is the present value of $10,000 received a. 12 years from today when the interest rate is 4% per year? b. 20 years from today when the interest rate is 8% per year? c. 6 years from today when the interest rate is 2% per year?
> Calculate the future value of $2000 in a. 5 years at an interest rate of 5% per year. b. 10 years at an interest rate of 5% per year. c. 5 years at an interest rate of 10% per year. d. Why is the amount of interest earned in part (a) less than half the a
> Suppose you invest $1000 in an account paying 8% interest per year. a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”? b. What is the balance in the account after 25 years? How much of thi
> Consider the following alternatives: i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. b. What is your ranking if t
> You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the scholarship?
> Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your answer depen
> Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3% rate, and its share price was $50. With the planned expa
> A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans: a. How much would you have in one year if you deposited the $55 instead? b. How much money could you borro
> You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
> Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual depreciation charges of $1 million and a tax rate of 35%. a. W
> Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement: a. What were Peet’s revenues for 2008? By what percentage did revenues grow from 2007? b. What were Peet’s operating a
> In April 2010, the following information was true about Abercrombie and Fitch (ANF) and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars. a. What is the market-to-book ratio of each company? b. What concl
> In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion. a. What was Apple’s current ratio? b. What was Apple’s quick ratio? c. In July 2007, Dell
> In June 2007, General Electric (GE) had a book value of equity of $117 billion, 10.3 billion shares outstanding, and a market price of $38.00 per share. GE also had cash of $16 billion, and total debt of $467 billion. a. What was GE’s market capitalizati
> Consider the following potential events that might have occurred to Global on December 30, 2010. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s book value of equit
> You have a loan outstanding. It requires making three annual payments of $1000 each at the end of the next three years. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan’s t
> For 2010, Wal-Mart and Target had the following information (all values are in millions of dollars): a. What is each company’s accounts receivable days? b. What is each company’s inventory turnover? c. Which company is
> You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage r
> DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose DFB will maintain the
> Suppose a firm’s tax rate is 35%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings, if th
> Suppose that in 2010, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4.50%. Suppose that they had no other income, interest expenses were unchanged, and taxes were the same p
> If JPJ Corp (the company from the previous question) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?
> JPJ Corp has sales of $1 million, accounts receivable of $50,000, total assets of $5 million (of which $3 million are fixed assets), inventory of $150,000, and cost of goods sold of $600,000. What is JPJ’s accounts receivable days? Fixed asset turnover?
> Ladders, Inc. has a net profit margin of 5% on sales of $50 million. It has book value of equity of $40 million and total liabilities with a book value of $30 million. What is Ladders’ ROE? ROA?
> If Local Co., the company in Problem 12, had interest expense of $800,000, how would that affect each of its margins? Problem 12 data Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are
> If Local Co., the company in Problem 12, had an increase in selling expenses of $300,000, how would that affect each of its margins? Problem 12 data: Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrat
> Zoom Enterprises expects that one year from now it will pay a total dividend of $5 million and repurchase $5 million worth of shares. It plans to spend $10 million on dividends and repurchases every year after that forever, although it may not always be
> The balance sheet information for Clorox Co. (CLX) in 2004–2005 is shown here (all values in thousands of dollars) a. What change in the book value of Clorox’s equity took place at the end of 2004? b. Is Clorox&acir
> Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%. a. What impact will the cost of the purchase have on earning
> Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million up front in cash; you also issue a bill for the cust
> Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new investment. Its earnings are expected to grow forever
> See the cash flow statement below for H. J. Heinz (HNZ) (all values in thousands of dollars) a. What were Heinz’s cumulative earnings over these four quarters? What were its cumulative cash flows from operating activities? b. What fra
> Find online the 2008 annual 10-K report for Peet’s Coffee and Tea (PEET), filed in early 2009. Answer the following questions from its cash flow statement: a. How much cash did Peet’s generate from operating activities in 2008? b. What was Peet’s depreci
> Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million. a. What is the firm’s current ROE? b. If the firm increased its net profit margin to 4%, what
> Repeat the analysis from parts a and b of the previous problem using Starbucks Corporation (SBUX) instead. Based on the DuPont Identity, what explains the difference between the two firms’ ROEs?
> Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008 (filed in early 2009). a. Compute Peet’s net profit margin, total asset turnover, and equity multiplier. b. Verify the DuPont Identity for Peet’s ROE. c. If Peet’s managers want
> In January 2009, American Airlines (AMR) had a market capitalization of $1.7 billion, debt of $11.1 billion, and cash of $4.6 billion. American Airlines had revenues of $23.8 billion. British Airways (BABWF) had a market capitalization of $2.2 billion, d
> Suppose you receive $100 at the end of each year for the next three years. a. If the interest rate is 8%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in (a)? c. Suppose you d
> Quisco Systems has 6.5 billion shares outstanding and a share price of $18.00. Quisco is considering developing a new networking product in-house at a cost of $500 million. Alternatively, Quisco can acquire a firm that already has the technology for $900
> What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?
> Think back to the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid
> How do financial institutions help with risk-bearing?
> Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share
> You are a shareholder in a C corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the corporate tax rate is 40% and the personal tax rate on (both
> What are some of the differences between the NYSE and NASDAQ?
> Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what is the implied credit spre
> Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign earnings at the same rate as profits earned in the United St
> You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today)
> Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm will retain 50% of its earnings. It will retain 20% of its
> Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88 this year and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?
> Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much ad
> Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various
> Why some trade credit is called free while other credit is called costly? If a firm buys on terms of 2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payable on its balance sheet, would the entire $300,000 be free c
> Which of the following would likely encourage a firm to increase the debt in its capital structure? a. The corporate tax rate increases. b. The personal tax rate increases. c. Due to market changes, the firm’s assets become less liquid. d. Changes in the
> The Weaver Watch Company sells watches for $25, the fixed costs are $140,000, and variable costs are $15 per watch. a. What is the firm’s gain or loss at sales of 8,000 watches? at 18,000 watches? b. What is the breakeven point? Illustrate by means of a
> Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 da
> Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizes its stock price? Explain.
> Why are accruals called spontaneous sources of funds, what are their costs, and why don’t firms use more of them?
> Robert Black and Carol Alvarez are vice presidents of Western Money Management and Co directors of the company’s pension fund management division. A major new client, the California League of Cities, has requested that Western present an investment semin
> What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets, and how might a cash budget be used when a firm is negot
> If a company’s beta were to double, would its required return also double?
> Suppose the population of Area Y is relatively young and the population of Area O is relatively old but everything else about the two areas is the same. a. Would interest rates likely be the same or different in the two areas? Explain. b. Would a trend t
> The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $8 million today. Bush estimates that once drilled, the oil will generate positive net cash flows of $4 m
> Why is EBIT generally considered independent of financial leverage? Why might EBIT actually be affected by financial leverage at high debt levels?
> A firm is considering two mutually exclusive projects, X and Y, with the following cash flows: The projects are equally risky, and their WACC is 12%. What is the MIRR of the project that maximizes shareholder value? 1 2 3 Project X Project Y -$1,000
> The following table gives Foust Company’s earnings per share for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/09) selling for $65.00 per share. The expected dividend at the end of the current year (1
> Define each of the following loan terms and explain how they are related to one another: the prime rate, the rate on commercial paper, the simple interest rate on a bank loan calling for interest to be paid monthly, and the rate on an installment loan ba
> Why do public utilities generally use different capital structures than pharmaceutical companies?
> Bartman Industries’ and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2003–2008. The Winslow 5000 data are adjusted to include dividends.
> Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding. The company’s stock currently trades at $32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in
> A life insurance policy is a financial asset, with the premiums paid representing the investment’s cost. a. How would you calculate the expected return on a 1-year life insurance policy? b. Suppose the owner of a life insurance policy has no other financ
> Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, H
> Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom’s debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM – rRF) is 6%. Using the CAPM, Bloom estimates
> In 2008, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2008 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2009, earnings are expected to jump to
> Stocks X and Y have the following probability distributions of expected future returns: a. Calculate the expected rate of return, ^rY, for Stock Y (^rX ¼ 12%). b. Calculate the standard deviation of expected returns, X, for Stock X (Y &Ac
> The Neal Company wants to estimate next year’s return on equity (ROE) under different leverage ratios. Neal’s total assets are $14 million, it currently uses only common equity, and its federal-plus-state tax rate is 4
> What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and
> a. Given the following information, calculate the expected value for Firm C’s EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and δA = $3.61; E(EPSB) = $4.20, and δB = $2.96. b. You are given that
> If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.
> Assume that the risk-free rate increases. What impact would this have on the cost of debt? What impact would it have on the cost of equity?
> Lloyd Corporation’s 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of $1,353.54, and the yield curve is flat. Assume that interest rates are expected
> Would each of the following increase, decrease, or have an indeterminant effect on a firm’s breakeven point (unit sales)? a. The sales price increases with no change in unit costs. b. An increase in fixed costs is accompanied by a decrease in variable co
> Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk pr
> If interest rates rise after a bond issue, what will happen to the bond’s price and YTM? Does the time to maturity affect the extent to which interest rate changes affect the bond’s price?
> Consider the following information for three stocks, Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Fund Q has on
> Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and
> Bradford Manufacturing Company has a beta of 1.45, while Farley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 12.0%. The risk-free rate of interest is 5%. By how much does Bradford’s required re
> The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than
> Indicate using a (+), (-), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminate manner: A/R Sales Profits The firm tightens its credit
> A sinking fund can be set up in one of two ways: a. The corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated total to retire the bond issue at maturity. b. The tru
> A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under what conditions would the YTM provide a better estimate, and when would the YTC be better?
> Executive salaries have been shown to be more closely correlated to the size of the firm than to its profitability. If a firm’s board of directors is controlled by management rather than outside directors, this might result in the firm’s retaining more e
> What are some pros and cons of holding high levels of current assets in relation to sales? Use the DuPont equation to help explain your answer.
> If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital structure?
