Question: You have 30 years left until retirement

> The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed $510,000 in the common stock account and $3.6 million in the additional paid-in surplus account. The 2015 balance sheet showed $545,000 and $3.85 million in the same two accounts, respectively. I

> Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $360 million. Current assets, fixed assets, and short-term debt are 20 percent, 75 percent,

> Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it be more useful than ROA in comparing two companies?

> Could a company’s change in net working capital be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?

> Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?

> The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $1.625 million, and the 2015 balance sheet showed long-term debt of $1.73 million. The 2015 income statement showed an interest expense of $185,000. What was the firm’s cash flo

> The most recent financial statements for Williamson Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $9,0

> Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkie under the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of $1,100

> As you increase the length of time involved, what happens to future values? What happens to present values?

> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March

> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March

> Why is it not necessarily bad for the operating cash flow to be negative for a particular period?

> One of the implicit assumptions we made in calculating the external funds needed was that the company was operating at full capacity. If the company is operating at less than full capacity, how will this affect the external funds needed?

> The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago: During the past year, the company issued 5 million shares of new stock at a total price of $63 million, and issu

> Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover = 2.85 Profit margin = 5.9% Equity multiplier = 1.70 Payout ratio = 60%

> One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not converted into a common- size statement. Why do you th

> Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?

> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March

> If the Hunter Corp. has a ROE of 12 percent and a payout ratio of 15 percent, what is its sustainable growth rate?

> Sankey, Inc., has current assets of $4,900, net fixed assets of $25,000, current liabilities of $4,100, and long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How much is net working capital?

> At 6.5 percent interest, how long does it take to double your money? To quadruple it?

> Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

> On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain.

> The most recent financial statements for Wise Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum incre

> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 7% $ 1,284 810 12 4,341 16,500 17 402,662 21,500 8 147,350

> Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate? Do you know,

> How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?

> Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?

> The Stefani Co. had $198,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal tax rate?

> The most recent financial statements for Heine, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $3,500 was paid, and the company wishes to maintain a constant payout ratio. Next yearâ€&

> First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a $7,000 deposit in each bank, how much more money would you earn from your Second City

> Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 242 4 $ 345 410 8 927 51,700 16 152,184 18,750 27 538,600

> In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the sustainable growth rate for Rosengarten, you will find it

> Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?

> Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?

> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will

> You have just won the lottery. You will receive $4,500,000 today, and then receive 40 payments of $1,600,000. These payments will start one year from now and will be paid every six months. A representative from Greenleaf Investments has offered to purcha

> An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six

> Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $10,000 balance from your current credit card, which charges an annual rate of 18.6 percent, to a

> Suppose two athletes sign 10-year contracts for $80 million. In one case, we’re told that the $80 million will be paid in 10 equal installments. In the other case, we’re told that the $80 million will be paid in 10 installments, but the installments will

> This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,000 Instant Credit! 17.4

> Two banks in the area offer 30-year, $225,000 mortgages at 5.6 percent and charge a $2,900 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.

> You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. Th

> You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided

> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 15.7 percent. You and the lender agree that the interest on

> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: All salaries are to be paid in a lump sum. The player has asked you as his agent to renegotiate the terms. He wants a $10 million signing bonus

> After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $28,000. The dealer has a leasing arrangement where you pay $2,400 today and $380 per month for the next three years. If yo

> Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $20,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he

> On September 1, 2013, Susan Chao bought a motorcycle for $34,000. She paid $2,000 down and financed the balance with a five-year loan at an annual percentage rate of 7.2 percent, compounded monthly. She started the monthly payments exactly one month afte

> Y3K, Inc., has sales of $3,100, total assets of $1,340, and a debt–equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?

> You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options: a. You will receive 31 annual payments of $250,000, with the first payment being delivered today. Th

> Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $63,000. He will receive his first annual salary payment one year from the day he begins to work. In addition, he will get an immed

> You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $65,000 per year

> You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at an APR of 11.2 percent, compounded monthly. Because the clubs cost $2,650 retail, Pings wants the PV of the lease payments to equal $2

> You want to buy a new sports car from Muscle Motors for $64,000. The contract is in the form of a 60-month annuity due at an APR of 6.15 percent. What will your monthly payment be?

> Suppose you are going to receive $16,250 per year for five years. The appropriate interest rate is 7.5 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an

> A 5-year annuity of ten $6,175 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 11 percent compounded monthly, what is the value of this annuity five years from now? What is the va

> A local finance company quotes an interest rate of 17 percent on one-year loans. So, if you borrow $23,000, the interest for the year will be $3,910.Because you must repay a total of $26,910 in one year, the finance company requires you to pay $26,910y12

> Given an interest rate of 5.6 percent per year, what is the value at Date t = 7 of a perpetual stream of $2,150 annual payments that begins at Date t = 15?

> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,300 payments and has an interest rate of 7.2 percent compounded monthly. Investment B is an 8 percent continuously compounded lump-sum invest

> For each of the following, compute the present value: Present Value Years Interest Rate Future Value 8 7% $ 13,827 13 15 43,852 17 725,380 26 18 590,710

> A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the interest rate is 12 percent compounded monthly for the first seven years, and 6 percent compounded monthly thereafter, what is the present value of the annuit

> What is the present value of $7,500 per year, at a discount rate of 7.1 percent, if the first payment is received 6 years from now and the last payment is received 25 years from now?

> Consider a firm with a contract to sell an asset for $135,000 three years from now. The asset costs $89,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate doe

> You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage for 80 percent of the $5,200,000 purchase price. The monthly payment on this loan will be $27,500. What is the APR on this loan? The EAR?

> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get $1.55 million, and so on. If the appropriate interest

> The present value of the following cash flow stream is $7,300 when discounted at 7.1 percent annually. What is the value of the missing cash flow? Year Cash Flow $1.500 2,700 4 2,900

> You need a 30-year, fixed-rate mortgage to buy a new home for $250,000. Your mortgage bank will lend you the money at an APR of 4.5 percent for this 360-month loan. However, you can only afford monthly payments of $950, so you offer to pay off any remain

> You want to borrow $96,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,950, but no more. Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan?

> You’re prepared to make monthly payments of $240, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your account balance reaches $35,000?

> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $4,300 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if in

> Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?

> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $72,500, and you plan to spend all of it. However, you want to start saving for retirement beginning next year.

> Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $135,000. Cash flows from increased sales will be $48,000 the f

> Young Pharmaceuticals is considering a drug project that costs $3.8 million today and is expected to generate end-of-year annual cash flows of $267,000, forever. At what discount rate would Young be indifferent between accepting or rejecting the project?

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the

> Use the sustainable growth rate equations from the previous problem to answer the following questions. I Am Myself, Inc., had total assets of $410,000 and equity of $230,000 at the beginning of the year. At the end of the year, the company had total asse

> Audrey Sanborn has just arranged to purchase a $650,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 5.2 percent APR, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment wi

> In the chapter, we discussed one calculation of the sustainable growth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate is ROE x b. This equation is identical to the sustainable growth rate equation presen

> What is the value today of a 15-year annuity that pays $900 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 11 percent for Years 1 through 5, and 13 percent thereafter.

> Based on the results in Problem 27, show that the internal and sustainable growth rates can be calculated as shown in Equations 3.24 and 3.25(mentioned below).(Hint: For the internal growth rate, set EFN equal to zero and solve for g.) Spontaneous li

> What is the present value of an annuity of $5,500 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent.

> So-called “same-store sales” are a very important measure for companies as diverse as McDonald’s and Sears. As the name suggests, examining same-store sales means comparing revenues from the same stores or restaurants at two different points in time. Why

> Define the following: S = Previous year’s sales A = Total assets E = Total equity g = Projected growth in sales PM = Profit margin b = Retention (plowback) ratio Assuming that all debt is constant, show that EFN can be written as: Hint

> A prestigious investment bank designed a new security that pays a quarterly dividend of $2.75 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the APR is 5.3 percent, compounded quarterly?

> Refer to the corporate marginal tax rate information in Table 2.3(given below): a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate at a taxa

> Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $215,000, received two years from today. Subsequent ann

> Shinedown, Inc., wishes to maintain a growth rate of 12 percent per year and a debt–equity ratio of .35. Profit margin is 4.9 percent, and the ratio of total assets to sales is constant at .75. Is this growth rate possible? To answer, determine what the

> Redo Problem 23 using sales growth rates of 30 and 35 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them.

> You’re trying to choose between two different investments, both of which have up-front costs of $75,000. Investment G returns $125,000 in six years. Investment H returns $185,000 in 10 years. Which of these investments has the higher return?

> You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $84 million in current taxes and had an interest expense of $41 million. Use

> Redo Problem 21 using sales growth rates of 15 and 25 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them.

> For 2015, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.

> What happens to the future value of an annuity if you increase the rate r? What happens to the present value?

> If Wilkinson, Inc., has an equity multiplier of 1.35, total asset turnover of 2.10, and a profit margin of 5.2 percent, what is its ROE?

> Record the following transactions in the general journal, assuming that the company records all vouchers as gross: 201X Voucher no. 15 was prepared for the purchase of $1,200 of merchandise on account from Reel Co.; terms 5/10, n/30. Jan. 7 Voucher

> Complete a trend analysis from the following data of Carter Corporation using 2015 as the base year. (Round to the nearest percent.) 2018 2017 2016 2015 Sales $1,010 $660 $560 $410 Gross Profit 380 290 380 180 Net Income 205 93 62 62

> Prepare a common-size income statement from the following (use net sales as 100%): Net Sales …………………………………………………. $800 Cost of Goods Sold ……………………………………… 200 Gross Profit from Sales ………………………………. 600 Operating Expenses ……………………………….…… 250 Net Income ………

> Complete a vertical analysis of the assets. (Round to the nearest tenth of a percent as needed.) а. Cash b. Accounts Receivable Merchandise Inventory d. Office Equipment Total Assets $ 700 775 C. 850 2,400 $4,725

> Calculate the amount of increase or decrease as well as the percentage of increase or decrease. (Round to the nearest tenth of a percent as needed.) 2016 2015 Amount % a. Accounts Receivable $770 $580 b. Accounts Payable 580 770