All Related Questions of Financial Management

Q: If you bought a share of stock, what would you expect

If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met?

Q: What are some actions that stockholders can take to ensure that management’s

What are some actions that stockholders can take to ensure that management’s and stockholders’ interests are aligned?

Q: What is an opportunity cost? How is this concept used in

What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.

Q: You want to buy a car, and a local bank will

You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 12% with interest paid monthly. What wil...

Q: Find the following values using the equations and then a financial calculator

Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually. a. An initial $500 compounded for 1 year at 6% b. An initial $500 compounded for...

Q: Find the following values. Compounding/discounting occurs annually.

Find the following values. Compounding/discounting occurs annually. a. An initial $500 compounded for 10 years at 6% b. An initial $500 compounded for 10 years at 12% c. The present value of $500 due...

Q: Shalit Corporation’s 2008 sales were $12 million. Its 2003 sales

Shalit Corporation’s 2008 sales were $12 million. Its 2003 sales were $6 million. a. At what rate have sales been growing? b. Suppose someone made this statement: “Sales doubled in 5 years. This repre...

Q: Find the interest rates earned on each of the following:

Find the interest rates earned on each of the following: a. You borrow $700 and promise to pay back $749 at the end of 1 year. b. You lend $700 and the borrower promises to pay you $749 at the end of...

Q: How long will it take $200 to double if it earns

How long will it take $200 to double if it earns the following rates? Compounding occurs once a year. a. 7% b. 10% c. 18% d. 100%

Q: Find the future values of these ordinary annuities. Compounding occurs once

Find the future values of these ordinary annuities. Compounding occurs once a year. a. $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0% d. Rework...

Q: Find the present values of these ordinary annuities. Discounting occurs

Find the present values of these ordinary annuities. Discounting occurs once a year. a. $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0% d. Rewor...

Q: The president of Southern Semiconductor Corporation (SSC) made this statement

The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary goal is to increase the value of our common stockholders’ equity.” Later in...

Q: Investors generally can make one vote for each share of stock they

Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the largest institutional shareholder in the United States; therefore, it holds many shares and has more votes tha...

Q: What types of changes have financial markets experienced during the last two

What types of changes have financial markets experienced during the last two decades? Have they been perceived as positive or negative changes? Explain.

Q: Suppose you were a member of Company X’s board of directors and

Suppose you were a member of Company X’s board of directors and chairperson of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Sh...

Q: Suppose you are a director of an energy company that has three

Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but all division managers...

Q: Differentiate between dealer markets and stock markets that have a physical location

Differentiate between dealer markets and stock markets that have a physical location.

Q: Describe the three different forms of market efficiency.

Describe the three different forms of market efficiency.

Q: Briefly explain what is meant by the term efficiency continuum.

Briefly explain what is meant by the term efficiency continuum.

Q: Hermann Industries is forecasting the following income statement: /

Hermann Industries is forecasting the following income statement: The CEO would like to see higher sales and a forecasted net income of $2,500,000. Assume that operating costs (excluding depreciation...

Q: The Davidson Corporation’s balance sheet and income statement are provided here.

The Davidson Corporation’s balance sheet and income statement are provided here. a. Construct the statement of stockholders’ equity for December 31, 2008. b. How mu...

Q: Financial information for Powell Panther Corporation is shown here.

Financial information for Powell Panther Corporation is shown here. a. What was net working capital for 2007 and 2008? b. What was the 2008 free cash flow? c. How would you explain the large increase...

Q: Your client is 40 years old; and she wants to begin

Your client is 40 years old; and she wants to begin saving for retirement, with the first payment to come one year from now. She can save $5,000 per year; and you advise her to invest it in the stock...

Q: Which of the following actions are most likely to directly increase cash

Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Explain and state the assumptions that underlie your answer. a. It issues $2 million of new...

Q: What is a firm’s intrinsic value? its current stock price?

What is a firm’s intrinsic value? its current stock price? Is the stock’s “true long-run value” more closely related to its intrinsic value or to its current price?

Q: W.C. Cycling had $55,000 in cash

W.C. Cycling had $55,000 in cash at year-end 2007 and $25,000 in cash at year-end 2008. Cash flow from long-term investing activities totaled -$250,000, and cash flow from financing activities totaled...

Q: Bailey Corporation’s financial statements (dollars and shares are in millions)

Bailey Corporation’s financial statements (dollars and shares are in millions) are provided here. a. What was net working capital for 2007 and 2008? b. What was Baileyâ€&...

Q: Financial statements are based on generally accepted accounting principles (GAAP)

Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Therefore, do investors need to worry about the validity of those statements? Explain yo...

Q: What is free cash flow? If you were an investor,

What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?

Q: a. Find the present values of the following cash flow streams

a. Find the present values of the following cash flow streams at 8% compounded annually. b. What are the PVs of the streams at 0% compounded annually?

Q: Would it be possible for a company to report negative free cash

Would it be possible for a company to report negative free cash flow and still be highly valued by investors; that is, could a negative free cash flow ever be a good thing in the eyes of investors? Ex...

Q: What does double taxation of corporate income mean? Could income ever

What does double taxation of corporate income mean? Could income ever be subject to triple taxation? Explain your answer.

Q: How does the deductibility of interest and dividends by the paying corporation

How does the deductibility of interest and dividends by the paying corporation affect the choice of financing (that is, the use of debt versus equity)?

Q: Explain the following statement: While the balance sheet can be thought

Explain the following statement: While the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period of...

Q: A rookie quarterback is negotiating his first NFL contract. His opportunity

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end...

Q: The Corrigan Corporation’s 2007 and 2008 financial statements follow, along with

The Corrigan Corporation’s 2007 and 2008 financial statements follow, along with some industry average ratios. a. Assess Corrigan’s liquidity position and determine...

Q: D’Leon Inc., a regional snack foods producer, after an expansion

D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attemp...

Q: When is a stock said to be in equilibrium? At any

When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain.

Q: Graser Trucking has $12 billion in assets, and its tax

Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio?

Q: Midwest Packaging’s ROE last year was only 3%; but its management

Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating plan that calls for a total debt ratio of 60%, which will result in annual interest charges of $300,000....

Q: Assume that you recently graduated with a degree in finance and have

Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the n...

Q: Lloyd Inc. has sales of $200,000, a

Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio...

Q: Central City Construction (CCC) needs $1 million of assets

Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating...

Q: Which of the following statements is most correct? a.

Which of the following statements is most correct? a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and fina...

Q: TIE RATIO AEI Incorporated has $5 billion in assets, and

TIE RATIO AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI’s times interest- earned (TI...

Q: The Petry Company has $1,312,500 in current

The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to inc...

Q: Crissie just won the lottery, and she must choose between three

Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to recei...

Q: Harrelson Inc. currently has $750,000 in accounts receivable

Harrelson Inc. currently has $750,000 in accounts receivable, and its day’s sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their b...

Q: Fontaine Inc. recently reported net income of $2 million.

Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from no...

Q: Complete the balance sheet and sales information using the following financial data

Complete the balance sheet and sales information using the following financial data:

Q: Suppose three honest individuals gave you their estimates of Stock X’s intrinsic

Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent repu...

Q: Explain whether the following statements are true or false. a

Explain whether the following statements are true or false. a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high retu...

Q: Data for Barry Computer Co. and its industry averages follow.

Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barryâ...

Q: A firm has been experiencing low profitability in recent years. Perform

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has...

Q: Doublewide Dealers has an ROA of 10%, a 2% profit

Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?

Q: Ebersoll Mining has $6 million in sales, its ROE is

Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. The company is 50% equity financed. What is its net income?

Q: Duval Manufacturing recently reported the following information:

Duval Manufacturing recently reported the following information: Net income……………………….$600,000 ROA…………………………………..8% Interest expense………………..$225,000 Duval’s tax rate is 35%. What is its bas...

Q: You are given the following information: Stockholders’ equity = $

You are given the following information: Stockholders’ equity = $3.75 billion, price/earnings ratio = 3.5, common shares outstanding = 50 million, and market/book ratio = 1.9. Calculate the price of...

Q: Explain whether the following statement is true or false: $100

Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. How...

Q: Assume the following relationships for the Brauer Corp.:

Assume the following relationships for the Brauer Corp.: Sales total assets………………………..1.5× Return on assets (ROA) ………………3% Return on equity (ROE) ………………..5% Calculate Brauer’s profit margi...

Q: Profit margins and turnover ratios vary from one industry to another.

Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between the turnover ratios, profit margins, and DuPont equations for a grocery chain an...

Q: How does inflation distort ratio analysis comparisons for one company over time

How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet...

Q: How does a cost-efficient capital market help reduce the prices

How does a cost-efficient capital market help reduce the prices of goods and services?

Q: If a firm’s ROE is low and management wants to improve it

If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.

Q: Is it better for a firm’s actual stock price in the market

Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO w...

Q: Give some examples that illustrate how (a) Seasonal factors

Give some examples that illustrate how (a) Seasonal factors and (b) Different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?

Q: Why is it sometimes misleading to compare a company’s financial ratios with

Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?

Q: Suppose you were comparing a discount merchandiser with a high-end

Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you exp...

Q: Indicate the effects of the transactions listed in the following table on

Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (−) to indicate a decr...

Q: Financial ratio analysis is conducted by three main groups of analysts:

Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect th...

Q: If a firm’s earnings per share grew from $1 to $

If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.

Q: Why would the inventory turnover ratio be more important for someone analyzing

Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?

Q: Over the past year, M. D. Ryngaert & Co

Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed asset...

Q: Describe the different ways in which capital can be transferred from suppliers

Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

Q: Answer the following questions: a. Assuming a rate of

Answer the following questions: a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years. b. What is the investment’s FV at rates of 0%, 5%, and 20% after 0, 1, 2, 3,...

Q: You have applied for a job with a local bank. As

You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions: a. Draw time lines for...

Q: Jan sold her house on December 31 and took a $10

Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30....

Q: If a company’s board of directors wants management to maximize shareholder wealth

If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm...

Q: Find the amount to which $500 will grow under each of

Find the amount to which $500 will grow under each of these conditions: a. 12% compounded annually for 5 years b. 12% compounded semiannually for 5 years c. 12% compounded quarterly for 5 years d. 12%...

Q: Find the present value of $500 due in the future under

Find the present value of $500 due in the future under each of these conditions: a. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discou...

Q: Find the future values of the following ordinary annuities: a

Find the future values of the following ordinary annuities: a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12% compounded semiannually b. FV of $200 paid each 3 months for 5 years a...

Q: You have saved $4,000 for a down payment on

You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 12% APR based on end-of-month payments. What is the most expensive car y...

Q: Banks and other lenders are required to disclose a rate called the

Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were compa...

Q: Bank A pays 4% interest compounded annually on deposits, while

Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced...

Q: Indicate whether the following instruments are examples of money market or capital

Indicate whether the following instruments are examples of money market or capital market securities. a. U.S. Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred stocks e. Dealer...

Q: As a jewelry store manager, you want to offer credit,

As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compoundin...

Q: Your firm sells for cash only; but it is thinking of

Your firm sells for cash only; but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. T...

Q: Erika and Kitty, who are twins, just received $30

Erika and Kitty, who are twins, just received $30,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her “early ret...

Q: Starting next year, you will need $10,000 annually

Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $10,000.) Your uncle deposits an amount today in a bank payi...

Q: Six years from today you need $10,000. You

Six years from today you need $10,000. You plan to deposit $1,500 annually, with the first payment to be made a year from today, in an account that pays an 8% effective annual rate. Your last deposit,...

Q: What are the four forms of business organization? What are the

What are the four forms of business organization? What are the advantages and disadvantages of each?

Q: You want to buy a house within 3 years, and you

You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings will increa...

Q: a. Set up an amortization schedule for a $25,

a. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% compounded annually. b. What percentage of the...

Q: You want to buy a house that costs $100,000

You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required $90,000. However, the realtor persuades...

Q: What is a loan amortization schedule, and what are some ways

What is a loan amortization schedule, and what are some ways these schedules are used?

Q: Laiho Industries’ 2007 and 2008 balance sheets (in thousands of dollars

Laiho Industries’ 2007 and 2008 balance sheets (in thousands of dollars) are shown. a. Sales for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and a...

Q: a. You plan to make five deposits of $1,

a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 4% nominal interest, compound...

Q: Simon recently received a credit card with an 18% nominal interest

Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased a new stereo for $350. The minimum payment on the card is only $10 per month. a. If Simon makes the...

Q: It is now December 31, 2008 (t = 0),

It is now December 31, 2008 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2007 accident. She requested recovery of lost wages plus $100,000 f...

Q: Your father is 50 years old and will retire in 10 years

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the...

Q: A father is now planning a savings program to put his daughter

A father is now planning a savings program to put his daughter through college. She is 13, she plans to enroll at the university in 5 years, and she should graduate in 4 years. Currently, the annual c...

Q: If you deposit $10,000 in a bank account that

If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?

Q: You have $42,180.53 in a brokerage account

You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the acco...

Q: Should stockholder wealth maximization be thought of as a long-term

Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and t...

Q: What’s the future value of a 7%, 5-year ordinary

What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?

Q: An investment will pay $100 at the end of each of

An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annu...

Q: Donna Jamison, a 2003 graduate of the University of Florida with

Donna Jamison, a 2003 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D’Leon Inc., a...

Q: Suppose a new and more liberal Congress and administration are elected.

Suppose a new and more liberal Congress and administration are elected. Their first order of business is to take away the independence of the Federal Reserve System and to force the Fed to greatly exp...

Q: Suppose 2-year Treasury bonds yield 4.5%, while

Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year bond 1 year from...

Q: How should the capital structure weights used to calculate the WACC be

How should the capital structure weights used to calculate the WACC be determined?

Q: Suppose a firm estimates its WACC to be 10%. Should the

Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for avera...

Q: The WACC is a weighted average of the costs of debt,

The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings ver...

Q: Your division is considering two projects. Its WACC is 10%,

Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows: a. Calculate the projectsâ...

Q: You recently went to work for Allied Components Company, a supplier

You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief...

Q: Project S costs $15,000, and its expected cash

Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,100 per year for 5 years...

Q: A company is analyzing two mutually exclusive projects, S and L

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: The company’s WACC is 10%. What is the IRR of the better project? (Hint: The better pr...

Q: K. Kim Inc. must install a new air conditioning unit

K. Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are av...

Q: An oil drilling company must choose between two mutually exclusive extraction projects

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t =...

Q: Assume that the real risk-free rate is 2% and

Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the 1-year bond yield is 5% and a 2-year bond (of similar risk) yields 7%, what is the 1-year interest rate tha...

Q: A company is considering two mutually exclusive expansion plans. Plan A

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.4 million per...

Q: A company has a 12% WACC and is considering two mutually

A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following net cash flows: a. What is each project’s NPV? b. What is...

Q: A store has 5 years remaining on its lease in a mall

A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall’s owner plans to sell the property in a year and wa...

Q: A mining company is deciding whether to open a strip mine,

A mining company is deciding whether to open a strip mine, which costs $2 million. Net cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a...

Q: A project has annual cash flows of $7,500 for

A project has annual cash flows of $7,500 for the next 10 years and then $10,000 each year for the following 10 years. The IRR of this 20-year project is 10.98%. If the firm’s WACC is 9%, what is the...

Q: Project X costs $1,000, and its cash flows

Project X costs $1,000, and its cash flows are the same in Years 1 through 10. Its IRR is 12%, and its WACC is 10%. What is the project’s MIRR?

Q: A project has the following cash flows: / This

A project has the following cash flows: This project requires two outflows at Years 0 and 2, but the remaining cash flows are positive. Its WACC is 10%, and its MIRR is 14.14%. What is the Year 2 cash...

Q: MIRR Refer to Problem 11-1. What is the project’s

MIRR Refer to Problem 11-1. What is the project’s MIRR? Problem 11-1 Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

Q: Refer to Problem 11-1. What is the project’s discounted

Refer to Problem 11-1. What is the project’s discounted payback? Problem 11-1 Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

Q: Your division is considering two projects with the following net cash flows

Your division is considering two projects with the following net cash flows (in millions): a. What are the projects’ NPVs assuming the WACC is 5%? 10%? 15%? b. What are the projects&...

Q: Which fluctuate more—long-term or short-term interest

Which fluctuate more—long-term or short-term interest rates? Why?

Q: A firm with a 14% WACC is evaluating two projects for

A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: a. Calculate NPV, IRR, MIRR, payback,...

Q: A mining company is considering a new project. Because the mine

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additi...

Q: An electric utility is considering a new power plant in northern Arizona

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the...

Q: If two mutually exclusive projects were being compared, would a high

If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to i...

Q: Discuss the following statement: If a firm has only independent projects

Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting...

Q: Why might it be rational for a small firm that does not

Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method?

Q: Project X is very risky and has an NPV of $3

Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. They are mutually exclusive, and project risk has been properly considered in the NPV analy...

Q: What reinvestment rate assumptions are built into the NPV, IRR,

What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give an explanation (other than “because the text says so”) for your answer.

Q: A firm has a $100 million capital budget. It is

A firm has a $100 million capital budget. It is considering two projects, each costing $100 million. Project A has an IRR of 20%; has an NPV of $9 million; and will be terminated after 1 year at a pro...

Q: How are project classifications used in the capital budgeting process?

How are project classifications used in the capital budgeting process?

Q: A 5-year Treasury bond has a 5.2%

A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years (IP10...

Q: What are three potential flaws with the regular payback method? Does

What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain.

Q: What is a mutually exclusive project? How should managers rank mutually

What is a mutually exclusive project? How should managers rank mutually exclusive projects?

Q: You must analyze a potential new product—a caulking compound that

You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks the company can...

Q: Allied Food Products is considering expanding into the fruit juice business with

Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting...

Q: Haley’s Graphic Designs Inc. is considering two mutually exclusive projects

Haley’s Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $10,000 and are typical average-risk projects for the firm. Project A has a...

Q: Cotner Clothes Inc. is considering the replacement of its old,

Cotner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine 190-3, which has a cost of $190,000, a 3-year expected lif...

Q: Zappe Airlines is considering two alternative planes. Plane A has an

Zappe Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce after-tax cash flows of $30 million per year. Plane B has a life...

Q: The Fernandez Company has an opportunity to invest in one of two

The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs $10 million but wil...

Q: A firm has two mutually exclusive investment projects to evaluate; both

A firm has two mutually exclusive investment projects to evaluate; both can be repeated indefinitely. The projects have the following cash flows: Projects X and Y are equally risky and may be repeate...

Q: Your firm, Agrico Products, is considering a tractor that would

Your firm, Agrico Products, is considering a tractor that would have a net cost of $36,000, would increase pretax operating cash flows before taking account of depreciation by $12,000 per year, and wo...

Q: Suppose the inflation rate is expected to be 7% next year

Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treas...

Q: Holmes Manufacturing is considering a new machine that costs $250,

Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the machin...

Q: The Erley Equipment Company purchased a machine 5 years ago at a

The Erley Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line...

Q: The Bigbee Bottling Company is contemplating the replacement of one of its

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful li...

Q: Truman Industries is considering an expansion. The necessary equipment would be

Truman Industries is considering an expansion. The necessary equipment would be purchased for $9 million, and the expansion would require an additional $3 million investment in working capital. The ta...

Q: Eisenhower Communications is trying to estimate the first-year net cash

Eisenhower Communications is trying to estimate the first-year net cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: The compan...

Q: The Chang Company is considering the purchase of a new machine to

The Chang Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is...

Q: Corcoran Consulting is deciding which of two computer systems to purchase.

Corcoran Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $20,000, which will generate cash flows of $6,000 at the end of eac...

Q: Kristin is evaluating a capital budgeting project that should last 4 years

Kristin is evaluating a capital budgeting project that should last 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or...

Q: You must evaluate a proposed spectrometer for the R&D Department

You must evaluate a proposed spectrometer for the R&D Department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls...

Q: You must evaluate a proposal to buy a new milling machine.

You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and...

Q: In late 1980, the U.S. Commerce Department released

In late 1980, the U.S. Commerce Department released new data showing inflation was 15%. At the time, the prime rate of interest was 21%, a record high. However, many investors expected the new Reagan...

Q: The Dauten Toy Corporation uses an injection molding machine that was purchased

The Dauten Toy Corporation uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its curre...

Q: Mississippi River Shipyards is considering replacing an 8-year-old

Mississippi River Shipyards is considering replacing an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $54,000 per year. The new machine wil...

Q: The Butler-Perkins Company (BPC) must decide between two

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial in...

Q: Distinguish among beta (or market) risk, within-

Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in a firm’s capital budget.

Q: In theory, market risk should be the only “relevant”

In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?

Q: Define (a) Sensitivity analysis, (b)

Define (a) Sensitivity analysis, (b) Scenario analysis, and (c) Simulation analysis. If GE was considering two projects (one for $500 million to develop a satellite communications system and the ot...

Q: If you were the CFO of a company that had to decide

If you were the CFO of a company that had to decide on hundreds of potential projects every year, would you want to use sensitivity analysis and scenario analysis as described in the chapter or would...

Q: What is a “replacement chain?” When and how should replacement

What is a “replacement chain?” When and how should replacement chains be used in capital budgeting?

Q: Explain why sunk costs should not be included in a capital budgeting

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Q: Explain why working capital is included in a capital budgeting analysis and

Explain why working capital is included in a capital budgeting analysis and how it is recovered at the end of a project’s life.

Q: Suppose you believe that the economy is just entering a recession.

Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short term basis? Why?

Q: Most firms generate cash inflows every day, not just once at

Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the...

Q: What are some differences in the analysis for a replacement project versus

What are some differences in the analysis for a replacement project versus that for a new expansion project?

Q: Bankers’ Services Inc. (BSI) is considering a project that

Bankers’ Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30% probability of good conditions, in which case the project will prov...

Q: 21st Century Educational Products (21st Century) is a rapidly growing

21st Century Educational Products (21st Century) is a rapidly growing software company; and consistent with its growth, it has a relatively large capital budget. While most of the companyâ€...

Q: How might a firm’s corporate WACC be affected by the size of

How might a firm’s corporate WACC be affected by the size of its capital budget?

Q: The Zinn Company plans to issue $20,000,000

The Zinn Company plans to issue $20,000,000 of 10-year bonds in December to help finance a new research and development laboratory. It is now August, and the current cost of debt to the high-risk biot...

Q: Audrey is considering an investment in Morgan Communications, whose stock currently

Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan’s stock, with an exercise price of $55, has a market value of $3.06. Meanwhile...

Q: Stewart Enterprises’ current stock price is $60 per share. Call

Stewart Enterprises’ current stock price is $60 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at the...

Q: Which of the following events are likely to increase the market value

Which of the following events are likely to increase the market value of a call option on a common stock? Explain. a. An increase in the stock’s price b. An increase in the volatility of the stock pri...

Q: Assume that you have been given the following information on Purcell

Assume that you have been given the following information on Purcell Industries: Using the Black-Scholes Option Pricing Model, what is the value of the option?

Q: Explain how the futures markets can be used to reduce interest rate

Explain how the futures markets can be used to reduce interest rate and input price risk.

Q: How can swaps be used to reduce the risks associated with debt

How can swaps be used to reduce the risks associated with debt contracts?

Q: Give two reasons stockholders might be indifferent between owning the stock of

Give two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and the stock of a firm with stable cash flows.

Q: Bond X is non callable and has 20 years to maturity,

Bond X is non callable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; and if you buy it, you plan to hold it for 5 years. You (and the...

Q: List seven reasons risk management might increase the value of a firm

List seven reasons risk management might increase the value of a firm.

Q: What is a post-audit, why do firms use them

What is a post-audit, why do firms use them, and what problems can arise when they are used?

Q: Why do options typically sell at prices higher than their exercise values

Why do options typically sell at prices higher than their exercise values?

Q: Discuss some of the techniques available to reduce risk exposure.

Discuss some of the techniques available to reduce risk exposure.

Q: Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology

Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually b...

Q: Citrus Products Inc. is a medium-sized producer of citrus

Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States; b...

Q: Table 19-1 lists foreign exchange rates for May 26,

Table 19-1 lists foreign exchange rates for May 26, 2008. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars, EMU euros,...

Q: Use the foreign exchange section of a current issue of The Wall

Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in Problem 19-5. a. What is the current exchange rate for changing dollars into 1,000 units...

Q: Use the foreign exchange section of a current issue of The Wall

Use the foreign exchange section of a current issue of The Wall Street Journal to look up the three currencies in Problem 19-8. What is the current exchange rate between Swedish kronas and pounds? Dat...

Q: Assume that interest rate parity holds. In both the spot market

Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen = 0.0086 dollar. And 90-day risk-free securities yield 4.6% in Japan. What is the yield on...

Q: Assume that interest rate parity holds and that 90-day risk

Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Britain. In the spot market, 1 pound ¼ $2. a. Is the 90-day forward rate trading a...

Q: You are considering a 10-year, $1,000

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an “effective” annual interest rate (not a nominal rate) of 8.16%, how mu...

Q: Explain in general terms what each of the following real options is

Explain in general terms what each of the following real options is and how it could change projects’ NPVs and their corresponding risk relative to what would have been estimated if the options had no...

Q: Chamberlain Canadian Imports has agreed to purchase 15,000 cases of

Chamberlain Canadian Imports has agreed to purchase 15,000 cases of Canadian beer for 4 million Canadian dollars at today’s spot rate. The firm’s financial manager,...

Q: You are the vice president of International InfoXchange, headquartered in Chicago

You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in the United States. Earlier this month you obtained a loan of 5 million...

Q: After all foreign and U.S. taxes, a U

After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be...

Q: Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s

Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected...

Q: A currency trader observes that in the spot exchange market, 1

A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.50 Israeli shekels or for 104.00 Japanese yen. What is the cross exchange rate between the yen and the...

Q: Six-month T-bills have a nominal rate of 7

Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate p...

Q: Does interest rate parity imply that interest rates are the same in

Does interest rate parity imply that interest rates are the same in all countries?

Q: Why might purchasing power parity fail to hold?

Why might purchasing power parity fail to hold?

Q: What is a Eurodollar? If a French citizen deposits $10

What is a Eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in New York, have Eurodollars been created? What if the deposit is made in Barclay’s Bank in London? Chase Manhattan’...

Q: Should firms require higher rates of return on foreign projects than on

Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.

Q: Would a failure to recognize growth options tend to cause a firm’s

Would a failure to recognize growth options tend to cause a firm’s actual capital budget to be above or below the optimal level? Would your answer be the same for abandonment, timing, and flexibility...

Q: Last year Joan purchased a $1,000 face value corporate

Last year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Joan s...

Q: Use the spreadsheet model to rework Parts a and b of Problem

Use the spreadsheet model to rework Parts a and b of Problem 20-8. Then answer the following question. c. Accepting that the corporate WACC should be used equally to discount all anticipated cash flow...

Q: Storm Software wants to issue $100 million in new capital to

Storm Software wants to issue $100 million in new capital to fund new opportunities. If Storm raised the $100 million of new capital in a straight-debt 20-year bond offering, Storm would have to offer...

Q: Martha Millon, financial manager for Fish & Chips Inc., has

Martha Millon, financial manager for Fish & Chips Inc., has been asked to perform a lease versus- buy analysis on a new computer system. The computer costs $1,200,000; and if it is purchased, Fish & C...

Q: Martha Millon, financial manager of Fish & Chips Inc., is

Martha Millon, financial manager of Fish & Chips Inc., is facing a dilemma. The firm was founded 5 years ago to develop a new fast-food concept; and although Fish & Chips has done well, the firm’s fou...

Q: In the summer of 2008, the Hadaway Company was planning to

In the summer of 2008, the Hadaway Company was planning to finance an expansion with a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if...

Q: As part of its overall plant modernization and cost reduction program,

As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analys...

Q: The Howe Computer Company has grown rapidly during the past 5 years

The Howe Computer Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credi...

Q: O’Brien Computers Inc. needs to raise $35 million to begin

O’Brien Computers Inc. needs to raise $35 million to begin producing a new microcomputer. O’Brien’s straight, nonconvertible debentures currently yield 12%. Its stock sells for $38 per share, the last...

Q: Connors Construction needs a piece of equipment that can be leased or

Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The...

Q: Elliott Athletics is trying to determine its optimal capital structure, which

Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and...

Q: Gregg Company recently issued two types of bonds. The first issue

Gregg Company recently issued two types of bonds. The first issue consisted of 20-year straight (no warrants attached) bonds with an 8% annual coupon. The second issue consisted of 20-year bonds with...

Q: Look back at Table 7-4 and examine United Parcel Service

Look back at Table 7-4 and examine United Parcel Service and Telecom Italia Capital bonds that mature in 2013. a. If these companies were to sell new $1,000 par value long-term bonds, approximately wh...

Q: Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking

Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost o...

Q: Morris-Meyer Mining Company must install $1.5 million

Morris-Meyer Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the required amount. Alternatively, a Nevada investment banking firm th...

Q: Pogue Industries Inc. has warrants outstanding that permit its holders to

Pogue Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $21. (Refer to Chapter 18 for Parts a, b, and c.) a. Calculate the exercis...

Q: Suppose there were no IRS restrictions on what constitutes a valid lease

Suppose there were no IRS restrictions on what constitutes a valid lease. Explain in a manner that a legislator might understand why some restrictions should be imposed.

Q: Suppose Congress changed the tax laws in a way that (

Suppose Congress changed the tax laws in a way that (1) Permitted equipment to be depreciated over a shorter period, (2) Lowered corporate tax rates, and (3) Reinstated the investment tax credit. D...

Q: What effect does the expected growth rate of a firm’s stock price

What effect does the expected growth rate of a firm’s stock price (subsequent to issue) have on its ability to raise additional funds through (a) Convertibles and (b) Warrants?

Q: a. How would a firm’s decision to pay out a higher

a. How would a firm’s decision to pay out a higher percentage of its earnings as dividends affect each of the following? (1) The value of its long-term warrants (2) The likelihood that its convertible...

Q: Suppose a company simultaneously issues $50 million of convertible bonds with

Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9% and $50 million of pure bonds with a coupon rate of 12%. Both bonds have the same maturity. Does the f...

Q: Assume that you have just been hired as business manager of Campus

Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were 60% of sales, and fixed cost...

Q: For purposes of measuring a firm’s leverage, should preferred stock be

For purposes of measuring a firm’s leverage, should preferred stock be classified as debt or equity? Does it matter if the classification is being made (a) By the firm’s management, (b) By creditors,...

Q: You are told that one corporation just issued $100 million of

You are told that one corporation just issued $100 million of preferred stock and another purchased $100 million of preferred stock as an investment. You are also told that one firm has an effective t...

Q: Suppose interest rates on Treasury bonds rose from 5% to 9

Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company’s common stock?

Q: Kaufman Enterprises has bonds outstanding with a $1,000 face

Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be called...

Q: One often finds that a company’s bonds have a higher yield than

One often finds that a company’s bonds have a higher yield than its preferred stock even though an investor considers the bonds to be less risky than the preferred. What causes this yield differential...

Q: Distinguish between operating leases and financial leases. Would a firm be

Distinguish between operating leases and financial leases. Would a firm be more likely to finance a fleet of trucks or a manufacturing plant with an operating lease? Explain.

Q: One alleged advantage of leasing voiced in the past was that it

One alleged advantage of leasing voiced in the past was that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This ra...

Q: Buena Terra Corporation is reviewing its capital budget for the upcoming year

Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to rema...

Q: Suppose you won the lottery and had two options: (

Suppose you won the lottery and had two options: (1) Receiving $0.5 million or (2)Taking a gamble in which at the flip of a coin you receive $1 million if a head comes up but receive zero if a tail...

Q: Indicate whether the following statements are true or false. If the

Indicate whether the following statements are true or false. If the statement is false, explain why. a. If a firm repurchases its stock in the open market, the shareholders who tender the stock are su...

Q: Discuss the pros and cons of having the directors formally announce what

Discuss the pros and cons of having the directors formally announce what a firm’s dividend policy will be in the future.

Q: The cost of retained earnings is less than the cost of new

The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay dividends during the same y...

Q: Indicate whether each of the following actions will increase or decrease a

Indicate whether each of the following actions will increase or decrease a bond’s yield to maturity: a. The bond’s price increases. b. The bond is downgraded by the rating agencies. c. A change in th...

Q: Rework Problem 16-10 using a spreadsheet model. After completing

Rework Problem 16-10 using a spreadsheet model. After completing Parts a through d, respond to the following: If Bowers’ customers began to pay late, collections would slow down, thu...

Q: Digital Inc. is considering production of a new cell phone.

Digital Inc. is considering production of a new cell phone. The project will require an investment of $20 million. If the phone is well-received, the project will produce cash flows of $10 million a y...

Q: Dan Barnes, financial manager of Ski Equipment Inc. (SKI

Dan Barnes, financial manager of Ski Equipment Inc. (SKI), is excited, but apprehensive. The company’s founder recently sold his 51% controlling block of stock to Kent Koren, who is...

Q: McDowell Industries sells on terms of 3/10, net 30

McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 40 days aft...

Q: Primrose Corp has $15 million of sales, $2 million

Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with b...

Q: Microtech Corporation is expanding rapidly and currently needs to retain all of

Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning...

Q: Companies often have to increase their initial investment costs to obtain real

Companies often have to increase their initial investment costs to obtain real options. Why might this be so, and how could a firm decide if it was worth the cost to obtain a given real option?

Q: Refer to Problem 17-1. What additional funds would be

Refer to Problem 17-1. What additional funds would be needed if the company’s year-end 2008 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the o...

Q: Austin Grocers recently reported the following 2008 income statement (in millions of

Austin Grocers recently reported the following 2008 income statement (in millions of dollars): This year the company is forecasting a 25% increase in sales; and it expects that its year-end operating...

Q: Walter Industries has $5 billion in sales and $1.

Walter Industries has $5 billion in sales and $1.7 billion in fixed assets. Currently, the company’s fixed assets are operating at 90% of capacity. a. What level of sales could Walter Industries have...

Q: At the end of last year, Roberts Inc. reported the

At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars): Looking ahead to the following year, the company’s CFO has assembled this inf...

Q: A company’s 5-year bonds are yielding 7.75%

A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is 2.5%;...

Q: What are the key factors on which external financing depends, as

What are the key factors on which external financing depends, as indicated in the AFN equation?

Q: What’s the difference between a call for sinking fund purposes and a

What’s the difference between a call for sinking fund purposes and a refunding call?

Q: Last year Clark Company issued a 10-year, 12%

Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100. a. What are...

Q: You plan to invest in the Kish Hedge Fund, which has

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Kish’s beta coefficient can be found as a weighted average of its stocks&...

Q: Welch Company is considering three independent projects, each of which requires

Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presente...

Q: Assume that today is December 31, 2008, and that the

Assume that today is December 31, 2008, and that the following information applies to Vermeil Airlines: ● After-tax operating income [EBIT(1 – T)] for 2009 is expected to be $500 million. ● The deprec...

Q: A Treasury bond that matures in 10 years has a yield of

A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premiu...

Q: a. Given the following graphs, calculate the total fixed costs

a. Given the following graphs, calculate the total fixed costs, variable costs per unit, and sales price for Firm A. Firm B’s fixed costs are $120,000, its variable costs per unit ar...

Q: Assume that it is now January 1, 2009. Wayne-

Assume that it is now January 1, 2009. Wayne-Martin Electric Inc. (WME) has developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a...

Q: A bond that pays interest forever and has no maturity is a

A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated simila...

Q: Warr Corporation just paid a dividend of $1.50 a

Warr Corporation just paid a dividend of $1.50 a share (that is, D0 = $1.50). The dividend is expected to grow 7% a year for the next 3 years and then at 5% a year thereafter. What is the expected div...

Q: Suppose rRF = 9%, rM = 14%, and bi =

Suppose rRF = 9%, rM = 14%, and bi = 1.3. a. What is ri, the required rate of return on Stock i? b. Now suppose that rRF (1) Increases to 10% or (2) Decreases to 8%. The slope of the SML remains con...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a midsized California company that specializes in creating exotic candies from tropical fruits such as mangoes, pap...

Q: Hart Enterprises recently paid a dividend, D0, of $1

Hart Enterprises recently paid a dividend, D0, of $1.25. It expects to have non constant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm’s required return is 10%. a. H...

Q: Here is the condensed 2008 balance sheet for Skye Computer Company (

Here is the condensed 2008 balance sheet for Skye Computer Company (in thousands of dollars): Skye’s earnings per share last year were $3.20, the common stock sells for $55.00, last...

Q: A mutual fund manager has a $20 million portfolio with a

A mutual fund manager has a $20 million portfolio with a beta of 1.5. The risk-free rate is 4.5%, and the market risk premium is 5.5%. The manager expects to receive an additional $5 million, which sh...

Q: Coleman Technologies is considering a major expansion program that has been proposed

Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its...

Q: It is a fact that the federal government (1)

It is a fact that the federal government (1) Encouraged the development of the savings and loan industry, (2) Virtually forced the industry to make long-term fixed-interest-rate mortgages, and (3)...

Q: Smith Technologies is expected to generate $150 million in free cash

Smith Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Smith has no debt or preferred stock, a...

Q: Klose Outfitters Inc. believes that its optimal capital structure consists of

Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% debt, and its tax rate is 40%. Klose must raise additional capital to fund its upcoming expansio...

Q: Midwest Electric Company (MEC) uses only debt and common equity

Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for...

Q: Suppose interest rates on residential mortgages of equal risk are 5.

Suppose interest rates on residential mortgages of equal risk are 5.5% in California and 7.0% in New York. Could this differential persist? What forces might tend to equalize rates? Would differential...

Q: The Scampini Supplies Company recently purchased a new delivery truck. The

The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $22,500; and it is expected to generate after-tax cash flows, including depreciation, of $6,250 per year. The...

Q: Suppose you held a diversified portfolio consisting of a $7,

Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio’s beta is 1.12. Now suppose you decided to sell one of the stocks in you...

Q: What is the implied nominal interest rate on a Treasury bond ($

What is the implied nominal interest rate on a Treasury bond ($100,000) futures contract that settled at 100’16.0 (or 100-160)? If interest rates increased by 1%, what would be the contract’s new valu...

Q: A bond has a $1,000 par value, 10

A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985. a. What is its yield to maturity (YTM)? b. Assume that the yield to maturity remains constant for the ne...

Q: a. What effect would each of the following events likely have

a. What effect would each of the following events likely have on the level of nominal interest rates? (1) Households dramatically increase their savings rate. (2) Corporations increase their demand fo...

Q: Ballack Co.’s common stock currently sells for $46.

Ballack Co.’s common stock currently sells for $46.75 per share. The growth rate is a constant 12%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is...

Q: Kahn Inc. has a target capital structure of 60% common

Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 10%, and...

Q: Wingler Communications Corporation (WCC) produces premium stereo headphones that sell

Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $28.80 per set, and this year’s sales are expected to be 450,000 units. Variable production costs for the expe...

Q: The Bouchard Company’s EPS was $6.50 in 2008,

The Bouchard Company’s EPS was $6.50 in 2008, up from $4.42 in 2003. The company pays out 40% of its earnings as dividends, and its common stock sells for $36.00. a. Calculate the past growth rate in...

Q: Bruner Aeronautics has perpetual preferred stock outstanding with a par value of

Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2, and its current price is $80. a. What is its nominal annual rate of re...

Q: Sidman Products’ common stock currently sells for $60.00 a

Sidman Products’ common stock currently sells for $60.00 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60, and it finances only with common equit...

Q: Adams Corporation is considering four average risk projects with the following costs

Adams Corporation is considering four average risk projects with the following costs and rates of return: The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. I...

Q: Heymann Company bonds have 4 years left to maturity. Interest is

Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. a. What is the yield to maturity at a current market pric...

Q: Ziege Systems is considering the following independent projects for the coming year

Ziege Systems is considering the following independent projects for the coming year: Ziege’s WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and...

Q: What does it mean when it is said that the United States

What does it mean when it is said that the United States is running a trade deficit? What impact will a trade deficit have on interest rates?

Q: Modigliani and Miller (MM) on the one hand and Gordon

Modigliani and Miller (MM) on the one hand and Gordon and Lintner (GL) on the other hand have expressed strong views regarding the effect of dividend policy on a firm’s cost of capital and value. a. I...

Q: A firm is about to double its assets to serve it’s rapidly

A firm is about to double its assets to serve it’s rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital structur...

Q: The real risk-free rate is 3%. Inflation is expected

The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities?...

Q: It is frequently stated that the one purpose of the preemptive right

It is frequently stated that the one purpose of the preemptive right is to allow individuals to maintain their proportionate share of the ownership and control of a corporation. a. How important do yo...

Q: Assume that you recently graduated with a major in finance. You

Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with Merrill Finch Inc., a large financial services corporation. Your first assignment is to in...

Q: Maria Juarez is a professional tennis player, and your firm manages

Maria Juarez is a professional tennis player, and your firm manages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepar...

Q: Due to a recession, expected inflation this year is only 3

Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectations theory...

Q: Suppose a firm makes the following policy changes. If the change

Suppose a firm makes the following policy changes. If the change means that external non spontaneous financial requirements (AFN) will increase, indicate this with a (+); indicate a decrease with a (&...

Q: A firm with a WACC of 10% is considering the following

A firm with a WACC of 10% is considering the following mutually exclusive projects: Which project would you recommend? Explain.

Q: Is it possible to construct a portfolio of real-world

Is it possible to construct a portfolio of real-world stocks that has an expected return equal to the risk-free rate?

Q: A stock had a 12% return last year, a year

A stock had a 12% return last year, a year when the overall stock market declined. Does this mean that the stock has a negative beta and thus very little risk if held in a portfolio? Explain.

Q: Suppose you are the money manager of a $4 million investment

Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: If the market’s required rate of retur...

Q: If investors’ aversion to risk increased, would the risk premium on

If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

Q: Hampton Manufacturing estimates that its WACC is 12% if equity comes

Hampton Manufacturing estimates that its WACC is 12% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 12.5%...

Q: Assume that you have a short investment horizon (less than 1

Assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Which of the two investments would...

Q: Northern Pacific Heating and Cooling Inc. has a 6-month

Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10 m...

Q: Dozier Corporation is a fast-growing supplier of office products.

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% ra...

Q: Tapley Inc. currently has assets of $5 million, has

Tapley Inc. currently has assets of $5 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and pays out 40% of its earnings as dividends. Net income i...

Q: Helen Bowers, owner of Helen’s Fashion Designs, is planning to

Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2009...

Q: Nevada Enterprises is considering buying a vacant lot that sells for $

Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company’s plan is to spend another $5 million today (t = 0) to build a hotel on the...

Q: An investor in Treasury securities expects inflation to be 2.5

An investor in Treasury securities expects inflation to be 2.5% in Year 1, 3.2% in Year 2, and 3.6% each year thereafter. Assume that the real risk-free rate is 2.75% and that this rate will remain co...

Q: Your broker offers to sell you some shares of Bahnsen & Co

Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen’s dividend is expected to grow at 5% per year for the next 3 years. If you buy...

Q: Why is a call provision advantageous to a bond issuer? When

Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding call?

Q: Southeastern Steel Company (SSC) was formed 5 years ago to

Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the research department of a...

Q: Bowles Sporting Inc. is prepared to report the following income statement

Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2009. Prior to reporting this income statement, the company wants to determine i...

Q: Firms HL and LL are identical except for their leverage ratios and

Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $20 million in assets, has $4 million of EBIT, and is in the 40% federal-plus-state tax...

Q: Clifford Clark is a recent retiree who is interested in investing some

Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: ●Bond A has a 7% annual coupon, matur...

Q: Martin Development Co. is deciding whether to proceed with Project X

Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-ta...

Q: HR Industries (HRI) has a beta of 1.8

HR Industries (HRI) has a beta of 1.8, while LR Industries’ (LRI) beta is 0.6. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation buil...

Q: Hooper Printing Inc. has bonds outstanding with 9 years left to

Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in in...

Q: In Chapter 7, we saw that if the market interest rate

In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) How a decrease in risk avers...

Q: Taussig Technologies Corporation (TTC) has been growing at a rate

Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn = 6%. a. If D0 = $...

Q: The future earnings, dividends, and common stock price of Carpetto

The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 7% per year. Carpetto’s common stock currently sells for $23.00 per share; its last dividend w...

Q: Investors require a 15% rate of return on Levine Company’s stock

Investors require a 15% rate of return on Levine Company’s stock (that is, rs = 15%). a. What is its value if the previous dividend was D0 = $2 and investors expect dividends to grow at a constant ann...

Q: Lamar Lumber Company has sales of $10 million per year,

Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar’s DSO, what would it be if all...

Q: You are considering an investment in Keller Corp’s stock, which is

You are considering an investment in Keller Corp’s stock, which is expected to pay a dividend of $2.00 a share at the end of the year (D1 = $2.00) and has a beta of 0.9. The risk-free rate is 5.6%, an...

Q: Define cash conversion cycle (CCC) and explain why, holding

Define cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.

Q: Stock X has a 10% expected return, a beta coefficient

Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard devia...

Q: Six years ago the Singleton Company issued 20-year bonds with

Six years ago the Singleton Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton call...

Q: How would each of the following scenarios affect a firm’s cost of

How would each of the following scenarios affect a firm’s cost of debt, rd(1 – T); its cost of equity, rs; and its WACC? Indicate with a plus (+), a minus (â&...

Q: What are the four key factors in a firm’s credit policy?

What are the four key factors in a firm’s credit policy? How would an easy policy differ from a tight policy? Give examples of how the four factors might differ between the two policies. How would the...

Q: Use a spreadsheet model to forecast the financial statements in Problems 17

Use a spreadsheet model to forecast the financial statements in Problems 17-13 and 17-14. Data from Problem 17-13 Morrissey Technologies Inc.’s 2008 financial statements are shown h...

Q: Why are convertibles and bonds with warrants typically offered with lower coupons

Why are convertibles and bonds with warrants typically offered with lower coupons than similarly rated straight bonds?

Q: Explain whether the following statement is true or false: Only weak

Explain whether the following statement is true or false: Only weak companies issue debentures.

Q: Suppose you owned a portfolio consisting of $250,000 of

Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds. a. Would your portfolio be riskless? Explain. b. Now suppose the portfolio consists of $250,000 of 30-day Treas...

Q: Sue Wilson, the new financial manager of New World Chemicals (

Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2009. NWC&aci...

Q: Would it ever be rational for a firm to borrow money in

Would it ever be rational for a firm to borrow money in order to pay dividends? Explain.

Q: What is the difference between a stock dividend and a stock split

What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a two-for-one split? Assume that either actio...

Q: How would each of the following changes tend to affect aggregate (

How would each of the following changes tend to affect aggregate (that is, the average for all corporations) payout ratios, other things held constant? Explain your answers. a. An increase in the pers...

Q: The following yields on U.S. Treasury securities were taken

The following yields on U.S. Treasury securities were taken from a recent financial publication: Term Rate 6 months………………….5.1% 1 year……………………….5.5% 2 year……………………….5.6%...

Q: What are the two definitions of cash, and why do corporate

What are the two definitions of cash, and why do corporate treasurers often use the second definition?

Q: A firm’s bonds have a maturity of 10 years with a $

A firm’s bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,100. What are their nominal yi...

Q: At year-end 2008, total assets for Ambrose Inc.

At year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2008 were $2.5 million, are expected to increase by 25% in 2009. Total assets and...

Q: Pierce Furnishings generated $2 million in sales during 2008, and

Pierce Furnishings generated $2 million in sales during 2008, and its year-end total assets were $1.5 million. Also, at year-end 2008, current liabilities were $500,000, consisting of $200,000 of note...

Q: An investor has two bonds in his portfolio that have a face

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. a. What will the value of each bond...

Q: Are securities that provide for a sinking fund more or less risky

Are securities that provide for a sinking fund more or less risky from the bondholder’s perspective than those without this type of provision? Explain.

Q: Rubenstein Bros. Clothing is expecting to pay an annual dividend per

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.75 out of annual earnings per share of $2.25. Currently, Rubenstein Bros.’ stock is selling for $12.50 per share. Adher...

Q: Stocks A and B have the following historical returns:

Stocks A and B have the following historical returns: a. Calculate the average rate of return for each stock during the period 2004 through 2008. b. Assume that someone held a portfolio consisting o...

Q: a. Rework Problem 18-4 using the spreadsheet model.

a. Rework Problem 18-4 using the spreadsheet model. Data from Problem 18-4 Assume that you have been given the following information on Purcell Industries: Using the Black-Scholes Option Pricing Mod...

Q: An 8% semiannual coupon bond matures in 5 years. The

An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond’s price and YTM?

Q: Most firms like to have their stock selling at a high P

Most firms like to have their stock selling at a high P/E ratio, and they also like to have extensive public ownership (many different shareholders). Explain how stock dividends or stock splits may he...

Q: Barrett Industries invests a large sum of money in R&D

Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends and it has no plans to pay dividen...

Q: Discuss the following statement: All else equal, firms with relatively

Discuss the following statement: All else equal, firms with relatively stable sales are able to carry relatively high debt ratios. Is the statement true or false? Why?

Q: One position expressed in the financial literature is that firms set their

One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment. a. Explain what a residual dividend policy implies, ill...

Q: Edney Manufacturing Company has $2 billion in sales and $0

Edney Manufacturing Company has $2 billion in sales and $0.6 billion in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity. a. What level of sales could Edney have ob...

Q: Mitts Cosmetics Co.’s stock price is $58.88

Mitts Cosmetics Co.’s stock price is $58.88, and it recently paid a $2.00 dividend. This dividend is expected to grow by 25% for the next 3 years, then grow forever at a constant rate, g; and rs = 12%...

Q: Christie Corporation is trying to determine the effect of its inventory turnover

Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s 2008 sales (all on credit) were $150,000; and...

Q: Would the yield spread on a corporate bond over a Treasury bond

Would the yield spread on a corporate bond over a Treasury bond with the same maturity tend to become wider or narrower if the economy appeared to be heading toward a recession? Would the change in th...

Q: It is now January 1, 2009, and you are considering

It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures...

Q: A stock is expected to pay a dividend of $0.

A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1 = 0.50), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the s...

Q: Morrissey Technologies Inc.’s 2008 financial statements are shown here.

Morrissey Technologies Inc.’s 2008 financial statements are shown here. Suppose that in 2009, sales increase by 10% over 2008 sales. The firm currently has 100,000 shares outstandi...

Q: Krogh Lumber’s 2008 financial statements are shown here. /

Krogh Lumber’s 2008 financial statements are shown here. a. Assume that the company was operating at full capacity in 2008 with regard to all items except fixed assets; fixed asset...

Q: If Congress increased the personal tax rate on interest, dividends,

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 capi...

Q: What are some pros and cons of holding high levels of current

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.

Q: Executive salaries have been shown to be more closely correlated to the

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 direc...

Q: A bond’s expected return is sometimes estimated by its YTM and sometimes

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?

Q: A sinking fund can be set up in one of two ways

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...

Q: Indicate using a (+), (-), or (0) whether each of

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 mann...

Q: The values of outstanding bonds change whenever the going rate of interest

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 pr...

Q: Bradford Manufacturing Company has a beta of 1.45, while

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 i...

Q: Rentz Corporation is investigating the optimal level of current assets for the

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...

Q: Consider the following information for three stocks, Stocks X, Y

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 correla...

Q: If interest rates rise after a bond issue, what will happen

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?

Q: Cyclone Software Co. is trying to establish its optimal capital structure

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 de...

Q: Would each of the following increase, decrease, or have an

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 f...

Q: Lloyd Corporation’s 14% coupon rate, semiannual payment, $1

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 c...

Q: Assume that the risk-free rate increases. What impact would

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?

Q: If you buy a callable bond and interest rates decline, will

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.

Q: a. Given the following information, calculate the expected value for

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) = $4.2...

Q: What does it mean to adopt a maturity matching approach to financing

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 app...

Q: The Neal Company wants to estimate next year’s return on equity (

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 c...

Q: Stocks X and Y have the following probability distributions of expected future

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 standar...

Q: In 2008, Keenan Company paid dividends totaling $3,600

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...

Q: Currently, Bloom Flowers Inc. has a capital structure consisting of

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 pre...

Q: Hardin-Gehr Corporation (HGC) began operations 5 years ago

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...

Q: A life insurance policy is a financial asset, with the premiums

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 th...

Q: Beta Industries has net income of $2,000,000

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...

Q: Bartman Industries’ and Reynolds Inc.’s stock prices and dividends,

Bartman Industries’ and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2003–2008. Th...

Q: Why do public utilities generally use different capital structures than pharmaceutical companies

Why do public utilities generally use different capital structures than pharmaceutical companies?

Q: Define each of the following loan terms and explain how they are

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 b...

Q: The following table gives Foust Company’s earnings per share for the last

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. T...

Q: A firm is considering two mutually exclusive projects, X and Y

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 sh...

Q: Why is EBIT generally considered independent of financial leverage? Why might

Why is EBIT generally considered independent of financial leverage? Why might EBIT actually be affected by financial leverage at high debt levels?

Q: The Bush Oil Company is deciding whether to drill for oil on

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,...

Q: Suppose the population of Area Y is relatively young and the population

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 d...

Q: If a company’s beta were to double, would its required return

If a company’s beta were to double, would its required return also double?

Q: What is a cash budget, and how can this statement be

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, an...

Q: Robert Black and Carol Alvarez are vice presidents of Western Money Management

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,...

Q: Why are accruals called spontaneous sources of funds, what are their

Why are accruals called spontaneous sources of funds, what are their costs, and why don’t firms use more of them?

Q: Is the debt level that maximizes a firm’s expected EPS the same

Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizes its stock price? Explain.

Q: Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500

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...

Q: The Weaver Watch Company sells watches for $25, the fixed

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....

Q: Which of the following would likely encourage a firm to increase the

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, t...

Q: Why some trade credit is called free while other credit is called

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...

Q: Jackson Trucking Company is in the process of setting its target capital

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 follow...

Q: Lamar Lumber buys $8 million of materials (net of discounts

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 finan...

Q: How is finance related to the disciplines of accounting and economics?

How is finance related to the disciplines of accounting and economics?

Q: Compare and contrast the potential liability of owners of proprietorships, partnerships

Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations.

Q: How are financial trades made in an over-the-counter

How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market.

Q: What is the role of a broker in security transactions? How

What is the role of a broker in security transactions? How are brokers compensated?

Q: Would there be positive interest rates on bonds in a world with

Would there be positive interest rates on bonds in a world with absolutely no risk (no default risk, maturity risk, and so on)? Why would a lender demand and a borrower be willing to pay, a positive i...

Q: What is a security?

What is a security?

Q: What are a bank's primary reserves? When the Fed sets reserve

What are a bank's primary reserves? When the Fed sets reserve requirements, what is its primary goal?

Q: Compare and contrast mutual and stockholder-owned savings and loan associations

Compare and contrast mutual and stockholder-owned savings and loan associations.

Q: Who owns a credit union? Explain.

Who owns a credit union? Explain.

Q: Which type of insurance company generally takes on the greater risks:

Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company?

Q: Compare and contrast a defined benefit and a defined contribution pension plan

Compare and contrast a defined benefit and a defined contribution pension plan.

Q: List and describe the three career opportunities in the field of finance

List and describe the three career opportunities in the field of finance.

Q: Define intermediation.

Define intermediation.

Q: What can a financial institution often do for a surplus economic unit

What can a financial institution often do for a surplus economic unit that it would have difficulty doing for itself if the surplus economic unit (SEU) were to deal directly with a deficit economic un...

Q: What can a financial institution often do for a deficit economic unit

What can a financial institution often do for a deficit economic unit (DEU) that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?

Q: Define depreciation expense as it appears on the income statement. How

Define depreciation expense as it appears on the income statement. How does depreciation affect cash flow?

Q: What are retained earnings? Why are they important?

What are retained earnings? Why are they important?

Q: Why do financial managers calculate the marginal tax rate?

Why do financial managers calculate the marginal tax rate?

Q: Indicate in which section the following balance items belong (current assets

Indicate in which section the following balance items belong (current assets, fixed assets, currentliabilities, long-term liabilities, or equity).

Q: Why do total assets equal the sum of total liabilities and equity

Why do total assets equal the sum of total liabilities and equity? Explain.

Q: What are the time dimensions of the income statement, the balance

What are the time dimensions of the income statement, the balance sheet, and the statement of cashflows? Hint: Are they videos or still pictures? Explain.

Q: Which ratios would a banker be most interested in when considering whether

Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.

Q: Describe the duties of the financial manager in a business firm.

Describe the duties of the financial manager in a business firm.

Q: Under what circumstances would market to book value ratios be misleading?

Under what circumstances would market to book value ratios be misleading? Explain.

Q: Why would an analyst use the Modified Du Pont system to calculate

Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain.

Q: What is a financial ratio?

What is a financial ratio?

Q: Why do analysts calculate financial ratios?

Why do analysts calculate financial ratios?

Q: Explain how the cash budget and the capital budget relate to pro

Explain how the cash budget and the capital budget relate to pro forma financial statements.

Q: Explain how management goals are incorporated into pro forma financial statements.

Explain how management goals are incorporated into pro forma financial statements.

Q: Explain the significance of the term additional funds needed.

Explain the significance of the term additional funds needed.

Q: What do financial managers look for when they analyze pro forma financial

What do financial managers look for when they analyze pro forma financial statements?

Q: Why do businesses spend time, effort, and money to produce

Why do businesses spend time, effort, and money to produce forecasts? Explain.

Q: What is the primary assumption behind the experience approach to forecasting?

What is the primary assumption behind the experience approach to forecasting?

Q: What is the basic goal of a business?

What is the basic goal of a business?

Q: Why is the coefficient of variation often a better risk measure when

Why is the coefficient of variation often a better risk measure when comparing different projects than the standard deviation?

Q: What is the difference between business risk and financial risk?

What is the difference between business risk and financial risk?

Q: Why does the riskiness of portfolios have to be looked at differently

Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets?

Q: What does it mean when we say that the correlation coefficient for

What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1?

Q: What is non-diversifiable risk? How is it measured?

What is non-diversifiable risk? How is it measured?

Q: Given that risk-averse investors demand more return for taking on

Given that risk-averse investors demand more return for taking on more risk when they invest, how much more return is appropriate for, say, a share of common stock, than is appropriate for a Treasury...

Q: Discuss risk from the perspective of the Capital Asset Pricing Model (

Discuss risk from the perspective of the Capital Asset Pricing Model (CAPM).

Q: What is risk aversion? If common stockholders are risk averse,

What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies?

Q: Explain the risk–return relationship.

Explain the risk–return relationship.

Q: How does continuous compounding benefit an investor?

How does continuous compounding benefit an investor?

Q: List and explain the three financial factors that influence the value of

List and explain the three financial factors that influence the value of a business.

Q: If you are doing PVA and FVA problems, what difference does

If you are doing PVA and FVA problems, what difference does it make if the annuities are "ordinary annuities" or "annuities due"?

Q: Which formula would you use to solve for the payment required for

Which formula would you use to solve for the payment required for a car loan if you know the interest rate, length of the loan, and the borrowed amount? Explain.

Q: Why does money have time value?

Why does money have time value?

Q: What is compound interest? Compare compound interest to discounting.

What is compound interest? Compare compound interest to discounting.

Q: Suppose you are planning to make regular contributions in equal payments to

Suppose you are planning to make regular contributions in equal payments to an investment fund for your retirement. Which formula would you use to figure out how much your investments will be worth at...

Q: If dividends paid to common stock holders are not legal obligations of

If dividends paid to common stock holders are not legal obligations of a corporation, is the cost of equity zero? Explain your answer.

Q: What is the investment opportunity schedule (IOS)? How does it

What is the investment opportunity schedule (IOS)? How does it help financial managers make business decisions?

Q: What is a marginal cost of capital schedule (MCC)? Is

What is a marginal cost of capital schedule (MCC)? Is the schedule always a horizontal line? Explain.

Q: Provide three examples of mutually exclusive projects.

Provide three examples of mutually exclusive projects.

Q: What is capital rationing? Should a firm practice capital rationing?

What is capital rationing? Should a firm practice capital rationing? Why?

Q: Explain why accounting profits and cash flows are not the same thing

Explain why accounting profits and cash flows are not the same thing.

Q: Explain how to resolve a “ranking conflict” between the net

Explain how to resolve a “ranking conflict” between the net present value and the internal rate of return. Why should the conflict be resolved as you explained?

Q: Why is the coefficient of variation a better risk measure to use

Why is the coefficient of variation a better risk measure to use than the standard deviation when evaluating the risk of capital budgeting projects?

Q: Explain how using a risk-adjusted discount rate improves capital budgeting

Explain how using a risk-adjusted discount rate improves capital budgeting decision making compared to using a single discount rate for all projects?

Q: How do we calculate the payback period for a proposed capital budgeting

How do we calculate the payback period for a proposed capital budgeting project? What are the main criticisms of the payback method?

Q: What are the advantages and disadvantages of the internal rate of return

What are the advantages and disadvantages of the internal rate of return method?

Q: How and why does working capital affect the incremental cash flow estimation

How and why does working capital affect the incremental cash flow estimation for a proposed large capital budgeting project? Explain.

Q: How do opportunity costs affect the capital budgeting decision-making process

How do opportunity costs affect the capital budgeting decision-making process?

Q: Answer the following questions about the discounted free cash flow model illustrated

Answer the following questions about the discounted free cash flow model illustrated in Figure 12-4: a. What are “free cash flows?” b. Explain the terminal value calculation at the end of the forecast...

Q: Explain the difference between the discounted free cash flow models as it

Explain the difference between the discounted free cash flow models as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.

Q: What is the relationship between a bond's market price and its promised

What is the relationship between a bond's market price and its promised yield to maturity? Explain.

Q: How are financial trades made on an organized exchange?

How are financial trades made on an organized exchange?

Q: Compare and contrast the book value and liquidation value per share for

Compare and contrast the book value and liquidation value per share for common stock. Is one method more reliable? Explain.

Q: Give two examples of types of companies that would be best able

Give two examples of types of companies that would be best able to handle high debt levels.

Q: What is an LBO? What are the risks for the equity

What is an LBO? What are the risks for the equity investors and what are the potential rewards?

Q: If an optimal capital structure exists, what are the reasons why

If an optimal capital structure exists, what are the reasons why too little debt is as undesirable as is too much debt?

Q: What is the operating leverage effect and what causes it? What

What is the operating leverage effect and what causes it? What are the potential benefits and negative consequences of high operating leverage?

Q: What is the financial leverage effect and what causes it? What

What is the financial leverage effect and what causes it? What are the potential benefits and negative consequences of high financial leverage?

Q: Define the following terms that relate to a convertible bond: conversion

Define the following terms that relate to a convertible bond: conversion ratio, conversion value, and straight bond value.

Q: Do you believe an increased common stock cash dividend can send a

Do you believe an increased common stock cash dividend can send a signal to the common stockholders? If so, what signal might it send?

Q: What is the effect of stock (not cash) dividends and

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock? Why do corporations declare stock splits and stock dividends?

Q: What is the matching principle of working capital financing? What are

What is the matching principle of working capital financing? What are the benefits of following this principle?

Q: Describe how society's interests can influence financial managers.

Describe how society's interests can influence financial managers.

Q: Can a company have a default rate on its accounts receivable that

Can a company have a default rate on its accounts receivable that is too low? Explain.

Q: What are compensating balances and why do banks require them from some

What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances?

Q: What are the pros and cons of commercial paper relative to bank

What are the pros and cons of commercial paper relative to bank loans for a company seeking shorter financing?

Q: Banks like to make short-term, self-liquidating loans

Banks like to make short-term, self-liquidating loans to businesses. Why?

Q: Under what circumstance the U.S. dollar and the Canadian

Under what circumstance the U.S. dollar and the Canadian dollar would be said to have achieved purchasing power parity?

Q: Briefly define the terms proprietorship, partnership, and corporation.

Briefly define the terms proprietorship, partnership, and corporation.

Q: What are financial markets? Why do they exist?

What are financial markets? Why do they exist?

Q: How do financial managers calculate the average tax rate?

How do financial managers calculate the average tax rate?

Q: Why are trend analysis and industry comparison important to financial ratio analysis

Why are trend analysis and industry comparison important to financial ratio analysis?

Q: What action(s) should be taken if analysis of pro

What action(s) should be taken if analysis of pro forma financial statements reveals positive trends? Negative trends?

Q: What happens to the riskiness of a portfolio if assets with very

What happens to the riskiness of a portfolio if assets with very low correlations (even negative correlations) are combined?

Q: Compare diversifiable and non-diversifiable risk. Which do you think

Compare diversifiable and non-diversifiable risk. Which do you think is more important to financial managers in business firms?

Q: How do risk-averse investors compensate for risk when they take

How do risk-averse investors compensate for risk when they take on investment projects?

Q: How is present value affected by a change in the discount rate

How is present value affected by a change in the discount rate?

Q: What is an annuity?

What is an annuity?

Q: Which is lower for a given company: the cost of debt

Which is lower for a given company: the cost of debt or the cost of equity? Explain. Ignore taxes in your answer.

Q: When a company issues new securities, how do flotation costs affect

When a company issues new securities, how do flotation costs affect the cost of raising that capital?

Q: What is the time value of money?

What is the time value of money?

Q: What does the “weight” refer to in the weighted average

What does the “weight” refer to in the weighted average cost of capital?

Q: How do tax considerations affect the cost of debt and the cost

How do tax considerations affect the cost of debt and the cost of equity?

Q: For a given IOS and MCC, how do financial managers decide

For a given IOS and MCC, how do financial managers decide which proposed capital budgeting projects to accept, and which to reject?

Q: Explain how to measure the firm risk of a capital budgeting project

Explain how to measure the firm risk of a capital budgeting project.

Q: Explain why we measure a project’s risk as the change in the

Explain why we measure a project’s risk as the change in the CV.

Q: How does the net present value relate to the value of the

How does the net present value relate to the value of the firm?

Q: What is the decision rule for accepting or rejecting proposed projects when

What is the decision rule for accepting or rejecting proposed projects when using net present value?

Q: What is the decision rule for accepting or rejecting proposed projects when

What is the decision rule for accepting or rejecting proposed projects when using internal rate of return?

Q: Why do we focus on cash flows instead of profits when evaluating

Why do we focus on cash flows instead of profits when evaluating proposed capital budgeting projects?

Q: What is a sunk cost? Is it relevant when evaluating a

What is a sunk cost? Is it relevant when evaluating a proposed capital budgeting project? Explain.

Q: What are the characteristics of an efficient market?

What are the characteristics of an efficient market?

Q: How do we estimate expected incremental cash flows for a proposed capital

How do we estimate expected incremental cash flows for a proposed capital budgeting project?

Q: What role does depreciation play in estimating incremental cash flows?

What role does depreciation play in estimating incremental cash flows?

Q: How financing costs are generally incorporated into the capital budgeting analysis process

How financing costs are generally incorporated into the capital budgeting analysis process?

Q: Describe the general pattern of cash flows from a bond with a

Describe the general pattern of cash flows from a bond with a positive coupon rate.

Q: All other things held constant, how would the market price of

All other things held constant, how would the market price of a bond be affected if coupon interest payments were made semiannually instead of annually?

Q: Why is the replacement value of assets method not generally used to

Why is the replacement value of assets method not generally used to value complete businesses?

Q: Does high operating leverage always mean high business risk? Explain.

Does high operating leverage always mean high business risk? Explain.

Q: Give two examples of types of companies likely to have high operating

Give two examples of types of companies likely to have high operating leverage.

Q: How does a sinking fund function in the retirement of an outstanding

How does a sinking fund function in the retirement of an outstanding bond issue?

Q: What are some examples of restrictive covenants that might be specified in

What are some examples of restrictive covenants that might be specified in a bond’s indenture?

Q: Which ratios would a potential long-term bond investor be most

Which ratios would a potential long-term bond investor be most interested in? Explain. Answer Current and potential lenders of long-term funds, such as banks and bondholders, are interested in debt...

Q: If a convertible bond has a conversion ratio of 20, a

If a convertible bond has a conversion ratio of 20, a face value of $1,000, a coupon rate of 8 percent, and the market price for the company’s stock is $15 per share, what is the convertible bond’s co...

Q: What is a callable bond? What is a puttable bond?

What is a callable bond? What is a puttable bond? How do each of these features affect their respective market interest rates?

Q: How does a mortgage bond compare to a debenture?

How does a mortgage bond compare to a debenture?

Q: What are some of the government requirements imposed on a public corporation

What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation?

Q: How are the members of the board of directors of a corporation

How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance?

Q: What are the advantages and the disadvantages of a new stock issue

What are the advantages and the disadvantages of a new stock issue?

Q: What does an investment banker do when underwriting a new security issue

What does an investment banker do when underwriting a new security issue for a corporation?

Q: How does a preemptive right protect the interests of existing stockholders?

How does a preemptive right protect the interests of existing stockholders?

Q: Explain why warrants are rarely exercised unless the time to maturity is

Explain why warrants are rarely exercised unless the time to maturity is small?

Q: Under what circumstances is a warrant’s value high? Explain.

Under what circumstances is a warrant’s value high? Explain.

Q: Explain how earnings available to common stockholders and common stock dividends paid

Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings.

Q: Explain the role of cash and of earnings when a corporation is

Explain the role of cash and of earnings when a corporation is deciding how much, if any, cash dividends to pay to common stockholders.

Q: Are there any legal factors that could restrict a corporation in its

Are there any legal factors that could restrict a corporation in its attempt to pay cash dividends to common stockholders? Explain.

Q: What are some of the factors that common stockholders consider when deciding

What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested?

Q: What is the Modigliani and Miller theory of dividends? Explain.

What is the Modigliani and Miller theory of dividends? Explain.

Q: Explain the bird in the hand theory of cash dividends.

Explain the bird in the hand theory of cash dividends.

Q: Explain how a firm determines the optimal level of current assets.

Explain how a firm determines the optimal level of current assets.

Q: What are the risks associated with using a large amount of short

What are the risks associated with using a large amount of short-term financing for working capital?

Q: What are the advantages and disadvantages of the aggressive working capital financing

What are the advantages and disadvantages of the aggressive working capital financing approach?

Q: What is the most conservative type of working capital financing plan a

What is the most conservative type of working capital financing plan a company could implement? Explain.

Q: What is working capital?

What is working capital?

Q: What is accumulated depreciation?

What is accumulated depreciation?

Q: What is the primary advantage to a corporation of investing some of

What is the primary advantage to a corporation of investing some of its funds in working capital?

Q: Can a corporation have too much working capital? Explain.

Can a corporation have too much working capital? Explain.

Q: What are the primary reasons that companies hold cash?

What are the primary reasons that companies hold cash?

Q: Explain the factors affecting the choice of a minimum cash balance amount

Explain the factors affecting the choice of a minimum cash balance amount.

Q: What are the negative consequences of a company holding too much cash

What are the negative consequences of a company holding too much cash?

Q: Explain the factors affecting the choice of a maximum cash balance amount

Explain the factors affecting the choice of a maximum cash balance amount.

Q: What is the difference between pro forma financial statements and a cash

What is the difference between pro forma financial statements and a cash budget? Explain why pro forma financial statements are not used to forecast cash needs.

Q: What are the benefits of “collecting early” and how do

What are the benefits of “collecting early” and how do companies attempt to do this?

Q: What are the benefits of “paying late” (but not

What are the benefits of “paying late” (but not too late) and how do companies attempt to do this?

Q: How does accounts receivable factoring work? What are the benefits to

How does accounts receivable factoring work? What are the benefits to the two parties involved? What are the risks?

Q: What is an agent? What are the responsibilities of an agent

What is an agent? What are the responsibilities of an agent?

Q: Accounts receivable are sometimes not collected. Why do companies extend trade

Accounts receivable are sometimes not collected. Why do companies extend trade credit when they could insist on cash for all sales?

Q: Inventory is sometimes thought of as a necessary evil. Explain.

Inventory is sometimes thought of as a necessary evil. Explain.

Q: What are the primary variables being balanced in the EOQ inventory model

What are the primary variables being balanced in the EOQ inventory model? Explain

Q: What are the benefits of the JIT inventory control system?

What are the benefits of the JIT inventory control system?

Q: What are the primary requirements for a successful JIT inventory control system

What are the primary requirements for a successful JIT inventory control system?

Q: Companies with rapidly growing levels of sales do not need to worry

Companies with rapidly growing levels of sales do not need to worry about raising funds from outside the firm. Do you agree or disagree with this statement? Explain.

Q: What happens when a bank charges discount interest on a loan?

What happens when a bank charges discount interest on a loan?

Q: What is trustworthy collateral from the lenders’ perspective? Explain whether accounts

What is trustworthy collateral from the lenders’ perspective? Explain whether accounts receivable and inventory are trustworthy collateral.

Q: Trade credit is free credit. Do you agree or disagree with

Trade credit is free credit. Do you agree or disagree with this statement? Explain.

Q: Banks like to make short-term, self-liquidating loans

Banks like to make short-term, self-liquidating loans to businesses. Why?

Q: What is a Treasury bill? How risky is it?

What is a Treasury bill? How risky is it?

Q: What are compensating balances and why do banks require them from some

What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances?

Q: What are the pros and cons of commercial paper relative to bank

What are the pros and cons of commercial paper relative to bank loans for a company seeking short term financing?

Q: What does it mean when the U.S. dollar weakens

What does it mean when the U.S. dollar weakens in the foreign exchange market?

Q: What kinds of U.S. companies would benefit most from

What kinds of U.S. companies would benefit most from a stronger dollar in the foreign exchange market? Explain.

Q: What are some of the primary advantages when a corporation has operations

What are some of the primary advantages when a corporation has operations in countries other than its home country? What are some of the risks?

Q: What is GATT, and what is its goal?

What is GATT, and what is its goal?

Q: What are the three major sections of the statement of cash flows

What are the three major sections of the statement of cash flows?

Q: What is an “equivalent annual annuity (EAA)?” When and

What is an “equivalent annual annuity (EAA)?” When and how are EAAs used in capital budgeting?

Q: After a 5-for-1 stock split, Strasburg Company

After a 5-for-1 stock split, Strasburg Company paid a dividend of $0.75 per new share, which represents a 9% increase over last year’s pre-split dividend. What was last year’s dividend per share?

Q: Javits & Sons’ common stock currently trades at $30.00

Javits & Sons’ common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 5% a year...

Q: Midwest Water Works estimates that its WACC is 10.5%.

Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: Assume that each of these projects is just as risky as the firmâ€&...

Q: NPV Project K costs $52,125, its expected net

NPV Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project’s NPV?

Q: Why is the NPV of a relatively long-term project (

Why is the NPV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term projec...

Q: Kennedy Air Services is now in the final year of a project

Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Kennedy can sell the used equipment today for $5 million, and...

Q: Huang Industries is considering a proposed project who’s estimated NPV is $

Huang Industries is considering a proposed project who’s estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.â€...

Q: Operating cash flows rather than accounting income are listed in Table 12

Operating cash flows rather than accounting income are listed in Table 12-1. Why do we focus on cash flows as opposed to net income in capital budgeting?

Q: Why are interest charges not deducted when a project’s cash flows for

Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated?

Q: Carter Corporation’s sales are expected to increase from $5 million in

Carter Corporation’s sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its asset...

Q: Jasper Furnishings has $300 million in sales. The company expects

Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’s CFO uses a simple linear regression to forecast the company’s inventory level for...

Q: Edwards Industries has $320 million in sales. The company expects

Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards’ CFO uses a simple linear regression to forecast the company’s receivables level f...

Q: Charlie’s Cycles Inc. has $110 million in sales. The

Charlie’s Cycles Inc. has $110 million in sales. The company expects that its sales will increase 5% this year. Charlie’s CFO uses a simple linear regression to forecast the company’s inventory level...

Q: Assume that an average firm in the office supply business has a

Assume that an average firm in the office supply business has a 6% profit margin, a 40% debt/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it true that if su...

Q: Would you agree that computerized corporate planning models were a fad during

Would you agree that computerized corporate planning models were a fad during the 1990s but that because of a need for flexibility in corporate planning, they are no longer used by most firms?

Q: Certain liability and net worth items generally increase spontaneously with increases in

Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark (3) next to those items that typically increase spontaneously.

Q: A call option on Bedrock Boulders stock has a market price of

A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share. a. What is the exercise value of the call option...

Q: The exercise price on one of Flanagan Company’s call options is $

The exercise price on one of Flanagan Company’s call options is $15, its exercise value is $22, and its premium is $5. What are the option’s market value and the stock’s current price?

Q: Suppose a firm is considering two mutually exclusive projects. One project

Suppose a firm is considering two mutually exclusive projects. One project has a life of 6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives. Might the fail...

Q: In the spot market, 10.5 Mexican pesos can be

In the spot market, 10.5 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same d...

Q: Why would a company choose to issue floating-rate as opposed

Why would a company choose to issue floating-rate as opposed to fixed-rate preferred stock?

Q: Marble Construction estimates that its WACC is 10% if equity comes

Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%....

Q: Evaluate the following statement: Issuing convertible securities represents a means by

Evaluate the following statement: Issuing convertible securities represents a means by which a firm can sell common stock at a price above the existing market price.

Q: Little Books Inc. recently reported $3 million of net income

Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement an...

Q: If most investors expect the same cash flows from Companies A and

If most investors expect the same cash flows from Companies A and B but are more confident that A’s cash flows will be closer to their expected value, which company should have the higher stock price?...

Q: Is an initial public offering an example of a primary or a

Is an initial public offering an example of a primary or a secondary market transaction? Explain.

Q: INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.

INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its...

Q: What would happen to the U.S. standard of living

What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.

Q: In its most recent financial statements, Newhouse Inc. reported $

In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends...

Q: Computer World Inc. paid out $22.5 million in

Computer World Inc. paid out $22.5 million in total common dividends and reported $278.9 million of retained earnings at year-end. The prior year’s retained earnings were $212.3 million. What was the...

Q: Early in September 1983, it took 245 Japanese yen to equal

Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 25 years later, in May 2008, that exchange rate had fallen to 103.5 yen to $1. Assume that the price of a Japanese-manufactured au...

Q: Identify and briefly compare the two leading stock exchanges in the United

Identify and briefly compare the two leading stock exchanges in the United States today.

Q: What four financial statements are contained in most annual reports?

What four financial statements are contained in most annual reports?

Q: A company’s fixed operating costs are $500,000, its

A company’s fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product’s sales price is $4.00. What is the company’s breakeven point; that is, at what unit sales volume...

Q: Who are some of the basic users of financial statements, and

Who are some of the basic users of financial statements, and how do they use them?

Q: If a “typical” firm reports $20 million of retained

If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain...

Q: What is meant by the following statement: Our tax rates are

What is meant by the following statement: Our tax rates are progressive.

Q: Edmund Enterprises recently made a large investment to upgrade its technology.

Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much effect on performance in the short run, they are expected to reduce future costs...

Q: A firm has a profit margin of 2% and an equity

A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?

Q: The H.R. Pickett Corp. has $500,

The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%. What...

Q: Baker Brothers has a DSO of 40 days, and its annual

Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.

Q: Bartley Barstools has an equity multiplier of 2.4, and

Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its debt ratio?

Q: Would you rather have a savings account that pays 5% interest

Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.

Q: A television costs $500 in the United States. The same

A television costs $500 in the United States. The same television costs 312.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

Q: To find the present value of an uneven series of cash flows

To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash fl...

Q: The present value of a perpetuity is equal to the payment on

The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I: PV − PMT/I. What is the future value of a perpetuity of PMT dollars per year? (Hint: The...

Q: You read in The Wall Street Journal that 30-day T

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current intere...

Q: The real risk-free rate is 3%, and inflation is

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?

Q: If a firm goes from zero debt to successively higher levels of

If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?

Q: An analyst is evaluating securities in a developing nation where the inflation

An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inf...

Q: One-year Treasury securities yield 5%. The market anticipates that

One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for 2-...

Q: Interest rates on 4-year Treasury securities are currently 7%,

Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year securit...

Q: Jaster Jets has $10 billion in total assets. Its balance

Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of comm...

Q: The real risk-free rate is 3%. Inflation is expected

The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 × (t – 1)%, where t = number of years to m...

Q: The real risk-free rate, r*, is 2.

The real risk-free rate, r*, is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturit...

Q: Suppose that 1 Danish krone could be purchased in the foreign exchange

Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.20. If the krone appreciated 10% tomorrow against the dollar, how many krones would a dollar buy tomorrow?

Q: An analyst is evaluating securities in a developing nation where the inflation

An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inf...

Q: Suppose a new process was developed that could be used to make

Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive; but it would, in time, lead to low prices for gasoline, electricity, and...

Q: Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is

Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the bond’...

Q: Nungesser Corporation’s outstanding bonds have a $1,000 par value

Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM. What is the bond’s price?

Q: An investor has two bonds in her portfolio, Bond C and

An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while Bon...

Q: Changes in sales cause changes in profits. Would the profit change

Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.

Q: An investor purchased the following 5 bonds. Each bond had a

An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell and...

Q: A company has an EPS of $2.00, a

A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0×. What is its P/E ratio?

Q: Is it true that the following equation can be used to find

Is it true that the following equation can be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago.

Q: A stock has a required return of 11%, the risk-

A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the...

Q: Given the following information, determine the beta coefficient for Stock J

Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: ^rJ = 12.5%; rRF = 4.5%; rM = 10.5%.

Q: Suppose the exchange rate between the U.S. dollar and

Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6 krona = $1 and the exchange rate between the dollar and the British pound was £1 = $2. What was the exchange rate between...

Q: Stock R has a beta of 1.5, Stock S

Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate of return is 7%. By how much does the required return on the riski...

Q: Calculate the required rate of return for Manning Enterprises assuming that investors

Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5%, and the market risk premium is 6.5...

Q: You have been managing a $5 million portfolio that has a

You have been managing a $5 million portfolio that has a beta of 1.25 and a required rate of return of 12%. The current risk-free rate is 5.25%. Assume that you receive another $500,000. If you invest...

Q: A stock’s returns have the following distribution: /

A stock’s returns have the following distribution: Calculate the stock’s expected return, standard deviation, and coefficient of variation.

Q: An individual has $35,000 invested in a stock with

An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfol...

Q: Assume that the risk-free rate is 6% and the

Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock with a beta of 0.7?

Q: Harley Motors has $10 million in assets, which were financed

Harley Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Harley’s beta is currently 1.2, and its tax rate is 40%. Use the Hamada equation to find...

Q: Axel Telecommunications has a target capital structure that consists of 70%

Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel repor...

Q: Assume that the risk-free rate is 5% and the

Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?

Q: The probability distribution of a less risky expected return is more peaked

The probability distribution of a less risky expected return is more peaked than that of a riskier return. What shape would the probability distribution be for (a) Completely certain returns and (b...

Q: Stock A has an expected return of 7%, a standard deviation

Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of –0.3, and a beta coefficient of –0.5. Stock B has an expected return...

Q: Why do U.S. corporations build manufacturing plants abroad when

Why do U.S. corporations build manufacturing plants abroad when they can build them at home?

Q: Thomas Brothers is expected to pay a $0.50 per

Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of retur...

Q: Harrison Clothiers’ stock currently sells for $20.00 a share

Harrison Clothiers’ stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What sto...

Q: Fee Founders has perpetual preferred stock outstanding that sells for $60

Fee Founders has perpetual preferred stock outstanding that sells for $60 a share and pays a dividend of $5 at the end of each year. What is the required rate of return?

Q: What will be the nominal rate of return on a perpetual preferred

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140...

Q: Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend

Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is $100. a. What is the stock’s value? b. Suppose interest rates rise a...

Q: What is the present value of a security that will pay $

What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?

Q: Martell Mining Company’s ore reserves are being depleted, so its sales

Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company’s earnings and div...

Q: Is the following equation correct for finding the value of a constant

Is the following equation correct for finding the value of a constant growth stock? Explain.

Q: Gamma Medical’s stock trades at $90 a share. The company

Gamma Medical’s stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the c...

Q: Trivoli Industries plans to issue perpetual preferred stock with an $11

Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $97.00; but flotation costs will be 5% of the market price, so the net price wil...

Q: The Heuser Company’s currently outstanding bonds have a 10% coupon and

The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its m...

Q: Percy Motors has a target capital structure of 40% debt and

Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%. Percy’s...

Q: The Evanec Company’s next expected dividend, D1, is $3

The Evanec Company’s next expected dividend, D1, is $3.18; its growth rate is 6%; and its common stock now sells for $36.00. New stock (external equity) can be sold to net $32.40 per share. a. What is...

Q: Patton Paints Corporation has a target capital structure of 40% debt

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. It’s before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current...

Q: WACC The Patrick Company’s cost of common equity is 16%, its

WACC The Patrick Company’s cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate is 40%. The stock sells at book value. Using the following bala...

Q: Hook Industries’ capital structure consists solely of debt and common equity.

Hook Industries’ capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $2.00 dividend per share (D0 = $2.00). The stock’s pr...

Q: Your parents will retire in 18 years. They currently have $

Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they...

Q: If the United States imports more goods from abroad than it exports

If the United States imports more goods from abroad than it exports, foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign curren...

Q: British pounds sell for $2 (U.S.) per

British pounds sell for $2 (U.S.) per pound, what should dollars sell for in pounds per dollar?

Q: If you deposit money today in an account that pays 6

If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

Q: What is the present value of a $100 perpetuity if the

What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be?

Q: You borrow $85,000; the annual loan payments are

You borrow $85,000; the annual loan payments are $8,273.59 for 30 years. What interest rate are you being charged?

Q: If you bought a share of common stock, you would probably

If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gains yield be in...

Q: Two investors are evaluating GE’s stock for possible purchase. They agree

Two investors are evaluating GE’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock...

Q: If the euro depreciates against the U.S. dollar,

If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result?

Q: Mansfield Corporation had 2010 sales of $100 million. The balance

Mansfield Corporation had 2010 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: The dividend payout rate is 50 percent of earnings, a...

Q: Delsing Plumbing Company has beginning inventory of 14,000 units,

Delsing Plumbing Company has beginning inventory of 14,000 units, will sell 50,000 units for the month, and desires to reduce ending inventory to 40 percent of beginning inventory. How many units shou...

Q: How is a cash budget used to help manage current assets?

How is a cash budget used to help manage current assets?

Q: “The most appropriate financing pattern would be one in which asset

“The most appropriate financing pattern would be one in which asset buildup and length of financing terms is perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.

Q: By using long-term financing to finance part of temporary current

By using long-term financing to finance part of temporary current assts, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statemen...

Q: A firm that uses short-term financing methods for a portion

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

Q: What are three theories for describing the shape of the term structure

What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory. Liquidity premium theory, the market segmentation theory, and...

Q: Discuss the relative volatility of short- and long-term interest

Discuss the relative volatility of short- and long-term interest rates.

Q: What does the term structure of interest rates indicate?

What does the term structure of interest rates indicate?

Q: Logan Distributing Company of Atlanta sells fans and heaters to retail outlets

Logan Distributing Company of Atlanta sells fans and heaters to retail outlets through out the Southeast. Joe Logan, the president of the company, is thinking about changing the firm's credit policy t...

Q: Beth’s Society Clothiers, Inc., has collection centers across the country

Beth’s Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm’s checks will take longe...

Q: Neon Light Company of Kansas City ships lamps and lighting appliances throughout

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she...

Q: On December 31 of last year, Wolfson Corporation had in inventory

On December 31 of last year, Wolfson Corporation had in inventory 400 units of its product, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per unit...

Q: Postal Express has outlets throughout the world. It also keeps funds

Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 200,000 reals in Brazil worth 130,000 dollars. It drew...

Q: Sanders’ Prime Time Company has annual credit sales of $1,

Sanders’ Prime Time Company has annual credit sales of $1,800,000 and accounts receivable of $210,000. Compute the value of the average collection period.

Q: Oral Roberts Dental Supplies has annual sales of $5,625

Oral Roberts Dental Supplies has annual sales of $5,625,000. Eighty percent are on credit. The firm has $475,000 in accounts receivable. Compute the value of the average collection period.

Q: Eco-Friendly Products has annual credit sales of $900,

Eco-Friendly Products has annual credit sales of $900,000 and an average collection period of 30 days. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receiv...

Q: Barney’s Antique Shop has annual credit sales of $1,080

Barney’s Antique Shop has annual credit sales of $1,080,000 and an average collection period of 40 days. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts rece...

Q: In Problem 8, if accounts receivable change to $140,

In Problem 8, if accounts receivable change to $140,000, while credit sales are $1,440,000, should we assume the firm has a more or a less lenient credit policy? Hint: Recompute the average collection...

Q: Mervyn’s Fine Fashions has an average collection period of 40 days.

Mervyn’s Fine Fashions has an average collection period of 40 days. The accounts receivable balance is $80,000. What is the value of its credit sales?

Q: Route Canal Shipping Company has the following schedule for aging of accounts

Route Canal Shipping Company has the following schedule for aging of accounts receivable: a. Fill in column (4) for each month. b. If the firm had $1,440,000 in credit sales over the four-month perio...

Q: Midwest Tires has expected sales of 12,000 tires this year

Midwest Tires has expected sales of 12,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per tire. a. What is the economic ordering quantity? b. How many orders will...

Q: Fisk Corporation is trying to improve its inventory control system and has

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of $8 pe...

Q: At the end of January, Higgins Data Systems had an inventory

At the end of January, Higgins Data Systems had an inventory of 600 units, which cost $16 per unit to produce. During February the company produced 850 units at a cost of $19 per unit. If the firm sol...

Q: In the second year, Fisk Corporation finds that it can reduce

In the second year, Fisk Corporation finds that it can reduce ordering costs to $2 per order but that carrying costs will stay the same at $1.20. Also, volume remains at 75,000 units. a. Recompute a,...

Q: Diagnostic Supplies has expected sales of 135,000 units per year

Diagnostic Supplies has expected sales of 135,000 units per year, carrying costs of $3 per unit, and an ordering cost of $4 per order. a. What is the economic order quantity? b. What is the averag...

Q: Wisconsin Snowmobile Corp. is considering a switch to level production.

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $30,000, but inventory would increase...

Q: Johnson Electronics is considering extending trade credit to some customers previously considered

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new...

Q: Henderson Office Supply is considering a more liberal credit policy to increase

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 8 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales...

Q: Comiskey Fence Co. is evaluating the extension of credit to a

Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectib...

Q: Reconsider problem 19C. Assume the average collection period is 120 days

Reconsider problem 19C. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended? Data from Problem 19C: Comis...

Q: Global Services is considering a promotional campaign that will increase annual credit

Global Services is considering a promotional campaign that will increase annual credit sales by $400,000. The company will require investments in accounts receivable, inventory, and plant and equipmen...

Q: If inventory turnover had only been 4 times: a.

If inventory turnover had only been 4 times: a. What would be the new value for inventory investment? b. What would be the return on investment? You need to recompute the total investment and the to...

Q: Dome Metals has credit sales of $144,000 yearly with

Dome Metals has credit sales of $144,000 yearly with credit terms of net 30 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take t...

Q: At the end of January, Mineral Labs had an inventory of

At the end of January, Mineral Labs had an inventory of 725 units, which cost $10 per unit to produce. During February the company produced 650 units at a cost of $14 per unit. If the firm sold 1,000...

Q: If Dome reduces its bank loans, which cost 10 percent,

If Dome reduces its bank loans, which cost 10 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm (don’t forget the 2 percent)? Should it offer t...

Q: Assume that the new trade terms of 2/10, net

Assume that the new trade terms of 2/10, net 30 will increase sales by 15 percent because the discount makes the Dome’s price competitive. If Dome earns 20 percent on sales before discounts, should it...

Q: If Dome offered a 2 percent discount for payment in 10 days

If Dome offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $144,000 for yo...

Q: Orbital Communications has operating plants in over 100 countries. It also

Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 100,000 kronas in Norway worth $35,00...

Q: Why might a firm keep a safety stock? What effect is

Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

Q: Explain the similarities and differences of lockbox systems and regional collection offices

Explain the similarities and differences of lockbox systems and regional collection offices.

Q: Why are Treasury bills a favorite place for financial managers to invest

Why are Treasury bills a favorite place for financial managers to invest excess cash?

Q: Explain why the bad debt percentage or any other similar credit-

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

Q: What does the EOQ formula tell us? What assumption is made

What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

Q: In the management of cash and marketable securities, why should the

In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

Q: The Bradley Corporation produces a product with the following costs as of

The Bradley Corporation produces a product with the following costs as of July 1, 2011: Beginning inventory at these costs on July 1 was 3,000 units. From July 1 to December 1, 2011, Bradley produced...

Q: Why would a financial manager want to slow down disbursements?

Why would a financial manager want to slow down disbursements?

Q: Use The Wall Street Journal or some other financial publication to find

Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-1 on page 200. Which security would you choose for a s...

Q: What are three quantitative measures that can be applied to the collection

What are three quantitative measures that can be applied to the collection policy of the firm?

Q: What are the 5 Cs of credit that are sometimes used by

What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid?

Q: If a firm uses a just-in-time inventory system

If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?

Q: Midland Chemical Co. is negotiating a loan from Manhattan Bank and

Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8 ¼ percent with a 20 percent compensating bala...

Q: Compute the cost of not taking the following cash discounts.

Compute the cost of not taking the following cash discounts. a. 2/10, net 40. b. 2/15, net 30. c. 2/10, net 45. d 3/10, net 90.

Q: Delilah’s Haircuts can borrow from its bank at 13 percent to take

Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds?

Q: Your bank will lend you $4,000 for 45 days

Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest?

Q: Your bank will lend you $3,000 for 50 days

Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your effective rate of interest?

Q: Assume in Problem 14 that the Bradley Corporation used LIFO accounting instead

Assume in Problem 14 that the Bradley Corporation used LIFO accounting instead of FIFO; what would its gross profit be? What would be the value of ending inventory? Data from Problem 14: The Bradley...

Q: I. M. Boring borrows $5,000 for one

I. M. Boring borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?

Q: Ida Kline borrows $8,000 for 90 days and pays

Ida Kline borrows $8,000 for 90 days and pays $180 interest. What is the effective rate of interest if the loan is discounted?

Q: Mo and Chris’s Sporting Goods, Inc., borrows $14,

Mo and Chris’s Sporting Goods, Inc., borrows $14,500 for 20 days at 12 percent interest. What is the dollar cost of the loan?

Q: Sampson Orange Juice Company normally takes 20 days to pay for its

Sampson Orange Juice Company normally takes 20 days to pay for its average daily credit purchases of $6,000. Its average daily sales are $7,000, and it collects accounts in 28 days. a. What is its net...

Q: Maxim Air Filters, Inc., plans to borrow $300,

Maxim Air Filters, Inc., plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effect...

Q: Digital Access, Inc., needs $400,000 in funds

Digital Access, Inc., needs $400,000 in funds for a project. a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow? b. Given your answer to part a and a state...

Q: Carey Company is borrowing $200,000 for one year at

Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest? What would the...

Q: Capone Child Care Centers, Inc., plans to borrow $250

Capone Child Care Centers, Inc., plans to borrow $250,000 for one year at 10 percent from the Chicago Bank and Trust Company. There is a 20 percent compensating balance requirement. Capone keeps minim...

Q: The treasurer of Neiman Supermarkets is seeking a $30,000

The treasurer of Neiman Supermarkets is seeking a $30,000 loan for 180 days from Wrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percent compensating balance requireme...

Q: Tucker Drilling Corp. plans to borrow $200,000.

Tucker Drilling Corp. plans to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8½ percent (9 percent total) and requires a compensating...

Q: Sprint Shoes, Inc., had a beginning inventory of 9,

Sprint Shoes, Inc., had a beginning inventory of 9,000 units on January 1, 2010. The costs associated with the inventory were: During 2010, the firm produced 42,500 units with the following costs: S...

Q: Your company plans to borrow $5 million for 12 months,

Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest. You would like to know the effective rate of interest for the following types of...

Q: If you borrow $12,000 at $900 interest for

If you borrow $12,000 at $900 interest for one year, what is your effective interest rate for the following payment plans? a. Annual payment. b. Semiannual payments. c. Quarterly payments. d. Monthl...

Q: Vroom Motorcycle Company is borrowing $30,000 from First State

Vroom Motorcycle Company is borrowing $30,000 from First State Bank. The total interest is $9,000. The loan will be paid by making equal monthly payments for the next three years. What is the effectiv...

Q: Mr. Paul Promptly is a very cautious businessman. His supplier

Mr. Paul Promptly is a very cautious businessman. His supplier offers trade credit terms of 3/10, net 70. Mr. Promptly never takes the discount offered, but he pays his suppliers in 60 days rather tha...

Q: The Ogden Timber Company buys from its suppliers on terms of 2

The Ogden Timber Company buys from its suppliers on terms of 2/10, net 35. Ogden has not been utilizing the discount offered and has been taking 50 days to pay its bills. The suppliers seem to accept...

Q: In problem 19, if the compensating balance requirement were 10 percent

In problem 19, if the compensating balance requirement were 10 percent instead of 25 percent, would you change your answer? Do the appropriate calculation.

Q: Bosworth Petroleum needs $500,000 to take a cash discount

Bosworth Petroleum needs $500,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $8,100. a. What is the effective rate on the bank loan? b....

Q: Columbus Shipping Company is negotiating with two banks for a $100,

Columbus Shipping Company is negotiating with two banks for a $100,000 loan. Bankcorp of Ohio requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterl...

Q: Texas Oil Supplies sells to the 12 accounts listed below.

Texas Oil Supplies sells to the 12 accounts listed below. J&J Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balanc...

Q: The treasurer for Thornton Pipe and Steel Company wishes to use financial

The treasurer for Thornton Pipe and Steel Company wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $105,000 per contract. It is Jul...

Q: Victoria’s Apparel has forecast credit sales for the fourth quarter of the

Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as: Experience has shown that 20 percent of sales receipts are collected in the month of sale, 70 per...

Q: Under what circumstances would it be advisable to borrow money to take

Under what circumstances would it be advisable to borrow money to take a cash discount?

Q: What advantages do compensating balances have for banks? Are the advantages

What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?

Q: A borrower is often confronted with a stated interest rate and an

A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should the financial manager recognize as the true cost of borrowing?

Q: What are the advantages of commercial paper in comparison with bank borrowing

What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?

Q: Briefly discuss three types of lender control used in inventory financing.

Briefly discuss three types of lender control used in inventory financing.

Q: What is meant by hedging in the financial futures market to offset

What is meant by hedging in the financial futures market to offset interest rate risks?

Q: Discuss the relative use of credit between large and small firms.

Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?

Q: How have new banking laws influenced competition?

How have new banking laws influenced competition?

Q: What is the prime interest rate? How does the average bank

What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

Q: What does LIBOR mean? Is LIBOR normally higher or lower than

What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?

Q: Simpson Glove Company has made the following sales projections for the next

Simpson Glove Company has made the following sales projections for the next six months. All sales are credit sales. Sales in January and February were $41,000 and $39,000 respectively. Experience has...

Q: Commercial paper may show up on corporate balance sheets as either a

Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.

Q: What is the difference between pledging accounts receivable and factoring accounts receivable

What is the difference between pledging accounts receivable and factoring accounts receivable?

Q: What is an asset-backed public offering?

What is an asset-backed public offering?

Q: Mr. Flint retired as president of Color Title Company but is

Mr. Flint retired as president of Color Title Company but is currently on a consulting contract for $45,000 per year for the next 10 years. a. If Mr. Flint’s opportunity cost (potential return) is 10...

Q: Your grandfather has offered you a choice of one of the three

Your grandfather has offered you a choice of one of the three following alternatives: $5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11 percen...

Q: On January 1, 2008, Mr. Dow bought 100 shares

On January 1, 2008, Mr. Dow bought 100 shares of stock at $12 per share. On December 31, 2010, he sold the stock for $18 per share. What is his annual rate of return? Interpolate to find the answer.

Q: C. D. Rom has just given an insurance company $

C. D. Rom has just given an insurance company $30,000. In return, he will receive an annuity of $3,200 for 20 years. At what rate of return must the insurance company invest this $30,000 in order to m...

Q: You wish to retire in 20 years, at which time you

You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement. During the period before retirement you c...

Q: Rusty Steele will receive the following payments at the end of the

Rusty Steele will receive the following payments at the end of the next three years: $4,000, $7,000, and $9,000. Then from the end of the fourth year through the end of the tenth year, he will receive...

Q: Kelly Greene has a contract in which she will receive the following

Kelly Greene has a contract in which she will receive the following payments for the next five years: $3,000, $4,000, $5,000, $6,000, and $7,000. She will then receive an annuity of $9,000 a year from...

Q: Watt's Lighting Stores made the following sales projection for the next six

Watt's Lighting Stores made the following sales projection for the next six months. All sales are credit sales. Sales in January and February were $33,000 and $32,000, respectively. Experience has sh...

Q: Kay Mart has purchased an annuity to begin payment at the end

Kay Mart has purchased an annuity to begin payment at the end of 2113 (the date of the first payment). Assume it is now the beginning of 2011. The annuity is for $12,000 per year and is designed to la...

Q: If your aunt borrows $50,000 from the bank at

If your aunt borrows $50,000 from the bank at 10 percent interest over the eight-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required ra...

Q: Jim Thorpe borrows $70,000 toward the purchase of a

Jim Thorpe borrows $70,000 toward the purchase of a home at 12 percent interest. His mortgage is for 30 years. a. How much will his annual payments be? (Although home payments are usually on a monthly...

Q: You are chairperson of the investment fund for the Continental Soccer League

You are chairperson of the investment fund for the Continental Soccer League. You are asked to set up a fund of semiannual payments to be compounded semiannually to accumulate a sum of $200,000 after...

Q: Your younger sister, Brittany, will start college in five years

Your younger sister, Brittany, will start college in five years. She has just informed your parents that she wants to go to Eastern State U., which will cost $30,000 per year for four years (cost assu...

Q: Brittany (from problem 46) is now 18 years old (

Brittany (from problem 46) is now 18 years old (five years have passed), and she wants to get married instead of going to college. Your parents have accumulated the necessary funds for her education....

Q: You invest $2,500 a year for three years at

You invest $2,500 a year for three years at 8 percent. a. What is the value of your investment after one year? Multiply $2,500 × 1.08. b. What is the value of your investment after two years? Multip...

Q: What is the present value of: a. $8

What is the present value of: a. $8,000 in 10 years at 6 percent? b. $16,000 in 5 years at 12 percent? c. $25,000 in 15 years at 8 percent?

Q: a. What is the present value of $100,

a. What is the present value of $100,000 to be received after 40 years with an 18 percent discount rate? b. Would the present value of the funds in part a be enough to buy a $125 concert ticket?

Q: You will receive $4,000 three years from now.

You will receive $4,000 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $4,000 × .909 (one year’s discount rate at 10 percen...

Q: The difficult part of solving a problem of this nature is to

The difficult part of solving a problem of this nature is to know what to do with the information contained within a story problem. Therefore, this problem will be easier to complete if you rely on Ch...

Q: Ultravision, Inc., anticipates sales of $240,000 from

Ultravision, Inc., anticipates sales of $240,000 from January through April. Materials will represent 50 percent of sales and because of level production, material purchases will be equal for each mon...

Q: If you invest $12,000 today, how much will

If you invest $12,000 today, how much will you have: a. In 6 years at 7 percent? b. In 15 years at 12 percent? c. In 25 years at 10 percent? d. In 25 years at 10 percent (compounded semiannually)?...

Q: Your aunt offers you a choice of $20,000 in

Your aunt offers you a choice of $20,000 in 50 years or $45 today. If money is discounted at 13 percent, which should you choose?

Q: Your uncle offers you a choice of $100,000 in

Your uncle offers you a choice of $100,000 in 10 years or $45,000 today. If money is discounted at 8 percent, which should you choose?

Q: In Problem 7, if you had to wait until 12 years

In Problem 7, if you had to wait until 12 years to get the $100,000, would your answer change? All other factors remain the same. Data from Problem 7: Your uncle offers you a choice of $100,000 in 10...

Q: You are going to receive $200,000 in 50 years

You are going to receive $200,000 in 50 years. What is the difference in present value between using a discount rate of 15 percent versus 5 percent?

Q: How much would you have to invest today to receive:

How much would you have to invest today to receive: a. $12,000 in 6 years at 12 percent? b. $15,000 in 15 years at 8 percent? c. $5,000 each year for 10 years at 8 percent? d. $40,000 each year for...

Q: If you invest $8,000 per period for the following

If you invest $8,000 per period for the following number of periods, how much would you have? a. 7 years at 9 percent. b. 40 years at 11 percent.

Q: You invest a single amount of $12,000 for 5

You invest a single amount of $12,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?

Q: Mrs. Crawford will receive $6,500 a year for

Mrs. Crawford will receive $6,500 a year for the next 14 years from her trust. If a 8 percent interest rate is applied, what is the current value of the future payments?

Q: John Longwaite will receive $100,000 in 50 years.

John Longwaite will receive $100,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?...

Q: The Denver Corporation has forecast the following sales for the first seven

The Denver Corporation has forecast the following sales for the first seven months of the year: Monthly material purchases are set equal to 30 percent of forecasted sales for the next month. Of the t...

Q: Sherwin Williams will receive $18,000 a year for the

Sherwin Williams will receive $18,000 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 10 percent is applied, should he be willing to sell out his future rig...

Q: General Mills will receive $27,500 per year for the

General Mills will receive $27,500 per year for the next 10 years as a payment for a weapon he invented. If a 12 percent rate is applied, should he be willing to sell out his future rights now for $16...

Q: The Western Sweepstakes has just informed you that you have won $

The Western Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at the rate of $50,000 a year for the next 20 years. With a discount rate of 12 percent, what i...

Q: Rita Gonzales won the $60 million lottery. She is to

Rita Gonzales won the $60 million lottery. She is to receive $1 million a year for the next 50 years plus an additional lump sum payment of $10 million after 50 years. The discount rate is 10 percent....

Q: Bruce Sutter invests $2,000 in a mint condition Nolan

Bruce Sutter invests $2,000 in a mint condition Nolan Ryan baseball card. He expects the card to increase in value 20 percent a year for the next five years. After that, he anticipates a 15 percent an...

Q: Christy Reed has been depositing $1,500 in her savings

Christy Reed has been depositing $1,500 in her savings account every December since 2001. Her account earns 6 percent compounded annually. How much will she have in December 2010? (Assume that a depos...

Q: At a growth (interest) rate of 8 percent annually,

At a growth (interest) rate of 8 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.

Q: If you owe $30,000 payable at the end of

If you owe $30,000 payable at the end of five years, what amount should your creditor accept in payment immediately if she could earn 11 percent on her money?

Q: Barney Smith invests in a stock that will pay dividends of $

Barney Smith invests in a stock that will pay dividends of $3.00 at the end of the first year; $3.30 at the end of the second year; and $3.60 at the end of the third year. Also, he believes that at th...

Q: Cousin Bertha invested $100,000 10 years ago at 12

Cousin Bertha invested $100,000 10 years ago at 12 percent, compounded quarterly. How much has she accumulated?

Q: The Boswell Corporation forecasts its sales in units for the next four

The Boswell Corporation forecasts its sales in units for the next four months as follows: Boswell maintains an ending inventory for each month in the amount of one and one-half times the expected sal...

Q: Determine the amount of money in a savings account at the end

Determine the amount of money in a savings account at the end of five years, given an initial deposit of $3,000 and a 8 percent annual interest rate when interest is compounded (a) annually, (b) semia...

Q: As stated in the chapter, annuity payments are assumed to come

As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginn...

Q: Related to the discussion in problem 27, what is the present

Related to the discussion in problem 27, what is the present value of a 10-year annuity of $3,000 per period in which payments come at the beginning of each period? The interest rate is 12 percent.

Q: You need $23,956 at the end of nine years

You need $23,956 at the end of nine years, and your only investment outlet is an 7 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial...

Q: Beverly Hills started a paper route on January 1, 2004.

Beverly Hills started a paper route on January 1, 2004. Every three months, she deposits $300 in her bank account, which earns 8 percent annually but is compounded quarterly. On December 31, 2007, she...

Q: Franklin Templeton has just invested $8,760 for her son

Franklin Templeton has just invested $8,760 for her son (age one). This money will be used for his son’s education 17 years from now. He calculates that he will need $60,000 by the time the boy goes t...

Q: Alex Bell has just retired from the telephone company. His total

Alex Bell has just retired from the telephone company. His total pension funds have an accumulated value of $200,000, and his life expectancy is 16 more years. His pension fund manager assumes he can...

Q: Dr. Oats, a nutrition professor, invests $80,

Dr. Oats, a nutrition professor, invests $80,000 in a piece of land that is expected to increase in value by 14 percent per year for the next five years. She will then take the proceeds and provide he...

Q: If you borrow $9,725 and are required to pay

If you borrow $9,725 and are required to pay back the loan in five equal annual installments of $2,500, what is the interest rate associated with the loan?

Q: Tom Busby owes $20,000 now. A lender will

Tom Busby owes $20,000 now. A lender will carry the debt for four more years at 8 percent interest. That is, in this particular case, the amount owed will go up by 8 percent per year for four years. T...

Q: The Volt Battery Company has forecast its sales in units as follows

The Volt Battery Company has forecast its sales in units as follows: Volt Battery always keeps an ending inventory equal to 120 percent of the next month's expected sales. The ending inventory for De...

Q: Why does money have a time value?

Why does money have a time value?

Q: List five different financial applications of the time value of money.

List five different financial applications of the time value of money.

Q: How is the future value (Appendix A) related to the

How is the future value (Appendix A) related to the present value of a single sum (Appendix B)?

Q: How is the present value of a single sum (Appendix B

How is the present value of a single sum (Appendix B) related to the present value of an annuity (Appendix D)?

Q: Does inflation have anything to do with making a dollar today worth

Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow?

Q: Adjust the annual formula for a future value of a single amount

Adjust the annual formula for a future value of a single amount at 12 percent for 10 years to a semiannual compounding formula. What are the interest factors (FVIF) before and after? Why are they diff...

Q: If, as an investor, you had a choice of daily

If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?

Q: What is a deferred annuity?

What is a deferred annuity?

Q: Lansing Auto Parts, Inc., has projected sales of $25

Lansing Auto Parts, Inc., has projected sales of $25,000 in October, $35,000 in November, and $30,000 in December. Of the company's sales, 20 percent are paid for by cash and 80 percent are sold on cr...

Q: Harry's Carryout Stores has eight locations. The firm wishes to expand

Harry's Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an...

Q: Archer Electronics Company's actual sales and purchases for April and May are

Archer Electronics Company's actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. The company makes 10 percent of its sale...

Q: Owen's Electronics has 9 operating plants in seven southwestern states. Sales

Owen's Electronics has 9 operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous y...

Q: The Manning Company has financial statements as shown below, which are

The Manning Company has financial statements as shown below, which are representative of the company's historical average. The firm is expecting a 20 percent increase in sales next year, and managemen...

Q: Conn Man's Shops, Inc., a national clothing chain, had

Conn Man's Shops, Inc., a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 8 percent and a dividend payout ratio of 25 percent. The balance...

Q: Galehouse Gas Stations Inc., expects sales to increase from $1

Galehouse Gas Stations Inc., expects sales to increase from $1,500,000 to $1,700,000 next year. Mr. Galehouse believes that net assets (Assets Liabilities) will represent 70% of sales. His firm has a...

Q: Philip Morris is excited because sales for his clothing company are expected

Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets Liabilities) will remain at 50 percen...

Q: In Problem 1 if there had been no increase in sales and

In Problem 1 if there had been no increase in sales and all other facts were the same, what would Philip’s ending cash balance be? What lesson do the examples in Problems 1 and 2 illustrate?

Q: Discuss the advantage and disadvantage of level production schedules in firms with

Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales.

Q: What are the basic benefits and purposes of developing pro forma statements

What are the basic benefits and purposes of developing pro forma statements and a cash budget?

Q: With inflation, what are the implications of using LIFO and FIFO

With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?

Q: Rapid corporate growth in sales and profits can cause financing problems.

Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement.

Q: Explain the relationship between inventory turnover and purchasing needs.

Explain the relationship between inventory turnover and purchasing needs.

Q: What conditions would help make a percent-of-sales forecast

What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

Q: Explain how the collections and purchases schedules are related to the borrowing

Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.

Q: Shock Electronics sells portable heaters for $25 per unit, and

Shock Electronics sells portable heaters for $25 per unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed costs are $96,000. a. Compute the break-even point in units...

Q: The Alliance Corp. expects to sell the following number of units

The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated....

Q: The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez's autograph stamped on

The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez's autograph stamped on them. Each bat sells for $13 and has a variable cost of $8. There are $20,000 in fixed costs involved in...

Q: Therapeutic Systems sells its products for $8 per unit. It

Therapeutic Systems sells its products for $8 per unit. It has the following costs: Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per uni...

Q: Draw two break-even graphs—one for a conservative firm

Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have ide...

Q: Eaton Tool Company has fixed costs of $200,000,

Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit. a. Compute the break-even point. b. Ms. Eaton comes up with a new plan to cut fixed cos...

Q: Jay Linoleum Company has fixed costs of $70,000.

Jay Linoleum Company has fixed costs of $70,000. Its product currently sells for $4 per unit and has variable costs per unit of $2.60. Mr. Thomas, the head of manufacturing, proposes to buy new equipm...

Q: Calloway Cab Company determines its break-even strictly on the basis

Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $400,000, but 20 percent of this value is represented by dep...

Q: Air Purifier, Inc., computes its break-even point strictly

Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,400,000, but 15 percent of this value is represented b...

Q: Boise Timber co. computes its break-even point strictly on

Boise Timber co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $6,000,000, but 25 percent of this value is represented by d...

Q: The Sterling Tire Company's income statement for 2010 is as follows:

The Sterling Tire Company's income statement for 2010 is as follows: Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of...

Q: The Harding Company manufactures skates. The company's income statement for 2010

The Harding Company manufactures skates. The company's income statement for 2010 is as follows: Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of finan...

Q: Bronco Truck Parts expects to sell the following number of units at

Bronco Truck Parts expects to sell the following number of units at the prices indicated under three different scenarios in the economy. The probability of each outcome is indicated. What is the expec...

Q: Mo & Chris's Delicious Burgers, Inc., sells food to Military

Mo & Chris's Delicious Burgers, Inc., sells food to Military Cafeterias for $15 a box. The fixed costs of this operation are $80,000, while the variable cost per box is $10. a. What is the break-even...

Q: United Snack Company sells 50-pound bags of peanuts to university

United Snack Company sells 50-pound bags of peanuts to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of peanuts are $.10 per pound. a. W...

Q: International Data Systems information on revenue and costs is only relevant up

International Data Systems information on revenue and costs is only relevant up to a sales volume of 100,000 units. After 100,000 units, the market becomes saturated and the price per unit falls from...

Q: U.S. Steal has the following income statement data:

U.S. Steal has the following income statement data: a. Compute DOL based on the formula below (see page 128 for an example): b. Confirm that your answer to part a is correct by recomputing DOL using...

Q: Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket

Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below. a. Compute earnings per share if ea...

Q: Compute the stock price for Cain if it sells at 18 times

Compute the stock price for Cain if it sells at 18 times earnings per share and EBIT is $40,000.

Q: Sterling Optical and Royal Optical both make glass frames and each is

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $120,000. The separate capital structures for Sterling and Royal are shown...

Q: Firms in Japan often employ both high operating and financial leverage because

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships. Assume the Mitaka Company has a sales volume of...

Q: Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: a. If you combine Sinclair's ca...

Q: The Norman Automatic Mailer Machine Company is planning to expand production because

The Norman Automatic Mailer Machine Company is planning to expand production because of the increased volume of mailouts. The increased mailout capacity will cost $2,000,000. The expansion can be fina...

Q: Cyber Security Systems had sales of 3,000 units at $

Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketing manager projects a 20 percent increase in unit volume sales this year with a 10 percent price increase. Returne...

Q: Dickinson Company has $12 million in assets. Currently half of

Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 percent and half with common stock having a par value of $8. Ms. Smith, vice-presiden...

Q: Edsel Research Labs has $24 million in assets. Currently half

Edsel Research Labs has $24 million in assets. Currently half of these assets are financed with long-term debt at 8 percent and half with common stock having a par value of $10. Ms. Edsel, the vice-pr...

Q: The Lopez-Portillo Company has $10 million in assets,

The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 15 percent and the par value of the stock is...

Q: Mr. Gold is in the widget business. He currently sells

Mr. Gold is in the widget business. He currently sells 1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-...

Q: Delsing Canning Company is considering an expansion of its facilities. Its

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: The company is currently financed with 50 percent debt and 50 percent equity (common...

Q: When you are considering two different financing plans, does being at

When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you are indifferent as to which plan is selected?

Q: What factors would cause a difference in the use of financial leverage

What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?

Q: Explain how the break-even point and operating leverage are affected

Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).

Q: Discuss the limitations of financial leverage.

Discuss the limitations of financial leverage.

Q: Explain why operating leverage decreases as a company increases sales and shifts

Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.

Q: Dodge Ball Bearings had sales of 10,000 units at $

Dodge Ball Bearings had sales of 10,000 units at $20 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 5 percent price decrease (due to a p...

Q: Discuss the various uses for break-even analysis.

Discuss the various uses for break-even analysis.

Q: What role does depreciation play in break-even analysis based on

What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?

Q: What does risk taking have to do with the use of operating

What does risk taking have to do with the use of operating and financial leverage?

Q: How does the interest rate on new debt influence the use of

How does the interest rate on new debt influence the use of financial leverage?

Q: Explain how combined leverage brings together operating income and earnings per share

Explain how combined leverage brings together operating income and earnings per share.

Q: Sharpe Knife Company expects sales next year to be $1,

Sharpe Knife Company expects sales next year to be $1,500,000 if the economy is strong, $800,000 if the economy is steady, and $500,000 if the economy is weak. Mr. Sharpe believes there is a 20 percen...

Q: Axle Supply Co., expects sales next year to be $300

Axle Supply Co., expects sales next year to be $300,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level. The company has a steady profit margin of 10 percen...

Q: Antivirus, Inc., expects its sales next year to be $

Antivirus, Inc., expects its sales next year to be $2,000,000. Inventory and accounts receivable will increase $430,000 to accommodate this sales level. The company has a steady profit margin of 12 pe...

Q: Antonio Banderos & Scarves makes headwear that is very popular in the

Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as: If seasonal production is used, it is assumed that inventory will directly...

Q: Bambino Sporting Goods makes baseball gloves that are very popular in the

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: If seasonal production is used, it is assumed that inv...

Q: Sales for Western Boot Stores are expected to be 40,000

Sales for Western Boot Stores are expected to be 40,000 units for October. The company likes to maintain 15 percent of unit sales for each month in ending inventory (i.e., the end of October). Beginni...

Q: Boatler Used Cadillac Co. requires $800,000 in financing

Boatler Used Cadillac Co. requires $800,000 in financing over the next two years. The firm can borrow the funds for two years at 9 percent interest per year. Mr. Boatler decides to do forecasting and...

Q: Biochemical Corp. requires $500,000 in financing over the

Biochemical Corp. requires $500,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predi...

Q: Stern Educational TV, Inc., has decided to buy a new

Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $200,000. The company can borrow $200,000 for three years at 12 percent annual in...

Q: Assume that Hogan Surgical Instruments Co. has $2,000

Assume that Hogan Surgical Instruments Co. has $2,000,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high liquidity plan, the return...

Q: Assume that Atlas Sporting Goods, Inc., has $800,

Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will...

Q: Winfrey Diet Food Corp. has $4,500,000

Winfrey Diet Food Corp. has $4,500,000 in assets. Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $960,000. The tax rate is 40 percent. If long-...

Q: In Problem 12, assume the term structure of interest rates becomes

In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 4 percentage points lower than short-term rates. If all other...

Q: Collins Systems, Inc., is trying to develop an asset-

Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in fixed asse...

Q: Lear, Inc., has $800,000 in current assets

Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 invested in fixed assets. a. Lear wishes to finance all fixed...

Q: Using the expectations hypothesis theory for the term structure of interest rates

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following dat...

Q: Vitale Hair Spray had sales of 8,000 units in March

Vitale Hair Spray had sales of 8,000 units in March. A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning inv...

Q: Using the expectations hypothesis theory for the term structure of interest rates

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following dat...

Q: Carmen’s Beauty Salon has estimated monthly financing requirements for the next six

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: Short-term financing will be utilized for the next six months. Projected annua...

Q: In Problem 18, what long-term interest rate would represent

In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? Hint: Divide the interest payments in...

Q: Eastern Auto Parts, Inc. has 20 percent of its sales

Eastern Auto Parts, Inc. has 20 percent of its sales paid for in cash and 80 percent on credit. All credit accounts are collected in the following month. Assume the following sales: January $60,000 F...

Q: Bombs Away Video Games Corporation has forecasted the following monthly sales:

Bombs Away Video Games Corporation has forecasted the following monthly sales: Bombs Away Video Games sells the popular Strafe and Capture video game. Its sells for $5 per unit and costs $2 per unit...

Q: Esquire Products, Inc., expects the following monthly sales:

Esquire Products, Inc., expects the following monthly sales: Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month...

Q: Austin Electronics expects sales next year to be $900,000

Austin Electronics expects sales next year to be $900,000 if the economy is strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The firm believes there is a 15 percent prob...

Q: Since the mid-1960s, corporate liquidity has been declining.

Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?

Q: Explain how rapidly expanding sales can drain the cash resources of a

Explain how rapidly expanding sales can drain the cash resources of a firm.

Q: What is the significance to working capital management of matching sales and

What is the significance to working capital management of matching sales and production?

Q: Ryan Boot Company (review of Chapters 2 through 5) (

Ryan Boot Company (review of Chapters 2 through 5) (multiple LO’s from Chapters 2 through 5) *Fixed costs include (a) Lease expense of $200,000 and (b) Depreciation of $500,000. No...

Q: Do you think that a country’s government should assist private business in

Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?

Q: Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm

Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm and gavethe Swiss client a choice of paying either $10,000 or SF15,000 in three months. a. In the example, Baltimore Machinery...

Q: Omni Advisors, an international pension fund manager, plans to sell

Omni Advisors, an international pension fund manager, plans to sell equitiesdenominated in Swiss francs (CHF) and purchase an equivalent amount of equities denominated in South African rands (ZAR). O...

Q: Researchers found that it is very difficult to forecast future exchange rates

Researchers found that it is very difficult to forecast future exchange rates moreaccurately than the forward exchange rate or the current spot exchange rate. Howwould you interpret this finding?

Q: Define country risk. How is it different from political risk?

Define country risk. How is it different from political risk?

Q: What are the advantages and disadvantages of FDI as compared to a

What are the advantages and disadvantages of FDI as compared to a licensing agreement with a foreign partner?

Q: What operational and financial measures can a MNC take to minimize the

What operational and financial measures can a MNC take to minimize the political risk associated with a foreign investment project?

Q: What factors would you consider in evaluating the political risk associated with

What factors would you consider in evaluating the political risk associated with making FDI in a foreign country?

Q: Explain why and how a firm’s cost of capital may decrease when

Explain why and how a firm’s cost of capital may decrease when the firm’s stock is cross-listed on foreign stock exchanges.

Q: Suppose you are a financial adviser and your client, who is

Suppose you are a financial adviser and your client, who is currently investing only inthe U.S. stock market, is considering diversifying into the U.K. stock market. At themoment, there are neither pa...

Q: Examine the following summary of the U.S. balance of

Examine the following summary of the U.S. balance of payments for 2000(in $ billion) and fill in the blank entries.

Q: The Glover Scholastic Aid Foundation has received a €20 million global

The Glover Scholastic Aid Foundation has received a €20 million global governmentbond portfolio from a Greek donor. This bond portfolio will be held ineuros and managed separately fro...

Q: Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industryfor 500 million yen payable in one year. The current spot rate is ¥124/$ and theone-year forward rate is 110/$. The annual...

Q: Suppose you are a euro-based investor who just sold Microsoft

Suppose you are a euro-based investor who just sold Microsoft shares that you hadbought six months ago. You had invested 10,000 euros to buy Microsoft sharesfor $120 per share; the exchange rate was $...

Q: Discuss foreign equity ownership restrictions. Why do you think countries impose

Discuss foreign equity ownership restrictions. Why do you think countries impose these restrictions?

Q: Using the American term quotes from Exhibit 5.4,calculate

Using the American term quotes from Exhibit 5.4,calculate a cross-rate matrixfor the euro, Swiss franc, Japanese yen, and British pound so that the resulting triangular matrix is similar to the portio...

Q: What is a mortgage backed security?

What is a mortgage backed security?

Q: As an investor, what factors would you consider before investing in

As an investor, what factors would you consider before investing in the emergingstock market of a developing country?

Q: The Docket Company of Asheville, NC, USA, is considering

The Docket Company of Asheville, NC, USA, is considering establishing anaffiliate operation in the city of Wellington, on the south island ofNew Zealand.It is undecided whether to establish the affili...

Q: Evaluate the usefulness of relative PPP in predicting movements in foreignexchange rates

Evaluate the usefulness of relative PPP in predicting movements in foreignexchange rates on: a. Short-term basis (for example, three months). b. Long-term basis (for example, six years).

Q: In problem 2, suppose that Mr. Silber sold SF4,

In problem 2, suppose that Mr. Silber sold SF4,600, his principal investmentamount, forward at the forward exchange rate of SF1.62 per dollar. How wouldthis affect the dollar rate of return on this Sw...

Q: At the start of 1996, the annual interest rate was 6

At the start of 1996, the annual interest rate was 6 percent in the United Statesand 2.8 percent in Japan. The exchange rate was 95 yen per dollar at the time.Mr. Jorus, who is the manager of a Bermud...

Q: Suppose you are interested in investing in the stock markets of seven

Suppose you are interested in investing in the stock markets of seven countries—i.e., Australia, Canada, Germany, Japan, Switzerland, the United Kingdom,and the United Statesâ&...

Q: The Cadbury Code of Best Practice,adopted in the United Kingdom

The Cadbury Code of Best Practice,adopted in the United Kingdom, led to asuccessful reform of corporate governance in the country. Explain the key requirementsof the code and discuss how it contribute...

Q: Explain the pricing spillover effect.

Explain the pricing spillover effect.

Q: The HFS Trustees have solicited input from three consultants concerning the risksand

The HFS Trustees have solicited input from three consultants concerning the risksand rewards of an allocation to international equities. Two of them strongly favorsuch action, while the third consulta...

Q: Japan Life Insurance Company invested $10,000,000 in

Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 when the exchange rate was 80 yen per dollar. The company liquidated the investment one year later for $10,650...

Q: A foreign exchange trader with a U.S. bank took

A foreign exchange trader with a U.S. bank took a short position of £5,000,000when the $/£ exchange rate was 1.55. Subsequently, the exchange rate has changedto 1.61. Is this movement in the exchange...

Q: Suppose we obtain the following data in dollar terms:

Suppose we obtain the following data in dollar terms: The correlation coefficient between the two markets is 0.58. Suppose that you invest equally, that is, 50 percent in each of the two markets. De...

Q: Explain official reserve assets and its major components. Answer

Explain official reserve assets and its major components.

Q: The United States has experienced continuous current account deficits since theearly 1980s

The United States has experienced continuous current account deficits since theearly 1980s. What do you think are the main causes for the deficits? What wouldbe the consequences of continuous U.S. cur...

Q: Rebecca Taylor, an international equity portfolio manager, recognizes that anoptimal

Rebecca Taylor, an international equity portfolio manager, recognizes that anoptimal country allocation strategy combined with an optimal currency strategyshould produce optimal portfolio performance....

Q: Mr. James K. Silber, an avid international investor,

Mr. James K. Silber, an avid international investor, just sold a share of Nestlé,a Swiss firm, for SF5,080. The share was bought for SF4,600 a year ago. Theexchange rate is SF1.60 per U.S. dollar now...

Q: Why do investors invest the lion’s share of their funds in domestic

Why do investors invest the lion’s share of their funds in domestic securities?

Q: Consider a U.S.-based company that exports goods to

Consider a U.S.-based company that exports goods to Switzerland. The U.S. Companyexpects to receive payment on a shipment of goods in three months. Becausethe payment will be in Swiss francs, the U.S....

Q: The Eastern Trading Company of Singapore presently follows a decentralized systemof cash

The Eastern Trading Company of Singapore presently follows a decentralized systemof cash management where it and its affiliates each maintain their own transactionand precautionary cash balances. East...

Q: Compare and contrast the various types of secondary market trading structures.

Compare and contrast the various types of secondary market trading structures.

Q: What factors are responsible for the recent surge in international portfolio investment

What factors are responsible for the recent surge in international portfolio investment (IPI)?

Q: Define and discuss indirect world systematic risk.

Define and discuss indirect world systematic risk.

Q: Using Exhibit 5.4, calculate the one-, three-,

Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium ordiscount for the Canadian dollar versus the U.S. dollar using American term quotations.For simplicity, assume each month...

Q: Discuss the twin objectives of taxation. Be sure to define the

Discuss the twin objectives of taxation. Be sure to define the key words.

Q: AffiliateA sells 5,000 units to Affiliate B per year.

AffiliateA sells 5,000 units to Affiliate B per year. The marginal income tax ratefor Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is40 percent. The transfer price per un...

Q: American Machine Tools is a mid-western manufacturer of tool-

American Machine Tools is a mid-western manufacturer of tool-and-die-making equipment.The company has had an inquiry from a representative of the Moldovan governmentabout the terms of sale for a $5,00...

Q: Sundance Sporting Goods, Inc., is a U.S.

Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sportinggoods—principally golf, tennis, and other racquet equipment, and also lawn sports,such as croquet and ba...

Q: Explain the concept of the world beta of a security.

Explain the concept of the world beta of a security.

Q: Assume today’s settlement price on a CME EUR futures contract is $

Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR.You have a short position in one contract. Your performance bond account currentlyhas a balance of $1,700. The next three d...

Q: Explain how exchange rate fluctuations affect the return from a foreign market

Explain how exchange rate fluctuations affect the return from a foreign market, measured in dollar terms. Discuss the empirical evidence for the effect of exchange rate uncertainty on the risk of fore...

Q: Discuss the advantages and disadvantages of closed-end country funds (

Discuss the advantages and disadvantages of closed-end country funds (CECFs) relative to American depository receipts (ADRs) as a means of international diversification.

Q: In contrast to the United States, Japan has realized continuous current

In contrast to the United States, Japan has realized continuous current account surpluses.What could be the main causes for these surpluses? Is it desirable to havecontinuous current account surpluses...

Q: Security returns are found to be less correlated across countries than within

Security returns are found to be less correlated across countries than within a country. Why can this be?

Q: Explain the concept of the Sharpe performance measure. Answer

Explain the concept of the Sharpe performance measure.

Q: San Pico is a rapidly growing Latin American developing country. The

San Pico is a rapidly growing Latin American developing country. The country isblessed with miles of scenic beaches that have attracted tourists by the thousands inrecent years to new resort hotels fi...

Q: A speculator is considering the purchase of five three-month Japanese

A speculator is considering the purchase of five three-month Japanese yen call optionswith a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen.The spot price is 95.28 cents...

Q: Would exchange rate changes always increase the risk of foreign investment?

Would exchange rate changes always increase the risk of foreign investment?Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.

Q: What are the various means the taxing authority of a country might

What are the various means the taxing authority of a country might use to determine if a transfer price is reasonable?

Q: Evaluate a home country’s multinational corporations as a tool for international diversification

Evaluate a home country’s multinational corporations as a tool for international diversification.

Q: Briefly discuss the cause and the solution(s) to the

Briefly discuss the cause and the solution(s) to the international bank crisisinvolving less-developed countries.

Q: Assume that FASB 8 is still in effect instead of FASB 52

Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balancesheet for Centralia Corporation and its affiliates after a depreciation of the euro from€1.1000/$1.00 to €1.17...

Q: Discuss any benefits you can think of for a company to

Discuss any benefits you can think of for a company to (a) cross-list its equityshares on more than one national exchange, and (b) to source new equity capitalfrom foreign investors as well as domes...

Q: Why do you think closed-end country funds often trade at

Why do you think closed-end country funds often trade at a premium or discount?

Q: Why might it be easier for an investor desiring to diversify his

Why might it be easier for an investor desiring to diversify his portfolio internationallyto buy depository receipts rather than the actual shares of the company?

Q: Why do you think the empirical studies about factors affecting equity returns

Why do you think the empirical studies about factors affecting equity returns basicallyshowed that domestic factors were more important than international factors,and, secondly, that industrial member...

Q: Sigma Corporation of Boston is contemplating establishing a wholly owned subsidiaryoperation in

Sigma Corporation of Boston is contemplating establishing a wholly owned subsidiaryoperation in the Mediterranean. Two countries under consideration are Spain andCyprus. Sigma intends to repatriate al...

Q: Assess the possibility for the euro to become another global currency rivaling

Assess the possibility for the euro to become another global currency rivaling theU.S. dollar. If the euro really becomes a global currency, what impact will it haveon the U.S. dollar and the world ec...

Q: Exhibit 13.11 presents a listing of major national stock market

Exhibit 13.11 presents a listing of major national stock market indexes as displayeddaily in the print edition of the Financial Times. At www.ft.com , you canfind an online tracking of these national...

Q: Comment on the following statement: “Since the United States imports

Comment on the following statement: “Since the United States imports more thanit exports, it is necessary for the United States to import capital from foreign countriesto finance its current account d...

Q: Sara Lee Corp. is serving up a brand name and a

Sara Lee Corp. is serving up a brand name and a shorter maturity than other recentcorporate borrowers to entice buyers to its first-ever dollar Eurobonds. The U.S.maker of consumer products, from Sara...

Q: Explain the internalization theory of FDI. What are the strengths and

Explain the internalization theory of FDI. What are the strengths and weaknesses of the theory?

Q: Use the binomial option-pricing model developed in the chapter to

Use the binomial option-pricing model developed in the chapter to value the callof problem 9. The volatility of the Swiss franc is 14.2 percent.

Q: Discuss what factors motivated Novo Industri to seek U.S.

Discuss what factors motivated Novo Industri to seek U.S. listing of its stock.What lessons can be derived from Novo’s experiences?

Q: In Example 10.2, a forward contract was used to

In Example 10.2, a forward contract was used to establish a derivatives “hedge” toprotect Centralia from a translation loss if the euro depreciated from â ...

Q: A five-year, 4 percent Euroyen bond sells at par

A five-year, 4 percent Euroyen bond sells at par. A comparable risk five-year,5.5 percent yen/dollar dual-currency bond pays $833.44 at maturity. It sells for¥110,000. What is the implied ¥/$ exchange...

Q: The Centralia Corporation is a U.S. manufacturer of small

The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances.It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, tomanufacture microwave ov...

Q: Consider 8.5 percent Swiss franc/U.S.

Consider 8.5 percent Swiss franc/U.S. dollar dual-currency bonds that pay$666.67 at maturity per SF1,000 of par value. It sells at par. What is the implicitSF/$ exchange rate at maturity? Will the inv...

Q: Your firm has just issued five-year floating-rate notes

Your firm has just issued five-year floating-rate notes indexed to six-monthU.S. dollar LIBOR plus 1/4 percent. What is the amount of the first coupon paymentyour firm will pay per U.S. $1,000 of face...

Q: Using Exhibit 5.4, calculate the one-, three-,

Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discountfor the U.S. dollar versus the British pound using European term quotations. Forsimplicity, assume each month ha...

Q: Explain how Eurocurrency is created.

Explain how Eurocurrency is created.

Q: It is September 1990 and Detroit Motors of Detroit, Michigan,

It is September 1990 and Detroit Motors of Detroit, Michigan, is consideringestablishing an assembly plant in Latin America for a new utility vehicle it has justdesigned. The cost of the capital expen...

Q: Suppose that you are a U.S.-based importer of

Suppose that you are a U.S.-based importer of goods from the United Kingdom.You expect the value of the pound to increase against the U.S. dollarover the next 30 days. You will be making payment on a...

Q: Jacob Bower has a liability that: • has a principal

Jacob Bower has a liability that: • has a principal balance of $100 million on June 30, 2008, • accrues interest quarterly starting on June 30, 2008, â€&...

Q: Recall the FRA problem presented as Example 11.2. Show

Recall the FRA problem presented as Example 11.2. Show how the bank canalternatively use a position in Eurodollar futures contracts to hedge the interestrate risk created by the maturity mismatch it h...

Q: George Johnson is considering a possible six-month $100 million

George Johnson is considering a possible six-month $100 million LIBOR-based,floating-rate bank loan to fund a project at terms shown in the table below. Johnsonfears a possible rise in the LIBOR rate...

Q: What is a forfaiting transaction?

What is a forfaiting transaction?

Q: Assume that FASB 8 is still in effect instead of FASB 52

Assume that FASB 8 is still in effect instead of FASB 52. Construct a translationexposure report for Centralia Corporation and its affiliates that is the counterpartto Exhibit 10.6 in the text. Centra...

Q: Explain the conditions under which the forward exchange rate will be an

Explain the conditions under which the forward exchange rate will be an unbiasedpredictor of the future spot exchange rate.

Q: Suppose that your firm is operating in a segmented capital market.

Suppose that your firm is operating in a segmented capital market. What actions would you recommend to mitigate the negative effects?

Q: Assume the time from acceptance to maturity on a $2,

Assume the time from acceptance to maturity on a $2,000,000 banker’s acceptanceis 90 days. Further assume that the importing bank’s acceptance commission is1.25 percent and that the market rate for 90...

Q: A bank is quoting the following exchange rates against the dollar for

A bank is quoting the following exchange rates against the dollar for the Swissfranc and the Australian dollar: SFr/$ = 1.5960–70 A$/$ = 1.7225–35 An Australian firm asks the bank for an A$/SFr quote....

Q: A corporation enters into a five-year interest rate swap with

A corporation enters into a five-year interest rate swap with a swap bank in whichit agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notionalamount of €15,000,000 and receive LI...

Q: Cray Research sold a supercomputer to the Max Planck Institute in Germany

Cray Research sold a supercomputer to the Max Planck Institute in Germany oncredit and invoiced €10 million payable in six months. Currently, the six-monthforward exchange rate is $1.10/€ and the fore...

Q: How are translation gains and losses handled differently according to the currentrate

How are translation gains and losses handled differently according to the currentrate method in comparison to the other three methods, that is, the current/ noncurrent method, the monetary/nonmonetary...

Q: Identify some instances under FASB 52 when a foreign entity’s functionalcurrency would

Identify some instances under FASB 52 when a foreign entity’s functionalcurrency would be the same as the parent firm’s currency.

Q: Using the quotations in Exhibit 7.3, note that the

Using the quotations in Exhibit 7.3, note that the September 2013 Mexican pesofutures contract has a price of $0.07713 per MXN. You believe the spot pricein September will be $0.08365 per MXN. What sp...

Q: Grecian Tile Manufacturing of Athens, Georgia, borrows $1,

Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBORplus a lending margin of 1.25 percent per annum on a six-month rollover basisfrom a London bank. If six-month LIBOR is 41⁄2 pe...

Q: Describe the remeasurement and translation process under FASB 52 of a whollyowned

Describe the remeasurement and translation process under FASB 52 of a whollyowned affiliate that keeps its books in the local currency of the country in which itoperates, which is different than its f...

Q: It is, generally, not possible to completely eliminate both translation

It is, generally, not possible to completely eliminate both translation exposure andtransaction exposure. In some cases, the elimination of one exposure will alsoeliminate the other. But in other case...

Q: What three basic documents are necessary to conduct a typical foreign commerce

What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each.

Q: Explain how to compute the overall balance and discuss its significance.

Explain how to compute the overall balance and discuss its significance.

Q: Explain the difference in the translation process between the monetary/nonmonetary

Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.

Q: Under what conditions would you recommend that the foreign subsidiary conform to

Under what conditions would you recommend that the foreign subsidiary conform to the local norm of financial structure?

Q: How does a time draft become a banker’s acceptance?

How does a time draft become a banker’s acceptance?

Q: Compare and contrast the three basic types of taxation that governments levy

Compare and contrast the three basic types of taxation that governments levy within their tax jurisdiction.

Q: Economic Exposure of Albion Computers PLCConsider Case 3 of Albion Computers PLC

Economic Exposure of Albion Computers PLCConsider Case 3 of Albion Computers PLC discussed in the chapter. Now, assume thatthe pound is expected to depreciate to $1.50 from the current level of $1.60...

Q: A U.S. firm holds an asset in France and

A U.S. firm holds an asset in France and faces the following scenario: In the above table, P * is the euro price of the asset held by the U.S. firm and P isthe dollar price of the asset. a. Compute...

Q: Suppose you are a British venture capitalist holding a major stake in

Suppose you are a British venture capitalist holding a major stake in an e-commercestart-up in Silicon Valley. As a British resident, you are concerned with the poundvalue of your U.S. equity position...

Q: Suppose that you hold a piece of land in the city of

Suppose that you hold a piece of land in the city of London that you may want tosell in one year. As a U.S. resident, you are concerned with the dollar value of theland. Assume that if the British eco...

Q: A bank sells a “three against six” $3,

A bank sells a “three against six” $3,000,000 FRA for a three-month period beginningthree months from today and ending six months from today. The purposeof the FRA is to cover the interest rate risk c...

Q: Exchange rate uncertainty may not necessarily mean that firms face exchange riskexposure

Exchange rate uncertainty may not necessarily mean that firms face exchange riskexposure. Explain why this may be the case.

Q: Comment on the proposition that the Bretton Woods system was programmed toan

Comment on the proposition that the Bretton Woods system was programmed toan eventual demise.

Q: DVR, Inc. can borrow dollars for five years at a

DVR, Inc. can borrow dollars for five years at a coupon rate of 2.75 percent. Alternatively,it can borrow yen for five years at a rate of .85 percent. The five-year yenswap rates are 0.64–0.70 percent...

Q: What is the difference between a buy-back transaction and a

What is the difference between a buy-back transaction and a counterpurchase?

Q: The time from acceptance to maturity on a $1,000

The time from acceptance to maturity on a $1,000,000 banker’s acceptance is120 days. The importer’s bank’s acceptance commission is 1.75 percent and themarket rate for 120-day B/As is 5.75 percent. Wh...

Q: Describe the key factors contributing to effective cash management within a firm

Describe the key factors contributing to effective cash management within a firm. Why is the cash management process more difficult in a MNC?

Q: Given the following information, what are the NZD/SGD currency

Given the following information, what are the NZD/SGD currency against currencybid-ask quotations?

Q: Suppose that your company has an equity position in a French firm

Suppose that your company has an equity position in a French firm. Discuss thecondition under which dollar/euro exchange rate uncertainty does not constituteexchange exposure for your company.

Q: Discuss the determinants of operating exposure.

Discuss the determinants of operating exposure.

Q: What were the main objectives of the Bretton Woods system?

What were the main objectives of the Bretton Woods system?

Q: Since the early 1980s, foreign portfolio investors have purchased a significant

Since the early 1980s, foreign portfolio investors have purchased a significant portionof U.S. Treasury bond issues. Discuss the short-term and long-term effects offoreigners’ portfolio investment on...

Q: General Motors exports cars to Spain, but the strong dollar against

General Motors exports cars to Spain, but the strong dollar against the euro hurtssales of GM cars in Spain. In the Spanish market, GM faces competition fromItalian and French car makers, such as Fiat...

Q: How would you define economic exposure to exchange risk?

How would you define economic exposure to exchange risk?

Q: Do problem 1 over again, this time assuming more realistically that

Do problem 1 over again, this time assuming more realistically that a swap bankis involved as an intermediary. Assume the swap bank is quoting five-year dollarinterest rate swaps at 10.7–10.8 percent...

Q: Explain the following statement: “Exposure is the regression coefficient.”

Explain the following statement: “Exposure is the regression coefficient.”

Q: Explain the competitive and conversion effects of exchange rate changes on thefirm’s

Explain the competitive and conversion effects of exchange rate changes on thefirm’s operating cash flow.

Q: Explain contingent exposure and discuss the advantages of using currency optionsto manage

Explain contingent exposure and discuss the advantages of using currency optionsto manage this type of currency exposure.

Q: Discuss the implications of purchasing power parity for operating exposure.

Discuss the implications of purchasing power parity for operating exposure.

Q: Show how double taxation on a taxpayer may result if all countries

Show how double taxation on a taxpayer may result if all countries were to tax the worldwide income of their residents and the income earned within their territorial boundaries.

Q: Do problem 4 again assuming you believe the September 2013 spot price

Do problem 4 again assuming you believe the September 2013 spot price will be$0.07061 per MXN. Data from Problem 4: Using the quotations in Exhibit 7.3, note that the September 2013 Mexican peso futur...

Q: What are the advantages and disadvantages to a firm of financial hedging

What are the advantages and disadvantages to a firm of financial hedging of itsoperating exposure compared to operational hedges (such as relocating its manufacturing site)?

Q: Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge

Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge against exchange rate exposure.

Q: Karla Ferris, a fixed income manager at Mangus Capital Management,

Karla Ferris, a fixed income manager at Mangus Capital Management, expects thecurrent positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds ma...

Q: In what sense do firms with nontradable assets get a free ride

In what sense do firms with nontradable assets get a free ride from firms whose securities are internationally tradable?

Q: Evaluate the following statement: “A firm can reduce its currency

Evaluate the following statement: “A firm can reduce its currency exposure bydiversifying across different business lines.”

Q: Discuss some of the reasons why international trade is more difficult and

Discuss some of the reasons why international trade is more difficult and risky from the exporter’s perspective than is domestic trade.

Q: Assume the settlement rate in problem 2 is 61⁄8 percent

Assume the settlement rate in problem 2 is 61⁄8 percent. What is the solution now?

Q: Discuss and compare hedging transaction exposure using the forward contractversus money market

Discuss and compare hedging transaction exposure using the forward contractversus money market instruments. When do alternative hedging approaches producethe same result?

Q: Nike, a company headquartered in Beaverton, Oregon, is a

Nike, a company headquartered in Beaverton, Oregon, is a major force in the sportsfootwear and fashion industry, with annual sales exceeding $12 billion, more thanhalf of which now come from outside t...

Q: Studies show that the legal protection of shareholder rights varies a great

Studies show that the legal protection of shareholder rights varies a great dealacross countries. Discuss the possible reasons why the English common law traditionprovides the strongest protection of...

Q: Briefly discuss the various types of countertrade.

Briefly discuss the various types of countertrade.

Q: The theory of comparative advantage was originally advanced by the 19th-

The theory of comparative advantage was originally advanced by the 19th-centuryeconomist David Ricardo as an explanation for why nations trade with one another.The theory claims that economic well-bei...

Q: Discuss the major trends that have prevailed in international business during

Discuss the major trends that have prevailed in international business during thelast two decades.

Q: How is a country’s economic well-being enhanced through free international

How is a country’s economic well-being enhanced through free international tradein goods and services?

Q: If the cost advantage of interest rate swaps would likely be arbitraged

If the cost advantage of interest rate swaps would likely be arbitraged away incompetitive markets, what other explanations exist to explain the rapid developmentof the interest rate swap market?

Q: What considerations might limit the extent to which the theory of comparativeadvantage

What considerations might limit the extent to which the theory of comparativeadvantage is realistic?

Q: What are multinational corporations (MNCs) and what economic roles do

What are multinational corporations (MNCs) and what economic roles do theyplay?

Q: Briefly discuss some of the services that international banks provide their customersand

Briefly discuss some of the services that international banks provide their customersand the marketplace.

Q: Discuss how the cost of capital is determined in segmented versus integrated

Discuss how the cost of capital is determined in segmented versus integrated capital markets.

Q: Ross Perot, a former presidential candidate of the Reform Party,

Ross Perot, a former presidential candidate of the Reform Party, which was a thirdpolitical party in the United States, had strongly objected to the creation of theNorth American Free Trade Agreement...

Q: A “three against nine” FRA has an agreement rate of

A “three against nine” FRA has an agreement rate of 4.75 percent. You believesix-month LIBOR in three months will be 5.125 percent. You decide to take aspeculative position in a FRA with a $1,000,000...

Q: In 1995, a working group of French chief executive officers was

In 1995, a working group of French chief executive officers was set up by theConfederation of French Industry (CNPF) and the French Association of PrivateCompanies (AFEP) to study the French corporate...

Q: Doug Bernard specializes in cross-rate arbitrage. He notices the

Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc = A$1.1440...

Q: What are the advantages of investing via international mutual funds?

What are the advantages of investing via international mutual funds?

Q: Rone Company asks Paula Scott, a treasury analyst, to recommend

Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible wayto manage the company’s financial risks. Two years ago, Rone issued a $25 million (U.S.$), five-year floating-rate note(FR...

Q: Describe the balance-of-payments identity and discuss its implications

Describe the balance-of-payments identity and discuss its implications under thefixed and flexible exchange rate regimes.

Q: Emphasizing the importance of voluntary compliance, as opposed to enforcement,

Emphasizing the importance of voluntary compliance, as opposed to enforcement,in the aftermath of such corporate scandals as those involving Enron andWorldCom, U.S. President George W. Bush stated tha...

Q: Exhibit 3.6 indicates that in 1999, Germany had a

Exhibit 3.6 indicates that in 1999, Germany had a current account deficit and atthe same time a capital account deficit. Explain how this can happen. Exhibit 3.6:

Q: Explain and derive the international Fisher effect.

Explain and derive the international Fisher effect.

Q: Explain how each of the following transactions will be classified and recorded

Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments: a. A Japanese insurance company purchases U.S. Treasury bonds a...

Q: Using the market data in Exhibit 7.6, show the

Using the market data in Exhibit 7.6, show the net terminal value of a long position inone 100 Aug Japanese yen European call contract at the following terminal spot prices,cents per yen: 91, 95, 100,...

Q: Construct a balance-of-payments table for Germany for the

Construct a balance-of-payments table for Germany for the year 2010 which iscomparable in format to Exhibit 3.1, and interpret the numerical data. You mayconsult International Financial Statistics pub...

Q: Suppose there exists a nontradable asset with a perfect positive correlation with

Suppose there exists a nontradable asset with a perfect positive correlation with a portfolio T of tradable assets. How will the nontradable asset be priced?

Q: The Fisher effect (Chapter 6) suggests that nominal interest rates

The Fisher effect (Chapter 6) suggests that nominal interest rates differ betweencountries because of differences in the respective rates of inflation. Accordingto the Fisher effect and your examinati...

Q: Describe the difference between a swap broker and a swap dealer.

Describe the difference between a swap broker and a swap dealer.

Q: Discuss the possible strengths and weaknesses of SDRs versus the dollar as

Discuss the possible strengths and weaknesses of SDRs versus the dollar as themain reserve currency. Do you think the SDR should or could replace the U.S.dollar as the main global reserve currency?

Q: Why would it be useful to examine a country’s balance-of

Why would it be useful to examine a country’s balance-of-payments data?

Q: What is the purpose of the Export-Import Bank?

What is the purpose of the Export-Import Bank?

Q: Why is it important to study international financial management?

Why is it important to study international financial management?

Q: What are the advantages of a currency options contract as a hedging

What are the advantages of a currency options contract as a hedging tool comparedwith the forward contract?

Q: Define balance of payments.

Define balance of payments.

Q: Following such high-profile corporate scandals as Enron and WorldCom in

Following such high-profile corporate scandals as Enron and WorldCom in the UnitedStates, European business executives smugly proclaimed that the same could not happenon their side of the Atlantic as...

Q: Explain “free cash flows.” Why do managers like to retain

Explain “free cash flows.” Why do managers like to retain free cash flows insteadof distributing it to shareholders? Discuss what mechanisms may be used to solvethis problem.

Q: Affiliate X sells 10,000 units to Affiliate Y per year

Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates forX and Y are 20 percent and 30 percent, respectively. The transfer price per unit iscurrently set at $1,000, but it can...

Q: The majority of major corporations are franchised as public corporations. Discussthe

The majority of major corporations are franchised as public corporations. Discussthe key strength and weakness of the “public corporation.” When do you think thepublic corporation as an organizational...

Q: Using the market data in Exhibit 7.6, show the

Using the market data in Exhibit 7.6, show the net terminal value of a long position inone 100 Aug Japanese yen European put contract at the following terminal spot prices,cents per yen: 91, 95, 100,...

Q: Assume you are a trader with Deutsche Bank. From the quote

Assume you are a trader with Deutsche Bank. From the quote screen on yourcomputer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 andCredit Suisse is offering SF1.1806/$1.00. You lear...

Q: Briefly discuss the various types of international banking offices.

Briefly discuss the various types of international banking offices.

Q: The current spot exchange rate is $1.95/£ and

The current spot exchange rate is $1.95/£ and the three-month forward rate is$1.90/£. On the basis of your analysis of the exchange rate, you are pretty confidentthat the spot exchange rate will be $1...

Q: Using the American term quotes from Exhibit 5.4, calculate

Using the American term quotes from Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Australian dollar and theSwiss franc. State the forward cross-rates...

Q: What is the necessary condition for a fixed-for-floating

What is the necessary condition for a fixed-for-floating interest rate swap to bepossible?

Q: Restate the following one-, three-, and six-month outright

Restate the following one-, three-, and six-month outright forward European termbid-ask quotes in forward points. Spot …………………………………1.3431–1.3436 One-Month ……………………….1.3432–1.3442 Three-Month …………………...

Q: Explain Gresham’s law.

Explain Gresham’s law.

Q: On August 3, 1995, the Maharashtra state government of India

On August 3, 1995, the Maharashtra state government of India, dominated bythe nationalist, right-wing Bharatiya Janata Party (BJP), abruptly canceled Enron’s$2.9 billion power projec...

Q: Explain “the wedge” between control and cash flow rights and

Explain “the wedge” between control and cash flow rights and discuss its implicationsfor corporate governance.

Q: Using the spot and outright forward quotes in problem 4, determine

Using the spot and outright forward quotes in problem 4, determine the correspondingbid-ask spreads in points. Information from Problem 4: Restate the following one-, three-, and six-month outright f...

Q: What is triangular arbitrage? What is a condition that will give

What is triangular arbitrage? What is a condition that will give rise to a triangulararbitrage opportunity?

Q: Discuss the implications of interest rate parity for exchange rate determination.

Discuss the implications of interest rate parity for exchange rate determination.

Q: Assume that interaffiliate cash flows are uncorrelated with one another. Calculatethe

Assume that interaffiliate cash flows are uncorrelated with one another. Calculatethe standard deviation of the portfolio of cash held by the centralized depositoryfor the following affiliate members:...

Q: What is the difference between the retail or client market and the

What is the difference between the retail or client market and the wholesale orinterbank market for foreign exchange?

Q: The Eastern Trading Company of Singapore purchases spices in bulk from around

The Eastern Trading Company of Singapore purchases spices in bulk from around theworld, packages them into consumer-size quantities, and sells them through salesaffiliates in Hong Kong, the United Kin...

Q: Company A is an AAA-rated firm desiring to issue five

Company A is an AAA-rated firm desiring to issue five-year FRNs. It findsthat it can issue FRNs at six-month LIBOR +1 .125 percent or at three-monthLIBOR +1 .125 percent. Given its asset structure, th...

Q: Who are the market participants in the foreign exchange market?

Who are the market participants in the foreign exchange market?

Q: How are foreign exchange transactions between international banks settled?

How are foreign exchange transactions between international banks settled?

Q: Discuss some of the pros and cons of countertrade from the country’s

Discuss some of the pros and cons of countertrade from the country’s perspective and the firm’s perspective.

Q: Discuss the basic motivations for a counterparty to enter into a currency

Discuss the basic motivations for a counterparty to enter into a currency swap.

Q: Many companies grant stock or stock options to managers. Discuss the

Many companies grant stock or stock options to managers. Discuss the benefitsand possible costs of using this kind of incentive compensation scheme.

Q: Why does most interbank currency trading worldwide involve the U.S

Why does most interbank currency trading worldwide involve the U.S. dollar?

Q: Discuss the advantages and disadvantages of the gold standard.

Discuss the advantages and disadvantages of the gold standard.

Q: Banks find it necessary to accommodate their clients’ needs to buy or

Banks find it necessary to accommodate their clients’ needs to buy or sell FXforward, in many instances for hedging purposes. How can the bank eliminate thecurrency exposure it has created for itself...

Q: A CAD/$ bank trader is currently quoting as mall figure bid

A CAD/$ bank trader is currently quoting as mall figure bid-ask of 35–40, whenthe rest of the market is trading at CAD1.3436–CAD1.3441. What is impliedabout the trader’s beliefs by his prices?

Q: Explain the mechanism that restores the balance-of-payments equilibrium

Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard.

Q: Recent surveys of corporate exchange risk management practices indicate thatmany U.

Recent surveys of corporate exchange risk management practices indicate thatmany U.S. firms simply do not hedge. How would you explain this result?

Q: Give a full definition of the market for foreign exchange.

Give a full definition of the market for foreign exchange.

Q: Do problem 1 again assuming you have a long position in the

Do problem 1 again assuming you have a long position in the futures contract. Data from Problem 1: Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR.You have a short positi...

Q: Assume the spot Swiss franc is $0.7000 and the

Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950.What is the minimum price that a six-month American call option with a strikingprice of $0.6800 should sell for in a ra...

Q: What is meant by a currency trading at a discount or at

What is meant by a currency trading at a discount or at a premium in the forwardmarket?

Q: Over the past five years, the exchange rate between the British

Over the past five years, the exchange rate between the British pound and the U.S.dollar, $/£, has changed from about 1.90 to about 1.45. Would you agree that over thisfive-year period, British goods...

Q: It has been shown that foreign companies listed on U.S

It has been shown that foreign companies listed on U.S. stock exchanges are valuedmore than those from the same countries that are not listed in the United States.Explain why U.S.-listed foreign firms...

Q: Veritas Emerging Market Fund specializes in investing in emerging stock markets ofthe

Veritas Emerging Market Fund specializes in investing in emerging stock markets ofthe world. Mr. Henry Mobaus, an experienced hand in international investment andyour boss, is currently interested in...

Q: While you were visiting London, you purchased a Jaguar for £

While you were visiting London, you purchased a Jaguar for £35,000, payablein three months. You have enough cash at your bank in New York City, whichpays 0.35 percent interest per month, compounding m...

Q: Currently, the spot exchange rate is $1.50/£

Currently, the spot exchange rate is $1.50/£ and the three-month forward exchangerate is $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S.and 5.8 percent per annum in the U.K...

Q: Discuss how a MNC might attempt to repatriate blocked funds from a

Discuss how a MNC might attempt to repatriate blocked funds from a host country.

Q: Explain Vernon’s product life-cycle theory of FDI. What are

Explain Vernon’s product life-cycle theory of FDI. What are the strengths and weaknesses of the theory?

Q: Suppose that the current spot exchange rate is €0.80

Suppose that the current spot exchange rate is €0.80/$ and the three-month forwardexchange rate is €0.7813/$. The three-month interest rate is 5.6 percent perannum in the United States and 5.40 percen...

Q: How does the theory of comparative advantage relate to the currency swap

How does the theory of comparative advantage relate to the currency swap market?

Q: Discuss the various ways the exporter can receive payment in a foreign

Discuss the various ways the exporter can receive payment in a foreign tradetransaction after the importer’s bank accepts the exporter’s time draft and itbecomes a banker’s acceptance.

Q: Explain how a country can run an overall balance-of-

Explain how a country can run an overall balance-of-payments deficit or surplus.

Q: In the October 23, 1999, issue, The Economist reports

In the October 23, 1999, issue, The Economist reports that the interest rate perannum is 5.93 percent in the United States and 70.0 percent in Turkey. Why doyou think the interest rate is so high in T...

Q: Suppose that the pound is pegged to gold at 6 pounds per

Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas thefranc is pegged to gold at 12 francs per ounce. This, of course, implies that theequilibrium exchange rate should be two fran...

Q: Following corporate scandals and failures in the United States and abroad,

Following corporate scandals and failures in the United States and abroad, therehas been a growing demand for corporate governance reform. What should bethe key objectives of corporate governance refo...

Q: Do problem 9 again assuming an American put option instead of a

Do problem 9 again assuming an American put option instead of a call option. Data from Problem 9: Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum...

Q: As of November 1, 1999, the exchange rate between the

As of November 1, 1999, the exchange rate between the Brazilian real and U.S.dollar was R$1.95/$. The consensus forecast for the U.S. and Brazil inflation ratesfor the next one-year period was 2.6 per...

Q: Omni Advisors, an international pension fund manager, uses the concepts

Omni Advisors, an international pension fund manager, uses the concepts of purchasingpower parity (PPP) and the International Fisher Effect (IFE) to forecastspot exchange rates. Omni gathers the finan...

Q: Explain the arrangements and workings of the European Monetary System (EMS

Explain the arrangements and workings of the European Monetary System (EMS).

Q: Should a firm hedge? Why or why not?

Should a firm hedge? Why or why not?

Q: Suppose that the current spot exchange rate is €1.50

Suppose that the current spot exchange rate is €1.50/£ and the one-year forwardexchange rate is €1.60/£. The one-year interest rate is 5.4 percent in euros and5.2 percent in pounds. You can borrow at...

Q: Due to the integrated nature of their capital markets, investors in

Due to the integrated nature of their capital markets, investors in both the UnitedStates and the U.K. require the same real interest rate, 2.5 percent, on their lending.There is a consensus in capita...

Q: Lured by extremely low labor costs in Bangladesh, many MNCs in

Lured by extremely low labor costs in Bangladesh, many MNCs in the so-calledfast-fashion business, including H&M, Inditex (parent of the popular Zara brand),Marks&Spencer, and Gap, are heavily outsour...

Q: After studying Iris Hamson’s credit analysis, George Davies is consideringwhether he

After studying Iris Hamson’s credit analysis, George Davies is consideringwhether he can increase the holding period return on Yucatan Resort’s excess cashholdings (which are held in pesos) by investi...

Q: James Clark is a currency trader with Wachovia. He notices the

James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate ……………………………………………….SFr1.2051/$ Six-month forward exchange rate ………………………….SFr1.1922/$ Six-month do...

Q: How does the deposit-loan rate spread in the Eurodollar market

How does the deposit-loan rate spread in the Eurodollar market compare with thedeposit-loan rate spread in the domestic U.S. banking system? Why?

Q: Suppose you conduct currency carry trade by borrowing $1,000

Suppose you conduct currency carry trade by borrowing $1,000,000 at the start ofeach year and investing in the New Zealand dollar for one year. One-year interestrates and the exchange rate between the...

Q: When the euro was introduced in January 1999, the United Kingdom

When the euro was introduced in January 1999, the United Kingdom was conspicuouslyabsent from the list of European countries adopting the common currency.Although the previous Labour government led by...

Q: Suppose that the treasurer of IBM has an extra cash reserve of

Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 toinvest for six months. The six-month interest rate is 8 percent per annum in theUnited States and 7 percent per annum in G...

Q: Discuss the risks confronting an interest rate and currency swap dealer.

Discuss the risks confronting an interest rate and currency swap dealer.

Q: How would you define transaction exposure? How is it different from

How would you define transaction exposure? How is it different from economicexposure?

Q: Explain the following three concepts of purchasing power parity (PPP):

Explain the following three concepts of purchasing power parity (PPP): a. The law of one price. b. Absolute PPP. c. Relative PPP.

Q: Use the European option-pricing models developed in the chapter to

Use the European option-pricing models developed in the chapter to value the call ofproblem 9 and the put of problem 10. Assume the annualized volatility of the Swissfranc is 14.2 percent. This proble...

Q: Suppose you are interested in investing in shares of Samsung Electronics of

Suppose you are interested in investing in shares of Samsung Electronics of Korea,which is a world leader in mobile phones, TVs, and home appliances. But beforeyou make an investment decision, you wou...

Q: Explain how special drawing rights (SDRs) are constructed. Also

Explain how special drawing rights (SDRs) are constructed. Also, discuss the circumstancesunder which the SDRs were created.

Q: In order for a derivatives market to function most efficiently, two

In order for a derivatives market to function most efficiently, two types ofeconomic agents are needed: hedgers and speculators. Explain.

Q: If Honda ADRs were trading at $44 when the underlying shares

If Honda ADRs were trading at $44 when the underlying shares were trading inTokyo at ¥3,945, what could you do to earn a trading profit? Use the informationin problem 1 to help you, and assume that tr...

Q: Why are most futures positions closed out through a reversing trade rather

Why are most futures positions closed out through a reversing trade rather thanheld to delivery?

Q: What is the difference between the Euronote market and the Eurocommercialpaper market

What is the difference between the Euronote market and the Eurocommercialpaper market?

Q: Discuss different ways that dominant investors may establish and maintain controlof a

Discuss different ways that dominant investors may establish and maintain controlof a company with relatively small investments.

Q: Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows

Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75–8.10 percentannually against six-month dollar LIBOR for dollars and 11.25–11.65 percentannually against six-month dollar LIBOR for...

Q: Discuss and compare the costs of hedging by forward contracts and optionscontracts

Discuss and compare the costs of hedging by forward contracts and optionscontracts.

Q: How can the FX futures market be used for price discovery?

How can the FX futures market be used for price discovery?

Q: What is the major difference in the obligation of one with a

What is the major difference in the obligation of one with a long position in afutures (or forward) contract in comparison to an options contract?

Q: Explain purchasing power parity, both the absolute and relative versions.

Explain purchasing power parity, both the absolute and relative versions. Whatcauses deviations from purchasing power parity?

Q: What is meant by the terminology that an option is in-,

What is meant by the terminology that an option is in-, at-, or out-of-the-money?

Q: List the arguments (variables) of which an FX call or

List the arguments (variables) of which an FX call or put option model price is afunction. How do the call and put premiums change with respect to a change in thearguments?

Q: Explain the basic differences between the operation of a currency forward marketand

Explain the basic differences between the operation of a currency forward marketand a futures market.

Q: Discuss the pros and cons of a MNC having a centralized cash

Discuss the pros and cons of a MNC having a centralized cash manager handle allinvestment and borrowing for all affiliates of the MNC versus each affiliate havinga local manager who performs the cash...

Q: It is Tuesday afternoon, February 14, 2012. Richard May

It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer atAmerican Digital Graphics (ADG), sits in his office on the thirty-fourth floor of thebuilding that dominates Rockefeller...

Q: Ashton Bishop is the debt manager for World Telephone, which needs

Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billionEuro financing for its operations. Bishop is considering the choice between issuanceof debt denominated...

Q: Explain the pricing-to-market phenomenon. Answer

Explain the pricing-to-market phenomenon.

Q: Suppose your company has purchased a put option on the euro to

Suppose your company has purchased a put option on the euro to manageexchange exposure associated with an account receivable denominated in that currency.In this case, your company can be said to have...

Q: What is a collateralized debt obligation and what effect did they have

What is a collateralized debt obligation and what effect did they have on the credit crunch?

Q: The public corporation is owned by a multitude of shareholders but run

The public corporation is owned by a multitude of shareholders but run by professionalmanagers. Managers can take self-interested actions at the expense of shareholders.Discuss the conditions under wh...

Q: There are arguments for and against the alternative exchange rate regimes.

There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoin...

Q: Using an example, discuss the possible effect of hedging on a

Using an example, discuss the possible effect of hedging on a firm’s tax obligations.

Q: Explain cross-hedging and discuss the factors determining its effectiveness.

Explain cross-hedging and discuss the factors determining its effectiveness.

Q: Explain the random walk model for exchange rate forecasting. Can it

Explain the random walk model for exchange rate forecasting. Can it be consistentwith technical analysis?

Q: What were the weaknesses of Basel II that became apparent during the

What were the weaknesses of Basel II that became apparent during the globalfinancial crisis that began in mid-2007?

Q: Airbus sold an A400 aircraft to Delta Airlines, a U.

Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 millionpayable in six months. Airbus is concerned about the euro proceeds from internationalsales and would like to contr...

Q: Dorchester, Ltd. is an old-line confectioner specializing in

Dorchester, Ltd. is an old-line confectioner specializing in high-quality chocolates.Through its facilities in the United Kingdom, Dorchester manufactures candies thatit sells throughout Western Europ...

Q: How is international financial management different from domestic financialmanagement?

How is international financial management different from domestic financialmanagement?

Q: Answer problems 1, 2, and 3 based on the stock

Answer problems 1, 2, and 3 based on the stock market data given by the following table. The above table provides the correlations among Telmex, a telephone/communicationcompany located in Mexico, t...

Q: How would you incorporate political risk into the capital budgeting process of

How would you incorporate political risk into the capital budgeting process of foreign investment projects?

Q: The Strik-it-Rich Gold Mining Company is contemplating expanding

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations.To do so it will need to purchase land that its geologists believe is rich in gold. Strikit-Rich’s management believes t...

Q: Discuss the criteria for a “good” international monetary system.

Discuss the criteria for a “good” international monetary system.

Q: The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong

The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong,the United Kingdom, and the United States, where they are resold by sales affiliates.Eastern Trading is concerned with wh...

Q: With regard to the Centralia case application in the chapter, how

With regard to the Centralia case application in the chapter, how would the APV change if: a. The forecast of (dand/or (f are incorrect? b. Deprecation cash flows are discounted at Kudinstead of id? c...

Q: The Alpha Company plans to establish a subsidiary in Hungary to manufactureand

The Alpha Company plans to establish a subsidiary in Hungary to manufactureand sell fashion wristwatches. Alpha has total assets of $70 million, of which$45 million is equity financed. The remainder i...

Q: Zeda, Inc., a U.S. MNC, is

Zeda, Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK 15,000,000 at a rate of 4 percent per annum. The...

Q: IBM purchased computer chips from NEC, a Japanese electronics concern,

IBM purchased computer chips from NEC, a Japanese electronics concern, andwas billed ¥250 million payable in three months. Currently, the spot exchangerate is ¥105/$ and the three-month forward rate i...

Q: Delta Company, a U.S. MNC, is contemplating

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditurein South Africa. The initial cost of the project is ZAR10,000. The annual cashflows over the five-year economic life of...

Q: Discuss how the advent of the euro would affect international diversification strategies

Discuss how the advent of the euro would affect international diversification strategies.

Q: In an integrated world financial market, a financial crisis in a

In an integrated world financial market, a financial crisis in a country can bequickly transmitted to other countries, causing a global crisis. What kind of measureswould you propose to prevent the re...

Q: Suppose that in the case application in the chapter the APV for

Suppose that in the case application in the chapter the APV for Centralia had been2$60,000. How large would the after-tax terminal value of the project need to bebefore the APV would be positive and C...

Q: Derive and explain the monetary approach to exchange rate determination.

Derive and explain the monetary approach to exchange rate determination.

Q: What methods do taxing authorities use to eliminate or mitigate the evil

What methods do taxing authorities use to eliminate or mitigate the evil of double taxation?

Q: Under what conditions will the foreign subsidiary’s financial structure become relevant?

Under what conditions will the foreign subsidiary’s financial structure become relevant?

Q: Explain and compare forward versus backward internalization.

Explain and compare forward versus backward internalization.

Q: The Beta Corporation has an optimal debt ratio of 40 percent.

The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equitycapital is 12 percent and its before-tax borrowing rate is 8 percent. Given a marginaltax rate of 35 percent, calculate...

Q: The current spot exchange rate is HUF250/$1.00.

The current spot exchange rate is HUF250/$1.00. Long-run inflation in Hungaryis estimated at 10 percent annually and 3 percent in the United States. If PPP isexpected to hold between the two countries...

Q: You plan to visit Geneva, Switzerland, in three months to

You plan to visit Geneva, Switzerland, in three months to attend an internationalbusiness conference. You expect to incur a total cost of SF5,000 for lodging,meals, and transportation during your stay...

Q: Discuss the conditions under which the capital expenditure of a foreign subsidiary

Discuss the conditions under which the capital expenditure of a foreign subsidiary might have a positive NPV in local currency terms but be unprofitable from the parent firm’s perspective.

Q: Why is capital budgeting analysis so important to the firm?

Why is capital budgeting analysis so important to the firm?

Q: Suppose that one year after the inception of the currency swap betweenCentralia

Suppose that one year after the inception of the currency swap betweenCentralia and the Spanish MNC, the U.S. dollar fixed rate has fallen from8 to 6 percent and the euro zone fixed rate for euros has...

Q: Discuss the regulatory and macroeconomic factors that contributed to the creditcrunch of

Discuss the regulatory and macroeconomic factors that contributed to the creditcrunch of 2007–2008.

Q: What is the intuition behind the NPV capital budgeting framework?

What is the intuition behind the NPV capital budgeting framework?

Q: Discuss the nature of the equation sequence, Equations 18.2a

Discuss the nature of the equation sequence, Equations 18.2a to 18.2f. In Equation (18.2a) s In Equation (18.2f)

Q: Relate the concept of lost sales to the definition of incremental cash

Relate the concept of lost sales to the definition of incremental cash flows.

Q: Assume that the Japanese yen is trading at a spot price of

Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen.Further assume that the premium of an American call (put) option with a strikingprice of 93 is 2.10 (2.20) cents. Cal...

Q: Once capital markets are integrated, it is difficult for a country

Once capital markets are integrated, it is difficult for a country to maintain a fixedexchange rate. Explain why this may be so.

Q: Give a full definition of arbitrage.

Give a full definition of arbitrage.

Q: A U.S. company needs to raise €50,

A U.S. company needs to raise €50,000,000. It plans to raise this money by issuingdollar-denominated bonds and using a currency swap to convert the dollars toeuros. The company expects interest rates...

Q: Discuss the different ways political events in a host country may affect

Discuss the different ways political events in a host country may affect local operations of a MNC.

Q: What is the nature of a concessionary loan and how is it

What is the nature of a concessionary loan and how is it handled in the APV model?

Q: What is the intuition of discounting the various cash flows in the

What is the intuition of discounting the various cash flows in the APV model at specific discount rates?

Q: Discuss the difference between performing the capital budgeting analysis from the parent

Discuss the difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to the subsidiary’s perspective.

Q: How might a MNC use transfer pricing strategies? How do import

How might a MNC use transfer pricing strategies? How do import duties affect transfer pricing policies?

Q: How did the credit crunch become a global financial crisis?

How did the credit crunch become a global financial crisis?

Q: Define the concept of a real option. Discuss some of the

Define the concept of a real option. Discuss some of the various real options a firm can be confronted with when investing in real projects.

Q: Discuss what is meant by the incremental cash flows of a capital

Discuss what is meant by the incremental cash flows of a capital project.

Q: Assume a currency swap in which two counterparties of comparable credit riskeach

Assume a currency swap in which two counterparties of comparable credit riskeach borrow at the best rate available, yet the nominal rate of one counterpartyis higher than the other. After the initial...

Q: What makes the APV capital budgeting framework useful for analyzing foreign capital

What makes the APV capital budgeting framework useful for analyzing foreign capital expenditures?

Q: Discuss the implications of the deviations from purchasing power parity for countries’competitive

Discuss the implications of the deviations from purchasing power parity for countries’competitive positions in the world market.

Q: Suppose a Spanish MNC has a mirror-image situation and needs

Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 tofinance a capital expenditure of one of its U.S. subsidiaries. It finds that it mustpay a 9 percent fixed rate in the United S...

Q: What problems can enter into the capital budgeting analysis if project debt

What problems can enter into the capital budgeting analysis if project debt is evaluated instead of the borrowing capacity created by the project?

Q: In the Modigliani-Miller equation, why is the market value

In the Modigliani-Miller equation, why is the market value of the levered firm greater than the market value of an equivalent unlevered firm?

Q: Daimler, a German carmaker, acquired Chrysler, the third largest

Daimler, a German carmaker, acquired Chrysler, the third largest U.S. automaker,for $40.5 billion in 1998. But after years of declining profit and labor problems,Daimler sold off Chrysler to the U.S....

Q: A company based in the United Kingdom has an Italian subsidiary.

A company based in the United Kingdom has an Italian subsidiary. The subsidiarygenerates €25,000,000 a year, received in equivalent semiannual installments of€12,500,000. The British company wishes to...

Q: Briefly discuss some variants of the basic interest rate and currency swaps

Briefly discuss some variants of the basic interest rate and currency swaps diagrammedin the chapter.

Q: Recently, many foreign firms from both developed and developing countries acquired

Recently, many foreign firms from both developed and developing countries acquired high-tech U.S. firms. What might have motivated these firms to acquire U.S. firms?

Q: What is a structured investment vehicle and what effect did they have

What is a structured investment vehicle and what effect did they have on the credit crunch?

Q: Japanese MNCs, such as Toyota, Toshiba, and Matsushita,

Japanese MNCs, such as Toyota, Toshiba, and Matsushita, made extensive investments in Southeast Asian countries like Thailand, Malaysia, and Indonesia. In your opinion, what forces are driving Japanes...

Q: Shrewsbury Herbal Products, located in central England close to the Welsh

Shrewsbury Herbal Products, located in central England close to the Welsh border, isan old-line producer of herbal teas, seasonings, and medicines. Its products are marketedall over the United Kingdom...

Q: Boeing just signed a contract to sell a Boeing 737 aircraft to

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France willbe billed €20 million payable in one year. The current spot exchange rate is $1.05/€and the one-year forward r...

Q: Since NAFTA was established, many Asian firms, especially those from

Since NAFTA was established, many Asian firms, especially those from Japan and Korea, have made extensive investments in Mexico. Why do you think these Asian firms decided to build production faciliti...

Q: Affiliate A sells 5,000 units to Affiliate B per year

Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax ratefor Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is40 percent. Additionally, Affiliate...

Q: Mexico experienced large-scale trade deficits, depletion of foreign reserve

Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings, anda major currency devaluation in December 1994, followed by the decision to freely floatthe peso. These events a...

Q: Explain how the premium and discount are determined when assets are priced

Explain how the premium and discount are determined when assets are priced to market. When will the law of one price prevail in international capital markets even if foreign equity ownership restricti...

Q: There are three production stages required before a pair of skis produced

There are three production stages required before a pair of skis produced by FjordFabrication can be sold at retail for NOK2,300. Fill in the following table to showthe value added at each stage in th...

Q: On the Tokyo Stock Exchange, Honda Motor Company stock closed at

On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 pershare on Thursday, April 11, 2013. Honda trades as an ADR on the NYSE. Oneunderlying Honda share equals one ADR. On April 11,...

Q: How would you explain the fact that China emerged as one of

How would you explain the fact that China emerged as one of the most important recipients of FDI in recent years?

Q: Why do you think the host country tends to resist cross-

Why do you think the host country tends to resist cross-border acquisitions rather than greenfield investments?

Q: What could be the reason for the negative synergistic gains for British

What could be the reason for the negative synergistic gains for British acquisitions of U.S. firms?

Q: Using the quotations in Exhibit 7.3, calculate the face

Using the quotations in Exhibit 7.3, calculate the face value of the open interest in the September 2013 Swiss franc futures contract. Exhibit 7.3:

Q: What is an exchange rate? What is the difference between direct

What is an exchange rate? What is the difference between direct and indirect rates? What is a cross rate?

Q: Suppose that the exchange rate is 0.60 dollars per Swiss

Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?

Q: Sheldon Corporation projects the following free cash flows (FCFs) and

Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 7% rate. Sheldon&...

Q: An unlevered firm has a value of $600 million. An

An unlevered firm has a value of $600 million. An otherwise identical but levered firm has $240 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate...

Q: An unlevered firm has a value of $800 million. An

An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. Af...

Q: Air Tampa has just been incorporated, and its board of directors

Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller...

Q: Companies U and L are identical in every respect except that U

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) there are no corporate or personal taxes, (2) all of the...

Q: Companies U and L are identical in every respect except that U

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) all of the MM assumptions are met, (2) both firms are sub...

Q: Companies U and L are identical in every respect except that

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumption...

Q: Schwarzentraub Industries’ expected free cash flow for the year is $500

Schwarzentraub Industries’ expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equit...

Q: International Associates (IA) is about to commence operations as an

International Associates (IA) is about to commence operations as an international trading company. The firm will have book assets of $10 million, and it expects to earn a 16% return on these assets be...

Q: A. Fethe Inc. is a custom manufacturer of guitars,

A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe’s current value of operations, which is also its value of d...

Q: Why might purchasing power parity fail to hold?

Why might purchasing power parity fail to hold?

Q: A bond that pays interest forever and has no maturity date is

A bond that pays interest forever and has no maturity date is a perpetual bond, also called a perpetuity or a consol. In what respect is a perpetual bond similar to: (1) a no-growth common stock and...

Q: Define each of the following terms: a. Proxy

Define each of the following terms: a. Proxy; proxy fight; preemptive right; classified stock; founders’ shares b. Estimated value / market price / c. Required rate of return, / expected rate of r...

Q: Before entering a formal agreement, investment banks carefully investigate the companies

Before entering a formal agreement, investment banks carefully investigate the companies whose securities they underwrite; this is especially true of the issues of firms going public for the first tim...

Q: Define each of the following terms: a. Going public

Define each of the following terms: a. Going public; new issue market; initial public offering (IPO) b. Public offering; private placement c. Venture capitalists; roadshow; spread d. Securities and Ex...

Q: The SEC attempts to protect investors who are purchasing newly issued securities

The SEC attempts to protect investors who are purchasing newly issued securities by making sure that the information put out by a company and its investment banks is correct and is not misleading. How...

Q: How do you think each of the following items would affect a

How do you think each of the following items would affect a company’s ability to attract new capital and the flotation costs involved in doing so? a. A decision of a privately held company to go publi...

Q: Define each of the following terms: a. Proprietorship;

Define each of the following terms: a. Proprietorship; partnership; corporation b. Limited partnership; limited liability partnership; Professional Corporation c. Stockholder wealth maximization d. Pr...

Q: If you were starting a business, what tax considerations might cause

If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation?

Q: Define each of the following terms: a. Annual

Define each of the following terms: a. Annual report; balance sheet; income statement b. Common stockholders’ equity, or net worth; retained earnings c. Statement of stockholders’ equity; statement...

Q: If a “typical” firm reports $20 million of retained

If a “typical” firm reports $20 million of retained earnings on its balance sheet, can the firm definitely pay a $20 million cash dividend?

Q: a. Multinational corporation b. Exchange rate; fixed exchange

a. Multinational corporation b. Exchange rate; fixed exchange rate system; floating exchange rate c. Trade deficit; devaluation; revaluation d. Exchange rate risk; convertible currency; pegged exchang...

Q: Explain the difference between NOPAT and net income. Which is a

Explain the difference between NOPAT and net income. Which is a better measure of the performance of a company’s operations?

Q: What is free cash flow? Why is it the most important

What is free cash flow? Why is it the most important measure of cash flow?

Q: Vigo Vacations has $200 million in total assets, $5

Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25 million in long-term debt. What is the debt ratio?

Q: Winston Washers’s stock price is $75 per share. Winston has

Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in comm...

Q: Reno Revolvers has an EPS of $1.50, a

Reno Revolvers has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio?

Q: Needham Pharmaceuticals has a profit margin of 3% and an equity

Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50 million. What is its ROE?

Q: Gardial & Son has an ROA of 12%, a 5%

Gardial & Son has an ROA of 12%, a 5% profit margin, and a return on equity equal to 20%. What is the company’s total assets turnover? What is the firm’s equity multiplier?

Q: Ace Industries has current assets equal to $3 million.

Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inv...

Q: Assume you are given the following relationships for the Haslam Corporation:

Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.2 Return on assets (ROA) 4% Return on equity (ROE)...

Q: The Nelson Company has $1,312,500 in current

The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to in...

Q: Why do U.S. corporations build manufacturing plants abroad when

Why do U.S. corporations build manufacturing plants abroad when they could build them at home?

Q: A call option on the stock of Bedrock Boulders has a market

A call option on the stock of Bedrock Boulders has a market price of $7. The stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call optio...

Q: Security A has an expected rate of return of 6%, a

Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of −0.25, and a beta coefficient of −0.5. Security B has an expected...

Q: Why do options sell at prices higher than their exercise values?

Why do options sell at prices higher than their exercise values?

Q: Describe the effect on a call option’s price that results from an

Describe the effect on a call option’s price that results from an increase in each of the following factors: (1) stock price, (2) strike price, (3) time to expiration, (4) risk-free rate, and (5)...

Q: Define each of the following terms: a. Option;

Define each of the following terms: a. Option; call option; put option b. Exercise value; strike price c. Black-Scholes option pricing model

Q: A sinking fund can be set up in one of two ways

A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

Q: a. Bond; Treasury bond; corporate bond; municipal bond

a. Bond; Treasury bond; corporate bond; municipal bond; foreign bond b. Par value; maturity date; coupon payment; coupon interest rate c. Floating-rate bond; zero coupon bond; original issue discoun...

Q: The rate of return on a bond held to its maturity date

The rate of return on a bond held to its maturity date is called the bond’s yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price...

Q: If you buy a callable bond and interest rates decline, will

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.

Q: Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is

Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is...

Q: Should firms require higher rates of return on foreign projects than on

Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.

Q: Seven years ago, Goodwynn & Wolf Incorporated sold a 20-

Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14% annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds originally were sold at their face v...

Q: “Short-term interest rates are more volatile than long-

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement tru...

Q: Suppose you and most other investors expect the inflation rate to be

Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-fre...

Q: Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is

Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of...

Q: Heath Foods’ bonds have 7 years remaining to maturity. The bonds

Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current...

Q: The real risk-free rate of interest is 4%. Inflation

The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury...

Q: A Treasury bond that matures in 10 years has a yield of

A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premiu...

Q: The real risk-free rate is 3%, and inflation is

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

Q: Renfro Rentals has issued bonds that have a 10% coupon rate

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the b...

Q: Thatcher Corporation’s bonds will mature in 10 years. The bonds have

Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 year...

Q: What is a Eurodollar? If a French citizen deposits $10

What is a Eurodollar? If a French citizen deposits $10,000 in Chase Bank in New York, have Eurodollars been created? What if the deposit is made in Barclays Bank in London? Chase’s Paris branch? Does...

Q: The Garraty Company has two bond issues outstanding. Both bonds pay

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. a. What will b...

Q: The Brownstone Corporation’s bonds have 5 years remaining to maturity. Interest

The Brownstone Corporation’s bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. a. What is the yield to maturi...

Q: A 10-year, 12% semiannual coupon bond with a

A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.) a. What is...

Q: You just purchased a bond that matures in 5 years. The

You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?

Q: A bond that matures in 7 years sells for $1,

A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield?

Q: Absalom Motors’ 14% coupon rate, semiannual payment, $1

Absalom Motors’ 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the...

Q: A bond trader purchased each of the following bonds at a yield

A bond trader purchased each of the following bonds at a yield to maturity of 8%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of ea...

Q: An investor has two bonds in his portfolio. Each bond matures

An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the oth...

Q: The real risk-free rate is 2%. Inflation is expected

The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 × (t-1), where t = number of years...

Q: Assume that the real risk-free rate, r*, is

Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 8% in Year 1, 5% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and free o...

Q: Does interest rate parity imply that interest rates are the same in

Does interest rate parity imply that interest rates are the same in all countries?

Q: Because of a recession, the inflation rate expected for the coming

Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that...

Q: Suppose Hillard Manufacturing sold an issue of bonds with a 10-

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the goi...

Q: Arnot International’s bonds have a current market price of $1,

Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 year...

Q: The current price of a stock is $15. In 6

The current price of a stock is $15. In 6 months, the price will be either $18 or $13. The annual risk-free rate is 6%. Find the price of a call option on the stock that has a strike price of $14 and...

Q: The exercise price on one of Flanagan Company’s options is $15

The exercise price on one of Flanagan Company’s options is $15, its exercise value is $22, and its time value is $5. What are the option’s market value and the price of the stock?

Q: Assume that you have been given the following information on Purcell

Assume that you have been given the following information on Purcell Industries: According to the Black-Scholes option pricing model, what is the option’s value?

Q: Use the Black-Scholes Model to find the price for a

Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time to expiration is 4 months, (4) annualize...

Q: The current price of a stock is $20. In 1

The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and th...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Play is fam...

Q: Sam Strother and Shawna Tibbs are vice presidents of Mutual of

Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co_directors of the company’s pension fund management division. An important new client, the North-Western...

Q: Hager’s Home Repair Company, a regional hardware chain that specializes in

Hager’s Home Repair Company, a regional hardware chain that specializes in “do it yourself” materials and equipment rentals, is cash rich because...

Q: The probability distribution of a less risky return is more peaked than

The probability distribution of a less risky return is more peaked than that of a riskier return. What shape would the probability distribution have for (a) completely certain returns and (b) comple...

Q: Security A has an expected return of 7%, a standard

Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of 20.3, and a beta coefficient of 21.5. Security B has an expected return o...

Q: What are the three principal forms of business organization? What are

What are the three principal forms of business organization? What are the advantages and disadvantages of each?

Q: What is a firm’s fundamental, or intrinsic, value? What

What is a firm’s fundamental, or intrinsic, value? What might cause a firm’s intrinsic value to be different from its actual market value?

Q: Edmund Enterprises recently made a large investment to upgrade its technology.

Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements won’t have much of an impact on performance in the short run, they are expected to reduce fut...

Q: If a company’s beta were to double, would its expected return

If a company’s beta were to double, would its expected return double?

Q: Define the following terms, using graphs or equations to illustrate your

Define the following terms, using graphs or equations to illustrate your answers where feasible. a. Risk in general; stand-alone risk; probability distribution and its relation to risk b. Expected...

Q: If investors’ aversion to risk increased, would the risk premium on

If investors’ aversion to risk increased, would the risk premium on a high beta stock increase by more or less than that on a low-beta stock? Explain.

Q: a. Differentiate between the terms expected rate of return, required

a. Differentiate between the terms expected rate of return, required rate of return, and historical rate of return as they are applied to common stocks. b. If you found values for each of these retur...

Q: Assume you have just been hired as a financial analyst by Tennessee

Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The fir...

Q: What is the Capital Asset Pricing Model (CAPM)? What are

What is the Capital Asset Pricing Model (CAPM)? What are some of its key assumptions? Has it been empirically verified? What is the role of the Security Market Line in the CAPM? Suppose you had to est...

Q: Differentiate between (a) stand-alone risk and (b

Differentiate between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured, and are both concepts relevant for investors? What is presumed to be the primary goal of financia...

Q: Assume that you recently graduated and have just reported to work as

Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Della Torre, a pro...

Q: What was the global economic crisis? This is a really big

What was the global economic crisis? This is a really big question, so specifically, explain how in our interconnected global economy a decrease in housing prices in large U.S. cities ended up bankrup...

Q: What is presumed to be the primary goal of financial management?

What is presumed to be the primary goal of financial management? How is this goal related to other societal goals and considerations? Is this goal consistent with the basic assumptions of microeconomi...

Q: What are the advantages of the corporate for mover a sole proprietorship

What are the advantages of the corporate for mover a sole proprietorship or a partnership? What are the disadvantages of this form?

Q: The Zinn Company plans to issue $10,000,000

The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the cu...

Q: Differentiate between (a) stand-alone risk

Differentiate between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured and are both concepts relevant for investors? What is securitization? How is securitization su...

Q: a. Suppose Asset A has an expected return of 10%

a. Suppose Asset A has an expected return of 10% and a standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. If the correlation between A and B is 0.35, wha...

Q: Define the following terms, using graphs or equations to illustrate your

Define the following terms, using graphs or equations to illustrate your answers wherever feasible: a. Portfolio; feasible set; efficient portfolio; efficient frontier b. Indifference curve; optimal p...

Q: You are given the following set of data: /

You are given the following set of data: a. Construct a scatter diagram showing the relationship between returns on Stock Y and the market. Use a spreadsheet or a calculator with a linear regression...

Q: The standard deviation of stock returns for Stock A is 40%.

The standard deviation of stock returns for Stock A is 40%. The standard deviation of the market return is 20%. If the correlation between Stock A and the market is 0.70, then what is Stock A’s beta?...

Q: An analyst has modeled the stock of Crisp Trucking using a two

An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second fa...

Q: Stock A has an expected return of 12% and a standard

Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected return of 18% and a standard deviation of 60%. The correlation coefficient between Stocks A and B is 0.2....

Q: The beta coefficient of an asset can be expressed as a function

The beta coefficient of an asset can be expressed as a function of the asset’s correlation with the market as follows: a. Substitute this expression for beta into the Security Marke...

Q: You are given the following set of data: /

You are given the following set of data: a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X’s beta coefficient. b. Determine the arithmetic...

Q: If a publicly traded company has a large number of undiversified investors

If a publicly traded company has a large number of undiversified investors, along with some who are well diversified, can the undiversified investors earn a rate of return high enough to compensate th...

Q: What is the difference between a spot rate and a forward rate

What is the difference between a spot rate and a forward rate? How can forward rates be used for hedging purposes? Why would hedging occur?

Q: A Treasury bond futures contract has a settlement price of 89’08.

A Treasury bond futures contract has a settlement price of 89’08. What is the implied annual yield?

Q: Define the terms covariance and correlation coefficient. How are they related

Define the terms covariance and correlation coefficient. How are they related to one another, and how do they affect the required rate of return on a stock? Would correlation affect its required rate...

Q: What is an efficient portfolio? What is the Capital Market Line

What is an efficient portfolio? What is the Capital Market Line (CML), how is it related to efficient portfolios, and how does it interface with an investor’s indifference curve to determine the inves...

Q: What is the Security Market Line (SML)? What information

What is the Security Market Line (SML)? What information is developed in the Capital Market Line analysis and then carried over and used to help specify the SML? For practical applications as opposed...

Q: What is the difference between a historical beta, an adjusted

What is the difference between a historical beta, an adjusted beta, and a fundamental beta? Does it matter which beta is used, and if so, which is best?

Q: Has the validity of the CAPM been confirmed through empirical tests?

Has the validity of the CAPM been confirmed through empirical tests?

Q: What is the difference between a diversifiable risk and a nondiversifiable risk

What is the difference between a diversifiable risk and a nondiversifiable risk? Should stock portfolio managers try to eliminate both types of risk?

Q: Define the terms interest rate risk and reinvestment rate risk. How

Define the terms interest rate risk and reinvestment rate risk. How are these risks affected by maturities, call provisions, and coupon rates? Why might different types of investors view these risks d...

Q: Would a bond be more or less desirable if you learned that

Would a bond be more or less desirable if you learned that it has a sinking fund that requires the company to redeem, say, 10% of the original issue each year beginning in 2019, either through open ma...

Q: What is a bond rating, and how do ratings affect

What is a bond rating, and how do ratings affect bonds’ prices and yields? Who rates bonds, and what are some of the factors the rating agencies consider? Is it possible for a given company to have s...

Q: Financial assets such as mortgages, credit card receivables, and auto

Financial assets such as mortgages, credit card receivables, and auto loan receivables are often bundled up, placed in a bank trust department, and then used as collateral for publicly traded bonds. B...

Q: What is the implied interest rate on a Treasury bond ($100

What is the implied interest rate on a Treasury bond ($100,000) futures contract that settled at 100’16? If interest rates increased by 1%, what would be the contract’s new value?

Q: Define and discuss how to calculate a bond’s coupon rate, current

Define and discuss how to calculate a bond’s coupon rate, current yield, expected capital gains yield for the current year, yield to maturity (YTM), and yield to call (YTC). What might be some represe...

Q: Assume that you recently graduated and landed a job as a financial

Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. Your first client recently inherited some assets and has asked you to e...

Q: You have observed the following returns over time: /

You have observed the following returns over time: Copyright Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required...

Q: Your investment club has only two stocks in its portfolio. $

Your investment club has only two stocks in its portfolio. $20,000 is invested in a stock with a beta of 0.7, and $35,000 is invested in a stock with a beta of 1.3. What is the portfolio’s beta?

Q: AA Industries’ stock has a beta of 0.8. The

AA Industries’ stock has a beta of 0.8. The risk-free rate is 4% and the expected return on the market is 12%. What is the required rate of return on AA’s stock?

Q: Suppose that the risk-free rate is 5% and that

Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a beta of 1.7?

Q: An analyst has modeled the stock of a company using the Fama

An analyst has modeled the stock of a company using the Fama-French threefactor model. The risk-free rate is 5%, the market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the retur...

Q: A stock’s return has the following distribution: /

A stock’s return has the following distribution: Calculate the stock’s expected return and standard deviation.

Q: The market and Stock J have the following probability distributions:

The market and Stock J have the following probability distributions: a. Calculate the expected rates of return for the market and Stock J. b. Calculate the standard deviations for the market and Stoc...

Q: Suppose rRF 5 5%, rM 5 10%, and rA 5

Suppose rRF 5 5%, rM 5 10%, and rA 5 12%. a. Calculate Stock A’s beta. b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?

Q: Carter Enterprises can issue floating-rate debt at LIBOR + 2

Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 10%. Brence Manufacturing can issue floating-rate debt at LIBOR + 3.1% or fixed-rate debt at 11%. Suppose Carter iss...

Q: As an equity analyst you are concerned with what will happen to

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries’ stock as market conditions change. Suppose rRF 5 5%, rM 5 12%, and bUTI 5 1.4. a....

Q: Your retirement fund consists of a $5,000 investment in

Your retirement fund consists of a $5,000 investment in each of 15 different common stocks. The portfolio’s beta is 1.20. Suppose you sell one of the stocks with a beta of 0.8 for $5,000 and use the p...

Q: Suppose you manage a $4 million fund that consists of four

Suppose you manage a $4 million fund that consists of four stocks with the following investments: If the market’s required rate of return is 14% and the risk-free rate is 6%, what is...

Q: You have a $2 million portfolio consisting of a $100

You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta...

Q: Stock R has a beta of 1.5, Stock S

Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate is 7%. By how much does the required return on the riskier stock e...

Q: You are considering an investment in either individual stocks or a portfolio

You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns: a. Calculate the...

Q: The Morris Corporation has $600,000 of debt outstanding,

The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris’ annual sales are $3 million, its average tax rate is 40%, and its net profit margin on sal...

Q: Complete the balance sheet and sales information in the table that follows

Complete the balance sheet and sales information in the table that follows for J. White Industries using the following financial data: Total assets turnover: 1.5 Gross profit margin on sales: (Sales...

Q: The Kretovich Company had a quick ratio of 1.4,

The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, a days sales outstanding of 36.5 days (based on a 365-day year), total current assets of $810,000, and cash and marketable secur...

Q: Data for Lozano Chip Company and its industry averages follow.

Data for Lozano Chip Company and its industry averages follow. a. Calculate the indicated ratios for Lozano. b. Construct the extended DuPont equation for both Lozano and the industry. c. Outline L...

Q: How can a company use a bankruptcy to abrogate labor contracts?

How can a company use a bankruptcy to abrogate labor contracts? Has this occurred in certain industries in recent years?

Q: The Jimenez Corporation’s forecasted 2016 financial statements follow, along with some

The Jimenez Corporation’s forecasted 2016 financial statements follow, along with some industry average ratios. Calculate Jimenez’s 2016 forecasted ratios, compare...

Q: Greene Sisters has a DSO of 20 days. The company’s average

Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.

Q: Explain, in your own words, how MM uses the arbitrage

Explain, in your own words, how MM uses the arbitrage process to prove the validity of Proposition I. Also, list the major MM assumptions and explain why each of these assumptions is necessary in the...

Q: A utility company is allowed to charge prices high enough to cover

A utility company is allowed to charge prices high enough to cover all costs, including its cost of capital. Public service commissions are supposed to take actions that stimulate companies to operate...

Q: Modigliani and Miller assumed that firms do not grow. How does

Modigliani and Miller assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?

Q: Your firm’s CEO has just learned about options and how your firm’s

Your firm’s CEO has just learned about options and how your firm’s equity can be viewed as an option. Why might he want to increase the riskiness of the firm, and why might the bondholders be unhappy...

Q: Define each of the following terms: a. MM Proposition

Define each of the following terms: a. MM Proposition I without taxes and with corporate taxes b. MM Proposition II without taxes and with corporate taxes c. Miller model d. Adjusted present value (AP...

Q: How is the value of a financial option affected by:

How is the value of a financial option affected by: (a) the current price of the underlying asset, (b) the exercise (or strike) price, (c) the risk-free rate, (d) the time until expiration (or mat...

Q: The stockholders’ claim in a levered firm can be viewed as a

The stockholders’ claim in a levered firm can be viewed as a call option; stockholders have the option to purchase the firm’s assets by paying off its debt. What incentives does this provide to stockh...

Q: Lewis Securities Inc. has decided to acquire a new market data

Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online da...

Q: In your answers to the following set of questions, assume that

In your answers to the following set of questions, assume that Ross Corporation has $200 million of assets at book value, $150 million of liabilities owed to 500 different creditors, and $50 million o...

Q: How do IRS regulations affect leasing decisions?

How do IRS regulations affect leasing decisions?

Q: Assuming that FASB Statement 13 is working as it is supposed to

Assuming that FASB Statement 13 is working as it is supposed to work, should traditional leasing arrangements enable a firm to use more financial leverage than it otherwise could? How do synthetic lea...

Q: Define the term NAL as it is used in lease analysis,

Define the term NAL as it is used in lease analysis, and then explain how the NAL is calculated.

Q: Is leasing a zero sum game in the sense that any gain

Is leasing a zero sum game in the sense that any gain to the lessee is a cost to the lessor? If not, how might both parties gain from a lease transaction? In your answer, explain how the lessee and th...

Q: Differentiate between an operating lease, a capital lease (also known

Differentiate between an operating lease, a capital lease (also known as a financial lease), and a sale and leaseback arrangement. How might investors be misled by firms that use lease financing exten...

Q: What is a synthetic lease? How are such leases structured,

What is a synthetic lease? How are such leases structured, and what is their primary purpose? Is it likely that the use of synthetic leases will increase or decrease?

Q: Mullet Technologies is considering whether or not to refund a $75

Mullet Technologies is considering whether or not to refund a $75 million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% bonds ove...

Q: Security Brokers Inc. specializes in underwriting new issues by small firms

Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows: Price to public: ……………………………. $5 per share Number of share...

Q: Benjamin Garcia’s start-up business is succeeding, but he needs

Benjamin Garcia’s start-up business is succeeding, but he needs $200,000 in additional funding to fund continued growth. Benjamin and an angel investor agree the business is worth $800,000 and the ang...

Q: Bynum and Crumpton Inc. (B&C), a small

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it...

Q: Is bankruptcy a fairly common occurrence among large companies, or is

Is bankruptcy a fairly common occurrence among large companies, or is it restricted primarily to small firms?

Q: Jan Volk, financial manager of Green Sea Transport (GST),

Jan Volk, financial manager of Green Sea Transport (GST), has been asked by her boss to review GST’s outstanding debt issues for possible bond refunding. Five years ago, GST issued $40,000,000 of 11%,...

Q: On the day an IPO comes out, the market price can

On the day an IPO comes out, the market price can rise above the offering price or fall below that price. Is it more common for the market price to close above or below the offering price on the day o...

Q: What’s the difference between an IPO and an SEO? Would you

What’s the difference between an IPO and an SEO? Would you view purchasing a stock in an SEO to be more or less risky than purchasing a stock in an IPO? Would you expect the same first day returns for...

Q: How do companies decide whether or not to refund their outstanding bonds

How do companies decide whether or not to refund their outstanding bonds? If the NPV as calculated in a bond refunding analysis is positive, does that mean that the company should call and refund the...

Q: What are some reasons why companies decide to go public? If

What are some reasons why companies decide to go public? If going public is a good idea, why don’t all companies do so?

Q: Sadik Industries must install $1 million of new machinery in its

Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a bank loan for 100% of the required amount. Alternatively, a Texas investment banking firm that represents...

Q: Reynolds Construction needs a piece of equipment that costs $200.

Reynolds Construction needs a piece of equipment that costs $200. Reynolds can either lease the equipment or borrow $200 from a local bank and buy the equipment. If the equipment is leased, the lease...

Q: Consider the data in Problem 19-1. Assume that Reynolds’

Consider the data in Problem 19-1. Assume that Reynolds’ tax rate is 40% and that the equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment wo...

Q: Two companies, Energen and Hastings Corporation, began operations with identical

Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additional fixed assets at a cost of $50,000. Energen obtained a 5-year, $5...

Q: Big Sky Mining Company must install $1.5 million of

Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following...

Q: Stohs Semiconductor Corporation plans to issue $50 million of 20-

Stohs Semiconductor Corporation plans to issue $50 million of 20-year bonds in 6 months. The interest rate would be 9% if the bonds were issued today. How can Stohs set up a hedge against an increase...

Q: Niendorf Incorporated needs to raise $25 million to construct production facilities

Niendorf Incorporated needs to raise $25 million to construct production facilities for a new type of USB memory device. The firm’s straight nonconvertible debentures currently yield 9%. Its stock sel...

Q: Neubert Enterprises recently issued $1,000 par value 15-

Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 5% coupon paid annually and warrants attached. These bonds are currently trading for $1,000. Neubert also has outstanding $1,0...

Q: Maese Industries Inc. has warrants outstanding that permit the holders to

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25. a. Calculate the exercise value of the firm’s warrants if the common...

Q: The Tsetsekos Company was planning to finance an expansion. The principal

The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock...

Q: Fifteen years ago, Roop Industries sold $400 million of convertible

Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value....

Q: The Howland Carpet Company has grown rapidly during the past 5 years

The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of cred...

Q: Is preferred stock more like bonds or common stock? Explain.

Is preferred stock more like bonds or common stock? Explain.

Q: What effect does the trend in stock prices (subsequent to issue

What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through: (a) convertibles and (b) warrants?

Q: If a firm expects to have additional financial requirements in the future

If a firm expects to have additional financial requirements in the future, would you recommend that it use convertibles or bonds with warrants? What factors would influence your decision?

Q: What does it mean to “manage” risk? Should its

What does it mean to “manage” risk? Should its stockholders want a firm to “manage” all of the risks it faces?

Q: How does a firm’s dividend policy affect each of the following?

How does a firm’s dividend policy affect each of the following? a. The value of its long-term warrants b. The likelihood that its convertible bonds will be converted c. The likelihood that its warrant...

Q: Evaluate the following statement: “Issuing convertible securities is a means

Evaluate the following statement: “Issuing convertible securities is a means by which a firm can sell common stock for more than the existing market price.”

Q: Suppose a company simultaneously issues $50 million of convertible bonds with

Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does...

Q: Define each of the following terms: a. Preferred stock

Define each of the following terms: a. Preferred stock b. Cumulative dividends; arrearages c. Warrant; detachable warrant d. Stepped-up price e. Convertible security f. Conversion ratio; conversion pr...

Q: Why do companies use so many different types of instruments to raise

Why do companies use so many different types of instruments to raise capital? Why not just use debt and common stock?

Q: The Raattama Corporation had sales of $3.5 million last

The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of p...

Q: Williams & Sons last year reported sales of $10 million and

Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s invento...

Q: What is the nominal and effective cost of trade credit under the

What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?

Q: Snider Industries sells on terms of 2/10, net 45

Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,500,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days af...

Q: a. If a firm buys under terms of 3/15

a. If a firm buys under terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? b. Does it receive more or less cre...

Q: What types of risks are interest-rate and exchange rate swaps

What types of risks are interest-rate and exchange rate swaps designed to mitigate? Why might one company prefer fixed-rate payments while another company prefers floating-rate payments, or payments i...

Q: Grunewald Industries sells on terms of 2/10, net 40

Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,562,500 and accounts receivable averaged $437,500. Half of Grunewald’s customers paid on the 10th day and took discou...

Q: Negus Enterprises has an inventory conversion period of 50 days, an

Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales. a....

Q: Strickler Technology is considering changes in its working capital policies to improve

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler’ss sales last year were $3,250,000 (all on credit), and its net profit margin was...

Q: Payne Products had $1.6 million in sales revenues in

Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on i...

Q: Dorothy Koehl recently leased space in the Southside Mall and opened a

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necess...

Q: Suppose a firm makes purchases of $3.65 million per

Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. a. What is the average amount of accounts payable net of discounts? (Assume the $3.65 millio...

Q: The Thompson Corporation projects an increase in sales from $1.

The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expans...

Q: What kinds of firms use commercial paper?

What kinds of firms use commercial paper?

Q: Define each of the following terms: a. Working capital

Define each of the following terms: a. Working capital; net working capital; net operating working capital b. Relaxed policy; restricted policy; moderate policy c. Permanent operating current assets;...

Q: What are the four elements of a firm’s credit policy? To

What are the four elements of a firm’s credit policy? To what extent can firms set their own credit policies as opposed to accepting policies that are dictated by its competitors?

Q: What is a futures contract, and how are futures used to

What is a futures contract, and how are futures used to manage risk? What are you protecting against if you buy Treasury futures contracts? What if you sell Treasury futures short?

Q: What are the advantages of matching the maturities of assets and liabilities

What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Q: From the standpoint of the borrower, is long-term or

From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?

Q: Is it true that most firms are able to obtain some free

Is it true that most firms are able to obtain some free trade credit and that additional trade credit is often available, but at a cost? Explain.

Q: Distinguish between operating leases and financial leases. Would you be more

Distinguish between operating leases and financial leases. Would you be more likely to find an operating lease employed for a fleet of trucks or for a manufacturing plant?

Q: Are lessees more likely to be in higher or lower income tax

Are lessees more likely to be in higher or lower income tax brackets than lessors?

Q: Commercial banks moved heavily into equipment leasing during the early 1970s,

Commercial banks moved heavily into equipment leasing during the early 1970s, acting as lessors. One major reason for this invasion of the leasing industry was to gain the benefits of accelerated depr...

Q: One advantage of leasing voiced in the past is that it kept

One advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This raised the...

Q: Suppose there were no IRS restrictions on what constituted a valid lease

Suppose there were no IRS restrictions on what constituted a valid lease. Explain, in a manner a legislator might understand, why some restrictions should be imposed. Illustrate your answer with numbe...

Q: Suppose Congress enacted new tax law changes that would: (

Suppose Congress enacted new tax law changes that would: (1) permit equipment to be depreciated over a shorter period, (2) lower corporate tax rates, and (3) reinstate the investment tax credit. Di...

Q: In our Anderson Company example, we assumed that the lease could

In our Anderson Company example, we assumed that the lease could not be canceled. What effect would a cancellation clause have on the lessee’s analysis? On the lessor’s analysis?

Q: What is interest rate parity? How might the treasurer of a

What is interest rate parity? How might the treasurer of a multinational firm use the interest rate parity concept: (a) when deciding how to invest the firm’s surplus cash and (b) when deciding wher...

Q: Distinguish between the APV, FCFE, and corporate valuation models.

Distinguish between the APV, FCFE, and corporate valuation models.

Q: Define each of the following terms: a. Lessee;

Define each of the following terms: a. Lessee; lessor b. Operating lease; financial lease; sale-and-leaseback; combination lease; synthetic lease; SPE c. Off–balance sheet financing; capitalizing d. F...

Q: Paul Duncan, financial manager of EduSoft Inc., is facing a

Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primary and secondary school markets. Al...

Q: Karen Johnson, CFO for Raucous Roasters (RR), a specialty

Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy in light of a recent scare she faced when RRâ&...

Q: Suppose you just bought a convertible bond at its par value.

Suppose you just bought a convertible bond at its par value. Your broker gives you information on the bond’s conversion ratio, coupon rate, maturity, years of call protection, and the yield on nonconv...

Q: If a company is thinking about issuing preferred stock to raise capital

If a company is thinking about issuing preferred stock to raise capital, what are some factors that it should consider? What factors should an investor consider before buying preferred stock?

Q: What is a warrant? If a company decides to raise capital

What is a warrant? If a company decides to raise capital by issuing bonds with warrants, how would the terms on both the bond and the warrant be set? Consider in particular how the coupon rate and mat...

Q: What is a convertible? If a company decides to raise capital

What is a convertible? If a company decides to raise capital by issuing convertible bonds, how would the terms on the bond be set? Consider specifically the maturity, coupon rate, and call features of...

Q: Is it true that, when one firm sells to another on

Is it true that, when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding discounts...

Q: Discuss this statement: “Firms can control their accruals within fairly

Discuss this statement: “Firms can control their accruals within fairly wide limits.”

Q: What are the two principal reasons for holding cash? Can a

What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?

Q: a. Synergy; merger b. Horizontal merger; vertical

a. Synergy; merger b. Horizontal merger; vertical merger; congeneric merger; conglomerate merger c. Friendly merger; hostile merger; defensive merger; tender offer; target company; breakup value; acqu...

Q: Indicate by a (1), (2), or (0

Indicate by a (1), (2), or (0) whether each of the following events would most likely cause accounts receivable (AR), sales, and profits to increase, decrease, or be affected in an indeterminate manne...

Q: Define each of the following terms: a. Cash discounts

Define each of the following terms: a. Cash discounts b. Seasonal dating c. Aging schedule; days sales outstanding (DSO) d. Payments pattern approach; uncollected balances schedule e. Simple interest;...

Q: Lewis Securities Inc. has decided to acquire a new market data

Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online da...

Q: What is a cash budget, and how is this statement used

What is a cash budget, and how is this statement used by a business? How is the cash budget affected by the CCC? By credit policy?

Q: Differentiate between free and costly trade credit. What is the

Differentiate between free and costly trade credit. What is the formula for determining the nominal annual cost rate associated with a credit policy? What is the formula for the effective annual cost...

Q: What are some advantages of matching the maturities of claims against assets

What are some advantages of matching the maturities of claims against assets with the lives of the assets financed by those claims? Is it feasible for a firm to match perfectly the maturities of all a...

Q: Define the terms aggressive and conservative when applied to financing, give

Define the terms aggressive and conservative when applied to financing, give examples of each, and then discuss the pros and cons of each approach. Would you expect to find entrenched firms in monopol...

Q: What is the cash conversion cycle (CCC)? Why it better

What is the cash conversion cycle (CCC)? Why it better, other things held constant, to have a shorter rather than a longer CCC? Suppose you know a company’s annual sales, average inventories, average...

Q: Suncoast Boats Inc. estimates that, because of the seasonal nature

Suncoast Boats Inc. estimates that, because of the seasonal nature of its business, it will require an additional $2 million of cash for the month of July. Suncoast Boats has the following four option...

Q: Mary Jones recently obtained an equipment loan from a local bank.

Mary Jones recently obtained an equipment loan from a local bank. The loan is for $15,000 with a nominal interest rate of 11%. However, this is an installment loan, so the bank also charges add-on int...

Q: Four economic classifications of mergers are: (1) horizontal

Four economic classifications of mergers are: (1) horizontal, (2) vertical, (3) conglomerate, and (4) congeneric. Explain the significance of these terms in merger analysis with regard to (a) the l...

Q: Del Hawley, owner of Hawley’s Hardware, is negotiating with First

Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the alternatives listed below. Calculate the effective annual in...

Q: Gifts Galore Inc. borrowed $1.5 million from National

Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months. A 20% compensating balance requirement raised the effecti...

Q: The Boyd Corporation has annual credit sales of $1.6

The Boyd Corporation has annual credit sales of $1.6 million. Current expenses for the collection department are $35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm...

Q: Kim Mitchell, the new credit manager of the Vinson Corporation,

Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net...

Q: Yonge Corporation must arrange financing for its working capital requirements for the

Yonge Corporation must arrange financing for its working capital requirements for the coming year. Yonge can: (a) borrow from its bank on a simple interest basis (interest payable at the end of the lo...

Q: The Russ Fogler Company, a small manufacturer of cordless telephones,

The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on January 1. Its credit sales for the first 6 months of operations were as follows: Throughout this entire perio...

Q: Malone Feed and Supply Company buys on terms of 1/10

Malone Feed and Supply Company buys on terms of 1/10, net 30, but it has not been taking discounts and has actually been paying in 60 rather than 30 days. Assume that the accounts payable are recorded...

Q: Explain how each of the following factors would probably affect a firm’s

Explain how each of the following factors would probably affect a firm’s target cash balance if all other factors were held constant. a. The firm institutes a new billing procedure that better synchro...

Q: a. Baumol model b. Total carrying cost; total

a. Baumol model b. Total carrying cost; total ordering cost; total inventory costs c. Economic Ordering Quantity (EOQ); EOQ model; EOQ range d. Reorder point; safety stock e. Red-line method; two-bin...

Q: Indicate by a (+), (_), or (0) whether each of

Indicate by a (+), (_), or (0) whether each of the following events would probably cause average annual inventory holdings to rise, fall, or be affected in an indeterminate manner: a. Our suppliers ch...

Q: Firm a wants to acquire Firm B. Firm B’s management agrees

Firm a wants to acquire Firm B. Firm B’s management agrees that the merger is a good idea. Might a tender offer be used? Why or why not?

Q: Barenbaum Industries projects that cash outlays of $4.5 million

Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities fr...

Q: The Gentry Garden Center sells 90,000 bags of lawn fertilizer

The Gentry Garden Center sells 90,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,000 bags. Each bag costs the firm $1.50, inventory carrying cost is 2...

Q: Explain briefly what the EOQ model is and how it can be

Explain briefly what the EOQ model is and how it can be used to help establish an optimal inventory policy. Is the EOQ concept consistent with just-in-time procedures for managing inventories?

Q: Explain how the EOQ inventory model can be modified and used to

Explain how the EOQ inventory model can be modified and used to help determine the optimal size of a firm’s cash balances. Do you think the EOQ approach to cash management is more or less relevant tod...

Q: Explain how the futures markets can be used to reduce interest rate

Explain how the futures markets can be used to reduce interest rate risk and contracts?

Q: How can swaps be used to reduce the risks associated with debt

How can swaps be used to reduce the risks associated with debt contracts?

Q: a. Derivatives b. Enterprise risk management c.

a. Derivatives b. Enterprise risk management c. Financial futures; forward contract d. Hedging; natural hedge; long hedge; short hedge; perfect hedge; symmetric hedge; asymmetric hedge e. Swap; struct...

Q: Why do liquidations usually result in losses for the creditors or the

Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.

Q: a. Informal restructuring; reorganization in bankruptcy b. Assignment

a. Informal restructuring; reorganization in bankruptcy b. Assignment; liquidation in bankruptcy; fairness; feasibility c. Absolute priority doctrine; relative priority doctrine d. Bankruptcy Reform A...

Q: Why do creditors usually accept a plan for financial rehabilitation rather than

Why do creditors usually accept a plan for financial rehabilitation rather than demand liquidation of the business?

Q: Distinguish between operating mergers and financial mergers.

Distinguish between operating mergers and financial mergers.

Q: Would it be a sound rule to liquidate whenever the liquidation value

Would it be a sound rule to liquidate whenever the liquidation value is above the value of the corporation as a going concern? Discuss.

Q: Are liquidations likely to be more common for public utility, railroad

Are liquidations likely to be more common for public utility, railroad, or industrial corporations? Why or why not?

Q: Zhao Automotive issues fixed-rate debt at a rate of 7

Zhao Automotive issues fixed-rate debt at a rate of 7.00%. Zhao agrees to an interest rate swap in which it pays LIBOR to Lee Financial and Lee pays 6.8% to Zhao. What is Zhao’s resulting net payment?...

Q: SafeCo can issue floating-rate debt at LIBOR + 1%

SafeCo can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 8%, but it would prefer to use fixed-rate debt. RiskyCo can issue floating- rate debt at LIBOR + 2% or fixed-rate debt at 8.8%,...

Q: Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm...

Q: Under the fixed exchange rate system, what was the currency against

Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?

Q: With the growth in demand for exotic foods, Possum Products’ CEO

With the growth in demand for exotic foods, Possum Products’ CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ost...

Q: Exchange rates fluctuate under both the fixed exchange rate and floating exchange

Exchange rates fluctuate under both the fixed exchange rate and floating exchange rate systems. What, then, is the difference between the two systems?

Q: If the Swiss franc depreciates against the U.S. dollar

If the Swiss franc depreciates against the U.S. dollar, can a dollar buy more or fewer Swiss francs as a result?

Q: If the United States imports more goods from abroad than it exports

If the United States imports more goods from abroad than it exports, then foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign c...

Q: The following balance sheet represents Boles Electronics Corporation’s position at the time

The following balance sheet represents Boles Electronics Corporation’s position at the time it filed for bankruptcy (in thousands of dollars): The mortgage bonds are secured by the p...

Q: VolWorld Communications Inc., a large telecommunications company, is evaluating the

VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld’s analysts...

Q: Vandell’s free cash flow (FCF0) is $2 million per

Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandell’s operations? If Vandell has $10.82 millio...

Q: Hastings estimates that if it acquires Vandell, interest payments will be

Hastings estimates that if it acquires Vandell, interest payments will be $1.5 million per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest i...

Q: Assuming the same information as for Problem 26-2, suppose

Assuming the same information as for Problem 26-2, suppose Hastings will increase Vandell’s level of debt at the end of Year 3 to $30.6 million so that the target capital structure is now 45% debt. As...

Q: Marston Marble Corporation is considering a merger with the Conroy Concrete Company

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.30. Conroy has been barely profitable, so it has paid an ave...

Q: What is synergy? What are some factors that might lead to

What is synergy? What are some factors that might lead to synergy? How is the amount of synergy in a proposed merger measured, and how is it allocated between the two firms’ stockholders? Would the fo...

Q: Many companies have serious discussions about merging. Sometimes these discussions lead

Many companies have serious discussions about merging. Sometimes these discussions lead to mergers, sometimes not. What are some factors that should be considered and that affect the likelihood of a m...

Q: Explain how the market multiples method is used to determine the value

Explain how the market multiples method is used to determine the value of a target firm to a potential acquirer. Give several examples of this procedure.

Q: If you were conducting a merger analysis, would you give the

If you were conducting a merger analysis, would you give the multiples method or one of the DCF methods (that is, the APV or corporate valuation model) more weight in your decision? Explain.

Q: Southwestern Wear Inc. has the following balance sheet: /

Southwestern Wear Inc. has the following balance sheet: The trustee’s costs total $281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the no...

Q: Explain how purchase accounting is implemented in a merger. Does the

Explain how purchase accounting is implemented in a merger. Does the accounting profession now require this method? How is any premium that the acquiring firm paid over the acquired firm’s book value...

Q: Acquisitions can have important tax consequences depending on: (a

Acquisitions can have important tax consequences depending on: (a) Whether the acquiring firm purchases the target’s stock or just its assets, (b) whether cash or stock is used for the payment, and...

Q: What are horizontal, vertical, congeneric, and conglomerate mergers?

What are horizontal, vertical, congeneric, and conglomerate mergers? Are the different types of mergers equally likely to pass muster with the Justice Department?

Q: The South Korean multinational manufacturing firm, Nam Sung Industries, is

The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project’s expected dollar cash flows consist of an i...

Q: At today’s spot exchange rates 1 U.S. dollar can

At today’s spot exchange rates 1 U.S. dollar can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross rate between the...

Q: The nominal yield on 6-month T-bills is 7

The nominal yield on 6-month T-bills is 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate pa...

Q: Assume that interest rate parity holds. In both the spot market

Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen equals 0.0086 dollar. In Japan, 90-day risk-free securities yield 4.6%. What is the yield...

Q: Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a

Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a 50 million-peso loan from a Mexico City bank last month to fund the expansion of your Monterrey, Mexico plant. When you t...

Q: In 1983, the Japanese yen-U.S. dollar

In 1983, the Japanese yen-U.S. dollar exchange rate was 245 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $8,000. Suppose that now the exchange rate is 80 yen per doll...

Q: Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches

Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today’s spot rate. The firm’s financial manager, James Desreumaux, has no...

Q: The Verbrugge Publishing Company’s 2015 balance sheet and income statement are as

The Verbrugge Publishing Company’s 2015 balance sheet and income statement are as follows (in millions of dollars): Verbrugge and its creditors have agreed upon a voluntary reorganiz...

Q: Assume that interest rate parity holds and that 90-day risk

Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $1.40. What is the 90-day forward rate?...

Q: Chapman Inc.’s Mexican subsidiary, V. Gomez Corporation,

Chapman Inc.’s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 50 pesos in dividends in 1 year after all foreign and U.S. taxes have been subtracted. The exchange rate in 1 yea...

Q: At the time it defaulted on its interest payments and filed for

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the balance sheet shown below (in thousands of dollars). The court, after trying unsuccessfu...

Q: What are some ways banks can state their charges, and how

What are some ways banks can state their charges, and how should the cost of bank debt be analyzed? In the early 1970s, Congress debated the need for new legislation, and it ended up passing a “Truth...

Q: What is purchasing power parity? How might a firm use this

What is purchasing power parity? How might a firm use this concept in its operations?

Q: Give two reasons stockholders might be indifferent between owning the stock of

Give two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.

Q: List six reasons why risk management might increase the value of a

List six reasons why risk management might increase the value of a firm.

Q: Discuss some of the techniques available to reduce risk exposures.

Discuss some of the techniques available to reduce risk exposures.

Q: What four methods are used to account for inventory? What are

What four methods are used to account for inventory? What are the financial implications of one method over another? How does the choice of inventory accounting method affect the order in which actual...

Q: Rich Jackson, a recent finance graduate, is planning to go

Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to gen...

Q: Assuming the firm’s sales volume remained constant, would you expect it

Assuming the firm’s sales volume remained constant, would you expect it to have a higher cash balance during a tight-money period or during an easy money period? Why?

Q: Andria Mullins, financial manager of Webster Electronics, has been asked

Andria Mullins, financial manager of Webster Electronics, has been asked by the firm’s CEO, Fred Weygandt, to evaluate the company’s inventory control techniques and to lead a discussion of the subjec...

Q: How would you decide whether or not to make the change described

How would you decide whether or not to make the change described in question 4? Assume you also have information on the company’s cost of capital, tax rate, and variable costs. How would the company’s...

Q: How does credit policy affect the cash conversion cycle as discussed in

How does credit policy affect the cash conversion cycle as discussed in the last chapter?

Q: How do each of the items in a firm’s credit policy—

How do each of the items in a firm’s credit policy— defined to include the credit period, the discount and discount period, the credit standards used, and the collection policy—affect its sales, the l...

Q: Suppose IBM signed a contract to buy a supply of computer chips

Suppose IBM signed a contract to buy a supply of computer chips from a German firm. The price is 10 million euros, and the chips will be delivered immediately, but IBM can delay payment for 6 months i...

Q: Does its management typically have complete control over a firm’s credit policy

Does its management typically have complete control over a firm’s credit policy? As a general rule, is it more likely that a company would increase its profitability if it tightened or loosened its cr...

Q: Suppose a company’s current credit terms are 1/10, net

Suppose a company’s current credit terms are 1/10, net 30, but management is considering changing its terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-paying cus...

Q: Suppose a firm makes a purchase and receives the shipment on February

Suppose a firm makes a purchase and receives the shipment on February 1. The terms of trade as stated on the invoice read “2/10, net 40, May 1 dating.” What is the latest date on which payment can be...

Q: Is it true that if a firm calculates its days sales outstanding

Is it true that if a firm calculates its days sales outstanding, it has no need for an aging schedule? Explain your answer.

Q: Firm A had no credit losses last year, but 1%

Firm A had no credit losses last year, but 1% of Firm B’s accounts receivable proved to be uncollectible and resulted in losses. Can you determine which firms credit manager is performing better? Why...

Q: An unlevered firm has a value of $800 million. An

An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. No...

Q: Should options given as part of compensation packages be reported on the

Should options given as part of compensation packages be reported on the income statement as an expense? What are some pros and cons relating to this issue?

Q: The rationale behind granting stock options is to induce employees to

The rationale behind granting stock options is to induce employees to work harder and be more productive. As the stock price increases (presumably due to their hard work), the employees share in this...

Q: Suppose a company has a DSO that is considerably higher than its

Suppose a company has a DSO that is considerably higher than its industry average. If the company could reduce its accounts receivable to the point where its DSO was equal to the industry average with...

Q: How do managers, bankers, and security analysts’ use:

How do managers, bankers, and security analysts’ use: (a) trend analysis, (b) benchmarking, (c) percent change analysis, and (d) common size analysis?

Q: Much has been made about the sweeping changes that are occurring in

Much has been made about the sweeping changes that are occurring in Europe as a result of the euro. Will the euro help European firms become more efficient? Will it change the way multinational corpor...

Q: Explain how ratio analysis in general, and the DuPont system in

Explain how ratio analysis in general, and the DuPont system in particular, can be used by managers to help maximize their firms’ stock prices

Q: How would each of the following factors affect ratio analysis?

How would each of the following factors affect ratio analysis? (a) The firm’s sales are highly seasonal. (b) The firm uses some type of window dressing. (c) The firm issues more debt and uses the p...

Q: How might one establish norms (or target values) for the

How might one establish norms (or target values) for the financial ratios of a company that is just getting started? Where might data for this purpose be obtained? Could information of this type be us...

Q: Why are financial ratios used? Name five categories of ratios,

Why are financial ratios used? Name five categories of ratios, and then list several ratios in each category. Would a bank loan officer, a bond analyst, a stock analyst, and a manager be likely to put...

Q: Is it true that the “flatter” (more nearly horizontal

Is it true that the “flatter” (more nearly horizontal) the demand curve for a particular firm’s stock and the less important investors regard the signaling effect of the offering, the more important t...

Q: WorldCom capitalized some costs that should, under standard accounting practices,

WorldCom capitalized some costs that should, under standard accounting practices, have been expensed. Enron and some other companies took similar actions to inflate their reported income and to hide d...

Q: How could (accurate) balance sheet and income statement information be

How could (accurate) balance sheet and income statement information be used, along with other information, to make a statement of cash flows? What is the primary purpose of this statement?

Q: Differentiate between net income, EPS, EBITDA, net cash flow

Differentiate between net income, EPS, EBITDA, net cash flow, NOPAT, free cash flow, MVA, and EVA. What is the primary purpose of each item; that is, when and how is it used?

Q: How and why are regular accounting data modified for use in financial

How and why are regular accounting data modified for use in financial management?

Q: The income statement shows “flows” over a period of time

The income statement shows “flows” over a period of time, while the balance sheet shows accounts at a given point in time. Explain how these two concepts are combined when we calculate free cash flow....

Q: How is multinational financial management different from financial management as practiced by

How is multinational financial management different from financial management as practiced by a firm that has no direct contacts with foreign firms or customers? What special problems and challenges d...

Q: Taxes affect many financial decisions. Explain how: (a

Taxes affect many financial decisions. Explain how: (a) interest and dividend payments are treated for tax purposes, from both a company’s and an investor’s perspective, and (b) how dividends and cap...

Q: If Congress wants to stimulate the economy, explain how it might

If Congress wants to stimulate the economy, explain how it might alter each of the following: (a) personal and corporate tax rates, (b) depreciation schedules, and (c) the differential between the...

Q: How are the balance sheet and the income statement related to one

How are the balance sheet and the income statement related to one another? How would you explain to a layperson the primary purpose of each of the statements? Which of the numbers in the income statem...

Q: Two investors are evaluating General Electric’s stock for possible purchase. They

Two investors are evaluating General Electric’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the ris...

Q: An unlevered firm has a value of $500 million. An

An unlevered firm has a value of $500 million. An otherwise identical but levered firm has $50 million in debt. Under the MM zero-tax model, what is the value of the levered firm?

Q: David Lyons, CEO of Lyons Solar Technologies, is concerned about

David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not us...

Q: The first part of the case, presented in Chapter 6

The first part of the case, presented in Chapter 6, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2015, rather than the expected profit. As a re...

Q: What is operating capital, and why is it important?

What is operating capital, and why is it important?

Q: What four statements are contained in most annual reports?

What four statements are contained in most annual reports?

Q: Jenny Cochran, a graduate of The University of Tennessee with

Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computronâ€...