What's the difference between a direct and an indirect transfer of money between investors and firms?
> Fleming, Inc. had a dividend payout ratio of 25% this year that resulted in a payout of $80,000 in dividends. Return on sales (ROS) was 8% this year and is expected to increase to 9% next year. If Fleming expects to have $305,100 available from next ye
> The Eagle Feather Fabric Company expects to complete the current year with the following financial results ($000). Forecast next year using a modified percentage of sales method assuming no dividends are paid and no new stock is sold along with the fol
> The Tower family wants to make a home improvement that is expected to cost $60,000. They want to fund as much of the cost as possible with a home equity loan, but can afford payments of only $600 per month. Their bank offers equity loans at 12% compound
> Larime Corp is forecasting 20X2 near the end of 20X1. The estimated year-end financial statements and a worksheet for the forecasts are shown below. Management expects the following next year: • An 8% increase in revenue. â&
> The management of Coker Corp is doing a quick forecast of 20X9 using the modified percentage of sales method in preparation for a more detailed planning exercise later in the month. The estimate is to assume a 10% growth in sales. All other line items
> If Sharon Henderson of the previous problem is also a founder of the company and has retained 8 million shares of its stock, how much of a difference will the auditors’ decision make in her personal wealth outside of the stock option?
> Joe Ferro's uncle is going to give him $250 a month for the next two years starting today. If Joe banks every payment in an account paying 6% compounded monthly, how much will he have at the end of three years?
> Read Business Analysis Case 3. Henderson Industries Inc.’s stock is currently selling at $22.40 per share. Sharon Jacobs, the CEO, has options to buy 250,000 shares at $25.50 per share that expire at the end of this year. Sharon feels that if the tradi
> The Cambridge Cartage Company has partially completed its forecast of next year's financial statements as follows. The firm pays interest at 10% on all borrowings and pays a combined state and federal tax rate of 40%. Complete the forecasted income st
> The Nelson Sheet Metal Company has current assets of $2.5 million and current liabilities of $1.0 million. The firm is in need of additional inventory and has an opportunity to borrow money on a short-term note with which it can buy the needed material.
> List the traditional qualifications for a mortgage loan and describe how each protects the lender.
> Industry A is dominated by ten large firms each with sales of approximately $500 million per year. A proposal to merge two of these firms was approved by the Justice Department as not violating the antitrust laws. Industry B is locally defined and much
> Relate the idea of cost of capital to the opportunity cost concept. Is the cost of capital the opportunity cost of project money?
> Why is it desirable to construct capital budgeting rules so that higher risk projects become less acceptable than lower risk projects?
> Because companies always have inventory and accounts receivable, most banks are happy to make long term loans to support those assets. Either refute or support that statement.
> Why are time value concepts important in ordinary business dealings, especially those involving contracts?
> Depreciation is a noncash charge. Why then is it important in Lease-Buy analysis? (Very short answer.)
> What bank problems does securitization solve?
> In leases with no residuals, lessors calculate the lease payments they must charge as if the lease was a loan. How does the presence of a residual change the calculation?
> Given the importance of dividends to the well-being of equity investors, why do they put up with the fact that dividends are discretionary?
> Explain the ideas of a risk-free rate and the real rate of interest. Are either of them approximated by anything that exists in the real world?
> The following issues are related to the accuracy and reliability of financial plans. Explain the processes/issues related to each. Top-down vs. bottom-up planning Plans as statements of goals vs. plans as predictions of what's going to happen. Planni
> There’s a fundamental difference between the rules one, two, and four for qualifying an operating lease and rule three. What is it?
> Summarize the effect of operating leverage on EBIT.
> Why is inflation important to lenders? How do they take it into consideration?
> 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?
> 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
> 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
> 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
