All Related Questions of Managerial Finance

Q: Santana Music is a U.S.-based MNC whose foreign

Santana Music is a U.S.-based MNC whose foreign subsidiary had pretax income of $55,000; all after-tax income is available in the form of dividends to the parent company. The local tax rate is 40%, th...

Q: You have been made treasurer for a day at AIMCO, which

You have been made treasurer for a day at AIMCO, which develops technology for video conferencing. A manager of the satellite division has asked you to authorize a capital expenditure in the amount of...

Q: Willow Enterprises is considering the acquisition of Steadfast Corp. in a

Willow Enterprises is considering the acquisition of Steadfast Corp. in a stock swap transaction. Currently, Willow’s stock is selling for $45 per share. Although Steadfast’s shares are currently trad...

Q: Phylum Plants’ stock is currently trading at a price of $55

Phylum Plants’ stock is currently trading at a price of $55 per share. The company is considering the acquisition of Taxonomy Central, whose stock is currently trading at $20 per share. The transactio...

Q: All-Stores Inc. is a holding company that has voting

All-Stores Inc. is a holding company that has voting control over both General Stores and Star Stores. All-Stores owns General Stores and Star Stores common stock valued at $15,000 and $12,000, respec...

Q: What are the important international trading blocs? What is the European

What are the important international trading blocs? What is the European Union, and what is its single unit of currency? What is GATT? What is the WTO?

Q: What is a joint venture? Why is it often essential to

What is a joint venture? Why is it often essential to use this arrangement? What effect do joint-venture laws and restrictions have on the operation of foreign-based subsidiaries?

Q: From the point of view of a U.S.-based

From the point of view of a U.S.-based MNC, what key tax factors need to be considered?

Q: Discuss the major reasons for the growth of the Euro market.

Discuss the major reasons for the growth of the Euro market. What is an offshore center? Name the major participants in the Euro market.

Q: Under FASB No. 52, what are the translation rules for

Under FASB No. 52, what are the translation rules for financial statement accounts? How does the temporal method differ from these rules?

Q: Define spot exchange rate and forward exchange rate. Define and compare

Define spot exchange rate and forward exchange rate. Define and compare accounting exposures and economic exposures to exchange rate fluctuations.

Q: Explain how differing inflation rates between two countries affect their exchange rate

Explain how differing inflation rates between two countries affect their exchange rate over the long term.

Q: Recently, some branches of Donut Shop, Inc., have dropped

Recently, some branches of Donut Shop, Inc., have dropped the practice of allowing employees to accept tips. Customers who once said, “Keep the change,” now have to get used to waiting for their nicke...

Q: Discuss macro and micro political risk. What is the emerging third

Discuss macro and micro political risk. What is the emerging third path to political risk? Describe some techniques for dealing with political risk.

Q: Indicate how NPV can differ depending on whether it is measured from

Indicate how NPV can differ depending on whether it is measured from the parent MNC’s point of view or from that of the foreign subsidiary, when cash flows may be blocked by local authorities.

Q: Briefly discuss some of the international factors that cause the capital structures

Briefly discuss some of the international factors that cause the capital structures of MNCs to differ from those of purely domestic firms.

Q: Describe the difference between foreign bonds and Eurobonds. Explain how each

Describe the difference between foreign bonds and Eurobonds. Explain how each is sold, and discuss the determinant(s) of their interest rates.

Q: What are the long-run advantages of having more local debt

What are the long-run advantages of having more local debt and less MNC-based equity in the capital structure of a foreign subsidiary?

Q: What is the Eurocurrency market? What are the main factors determining

What is the Eurocurrency market? What are the main factors determining foreign exchange rates in that market? Differentiate between the nominal interest rate and the effective interest rate in this ma...

Q: Discuss the steps to be followed in adjusting a subsidiary’s accounts relative

Discuss the steps to be followed in adjusting a subsidiary’s accounts relative to third parties when that subsidiary’s local currency is expected to appreciate in value in relation to the currency of...

Q: Outline the changes to be undertaken in intra-MNC accounts if

Outline the changes to be undertaken in intra-MNC accounts if a subsidiary’s currency is expected to depreciate in value relative to the currency of the parent MNC.

Q: What are some of the major reasons for the rapid expansion in

What are some of the major reasons for the rapid expansion in international mergers and joint ventures of firms?

Q: What is float, and what are its three components?

What is float, and what are its three components?

Q: Ross Company, a manufacturer of pharmaceuticals, has pretax ordinary income

Ross Company, a manufacturer of pharmaceuticals, has pretax ordinary income of $500,000 and has just sold for $150,000 an asset purchased 2 years ago for $125,000. Using Table 1.2, calcula...

Q: What are the firm’s objectives with regard to collection float and to

What are the firm’s objectives with regard to collection float and to payment float?

Q: What are the three main advantages of cash concentration?

What are the three main advantages of cash concentration?

Q: What are three mechanisms of cash concentration? What is the objective

What are three mechanisms of cash concentration? What is the objective of using a zero-balance account (ZBA) in a cash concentration system?

Q: What two characteristics make a security marketable? Why are the yields

What two characteristics make a security marketable? Why are the yields on nongovernment marketable securities generally higher than the yields on government issues with similar maturities?

Q: Differentiate between a nominal annual rate and an effective annual rate (

Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).

Q: You are responsible for managing your company’s short-term investments and

You are responsible for managing your company’s short-term investments and you know that the compounding frequency of investment opportunities is quite important. Using the information provided at MyL...

Q: How do market forces—both shareholder activism and the threat of

How do market forces—both shareholder activism and the threat of takeover—prevent or minimize the agency problem? What role do institutional investors play in shareholder activism?

Q: For what three main reasons is profit maximization potentially inconsistent with wealth

For what three main reasons is profit maximization potentially inconsistent with wealth maximization?

Q: How can you determine the size of the equal, end-

How can you determine the size of the equal, end-of-year deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?

Q: Describe the procedure used to amortize a loan into a series of

Describe the procedure used to amortize a loan into a series of equal periodic payments.

Q: What does it mean when we say that individuals as a group

What does it mean when we say that individuals as a group are net suppliers of funds for financial institutions? What do you think the consequences might be for financial markets if individuals consum...

Q: How can you determine the unknown number of periods when you know

How can you determine the unknown number of periods when you know the present and future values—single amount or annuity—and the applicable rate of interest?

Q: Why is it important that managers recognize that a tradeoff exists between

Why is it important that managers recognize that a tradeoff exists between risk and return? Why does that tradeoff exist?

Q: What is the primary economic principle used in managerial finance?

What is the primary economic principle used in managerial finance?

Q: What are the major differences between accounting and finance with respect to

What are the major differences between accounting and finance with respect to emphasis on cash flows and decision making?

Q: If managers do not act in the best interests of shareholders,

If managers do not act in the best interests of shareholders, what role might incentives play in explaining that behavior?

Q: What are financial institutions? Describe the role they play within the

What are financial institutions? Describe the role they play within the financial market environment.

Q: What different aspects of financial markets do the Securities Act of 1933

What different aspects of financial markets do the Securities Act of 1933 and the Securities Exchange Act of 1934 regulate?

Q: Describe the roles of, and the relationships among, the major

Describe the roles of, and the relationships among, the major parties in a corporation: stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take?

Q: What four ways do VCs use to organize their businesses? How

What four ways do VCs use to organize their businesses? How do they structure and price their deals?

Q: What general procedures must a private firm follow to go public via

What general procedures must a private firm follow to go public via an initial public offering (IPO)?

Q: You are the chief financial officer (CFO) of Gaga Enterprises

You are the chief financial officer (CFO) of Gaga Enterprises, an edgy fashion design firm. Your firm needs $10 million to expand production. How do you think the process of raising this money will va...

Q: What role does an investment bank play in a public offering?

What role does an investment bank play in a public offering? Describe an underwriting syndicate.

Q: What is securitization, and how does it facilitate investment in real

What is securitization, and how does it facilitate investment in real estate assets?

Q: What is a mortgage-backed security? What basic risk is

What is a mortgage-backed security? What basic risk is associated with mortgage-backed securities?

Q: How do rising home prices contribute to low mortgage delinquencies?

How do rising home prices contribute to low mortgage delinquencies?

Q: Why do falling home prices create an incentive for homeowners to default

Why do falling home prices create an incentive for homeowners to default on their mortgages even if they can afford to make the monthly payments?

Q: Why does a crisis in the financial sector spill over into other

Why does a crisis in the financial sector spill over into other industries?

Q: Who are the key customers of financial institutions? Who are net

Who are the key customers of financial institutions? Who are net suppliers, and who are net demanders of funds?

Q: Which legal form of business organization is most common? Which form

Which legal form of business organization is most common? Which form do the largest businesses typically take and why?

Q: Describe the role of commercial banks, investment banks, and the

Describe the role of commercial banks, investment banks, and the shadow banking system within the financial market environment.

Q: What role do financial markets play in our economy? What are

What role do financial markets play in our economy? What are primary and secondary markets? What relationship exists between financial institutions and financial markets?

Q: For what kinds of needs do you think a firm would issue

For what kinds of needs do you think a firm would issue securities in the money market versus the capital market?

Q: What is a private placement versus a public offering?

What is a private placement versus a public offering?

Q: What is the money market? What is the Eurocurrency market?

What is the money market? What is the Eurocurrency market?

Q: What is the capital market? What are broker markets? What

What is the capital market? What are broker markets? What are dealer markets? How do they differ?

Q: Describe the role of capital markets from the firm’s and investors’ perspectives

Describe the role of capital markets from the firm’s and investors’ perspectives. What is the efficient market hypothesis?

Q: Why do you think that so many pieces of important legislation related

Why do you think that so many pieces of important legislation related to financial markets and institutions were passed during the Great Depression?

Q: What roles do GAAP, the FASB, and the PCAOB play

What roles do GAAP, the FASB, and the PCAOB play in the financial reporting activities of public companies?

Q: In most of the specific firms listed have current ratios that fall

In most of the specific firms listed have current ratios that fall below the industry average. Why? One exception to this general pattern is Whole Foods Market, which competes at the very high end of...

Q: To assess the firm’s average collection period and average payment period ratios

To assess the firm’s average collection period and average payment period ratios, what additional information is needed, and why?

Q: What is financial leverage?

What is financial leverage?

Q: What ratio measures the firm’s degree of indebtedness? What ratios assess

What ratio measures the firm’s degree of indebtedness? What ratios assess the firm’s ability to service debts?

Q: Over the past 100 years, the level of government regulation of

Over the past 100 years, the level of government regulation of financial institutions and markets has ebbed and flowed or, as some economists might argue, has ebbed and flooded. Although the laws and...

Q: What three ratios of profitability appear on a common-size income

What three ratios of profitability appear on a common-size income statement?

Q: What would explain a firm having a high gross profit margin and

What would explain a firm having a high gross profit margin and a low net profit margin?

Q: A firm’s ROE is typically not equal to its ROA. Why

A firm’s ROE is typically not equal to its ROA. Why? When would a firm’s ROA equal its ROE?

Q: What do the price/earnings (P/E) ratio

What do the price/earnings (P/E) ratio and the market/book (M/B) ratio reveal about how investors assess a firm’s performance? What caveats must investors keep in mind when evaluating these ratios?

Q: Financial ratio analysis is often divided into five areas: liquidity,

Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is of great...

Q: Describe how you would use a large number of ratios to perform

Describe how you would use a large number of ratios to perform a complete ratio analysis of the firm.

Q: Describe the purpose of each of the four major financial statements.

Describe the purpose of each of the four major financial statements.

Q: What three areas of analysis are combined in the modified DuPont formula

What three areas of analysis are combined in the modified DuPont formula? Explain how the manager uses the DuPont system of analysis to dissect the firm’s results and isolate their causes.

Q: Why are the notes to the financial statements important to professional securities

Why are the notes to the financial statements important to professional securities analysts?

Q: How is the current rate (translation) method used to consolidate

How is the current rate (translation) method used to consolidate a firm’s foreign and domestic financial statements?

Q: Angina Inc. has 5 million shares outstanding. The firm is

Angina Inc. has 5 million shares outstanding. The firm is considering issuing an additional 1 million shares. After selling these shares at their $20 per share offering price and netting 95% of the sa...

Q: With regard to financial ratio analysis, how do the viewpoints held

With regard to financial ratio analysis, how do the viewpoints held by the firm’s present and prospective shareholders, creditors, and management differ?

Q: What is the difference between cross-sectional and time-series

What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?

Q: When performing cross-sectional ratio analysis, the analyst should pay

When performing cross-sectional ratio analysis, the analyst should pay primary attention to what types of deviations from the norm? Why?

Q: Why is it preferable to compare ratios calculated using financial statements that

Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?

Q: Under what circumstances would the current ratio be the preferred measure of

Under what circumstances would the current ratio be the preferred measure of overall firm liquidity? Under what circumstances would the quick ratio be preferred?

Q: What is the financial planning process? Contrast long-term (

What is the financial planning process? Contrast long-term (strategic) financial plans with short-term (operating) financial plans.

Q: What is the purpose of the cash budget? What role does

What is the purpose of the cash budget? What role does the sales forecast play in its preparation?

Q: Briefly describe the basic format of the cash budget.

Briefly describe the basic format of the cash budget.

Q: How can the two “bottom lines” of the cash budget

How can the two “bottom lines” of the cash budget be used to determine the firm’s short-term borrowing and investment requirements?

Q: What is the purpose of pro forma statements? What inputs are

What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches?

Q: You are a summer intern at the office of a local tax

You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager gives you the following list of accounts and asks you to prepare a sim...

Q: How is the percent-of-sales method used to prepare

How is the percent-of-sales method used to prepare pro forma income statements?

Q: What is the significance of the “plug” figure, external

What is the significance of the “plug” figure, external financing required? Differentiate between strategies associated with positive values and with negative values for external financing required.

Q: Which three statements result as part of the short-term (

Which three statements result as part of the short-term (operating) financial planning process?

Q: What is the financial manager’s objective in evaluating pro forma statements?

What is the financial manager’s objective in evaluating pro forma statements?

Q: What does it mean to say that corporations face a double taxation

What does it mean to say that corporations face a double taxation problem?

Q: Define agency problems, and describe how they give rise to agency

Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.

Q: How can the firm structure management compensation to minimize agency problems?

How can the firm structure management compensation to minimize agency problems?

Q: What is risk? Why must financial managers consider risk as well

What is risk? Why must financial managers consider risk as well as return when they evaluate a decision alternative or action?

Q: Is maximizing shareholder wealth inconsistent with having concern for the welfare of

Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm’s other stakeholders?

Q: What are the main types of decisions that financial managers make?

What are the main types of decisions that financial managers make?

Q: Explain why the income statement can also be called a “profit

Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?

Q: Briefly describe the first four modified accelerated cost recovery system (MACRS

Briefly describe the first four modified accelerated cost recovery system (MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS reco...

Q: Describe the overall cash flow through the firm in terms of cash

Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.

Q: Explain why a decrease in cash is classified as a cash inflow

Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow (use) in preparing the statement of cash flows.

Q: Why is depreciation (as well as amortization and depletion) considered

Why is depreciation (as well as amortization and depletion) considered a noncash charge?

Q: Describe the general format of the statement of cash flows. How

Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement?

Q: Why do we exclude interest expense from operating cash flow?

Why do we exclude interest expense from operating cash flow?

Q: Define and differentiate between a firm’s operating cash flow (OCF)

Define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).

Q: What is the difference between future value and present value? Which

What is the difference between future value and present value? Which approach is generally preferred by financial managers?

Q: What is the difference between an ordinary annuity and an annuity due

What is the difference between an ordinary annuity and an annuity due? Which is more valuable? Why?

Q: What are the most efficient ways to calculate the present value of

What are the most efficient ways to calculate the present value of an ordinary annuity?

Q: Assume that the Mexican peso currently trades at 12 pesos to the

Assume that the Mexican peso currently trades at 12 pesos to the U.S. dollar. During the year, U.S. inflation is expected to average 3%, while Mexican inflation is expected to average 5%. What is the...

Q: Cooper Industries Inc. began 2019 with retained earnings of $25

Cooper Industries Inc. began 2019 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockho...

Q: How can the formula for the future value of an annuity be

How can the formula for the future value of an annuity be modified to find the future value of an annuity due?

Q: What is the cause of uncertainty in the cash budget, and

What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?

Q: What is a perpetuity? Why is the present value of a

What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate? Why doesn’t this chapter provide an equation showing you how to calculate...

Q: Because tax time comes around every year, you smartly decide to

Because tax time comes around every year, you smartly decide to make equal contributions to your IRA at the end of every year. Using the information provided at MyLab Finance, calculate the future val...

Q: Why does the presence of fixed costs lead to errors in a

Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method?

Q: Describe the judgmental approach for simplified preparation of the pro forma balance

Describe the judgmental approach for simplified preparation of the pro forma balance sheet.

Q: How do you calculate the future value of a mixed stream of

How do you calculate the future value of a mixed stream of cash flows? How do you calculate the present value of a mixed stream?

Q: What are the two basic weaknesses of the simplified approaches to preparing

What are the two basic weaknesses of the simplified approaches to preparing pro forma statements?

Q: Define and differentiate among the three basic patterns of cash flow:

Define and differentiate among the three basic patterns of cash flow: (1) a single amount, (2) an annuity, and (3) a mixed stream.

Q: What effect does compounding interest more frequently than annually have on (

What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?

Q: Bluestone Metals Inc. is a metal fabrication firm that manufactures prefabricated

Bluestone Metals Inc. is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you...

Q: How is the compounding process related to the payment of interest on

How is the compounding process related to the payment of interest on savings? What is the general equation for future value?

Q: What effect would a decrease in the interest rate have on the

What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?

Q: What is meant by “the present value of a future amount

What is meant by “the present value of a future amount”? What is the general equation for present value?

Q: What effect does increasing the required return have on the present value

What effect does increasing the required return have on the present value of a future amount? Why?

Q: How are present value and future value calculations related?

How are present value and future value calculations related?

Q: It is tax time and you would like to make a tax

It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Using the information provided at MyLab Finance, find the future value of an IRA cont...

Q: It is never too soon to begin investing for a child’s college

It is never too soon to begin investing for a child’s college education. Using the information provided at MyLab Finance, determine the present value you would need to invest today to ensure that your...

Q: What is the real rate of interest? Differentiate it from the

What is the real rate of interest? Differentiate it from the nominal rate of interest.

Q: What is the current yield for a bond? How are bond

What is the current yield for a bond? How are bond prices quoted? How are bonds rated, and why?

Q: Compare the basic characteristics of Eurobonds and foreign bonds.

Compare the basic characteristics of Eurobonds and foreign bonds.

Q: If we know that a firm has a net profit margin of

If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to...

Q: Why is it important for financial managers to understand the valuation process

Why is it important for financial managers to understand the valuation process?

Q: What are the three key inputs to the valuation process?

What are the three key inputs to the valuation process?

Q: Does the valuation process apply only to assets that provide an annual

Does the valuation process apply only to assets that provide an annual cash flow? Explain

Q: What is the term structure of interest rates, and how is

What is the term structure of interest rates, and how is it related to the yield curve?

Q: For a given class of similar-risk securities, what does

For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) downward sloping, (b) upward sloping, and (c) flat? What is the “normal” sh...

Q: Briefly describe the following theories of the general shape of the yield

Briefly describe the following theories of the general shape of the yield curve: (a) expectations theory, (b) liquidity preference theory, and (c) market segmentation theory.

Q: List and briefly describe the potential issuer- and issue-related

List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium. Which are the purely debt-specific risks?

Q: What are typical maturities, denominations, and interest payments of a

What are typical maturities, denominations, and interest payments of a corporate bond? What mechanisms protect bondholders?

Q: Differentiate between standard debt provisions and restrictive covenants included in a bond

Differentiate between standard debt provisions and restrictive covenants included in a bond indenture. What are the consequences if a bond issuer violates any of these covenants?

Q: How is the cost of bond financing typically related to the cost

How is the cost of bond financing typically related to the cost of short term borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?

Q: The installed cost of a new computerized controller was $65,

The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation percenta...

Q: What is a conversion feature? A call feature? What are

What is a conversion feature? A call feature? What are stock purchase warrants?

Q: What are the key differences between debt and equity?

What are the key differences between debt and equity?

Q: Describe, compare, and contrast the following common stock dividend valuation

Describe, compare, and contrast the following common stock dividend valuation models: (a) zero-growth, (b) constant-growth, and (c) variable-growth.

Q: Describe the free cash flow valuation model, and explain how it

Describe the free cash flow valuation model, and explain how it differs from the dividend valuation models. What is the appeal of this model?

Q: Explain each of the three other approaches to common stock valuation:

Explain each of the three other approaches to common stock valuation: (a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?

Q: Explain the linkages among financial decisions, return, risk, and

Explain the linkages among financial decisions, return, risk, and stock value.

Q: Assuming that all other variables remain unchanged, what effect would each

Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases. (c) Th...

Q: What risks do common stockholders take that other suppliers of capital do

What risks do common stockholders take that other suppliers of capital do not?

Q: How does a rights offering protect a firm’s stockholders against the dilution

How does a rights offering protect a firm’s stockholders against the dilution of ownership?

Q: Explain the relationships among authorized shares, outstanding shares, treasury stock

Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares.

Q: Classify the following changes in each of the accounts as either an

Classify the following changes in each of the accounts as either an inflow or an outflow of cash. During the year (a) marketable securities increased, (b) land and buildings decreased, (c) accounts pa...

Q: What are the advantages to both U.S.-based and

What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? What are American depositary shares (ADSs...

Q: What claims do preferred stockholders have with respect to distribution of earnings

What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets?

Q: Explain the cumulative feature of preferred stock. What is the purpose

Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue?

Q: Describe the events that occur in an efficient market in response to

Describe the events that occur in an efficient market in response to new information that cause the expected return to exceed the required return. What happens to the market value?

Q: What does the efficient-market hypothesis (EMH) say about

What does the efficient-market hypothesis (EMH) say about (a) securities prices, (b) their reaction to new information, and (c) investor opportunities to profit? What is the behavioral finance challen...

Q: How does international diversification enhance risk reduction? When might international diversification

How does international diversification enhance risk reduction? When might international diversification result in subpar returns? What are political risks, and how do they affect international diversi...

Q: How are total risk, non diversifiable risk, and diversifiable risk

How are total risk, non diversifiable risk, and diversifiable risk related? Why is non diversifiable risk the only relevant risk?

Q: What risk does beta measure? How can you find the beta

What risk does beta measure? How can you find the beta of a portfolio?

Q: Explain the meaning of each variable in the capital asset pricing model

Explain the meaning of each variable in the capital asset pricing model (CAPM) equation. What is the security market line (SML)?

Q: What impact would the following changes have on the security market line

What impact would the following changes have on the security market line and therefore on the required return for a given level of risk? (a) An increase in inflationary expectations. (b) Investors bec...

Q: Determine the operating cash flow (OCF) for Kleczka Inc.,

Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of $2,500, cost of goods sold totale...

Q: Define and specify the general equation for the value of any asset

Define and specify the general equation for the value of any asset, V0.

Q: Define return, and describe how to find the total rate of

Define return, and describe how to find the total rate of return on an investment.

Q: Compare the following risk preferences: (a) risk averse

Compare the following risk preferences: (a) risk averse, (b) risk neutral, and (c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk aver...

Q: Explain how the range is used in scenario analysis.

Explain how the range is used in scenario analysis.

Q: What does a plot of the probability distribution of outcomes show a

What does a plot of the probability distribution of outcomes show a decision maker about an asset’s risk?

Q: What relationship exists between the size of the standard deviation and the

What relationship exists between the size of the standard deviation and the degree of asset risk?

Q: What does the coefficient of variation reveal about an investment’s risk that

What does the coefficient of variation reveal about an investment’s risk that the standard deviation does not?

Q: Why is the correlation between asset returns important? How does diversification

Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in i...

Q: What is risk in the context of financial decision making?

What is risk in the context of financial decision making?

Q: What premise about share value underlies the constant-growth valuation (

What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?

Q: During the year, Xero Inc. experienced an increase in net

During the year, Xero Inc. experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in ac...

Q: Why is the cost of financing a project with retained earnings less

Why is the cost of financing a project with retained earnings less than the cost of financing it with a new issue of common stock?

Q: What is the weighted average cost of capital (WACC), and

What is the weighted average cost of capital (WACC), and how is it calculated?

Q: What role does the cost of capital play in the firm’s long

What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?

Q: What does the firm’s capital structure represent?

What does the firm’s capital structure represent?

Q: What are the typical sources of long-term capital available to

What are the typical sources of long-term capital available to the firm?

Q: What are the net proceeds from the sale of a bond?

What are the net proceeds from the sale of a bond? What are flotation costs, and how do they affect a bond’s net proceeds?

Q: What methods can be used to find the before-tax cost

What methods can be used to find the before-tax cost of debt?

Q: What is an efficient portfolio? How can the return and standard

What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined?

Q: How would you calculate the cost of preferred stock?

How would you calculate the cost of preferred stock?

Q: What is the financial manager’s goal in selecting investment projects for the

What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.

Q: Rimier Corp. forecasts sales of $650,000 for 2020

Rimier Corp. forecasts sales of $650,000 for 2020. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed cost...

Q: Do the net present value (NPV) and internal rate of

Do the net present value (NPV) and internal rate of return (IRR) agree with respect to accept–reject decisions? With respect to ranking decisions? Explain.

Q: How do the constant-growth valuation model and capital asset pricing

How do the constant-growth valuation model and capital asset pricing model methods for finding the cost of common stock differ?

Q: How is a net present value profile used to compare projects?

How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?

Q: What is the payback period? How is it calculated?

What is the payback period? How is it calculated?

Q: What weaknesses are commonly associated with the use of the payback period

What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment?

Q: How is the net present value (NPV) calculated for a

How is the net present value (NPV) calculated for a project with a conventional cash flow pattern?

Q: What decision rule do managers follow when they use NPV to accept

What decision rule do managers follow when they use NPV to accept or reject investment ideas? How is an investment’s NPV related to the firm’s market value?

Q: Explain the similarities and differences between NPV, PI, and EVA

Explain the similarities and differences between NPV, PI, and EVA.

Q: How is the before-tax cost of debt converted into the

How is the before-tax cost of debt converted into the after-tax cost?

Q: What is the internal rate of return (IRR) on an

What is the internal rate of return (IRR) on an investment? How is it determined?

Q: Your broker calls to offer you the investment opportunity of a lifetime

Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled to the principal and...

Q: What is the decision rule that managers follow when they use the

What is the decision rule that managers follow when they use the IRR method to accept or reject investment proposals? How is that decision rule related to the firm’s market value?

Q: Why is it important to evaluate capital budgeting projects on the basis

Why is it important to evaluate capital budgeting projects on the basis of incremental cash flows?

Q: How are the net operating cash flows that are associated with a

How are the net operating cash flows that are associated with a replacement decision calculated?

Q: Explain how the terminal cash flow is calculated for replacement projects.

Explain how the terminal cash flow is calculated for replacement projects.

Q: Diagram and describe the three types of net cash flows for a

Diagram and describe the three types of net cash flows for a capital budgeting project.

Q: Does the assumption concerning the reinvestment of intermediate cash inflow tend to

Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?

Q: What three types of net cash flows may exist for a given

What three types of net cash flows may exist for a given project? How can expansion decisions be treated as replacement decisions? Explain

Q: What effect do sunk costs and opportunity costs have on a project’s

What effect do sunk costs and opportunity costs have on a project’s net cash flows?

Q: Explain how to use each of the following inputs to calculate the

Explain how to use each of the following inputs to calculate the initial investment: (a) cost of the new asset, (b) installation costs, (c) proceeds from the sale of the old asset, (d) tax on the sale...

Q: How do you calculate the book value of an asset?

How do you calculate the book value of an asset?

Q: Assume that a firm makes a $2,500 deposit into

Assume that a firm makes a $2,500 deposit into a short-term investment account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 ye...

Q: What three tax situations may result from the sale of an asset

What three tax situations may result from the sale of an asset that is being replaced?

Q: Referring to the basic format for calculating an initial investment, explain

Referring to the basic format for calculating an initial investment, explain how a firm would determine the depreciable value of the new asset.

Q: How does depreciation enter into the calculation of operating cash flows?

How does depreciation enter into the calculation of operating cash flows? How does the income statement format in Table 11.6 relate to Equation 4.3 for finding operating cash flow (OCF)? Table 11.6:...

Q: Are most mutually exclusive capital budgeting projects equally risky? If you

Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project change a firm...

Q: What are real options? What are some major types of real

What are real options? What are some major types of real options?

Q: What is the difference between the strategic NPV and the traditional NPV

What is the difference between the strategic NPV and the traditional NPV? Do they always result in the same accept–reject decisions?

Q: What is capital rationing? In theory, should capital rationing exist

What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?

Q: Compare and contrast the internal rate of return approach and the net

Compare and contrast the internal rate of return approach and the net present value approach to capital rationing. Which is better? Why?

Q: What is the relationship between the firm’s target capital structure and the

What is the relationship between the firm’s target capital structure and the weighted average cost of capital (WACC)?

Q: Describe the logic underlying the use of target weights to calculate the

Describe the logic underlying the use of target weights to calculate the WACC, and compare and contrast this approach with the use of historical weights. What is the preferred weighting scheme?

Q: If Like A Lot Corp. borrows yen at a nominal annual

If Like A Lot Corp. borrows yen at a nominal annual interest rate of 2% and during the year the yen appreciates by 10%, what will the effective annual interest rate be for the loan?

Q: If Bob and Judy combine their savings of $1,260

If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after...

Q: Define risk in terms of the cash flows from a capital budgeting

Define risk in terms of the cash flows from a capital budgeting project. How can determination of the breakeven cash inflow be used to gauge project risk?

Q: Describe how each of the following behavioral approaches can be used to

Describe how each of the following behavioral approaches can be used to deal with project risk: (a) scenario analysis and (b) simulation.

Q: How can firms mitigate currency risk and political risk when investing in

How can firms mitigate currency risk and political risk when investing in a foreign country?

Q: Briefly explain how the following items affect the capital budgeting decisions of

Briefly explain how the following items affect the capital budgeting decisions of multinational companies: (a) exchange rate risk; (b) political risk; (c) tax law differences; (d) transfer pricing; an...

Q: Describe the basic procedures involved in using risk-adjusted discount rates

Describe the basic procedures involved in using risk-adjusted discount rates (RADRs). How is this approach related to the capital asset pricing model (CAPM)?

Q: Explain why a firm whose stock is actively traded in the securities

Explain why a firm whose stock is actively traded in the securities markets need not concern itself with diversification. Despite this reason, how is the risk of capital budgeting projects frequently...

Q: How are risk classes often used to apply RADRs?

How are risk classes often used to apply RADRs?

Q: Explain why a mere comparison of the NPVs of unequal-lived

Explain why a mere comparison of the NPVs of unequal-lived, ongoing, mutually exclusive projects is inappropriate. Describe the annualized net present value (ANPV) approach for comparing unequal-lived...

Q: What does the term leverage mean? How are operating leverage,

What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?

Q: Briefly describe the agency problem that exists between owners and lenders.

Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?

Q: Gabrielle just won $2.5 million in the state lottery

Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a lump sum of $1.3 million now, or she can elect to receive $100,000 at the end of each of the next 25 years....

Q: How does asymmetric information affect the firm’s capital structure decisions? How

How does asymmetric information affect the firm’s capital structure decisions? How do the firm’s financing actions give investors signals that reflect management’s view of stock value?

Q: How do the cost of debt, the cost of equity,

How do the cost of debt, the cost of equity, and the weighted average cost of capital (WACC) behave as the firm’s financial leverage increases from zero? Where is the optimal capital structure? What i...

Q: What is the operating breakeven point? How do changes in fixed

What is the operating breakeven point? How do changes in fixed operating costs, the sale price per unit, and the variable operating cost per unit affect it?

Q: What is operating leverage? What causes it? How do you

What is operating leverage? What causes it? How do you measure the degree of operating leverage (DOL)?

Q: What is financial leverage? What causes it? How do you

What is financial leverage? What causes it? How do you measure the degree of financial leverage (DFL)?

Q: What is the general relationship among operating leverage, financial leverage,

What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?

Q: What is a firm’s capital structure? What ratios assess the degree

What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?

Q: In what ways are the capital structures of U.S.

In what ways are the capital structures of U.S. firms and non–U.S. firms different? How are they similar?

Q: What is the major benefit of debt financing? How does it

What is the major benefit of debt financing? How does it affect the firm’s cost of debt?

Q: What are business risk and financial risk? How does each influence

What are business risk and financial risk? How does each influence the firm’s capital structure decisions?

Q: Your firm has the option of making an investment in new software

Your firm has the option of making an investment in new software that will cost $130,000 today but will save the company money over several years. You estimate that the software will provide the savin...

Q: What two ways can firms distribute cash to shareholders?

What two ways can firms distribute cash to shareholders?

Q: Describe a constant-payout-ratio dividend policy, a regular

Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies?

Q: Why do firms issue stock dividends? Comment on the following statement

Why do firms issue stock dividends? Comment on the following statement: “I have a stock that promises to pay a 20% stock dividend every year, and therefore it guarantees that I will break even in 5 ye...

Q: Compare a stock split with a stock dividend.

Compare a stock split with a stock dividend.

Q: Explain the EBIT–EPS approach to capital structure. Include in

Explain the EBIT–EPS approach to capital structure. Include in your explanation a graph indicating the financial breakeven point; label the axes. Is this approach consistent with maximization of the o...

Q: Why do maximizing EPS and maximizing value not necessarily lead to the

Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?

Q: What important factors in addition to quantitative factors should a firm consider

What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?

Q: What procedure is used to value a bond that pays annual interest

What procedure is used to value a bond that pays annual interest? Semiannual interest?

Q: What relationship between the required return and the coupon rate will cause

What relationship between the required return and the coupon rate will cause a bond to sell at a discount? At a premium? At its par value?

Q: If the required return on a bond differs from its coupon rate

If the required return on a bond differs from its coupon rate, describe the behavior of the bond price over time as the bond moves toward maturity.

Q: Joseph is a friend of yours. He has plenty of money

Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds. Partner...

Q: As a risk-averse investor, would you prefer bonds with

As a risk-averse investor, would you prefer bonds with short or long periods until maturity? Why?

Q: Why do rapidly growing firms generally pay no dividends?

Why do rapidly growing firms generally pay no dividends?

Q: What is a bond’s yield to maturity (YTM)? Briefly describe

What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM. Why is the YTM a good measure of the required return o...

Q: How does the future value of a deposit subject to continuous compounding

How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?

Q: The dividend payout ratio equals dividends paid divided by earnings. How

The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?

Q: Who are holders of record? When does a stock sell ex

Who are holders of record? When does a stock sell ex dividend?

Q: What effect did the Jobs and Growth Tax Relief Reconciliation Act of

What effect did the Jobs and Growth Tax Relief Reconciliation Act of 2003 have on the taxation of corporate dividends? On corporate dividend payouts?

Q: What benefit is available to participants in a dividend reinvestment plan?

What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit from such a plan?

Q: Does following the residual theory of dividends lead to a stable dividend

Does following the residual theory of dividends lead to a stable dividend? Is this approach consistent with dividend relevance?

Q: Contrast the basic arguments about dividend policy advanced by Miller and Modigliani

Contrast the basic arguments about dividend policy advanced by Miller and Modigliani and by Gordon and Lintner.

Q: Jack and Jill have just had their first child. If they

Jack and Jill have just had their first child. If they expect that college will cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each of the next...

Q: What five factors do firms consider in establishing dividend policy? Briefly

What five factors do firms consider in establishing dividend policy? Briefly describe each of them.

Q: Why is working capital management one of the most important and time

Why is working capital management one of the most important and time-consuming activities of the financial manager? What is net working capital?

Q: What factors make managing inventory more difficult for exporters and multinational companies

What factors make managing inventory more difficult for exporters and multinational companies?

Q: What is the role of the five C’s of credit in the

What is the role of the five C’s of credit in the credit selection activity?

Q: Explain why credit scoring is typically applied to consumer credit decisions rather

Explain why credit scoring is typically applied to consumer credit decisions rather than to mercantile credit decisions.

Q: What are the basic tradeoffs in a tightening of credit standards?

What are the basic tradeoffs in a tightening of credit standards?

Q: Why are the risks involved in international credit management more complex than

Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales?

Q: What is the relationship between the predictability of a firm’s cash inflows

What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are net working capital, liquidity, and risk of insolvency related?

Q: Why does an increase in the ratio of current assets to total

Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total asset...

Q: What is the difference between the firm’s operating cycle and its cash

What is the difference between the firm’s operating cycle and its cash conversion cycle?

Q: Ann and Jack have been partners for several years. Their firm

Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions. One disagreement, however, concern...

Q: Why is it helpful to divide the funding needs of a seasonal

Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy?

Q: Why is it important for a firm to minimize the length of

Why is it important for a firm to minimize the length of its cash conversion cycle?

Q: What are likely to be the viewpoints of each of the following

What are likely to be the viewpoints of each of the following managers about the levels of the various types of inventory: finance, marketing, manufacturing, and purchasing? Why is inventory an inves...

Q: Briefly describe the following techniques for managing inventory: (1

Briefly describe the following techniques for managing inventory: (1) ABC system, economic order quantity (EOQ) model, (2) just-in time (JIT) system, and (3) three computerized systems for resource c...

Q: What are the two major sources of spontaneous short-term financing

What are the two major sources of spontaneous short-term financing for a firm? How do their balances behave relative to the firm’s sales?

Q: What is the important difference between international and domestic transactions? How

What is the important difference between international and domestic transactions? How is a letter of credit used in financing international trade transactions? How is “netting” used in transactions be...

Q: Are secured short-term loans viewed as more risky or less

Are secured short-term loans viewed as more risky or less risky than unsecured short-term loans? Why?

Q: In general, what interest rates and fees are levied on secured

In general, what interest rates and fees are levied on secured short-term loans? Why are these rates generally higher than the rates on unsecured short-term loans?

Q: Describe and compare the basic features of the following methods of using

Describe and compare the basic features of the following methods of using accounts receivable to obtain short-term financing: (a) pledging accounts receivable and (b) factoring accounts receivable. Be...

Q: The nominal, risk-free rate on T-bills is

The nominal, risk-free rate on T-bills is 1.23%. If the real rate of interest is 0.80%, what is the expected inflation rate?

Q: Is there a cost associated with taking an early payment discount?

Is there a cost associated with taking an early payment discount? Is there any cost associated with giving up a discount? How do borrowing costs affect the decision to take or forego an early payment...

Q: What is “stretching accounts payable”? What effect does this action

What is “stretching accounts payable”? What effect does this action have on the cost of giving up a discount?

Q: How is the prime rate of interest relevant to the cost of

How is the prime rate of interest relevant to the cost of short-term bank borrowing? What is a floating-rate loan?

Q: How does the effective annual rate differ between a loan requiring interest

How does the effective annual rate differ between a loan requiring interest payments at maturity and another, similar loan requiring interest in advance?

Q: What are the basic terms and characteristics of a single-payment

What are the basic terms and characteristics of a single-payment note? How is the effective annual rate on such a note found?

Q: What is a line of credit? Describe each of the following

What is a line of credit? Describe each of the following features that are often included in these agreements: (a) operating-change restrictions, (b) compensating balance, and (c) annual cleanup.

Q: What is a revolving credit agreement? How does this arrangement differ

What is a revolving credit agreement? How does this arrangement differ from the line-of-credit agreement? What is a commitment fee?

Q: How do firms use commercial paper to raise short-term funds

How do firms use commercial paper to raise short-term funds? Who can issue commercial paper? Who buys commercial paper?

Q: Differentiate between a hybrid security and a derivative security.

Differentiate between a hybrid security and a derivative security.

Q: What is the implied price of a warrant? How is it

What is the implied price of a warrant? How is it estimated? To be effective, how should it be related to the estimated market value of a warrant?

Q: The yields for Treasuries with differing maturities on a recent day were

The yields for Treasuries with differing maturities on a recent day were as shown in the table below. a. Use the information to plot a yield curve for this date. b. If the expectations hypothesis is...

Q: What is the general relationship between the theoretical and market values of

What is the general relationship between the theoretical and market values of a warrant? In what circumstances are these values quite close? What is a warrant premium?

Q: What is an option? Define calls and puts. What role

What is an option? Define calls and puts. What role, if any, do call and put options play in the fund-raising activities of the firm?

Q: How can the firm use currency options to hedge foreign-currency

How can the firm use currency options to hedge foreign-currency exposures resulting from international transactions?

Q: For the following methods of using inventory as short-term loan

For the following methods of using inventory as short-term loan collateral, describe the basic features of each, and compare their use: (a) floating lien, (b) trust receipt loan, and (c) warehouse rec...

Q: Why do a firm’s regular credit terms typically conform to those of

Why do a firm’s regular credit terms typically conform to those of its industry?

Q: Why should a firm actively monitor the accounts receivable of its credit

Why should a firm actively monitor the accounts receivable of its credit customers? How are the average collection period and an aging schedule used for credit monitoring?

Q: What is leasing? Define, compare, and contrast operating leases

What is leasing? Define, compare, and contrast operating leases and financial (or capital) leases. How does the Financial Accounting Standards Board’s Statement No. 13 define a financial (or capital)...

Q: Describe the four basic steps involved in the lease-versus-

Describe the four basic steps involved in the lease-versus-purchase decision process. How are capital budgeting methods applied in this process?

Q: What type of lease must be treated as a capitalized lease on

What type of lease must be treated as a capitalized lease on the balance sheet? How does the financial manager capitalize a lease?

Q: List and discuss the commonly cited advantages and disadvantages that should be

List and discuss the commonly cited advantages and disadvantages that should be considered when deciding whether to lease or purchase.

Q: The YTMs for Treasuries with differing maturities (with each rate expressed

The YTMs for Treasuries with differing maturities (with each rate expressed as an annual rate) on a recent day were as shown in the following table. The real rate of interest is 0.8% per year. Use t...

Q: What is the conversion feature? What is a conversion ratio?

What is the conversion feature? What is a conversion ratio? How do convertibles and other contingent securities affect EPS? Briefly describe the motives for convertible financing.

Q: When the market price of the stock rises above the conversion price

When the market price of the stock rises above the conversion price, why may a convertible security not be converted? How can the call feature be used to force conversion in this situation? What is an...

Q: Define the straight bond value, conversion (or stock) value

Define the straight bond value, conversion (or stock) value, market value, and market premium associated with a convertible bond, and describe the general relationships among them.

Q: What are stock purchase warrants? What are the similarities and key

What are stock purchase warrants? What are the similarities and key differences between the effects of warrants and those of convertibles on the firm’s capital structure and its ability to raise new c...

Q: Define and differentiate among the members of each of the following sets

Define and differentiate among the members of each of the following sets of terms: (a) mergers, consolidations, and holding companies; (b) acquiring company and target company; (c) friendly merger and...

Q: What key advantages and disadvantages are associated with holding companies? What

What key advantages and disadvantages are associated with holding companies? What is pyramiding, and what are its consequences?

Q: Discuss the differences in merger practices between U.S. companies

Discuss the differences in merger practices between U.S. companies and companies in other countries. What changes are occurring in international merger activity, particularly in Western Europe and Jap...

Q: What are the three types of business failure? What is the

What are the three types of business failure? What is the difference between insolvency and bankruptcy? What are the major causes of business failure?

Q: Define an extension and a composition, and explain how they might

Define an extension and a composition, and explain how they might be combined to form a voluntary settlement plan to sustain the firm. How is a voluntary settlement resulting in liquidation handled?

Q: What is the concern of Chapter 11 of the Bankruptcy Reform Act

What is the concern of Chapter 11 of the Bankruptcy Reform Act of 1978? How is the debtor in possession (DIP) involved in (1) the valuation of the firm, (2) the recapitalization of the firm, and (3) t...

Q: Assume that the rate of inflation expected over the coming year is

Assume that the rate of inflation expected over the coming year is 3.3%. Explain how a 1-year T-bill could earn a negative real rate of return over the next year. How could it have a zero real rate of...

Q: What is the concern of Chapter 7 of the Bankruptcy Reform Act

What is the concern of Chapter 7 of the Bankruptcy Reform Act of 1978? Under which conditions is a firm liquidated in bankruptcy? Describe the procedures (including the role of the trustee) involved i...

Q: Indicate in which order the following claims would be settled when distributing

Indicate in which order the following claims would be settled when distributing the proceeds from liquidating a bankrupt firm: (a) claims of preferred stockholders; (b) claims of secured creditors; (c...

Q: Briefly describe each of the following motives for merging: (

Briefly describe each of the following motives for merging: (a) growth or diversification, (b) synergy, (c) fund raising, (d) increased managerial skill or technology, (e) tax considerations, (f) incr...

Q: Briefly describe each of the following types of mergers: (

Briefly describe each of the following types of mergers: (a) horizontal, (b) vertical, (c) congeneric, and (d) conglomerate.

Q: What is a leveraged buyout (LBO)? What are the three

What is a leveraged buyout (LBO)? What are the three key attributes of an attractive candidate for acquisition via an LBO?

Q: What is an operating unit? What is a divestiture? What

What is an operating unit? What is a divestiture? What are four common methods used by firms to divest themselves of operating units? What is breakup value?

Q: Describe the procedures typically used by an acquirer to value a target

Describe the procedures typically used by an acquirer to value a target company, whether it is being acquired for its assets or as a going concern.

Q: What is the ratio of exchange? Is it based on the

What is the ratio of exchange? Is it based on the current market prices of the shares of the acquiring and target firms? Why may a long-run view of the merged firm’s earnings per share change a merger...

Q: What role do investment bankers often play in the merger negotiation process

What role do investment bankers often play in the merger negotiation process? What is a tender offer? When and how is it used?

Q: Briefly describe each of the following takeover defenses against a hostile merger

Briefly describe each of the following takeover defenses against a hostile merger: (a) white knight, (b) poison pill, (c) greenmail, (d) leveraged recapitalization, (e) golden parachutes, and (f) shar...

Q: Carry Trade Inc. borrows yen when the yen is trading at

Carry Trade Inc. borrows yen when the yen is trading at ¥110/US$. If the nominal annual interest rate of the loan is 3% and at the end of the year the yen trades at ¥120/US$, what is the effective ann...

Q: Calculate the risk premium for each of the following rating classes of

Calculate the risk premium for each of the following rating classes of long-term securities, assuming that the yield to maturity (YTM) for comparable Treasuries is 4.51%.

Q: Sara Lehn, chief financial officer of Merit Enterprise Corp., was

Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk for...

Q: A U.S.-based MNC has a foreign subsidiary that

A U.S.-based MNC has a foreign subsidiary that earns $250,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a...

Q: A U.S.-based MNC has a subsidiary in France

A U.S.-based MNC has a subsidiary in France (local currency, euro, €). The balance sheet and income statement of the subsidiary follow. Assume that on December 31, 2019, the exchange...

Q: Fred Nappa is planning to take a wine-tasting tour through

Fred Nappa is planning to take a wine-tasting tour through Italy this summer. The tour will cost 2,750 euros (€) and includes transportation, hotels, and a guide. Fred estimates that round-trip airfar...

Q: The economies of the world tend to rise and fall in cycles

The economies of the world tend to rise and fall in cycles that offset each other. International stocks can provide possible diversification for a portfolio heavy on U.S. equities. Because research on...

Q: A U.S.-based multinational company has two subsidiaries,

A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicat...

Q: Is there a conflict between maximizing shareholder wealth and never paying bribes

Is there a conflict between maximizing shareholder wealth and never paying bribes when doing business abroad? If so, how might you explain the firm’s position to shareholders who are asking why the co...

Q: Marla’s Cafe is attempting to acquire the Victory Club. Certain financial

Marla’s Cafe is attempting to acquire the Victory Club. Certain financial data on these corporations are summarized in the following table. Marla’s Cafe has suffi...

Q: Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0

Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0.4 share of its stock for each share of Lewis stock. Certain financial data on these companies are given in the followi...

Q: Calculate the ratio of exchange (1) of shares and (

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A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only source of cash inflows and that...

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Maris Brothers Inc. needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 4.9 and the following information in its preparation. Sales: February = $500,000;...

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The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to produce cash inflows of $3,000 at the end of year 1, $6,000 at t...

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A firm raises capital by selling $20,000 worth of debt with flotation costs equal to 2% of its par value. If the debt matures in 10 years and has a coupon interest rate of 8% (paid annually), what is...

Q: Without referring to the preprogrammed function on your financial calculator, use

Without referring to the preprogrammed function on your financial calculator, use the basic formula for present value, along with the given discount rate, r, and the number of periods, n, to calculate...

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For each of the cases shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period not...

Q: Answer each of the following questions. a. How much

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Q: Jim Nance has been offered an investment that will pay him $

Jim Nance has been offered an investment that will pay him $500 three years from today. a. If his opportunity cost is 7% compounded annually, what value should he place on this opportunity today? b. W...

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Q: You just won a lottery that promises to pay you $1

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Q: In exchange for a $23,000 payment today, a

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Q: Tom Alexander has an opportunity to purchase any of the investments shown

Tom Alexander has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each i...

Q: You put $10,000 in an account earning 5%.

You put $10,000 in an account earning 5%. After 3 years, you make another deposit into the same account. Four years later (that is, 7 years after your original $10,000 deposit), the account balance is...

Q: For each case in the accompanying table, answer the questions that

For each case in the accompanying table, answer the questions that follow. a. Calculate the future value of the annuity, assuming that it is (1) An ordinary annuity. (2) An annuity due. b. Compare y...

Q: Your firm, People’s Consulting Group, has been asked to consult

Your firm, People’s Consulting Group, has been asked to consult on a potential preferred stock offering by Brave New World. This 9% preferred stock issue would be sold at its par value of $55 per shar...

Q: Future value calculation  Without referring to the preprogrammed function on your financial

Future value calculation  Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rat...

Q: Consider the following cases. / a.

Consider the following cases. a. Calculate the present value of the annuity, assuming that it is (1) An ordinary annuity. (2) An annuity due. b. Compare your findings in parts a(1) and a(2). All els...

Q: Marian Kirk wishes to select the better of two 10-year

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Q: Hal Thomas, a 25-year-old college graduate,

Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retirement arra...

Q: An insurance agent is trying to sell you an annuity that will

An insurance agent is trying to sell you an annuity that will provide you with $12,000 at the end of each of the next 25 years. If you don’t purchase this annuity, you can invest your money and earn a...

Q: Emily Jacob is 45 years old and has saved nothing for retirement

Emily Jacob is 45 years old and has saved nothing for retirement. Fortunately, she just inherited $75,000. Emily plans to put a large portion of that money into an investment account earning an 11% re...

Q: Assume that you just won the state lottery. Your prize can

Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (i.e., $1,000,000 over 25 years) or as a single amount of $500...

Q: Consider the data in the following table. /

Consider the data in the following table. Determine the present value of each perpetuity.

Q: Suppose that today’s date is January 1, 2019. You have

Suppose that today’s date is January 1, 2019. You have the opportunity to make an investment that will pay you $100 on January 1 of every year, starting in 2020 and continuing forever. Assume the rele...

Q: You have $100 to invest. If you put the money

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Q: Duke Energy has been paying dividends steadily for 20 years. During

Duke Energy has been paying dividends steadily for 20 years. During that time, dividends have grown at a compound annual rate of 3%. If Duke Energy’s current stock price is $78 and the firm plans to p...

Q: For each of the cases shown in the following table, calculate

For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today and held until the end of the deposit period if the interest is compounded annual...

Q: You have $1,500 to invest today at 7%

You have $1,500 to invest today at 7% interest compounded annually. a. Find how much you will have accumulated in the account after (1) 3 years, (2) 6 years, and (3) 9 years. b. Use your findings in p...

Q: As part of your financial planning, you wish to purchase a

As part of your financial planning, you wish to purchase a new car 5 years from today. The car you wish to purchase costs $14,000 today, and your research indicates that its price will increase by 2%...

Q: You can deposit $10,000 into an account paying 9

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Q: Misty needs to have $15,000 in 5 years to

Misty needs to have $15,000 in 5 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 5 years until it grows to $15,000...

Q: A person borrows $200 that he must repay in a lump

A person borrows $200 that he must repay in a lump sum no more than 8 years from now. The interest rate is 8.5% annually compounded. The borrower can repay the loan at the end of any earlier year with...

Q: Carl Foster, a trainee at an investment banking firm, is

Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month U.S...

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Charter Corp. has issued 2,500 debentures with a total principal value of $2,500,000. The bonds have a coupon rate of 7%. a. What dollar amount of interest per bond can an investor expect to receive e...

Q: Assume that the Financial Management Corporation’s $1,000-par

Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matures on May 15, 2027, has a current price quote of 97.708, and has a yield to maturity (YTM) of 6.034%....

Q: Imagine that you are trying to evaluate the economics of purchasing a

Imagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an apartment. If you buy the condo, during each of the next 4 years you...

Q: Weekend Warriors Inc. has 35% debt and 65% equity

Weekend Warriors Inc. has 35% debt and 65% equity in its capital structure. The firm’s estimated after-tax cost of debt is 8% and its estimated cost of equity is 13%. Determine the firm’s weighted ave...

Q: Using the information provided in the following table, find the value

Using the information provided in the following table, find the value of each asset today.

Q: Laura Drake wishes to estimate the value of an asset expected to

Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 per year for each of the next 4 years and $15,000 in 5 years. Her research indicates that she must earn...

Q: Complex Systems has an outstanding issue of $1,000-

Complex Systems has an outstanding issue of $1,000-parvalue bonds with a 12% coupon rate. The issue pays interest annually and has 16 years remaining to its maturity date. a. If bonds of similar risk...

Q: Calculate the value of each of the bonds shown in the following

Calculate the value of each of the bonds shown in the following table, all of which pay interest annually.

Q: Midland Utilities has a bond issue outstanding that will mature to its

Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 12 years. The bond has a coupon rate of 11% and pays interest annually. a. Find the value of the bond if the...

Q: Pecos Manufacturing has just issued a 15-year, 12%

Pecos Manufacturing has just issued a 15-year, 12% coupon rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% unti...

Q: Lynn Parsons is considering investing in either of two outstanding bonds.

Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon rates and pay annual interest. Bond A has exactly 5 years to maturity, an...

Q: To estimate the equilibrium rate of interest, the economics division of

To estimate the equilibrium rate of interest, the economics division of Mountain Banks—a major bank holding company—has gathered the data summarized in the followin...

Q: The relationship between a bond’s yield to maturity and coupon rate can

The relationship between a bond’s yield to maturity and coupon rate can be used to predict its pricing level. For each of the bonds listed, state whether the price of the bond will b...

Q: The Salem Company bond currently sells for $867.59,

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Q: Oxy Corporation uses debt, preferred stock, and common stock to

Oxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm’s capital structure targets the following proportions: debt, 55%; preferred stock, 10%; and common stock, 35%. I...

Q: Each of the bonds shown in the following table pays interest annually

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Q: Mark Goldsmith’s broker has shown him two bonds issued by different companies

Mark Goldsmith’s broker has shown him two bonds issued by different companies. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by Crabb...

Q: Find the value of a bond maturing in 6 years, with

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Q: Calculate the value of each of the bonds shown in the following

Calculate the value of each of the bonds shown in the following table, all of which pay interest semiannually.

Q: Zane Perelli currently has $100 that he can spend today on

Zane Perelli currently has $100 that he can spend today on socks costing $2.50 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a 9% nominal...

Q: A firm wishing to evaluate interest rate behavior has gathered yield data

A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized...

Q: Economic forecasters predict that the rate of inflation will hold steady at

Economic forecasters predict that the rate of inflation will hold steady at 2% per year indefinitely. The table below shows the nominal interest rate paid on Treasury securities having different matur...

Q: Tyra loves to shop at her favorite store, Dollar Barrel,

Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel...

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The following yield data for a number of highest quality corporate bonds existed at each of the three points in time noted. a. On the same set of axes, draw the yield curve at each of the three give...

Q: A 1-year Treasury bill currently offers a 5% rate

A 1-year Treasury bill currently offers a 5% rate of return. A 2-year Treasury note offers a 5.5% rate of return. Under the expectations theory, what rate of return do investors expect a 1-year Treasu...

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Q: In January 2016, Anheuser-Busch issued an outstanding bond that

In January 2016, Anheuser-Busch issued an outstanding bond that pays a 3.3% coupon rate, matures in January 2023, and has a yield to maturity of 2.82%. In January 2017, Santander Holdings issued an ou...

Q: Aspin Corporation’s charter authorizes issuance of 2,000,000 shares

Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm wishes t...

Q: Seagate Technology is a global leader in data storage solutions and a

Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends: Assume that the historical an...

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Q: Over the past 6 years, Elk County Telephone has paid the

Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table. The firm’s dividend per share in 2020 is expected to be $3.02. a. If you can earn 1...

Q: Newman Manufacturing is considering a cash purchase of the stock of Grips

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Q: Home Place Hotels Inc. is entering into a 3-year

Home Place Hotels Inc. is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when completed, it should allow the co...

Q: Lawrence Industries’ most recent annual dividend was $1.80 per

Lawrence Industries’ most recent annual dividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%. Find the market value of Lawrence’s shares when: a. Dividends are expected to...

Q: You are evaluating the potential purchase of a small business with no

You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,500 of free cash flow (FCF0 = $42,500). On the basis of a review of simi...

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Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have...

Q: Herky Foods is considering acquisition of a new wrapping machine. By

Herky Foods is considering acquisition of a new wrapping machine. By purchasing the machine, Herky will save money on packaging in each of the next 5 years, producing the series of cash inflows shown...

Q: Assume that you have an opportunity to buy the stock of CoolTech

Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are concerned about w...

Q: The balance sheet for Gallinas Industries is as follows.

The balance sheet for Gallinas Industries is as follows. Additional information with respect to the firm is available: (1) Preferred stock can be liquidated at book value. (2) Accounts receivable an...

Q: Acura Labs Inc. has an outstanding issue of preferred stock with

Acura Labs Inc. has an outstanding issue of preferred stock with a $40 par value and an 8% annual dividend. a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each q...

Q: For each of the firms shown in the following table, use

For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples.

Q: REH Corporation’s most recent dividend was $3 per share, its

REH Corporation’s most recent dividend was $3 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety of proposals are being considered by managemen...

Q: Given the following information for the stock of Foster Company, calculate

Given the following information for the stock of Foster Company, calculate the risk premium on its common stock.

Q: Giant Enterprises’ stock has a required return of 14.8%.

Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will...

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Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the...

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Melissa is trying to value the stock of Generic Utility Inc., which is clearly not growing at all. Generic declared and paid a $5 dividend last year. The required return for utility stocks is 11%, but...

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Q: a. Calculate the required rate of return for an asset that

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Bond-rating agencies have invested significant sums of money in an effort to determine which quantitative and non-quantitative factors best predict bond defaults. Furthermore, some of the raters inves...

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Q: On completion of her introductory finance course, Marla Lee was so

On completion of her introductory finance course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were wealthy alumni of the...

Q: In each case in the following table, how many dollars of

In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid?

Q: For each of the mixed streams of cash flows shown in the

For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, as...

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Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 now, or the buyer will make a series of 5 payments starting now a...

Q: Valerian Corp. convertible preferred stock has a fixed conversion ratio of

Valerian Corp. convertible preferred stock has a fixed conversion ratio of five common shares per one share of preferred stock. The preferred stock pays a dividend of $10.00 per share per year. The co...

Q:  TXS Manufacturing has an outstanding preferred stock issue with a par

 TXS Manufacturing has an outstanding preferred stock issue with a par value of $65 per share. The preferred shares pay dividends annually at a rate of 10%. a. What is the annual dividend on TXS prefe...

Q: Kelsey Drums Inc. is a well-established sup- plier

Kelsey Drums Inc. is a well-established sup- plier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $2.80 per share pe...

Q: Jones Design wishes to estimate the value of its outstanding preferred stock

Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar-risk preferred stocks are...

Q: Billabong Tech uses the internal rate of return (IRR) to

Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt req...

Q: Use the constant-growth dividend model (Gordon growth model)

Use the constant-growth dividend model (Gordon growth model) to find the value of each firm shown in the following table.

Q: McCracken Roofing Inc. common stock paid a dividend of $1

McCracken Roofing Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future. a. What requir...

Q: Douglas Keel, a financial analyst for Orange Industries, wishes to

Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas’s research indicates that the immediate past returns w...

Q: Swift Manufacturing must choose between two asset purchases. The annual rate

Swift Manufacturing must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table summarize the firm’s analysis to thi...

Q: Three assets—F, G, and H—are currently

Three assets—F, G, and H—are currently under consideration by Perth Industries. The probability distributions of expected returns for these assets are shown in the...

Q: Answer the following questions, assuming that the rates of return associated

Answer the following questions, assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.9%; and that the coefficient of...

Q: Jamie Wong is thinking of building an investment portfolio containing two stocks

Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%....

Q: You have been given the historical return data shown in the first

You have been given the historical return data shown in the first table on three assets—F, G, and H—over the period 2016–2019. Using these asset...

Q: Matt Peters wishes to evaluate the risk and return behaviors associated with

Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and pe...

Q: Joe Martinez, a U.S. citizen living in Brownsville

Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchased 1,000 shares at 20.50 pesos per share. Twelve months later, he so...

Q: Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key

Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on the same s...

Q: David Talbot randomly selected securities from all those listed on the New

David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 se...

Q: A firm wishes to estimate graphically the betas for two assets,

A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10 year...

Q: You are analyzing the performance of two stocks. The first,

You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical Industries makes machine tools and other heavy equipment, the demand for whi...

Q: For each of the investments shown in the following table, calculate

For each of the investments shown in the following table, calculate the rate of return earned over the period.

Q: A firm wishes to assess the impact of changes in the market

A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.20. a. If the market return increased by 15%, what impact would this change be expected to have on t...

Q: Answer the questions below for assets A to D shown in the

Answer the questions below for assets A to D shown in the table. a. What impact would a 10% increase in the market return be expected to have on each asset’s return? b. What impact would a 10% decreas...

Q: Sharon Smith, the financial manager for Barnett Corporation, wishes to

Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an assetâ&#...

Q: Solar Designs is considering an investment in an expanded product line.

Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are under review. After investigating the possible outcomes, the company made the estimates show...

Q: Micro-Pub Inc. is considering the purchase of one of

Micro-Pub Inc. is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management h...

Q: Swan’s Sportswear is thinking about bringing out a line of designer jeans

Swan’s Sportswear is thinking about bringing out a line of designer jeans. Currently, it is negotiating with two well-known designers. Because of the highly competitive nature of the...

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If Halley Industries reimburses employees who earn master’s degrees and who agree to remain with the firm for an additional 3 years, should the expense of the tuition reimbursement be categorized as a...

Q: Metal Manufacturing has isolated four alternatives for meeting its need for increased

Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each alternative. a. Calculate the...

Q: Greengage Inc., a successful nursery, is considering several expansion projects

Greengage Inc., a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. a. Which project...

Q: Mike is searching for a stock to include in his current stock

Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech Inc.; he has been impressed with the company’s computer products and believes tha...

Q: Mace Manufacturing is in the process of analyzing its investment decision-

Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North an...

Q: Ross Textiles wishes to measure its cost of common stock equity.

Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $70.67. The firm just recently paid a dividend of $4. The firm has been increasing dividends...

Q: Using the data for each firm shown in the following table,

Using the data for each firm shown in the following table, calculate the cost of retained earnings and the cost of new common stock using the constant-growth valuation model.

Q: Bell Jewelers wishes to explore the effect on its cost of capital

Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50%...

Q: The market values and after-tax costs of various sources of

The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table. a. Calculate the firm’s WACC. b. Explain how the firm can u...

Q: Webster Company has compiled the information shown in the following table.

Webster Company has compiled the information shown in the following table. a. Calculate the WACC using book value weights. b. Calculate the WACC using market value weights. c. Compare the answers ob...

Q: After careful analysis, Dexter Brothers has determined that its optimal capital

After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table. The cost of debt is...

Q: Iridium Corp. has spent $3.5 billion over the

Iridium Corp. has spent $3.5 billion over the past decade developing a satellitebased telecommunication system. It is currently trying to decide whether to spend an additional $350 million on the proj...

Q: Edna Recording Studios Inc. reported earnings available to common stock of

Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outsta...

Q:  Dillon Labs has asked its financial manager to measure the cost

 Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the follow...

Q: John Dough has just been awarded his degree in business. He

John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years, and he can repay them without penalty any time before maturity. The amoun...

Q: Lang Enterprises is interested in measuring its overall cost of capital.

Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket. Debt The firm can raise debt by sell...

Q: Currently, Warren Industries can sell 15-year, $1

Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 7% coupon rate. Because current market rates for similar bonds are just under 7%, Warren can sell its...

Q: American Exploration Inc., a natural gas producer, is trying to

American Exploration Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50-50 mix of debt and equity, but it is considering a tar...

Q: During the 1990s, General Electric put together a long string of

During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecasts of Wall Street stock analysts. Some skeptics wond...

Q: You are considering three stocks—A, B, and C

You are considering three stocks—A, B, and C—for possible inclusion in your investment portfolio. Stock A has a beta of 0.80, stock B has a beta of 1.40, and stock C has a beta of -0.30. a. Rank these...

Q: Rose Berry is attempting to evaluate two possible portfolios, which consist

Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particularly interested in using beta to compare the risks of...

Q: For each case in the following table, use the capital asset

For each case in the following table, use the capital asset pricing model to find the required return.

Q: Landscapes Unlimited has spent $2,200 evaluating a new service

Landscapes Unlimited has spent $2,200 evaluating a new service area for expanding its business territory. The expansion will require the purchase of a new truck for $35,000, and fitting the truck with...

Q: Katherine Wilson is wondering how much risk she must undertake to generate

Katherine Wilson is wondering how much risk she must undertake to generate an acceptable return on her portfolio. The risk-free return currently is 5%. The return on the overall stock market is 16%. U...

Q: Use the basic equation for the capital asset pricing model (CAPM

Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 0.90 when the risk-free rate and marke...

Q: Jamie Peters invested $100,000 to set up the following

Jamie Peters invested $100,000 to set up the following portfolio 1 year ago. a. Calculate the portfolio beta on the basis of the original cost figures. b. Calculate the percentage return of each ass...

Q: Assume that the risk-free rate, RF, is currently

Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 13%. a. Draw the security market line (SML) on a set of “non diversifiable risk (x-axis)– required retu...

Q: Assume that the risk-free rate, RF, is currently

Assume that the risk-free rate, RF, is currently 8%; the market return, rm, is 12%; and asset A has a beta, bA, of 1.10. a. Draw the security market line (SML) on a set of “non-diversifiable risk (x-a...

Q: David Abbot is buying a new house, and he is taking

David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of...

Q: For each of the following $1,000-parvalue bonds

For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity, using the approximation formula.

Q: Gronseth Drywall Systems Inc. is in discussions with its investment bankers

Gronseth Drywall Systems Inc. is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry differ...

Q: Wans is interested in buying a new motorcycle. She has decided

Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the mo...

Q: Taylor Systems has just issued preferred stock. The stock has an

Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be paid....

Q: A few years ago, Largo Industries implemented an inventory auditing system

A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000. Since then, it has taken depreciation deductions totaling $124,250. What is the system’s cu...

Q: Determine the cost for each of the following preferred stocks.

Determine the cost for each of the following preferred stocks.

Q: Netflix common stock has a beta, b, of 0.

Netflix common stock has a beta, b, of 0.8. The risk-free rate is 3%, and the market return is 10%. a. Determine the risk premium on Netflix common stock. b. Determine the required return that Netflix...

Q: The Ball Shoe Company is considering an investment project that requires an

The Ball Shoe Company is considering an investment project that requires an initial investment of $542,000 and returns after-tax cash inflows of $75,000 per year for 10 years. The firm has a maximum a...

Q: Hook Industries is considering the replacement of one of its old metal

Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each a...

Q: Jenny Jenks has researched the financial pros and cons of entering into

Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the master’s program will have an up-front cost of $50,0...

Q: Neil Corporation has three projects under consideration. The cash flows for

Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital. a. Calculate each projectâ€&...

Q: A project costs $2,500,000 up front and

A project costs $2,500,000 up front and will generate cash flows in perpetuity of $240,000. The firm’s cost of capital is 9%. a. Calculate the project’s NPV. b. Calculate the annual EVA in a typical y...

Q: For each of the projects shown in the following table, calculate

For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find...

Q: Peace of Mind Inc. (PMI) sells extended warranties for

Peace of Mind Inc. (PMI) sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the custom...

Q: Bell Manufacturing is attempting to choose the better of two mutually exclusive

Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm’s warehouse capacity. The relevant cash flows for the projects are sho...

Q: Bryson Sciences is planning to purchase a high-powered microscopy machine

Bryson Sciences is planning to purchase a high-powered microscopy machine for $385,000 and incur an additional $31,300 in installation expenses. It is replacing older microscopy equipment that can be...

Q: Acme Oscillators is considering an investment project that has the following rather

Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. a. Calculate the project’s NPV at each of the following discount rate...

Q: Oak Enterprises accepts projects earning more than the firm’s 15% cost

Oak Enterprises accepts projects earning more than the firm’s 15% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of $10,000 and requires an initial i...

Q: Benson Designs has prepared the following estimates for a long-term

Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax cash inflows of $4,000...

Q: Nova Products has a 5-year maximum acceptable payback period.

Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial...

Q: Botany Bay Inc., a maker of casual clothing, is considering

Botany Bay Inc., a maker of casual clothing, is considering four projects. Because of past financial difficulties, the company has a high cost of capital at 15%. a. Calculate the NPV of each project...

Q: Nicholson Roofing Materials Inc. is considering two mutually exclusive projects,

Nicholson Roofing Materials Inc. is considering two mutually exclusive projects, each with an initial investment of $150,000. The company’s board of directors has set a maximum 4-yea...

Q: Rieger International is evaluating the feasibility of investing $95,000

Rieger International is evaluating the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal, as shown i...

Q: Thomas Company is considering two mutually exclusive projects. The firm,

Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table. a. Calculate the NPV of each p...

Q: Pound Industries is attempting to select the best of three mutually exclusive

Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following tabl...

Q: Projects A and B, of equal risk, are alternatives for

Projects A and B, of equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are show...

Q: Birkenstock is considering an investment in a nylon-knitting machine.

Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years. The...

Q: Froogle Enterprises is evaluating an unusual investment project. What makes the

Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table. a. Why is it difficult to cal...

Q: The High-Flying Growth Company (HFGC) has been expanding

The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years...

Q: White Rock Services Inc. has an opportunity to make an investment

White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows. a. Calculate the NPV at the following discount rates and plot an NPV profile for this inves...

Q: Diane Dennison is a financial analyst working for a large chain of

Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent lights in all of its stores w...

Q: Shell Camping Gear Inc. is considering two mutually exclusive projects.

Shell Camping Gear Inc. is considering two mutually exclusive projects. Each requires an initial investment (CF0) of $100,000. John Shell, president of the company, has set a maximum payback period of...

Q: Wolff Enterprises must consider several investment projects, A through E,

Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant inform...

Q: Risk is a major concern of almost all investors. When shareholders

Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risks with those funds. What ethical limits should managers observe when t...

Q: Bill Williams has the opportunity to invest in project A, which

Bill Williams has the opportunity to invest in project A, which costs $9,000 today and promises to pay $2,200, $2,500, $2,500, $2,000, and $1,800 over the next 5 years. Or Bill can invest $9,000 in pr...

Q: Calculate the net present value (NPV) for the following 15

Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%. a. Initial investment is $1,000,000; c...

Q: Le Pew Cosmetics is evaluating a new fragrance mixing machine. The

Le Pew Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $360,000 and will generate after-tax cash inflows of $62,650 per year for 8 years. For each...

Q: You wish to evaluate a project requiring an initial investment of $

You wish to evaluate a project requiring an initial investment of $59,500 and having a useful life of 7 years. What minimum amount of annual cash inflow do you need if your firm has an 8.7% cost of ca...

Q: Using a 10% cost of capital, calculate the net present

Using a 10% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable.

Q: Simes Innovations Inc. is negotiating to purchase exclusive rights to manufacture

Simes Innovations Inc. is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car’s inventor has offered Simes the choice of either a one-time payment of $1...

Q: A firm can purchase new equipment for a $150,000

A firm can purchase new equipment for a $150,000 initial investment. The equipment generates an annual after-tax cash inflow of $44,400 for 4 years. a. Determine the net present value (NPV) of the equ...

Q: Given the following list of outlays, indicate whether each is normally

Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers. a. An outlay of $27,600 for a marketing resea...

Q: Samuels Manufacturing is considering the purchase of a new machine to replace

Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of $920,000 and total current liabilities of $640,000. As a...

Q: Vastine Medical Inc. is considering replacing its existing computer system,

Vastine Medical Inc. is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated us...

Q: Cushing Corporation is considering the purchase of a new grading machine to

Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depre...

Q: Edwards Manufacturing Company (EMC) is considering replacing one machine with

Edwards Manufacturing Company (EMC) is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine...

Q: DuPree Coffee Roasters Inc. wishes to expand and modernize its facilities

DuPree Coffee Roasters Inc. wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $130,000. The firm has a chance to sell i...

Q: A firm is evaluating the acquisition of an asset that costs $

A firm is evaluating the acquisition of an asset that costs $64,000 and requires $4,000 in installation costs. If the firm depreciates the asset under MACRS, using a 5-year recovery period determine t...

Q: A bond with 5 years to maturity and a coupon rate of

A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000. Interest is paid annually. If the required return on this bond is 8%, what is the price of the bond?

Q: Like most firms in its industry, Culinary Cafe uses a subjective

Like most firms in its industry, Culinary Cafe uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale o...

Q: A firm is considering renewing its equipment to meet increased demand for

A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate...

Q: Richard and Linda Thomson operate a local lawn maintenance service for commercial

Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe it is...

Q: Miller Corporation is considering replacing a machine. The replacement will reduce

Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (i.e., increase earnings before interest, taxes, depreciation, and amortization) by $16,000 per ye...

Q: Strong Tool Company has been considering purchasing a new lathe to replace

Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years. The new lathe is expected to have a 5-year life and depreci...

Q: For each of the following projects, determine the net cash flows

For each of the following projects, determine the net cash flows, and depict the cash flows on a timeline. a. A project that requires an initial investment of $120,000 and will generate annual operati...

Q: Scenic Tours Inc. is a provider of bus tours throughout New

Scenic Tours Inc. is a provider of bus tours throughout New England. The corporation is considering the replacement of 10 of its older buses. The existing buses were purchased 4 years ago at a total c...

Q: Looner Industries is currently analyzing the purchase of a new machine that

Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Purchase of this machine is expected to result in an increase in...

Q: Tesla Systems has estimated the cash flows over the 5-year

Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below. a. If project A, which requires an initial investment...

Q: Masters Golf Products Inc. spent 3 years and $1,

Masters Golf Products Inc. spent 3 years and $1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest...

Q: Gen-X Industries is developing the incremental cash flows associated with

Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs relat...

Q: Fiftycent Inc. has hired you to advise the firm on a

Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the fol...

Q: Dave and Ann Stone have been living at their current home for

Dave and Ann Stone have been living at their current home for the past 6 years. During that time, they have replaced the water heater for $375, have replaced the dishwasher for $599, and have had to m...

Q: Find the book value for each of the assets shown in the

Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 for the applicable depreciation percentages.

Q: Troy Industries purchased a new machine 3 years ago for $80

Troy Industries purchased a new machine 3 years ago for $80,000. It is being depreciated under MACRS with a 5-year recovery period, using the percentages given. Assume a 40% tax rate. a. What is the b...

Q: For each of the following cases, determine the total taxes resulting

For each of the following cases, determine the total taxes resulting from the transaction. Assume a 40% tax rate. The asset was purchased 2 years ago for $200,000 and is being depreciated under MACRS,...

Q: Spin Corp., a media services firm with net earnings of $

Spin Corp., a media services firm with net earnings of $3,200,000 in the past year, is considering the following projects. The media services business is cyclical and highly competitive. The board o...

Q: After a careful evaluation of investment alternatives and opportunities, Masters School

After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in...

Q: Lara Fredericks is interested in two mutually exclusive investments. Both investments

Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 6 years. The cost of the first investment is $10,000, and Lara expects equal and co...

Q: Centennial Catering Inc. is considering two mutually exclusive investments. The

Centennial Catering Inc. is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial’s man...

Q: Moses Manufacturing is attempting to select the best of three mutually exclusive

Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X i...

Q: Evans Industries wishes to select the best of three possible machines,

Evans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm’s ongoing need for additional aluminum-extrusion capacity. The th...

Q: Powerswitch Electric is faced with a capital budget of $150,

Powerswitch Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects along with their initia...

Q: Portland Products is considering the purchase of one of three mutually exclusive

Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 14% cost of capital to evaluate these equal-risk...

Q: JBL Co. has designed a new conveyor system. Management must

JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 year...

Q: Richard and Linda Butler decide that it is time to purchase a

Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, the...

Q: Jenny Rene, the CFO of Asor Products Inc., has just

Jenny Rene, the CFO of Asor Products Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm’s manufacturing capacity. Using the traditional N...

Q: Valley Corporation is attempting to select the best of a group of

Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unu...

Q: The Sleek Ring Company, a leading producer of fine cast silver

The Sleek Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. The up-front cost of the equ...

Q: A firm with a 13% cost of capital must select the

A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million. a. Calculate the present value of cash in...

Q: The Environmental Protection Agency sometimes imposes penalties on firms that pollute the

The Environmental Protection Agency sometimes imposes penalties on firms that pollute the environment. But did you know there is a legal market for pollution? For example, a mechanism developed to lim...

Q: Russell Industries is considering replacing a fully depreciated machine that has a

Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $200,000 and wi...

Q: Marcus Tube, a manufacturer of high quality aluminum tubing, has

Marcus Tube, a manufacturer of high quality aluminum tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 3...

Q: Canvas Reproductions has fixed operating costs of $12,500 and

Canvas Reproductions has fixed operating costs of $12,500 and variable operating costs of $10 per unit and sells its paintings for $25 each. At what level of unit sales will the company break even in...

Q: Central Laundry and Cleaners is considering replacing an existing piece of machinery

Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,000, and this amount...

Q: Lombard Company is contemplating the purchase of a new high-speed

Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of $60,000; it was...

Q: Jan and Deana have been dreaming about owning a boat for some

Jan and Deana have been dreaming about owning a boat for some time and have decided that estimating its cash flows will help them in their decision process. They expect to have a disposable annual inc...

Q: Atlantic Drydock is considering replacing an existing hoist with one of two

Atlantic Drydock is considering replacing an existing hoist with one of two newer, more efficient pieces of equipment. The existing hoist is 3 years old, cost $32,000, and is being depreciated under M...

Q: With the market price of gold at C$1,562

With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an...

Q: Boardman Gasses and Chemicals is a supplier of highly purified gases to

Boardman Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existin...

Q: Prime Paints is in the process of evaluating two mutually exclusive additions

Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and o...

Q: Kiosk Corp. produces vending machines and places them in public buildings

Kiosk Corp. produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in a local library. The company makes two types of machines....

Q: Recall from P11-28 that when the market price of gold

Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was reopening an old gol...

Q: You are interested in an investment project that costs $40,

You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future end of-year cash inflows of $12,000, $12,500, $11,500, $9,000, and $8,...

Q: The Great Fish Taco Corporation currently has fixed operating costs of $

The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box. If the firm has a potentia...

Q: Ogden Corporation has compiled the following information on a capital expenditure proposal

Ogden Corporation has compiled the following information on a capital expenditure proposal: (1) The projected cash inflows are normally distributed with a mean of $36,000 and a standard deviation of $...

Q: Country Wallpapers is considering investing in one of three mutually exclusive projects

Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 15%, and the risk-free rate, RF, is 10%. The f...

Q: Kate Rowland wishes to estimate the number of flower arrangements she must

Kate Rowland wishes to estimate the number of flower arrangements she must sell at $24.95 to break even. She has estimated fixed operating costs of $12,350 per year and variable operating costs of $15...

Q: Levin Corporation has fixed operating costs of $72,000,

Levin Corporation has fixed operating costs of $72,000, variable operating costs of $6.75 per unit, and a selling price of $9.75 per unit. a. Calculate the operating breakeven point in units. b. Compu...

Q: Southland Industries has $60,000 of 6% (annual

Southland Industries has $60,000 of 6% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Ass...

Q: Northwestern Savings and Loan has a current capital structure consisting of $

Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%. a. Using EB...

Q: Max Small has outstanding school loans that require a monthly payment of

Max Small has outstanding school loans that require a monthly payment of $1,000. He needs to buy a new car for work and estimates that this purchase will add $350 per month to his existing monthly obl...

Q: Wells and Associates has an EBIT of $67,500.

Wells and Associates has an EBIT of $67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a 40% tax rate. a. Use the degree of financial leverage (DFL...

Q: Play-More Toys produces inflatable beach balls, selling 400,

Play-More Toys produces inflatable beach balls, selling 400,000 balls per year. Each ball produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The fi...

Q: Firm R has sales of 100,000 units at $2

Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at...

Q: Chico’s has sales of 15,000 units at a price of

Chico’s has sales of 15,000 units at a price of $20 per unit. The firm incurs fixed operating costs of $30,000 and variable operating costs of $12 per unit. What is Chico’s degree of operating leverag...

Q: Carolina Fastener Inc. makes a patented marine bulkhead latch that wholesales

Carolina Fastener Inc. makes a patented marine bulkhead latch that wholesales for $6.00. Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13...

Q: Kirsten Neal is interested in purchasing a new house, given that

Kirsten Neal is interested in purchasing a new house, given that mortgage rates are low. Her bank has specific rules regarding an applicant’s ability to meet the contractual payments...

Q: Given the price and cost data shown in the accompanying table for

Given the price and cost data shown in the accompanying table for each of the three firms, F, G, and H, answer the questions that follow. a. What is the operating breakeven point in units for each f...

Q:  Fine Leather Enterprises sells its single product for $129.

 Fine Leather Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are $473,000 annually, and its variable operating costs are $86.00 per unit. a. Find the firm’...

Q: Barry Carter is considering opening a used-book store. He

Barry Carter is considering opening a used-book store. He wants to estimate the number of books he must sell to break even. The books will be sold for $13.98 each, variable operating costs are $10.48...

Q: Paul Scott has a 2014 Cadillac that he wants to update with

Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his...

Q: JWG Company publishes Creative Crosswords. Last year, the book of

JWG Company publishes Creative Crosswords. Last year, the book of puzzles sold for $10, with a variable operating cost of $8 per book and a fixed operating cost of $40,000. a. How many books must JWG...

Q: Molly Jasper and her sister, Caitlin Peters, got into the

Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Cai...

Q: Stewart Industries sells its finished product for $9 per unit.

Stewart Industries sells its finished product for $9 per unit. Its fixed operating costs are $20,000, and the variable operating cost per unit is $5. a. Calculate the firm’s earnings before interest a...

Q: Grey Products has fixed operating costs of $380,000,

Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit. a. Calculate the operating breakeven point in units. b. Calculate...

Q: Parker Investments has EBIT of $20,000, interest expense

Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base...

Q: At the quarterly dividend meeting, Wood Shoes declared a cash dividend

At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10. The firm has 300,000 shares of common stock outstanding and has set...

Q: Milwaukee Tool has the following stockholders’ equity account. The firm’s common

Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share. a. Show the effects on the firm of a cash...

Q: Sarah Warren currently holds 400 shares of Nutri-Foods. The

Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been...

Q: Security Data Company has outstanding 50,000 shares of common stock

Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common stockholders of $120,000, but it has de...

Q: Growth Industries’ current stockholders’ equity account is as follows:

Growth Industries’ current stockholders’ equity account is as follows: a. Indicate the change, if any, expected if the firm declares a 2-for-1 stock split. b. Ind...

Q: Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp

Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $122 per share. Nathan read in the Wall Street Journal that the company’s board of directors had vote...

Q: Mammoth Corporation is considering a 3-for-2 stock split

Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders’ equity position as shown. The current stock price is $120 per share. The most recent peri...

Q: The board of Wicker Home Health Care Inc. is exploring ways

The board of Wicker Home Health Care Inc. is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appeali...

Q: The following financial data on the Bond Recording Company are available:

The following financial data on the Bond Recording Company are available: The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to...

Q: Harte Textiles Inc., a maker of custom upholstery fabrics, is

Harte Textiles Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclical downturn in the home furnishings business. The company has mai...

Q: Cobalt Industries had sales of 150,000 units at a price

Cobalt Industries had sales of 150,000 units at a price of $10 per unit. It faced fixed operating costs of $250,000 and variable operating costs of $5 per unit. The company is subject to a tax rate of...

Q: Kathy Snow wishes to purchase shares of Countdown Computing Inc. The

Kathy Snow wishes to purchase shares of Countdown Computing Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12. a. What is...

Q: As president of Young’s of California, a large clothing chain,

As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockhol...

Q: The Howe Company’s stockholders’ equity account follows: /

The Howe Company’s stockholders’ equity account follows: The earnings available for common stockholders from this period’s operations are $100,0...

Q: A firm has $800,000 in paid-in capital

A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earn...

Q: Bennett Farm Equipment Sales Inc. is in a highly cyclical business

Bennett Farm Equipment Sales Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctua...

Q: Over the past 10 years, a firm has had the earnings

Over the past 10 years, a firm has had the earnings per share shown in the following table. a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all ye...

Q: Given the earnings per share over the period 2012– 2019 shown

Given the earnings per share over the period 2012– 2019 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through...

Q: Columbia Paper has the following stockholders’ equity account. The firm’s common

Columbia Paper has the following stockholders’ equity account. The firm’s common stock has a current market price of $30 per share. a. Show the effects on Columbi...

Q: American Products is concerned about managing cash efficiently. On average,

American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximatel...

Q: Lewis Enterprises is considering relaxing its credit standards to increase its currently

Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,...

Q: Bristol’s Bistro, Inc., has declared a dividend of $1

Bristol’s Bistro, Inc., has declared a dividend of $1.25 per share for shareholders of record on Tuesday, December 3. The firm has 350,000 shares outstanding and will pay the dividend on December 28....

Q: Gardner Company currently makes all sales on credit and offers no discount

Gardner Company currently makes all sales on credit and offers no discount. The firm is considering offering a 2% discount for payment within 15 days. The firm’s current average collection period is 6...

Q: A firm is contemplating shortening its credit period from 40 to 30

A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses...

Q: Parker Tool is considering lengthening its credit period from 30 to 60

Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has $345,000 in variabl...

Q: Simon Corporation has daily cash receipts of $65,000.

Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 3.0 days. Once received, the payments are p...

Q: Eagle Industries believes that a lockbox system can shorten its accounts receivable

Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other...

Q: Union Company is considering establishment of a zero-balance account.

Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaini...

Q: Alexis Morris, an assistant manager at a local department store,

Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requireme...

Q: A group of angry shareholders has placed a corporate resolution before all

A group of angry shareholders has placed a corporate resolution before all shareholders at a company’s annual stockholders’ meeting. The resolution demands that the company stretch its accounts payabl...

Q: Charter Enterprises currently has $1 million in total assets and is

Charter Enterprises currently has $1 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be...

Q: Camp Manufacturing turns over its inventory 5 times each year, has

Camp Manufacturing turns over its inventory 5 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm has annual sales of $3.5 million and...

Q: Chancellor Industries has retained earnings available of $1.2 million

Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments that require financing of $950,000 and $1.75 million, respectively. Chancellor uses a targ...

Q: Tower Interiors has made the forecast of sales shown in the following

Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. The firm has fixed operating costs of $75,000 and variable operatin...

Q: Williams Glassware has estimated, at various debt ratios, the expected

Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share, as shown in the following table. a. Estimate the optim...

Q: Garrett Industries turns over its inventory 6 times each year; it

Garrett Industries turns over its inventory 6 times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million. Assume t...

Q: Dynabase Tool has forecast its total funds requirements for the coming year

Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. a. Divide the firm’s monthly funds requirement into (1) a permanent com...

Q: Tiger Corporation purchases 1,400,000 units per year of

Tiger Corporation purchases 1,400,000 units per year of one component. The fixed cost per order is $55. The annual carrying cost of the item is 27% of its $10 cost. a. Determine the EOQ if (1) the con...

Q: Alexis Company uses 800 units of a product per year on a

Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a sh...

Q:  Jimmy Johnson is interested in buying a new Jeep SUV.

 Jimmy Johnson is interested in buying a new Jeep SUV. Two options are available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and...

Q: Tara’s Textiles currently has credit sales of $360 million per year

Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs ar...

Q: A firm is evaluating an accounts receivable change that would increase bad

A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per...

Q: Determine the date when a firm must pay for purchases made and

Determine the date when a firm must pay for purchases made and invoices dated on June 19 under each of the following credit terms: a. Net 30 date of invoice. b. Net 30 EOM. c. Net 45 date of invoice....

Q: As chief financial officer, you are responsible for weighing the financial

As chief financial officer, you are responsible for weighing the financial pros and cons of the many investment opportunities developed by your company’s research and development division. You are cur...

Q: Ashkenazi Companies has the following stockholders’ equity account: /

Ashkenazi Companies has the following stockholders’ equity account: Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share d...

Q: John Savage has obtained a short-term loan from First Carolina

John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $45,000. John needs the money to cover start-up costs in a new business. He h...

Q: A financial institution made a $4 million, 1-year

A financial institution made a $4 million, 1-year discount loan at 6% interest, requiring a compensating balance equal to 5% of the face value of the loan. Determine the effective annual rate associat...

Q: Lincoln Industries has a line of credit at Bank Two that requires

Lincoln Industries has a line of credit at Bank Two that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borro...

Q: Weathers Catering Supply Inc. needs to borrow $150,000

Weathers Catering Supply Inc. needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note: Weathers currently maint...

Q: Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local

Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowin...

Q: Commercial paper is usually sold at a discount. Fan Corporation has

Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (...

Q: Kansas City Castings (KCC) is attempting to obtain the maximum

Kansas City Castings (KCC) is attempting to obtain the maximum loan possible using accounts receivable as collateral. The firm extends net-30-day credit. The amounts that are owed KCC by its 12 credit...

Q: Springer Products wishes to borrow $80,000 from a local

Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as collateral any accounts that are norm...

Q: Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc

Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lendin...

Q: Finance factors the accounts of the Holder Company. All eight factored

Finance factors the accounts of the Holder Company. All eight factored accounts are shown in the following table, with the amount factored, the date due, and the status on May 30. Indicate the amounts...

Q: The board of Kopi Industries is considering a new dividend policy that

The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as sh...

Q: Determine the cost of giving up the discount under each of the

Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.) a. 2/10 net 30. b. 1/10 net 30. c. 1/10 net 45. d. 3/10 net 90. e. 1/10 net 60. f...

Q: Raymond Manufacturing faces a liquidity crisis: It needs a loan of

Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firm’s...

Q: Rancco Inc. reported total sales of $73 million last year

Rancco Inc. reported total sales of $73 million last year, including $13 million in revenue (labor, sales to tax-exempt entities) exempt from sales tax. The company collects sales tax at a rate of 5%....

Q: Data-Check is considering two capital structures. The key information

Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. a. Calculate two EBIT–EPS coordinates for each of the...

Q: Litho-Print is considering two possible capital structures, A and

Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate. a. Calculate two EBIT–EPS coordinates for each of the stru...

Q: Purchases made on credit are due in full by the end of

Purchases made on credit are due in full by the end of the billing period. Many firms extend a discount for payment made in the first part of the billing period. The original invoice contains a type o...

Q: Joanne Germano works in an accounts payable department of a major retailer

Joanne Germano works in an accounts payable department of a major retailer. She has attempted to convince her boss to take the discount on the 1/15 net 65 credit terms most suppliers offer, but her bo...

Q: Mark and Stacy McCoy are set to move into their first apartment

Mark and Stacy McCoy are set to move into their first apartment. They visited Levin Furniture, looking for a dining room table and buffet. Dining room sets are typically one of the more expensive home...

Q: Prairie Manufacturing has four possible suppliers, all of which offer different

Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credi...

Q: On accepting the position of chief executive officer and chairman of Muse

On accepting the position of chief executive officer and chairman of Muse Inc., Dominic Howard changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s week...

Q: The current stockholders’ equity account for Hilo Farms is as follows:

The current stockholders’ equity account for Hilo Farms is as follows: Hilo has announced plans to issue an additional 5,000 shares of common stock as part of its stock dividend pl...

Q: When Waverly Wear Inc. merged with Southerly Inc., Waverly’s employees

When Waverly Wear Inc. merged with Southerly Inc., Waverly’s employees were switched from a weekly to a biweekly pay period. Waverly’s weekly payroll amounted to $389,500. The annual cost of funds for...

Q: Data Back-Up Systems has obtained a $10,000

Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365day year.) a. How much interest (in dollars) will the firm pay...

Q: Given the lease payments and terms shown in the following table,

Given the lease payments and terms shown in the following table, determine the yearly after-tax cash outflows for each firm, assuming that lease payments are made at the end of each year and that the...

Q: What is the conversion (or stock) value of each of

What is the conversion (or stock) value of each of the following convertible bonds? a. A $1,000-par-value bond that is convertible into 25 shares of common stock. The common stock is currently selling...

Q: Find the conversion (or stock) value for each of the

Find the conversion (or stock) value for each of the $1,000-par-value convertible bonds described in the following table.

Q: Calculate the straight bond value for each of the bonds shown in

Calculate the straight bond value for each of the bonds shown in the table below.

Q: Eastern Clock Company has an outstanding issue of convertible bonds with a

Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon rate and a 20-yea...

Q: Craig’s Cake Company has an outstanding issue of 15-year convertible

Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have an 8% annual coupon rate, wher...

Q: Calculate the implied price of each warrant for each of the bonds

Calculate the implied price of each warrant for each of the bonds shown in the following table.

Q: Dinoo Mathur wishes to determine whether the $1,000 price

Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing’s bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.5%...

Q: Everdeen Inc. has a 90-day operating cycle. If

Everdeen Inc. has a 90-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its cash conversion...

Q: Kent Hotels has warrants that allow the purchase of three shares of

Kent Hotels has warrants that allow the purchase of three shares of its outstanding common stock at $50 per share. The common stock price per share and the market value of the warrant associated with...

Q: For each of the loan amounts, interest rates, annual payments

For each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year over the term of the loan, assuming that the pa...

Q: Schuyler Company wishes to purchase an asset costing $117,000

Schuyler Company wishes to purchase an asset costing $117,000. The full amount needed to finance the asset can be borrowed at 14% interest. The terms of the loan require equal end-of-year payments for...

Q: JLB Corporation is attempting to determine whether to lease or purchase research

JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease a...

Q: Northwest Lumber Company needs to expand its facilities. To do so

Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its...

Q: Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring

Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease th...

Q: Given the lease payments, terms remaining until the leases expire,

Given the lease payments, terms remaining until the leases expire, and discount rates shown in the following table, calculate the capitalized value of each lease, assuming that lease payments are made...

Q: Calculate the conversion price for each of the following convertible bonds:

Calculate the conversion price for each of the following convertible bonds: a. A $1,000-par-value bond that is convertible into 40 shares of common stock. b. A $1,000-par-value bond that is convertibl...

Q: What is the conversion ratio for each of the following bonds?

What is the conversion ratio for each of the following bonds? a. A $1,000-par-value bond that is convertible into common stock at $43.75 per share. b. A $1,000-par-value bond that is convertible into...

Q: Connors Shoe Company is contemplating the acquisition of Salinas Boots, a

Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses over the past few years. As a result of the acquisition, Connors believes that...

Q: Icy Treats Inc. is a seasonal business that sells frozen desserts

Icy Treats Inc. is a seasonal business that sells frozen desserts. At the peak of its summer selling season, the firm has $35,000 in cash, $125,000 in inventory, $70,000 in accounts receivable, and $6...

Q: Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman

Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for $1...

Q: Hahn Textiles has a tax loss carryforward of $800,000

Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per...

Q: Zarin Printing Company is considering the acquisition of Freiman Press at a

Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining a...

Q: Benson Oil is being considered for acquisition by Dodd Oil. The

Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the follo...

Q: In corporate settings, it is not unusual for firms to assess

In corporate settings, it is not unusual for firms to assess the financial viability of a business unit and decide whether to retain it within the corporation or divest it. The selling of units that d...

Q: Seven years ago, after 15 years in public accounting, Stanley

Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and O’Brien Public Accountants and start...

Q: Mama Leone’s Frozen Pizzas uses 50,000 pounds of cheese per

Mama Leone’s Frozen Pizzas uses 50,000 pounds of cheese per year. Each pound costs $5.50. The ordering cost for the cheese is $250 per order, and its carrying cost is $1.50 per pound per year. Calcula...

Q: Forrester Fashions has annual credit sales of 250,000 units with

Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a per unit sale price of $30. Bad debts cu...

Q: Klein’s Tools is considering offering a discount to speed up the collection

Klein’s Tools is considering offering a discount to speed up the collection of accounts receivable. Currently, the firm has an average collection period of 65 days, annual sales are 35,000 units, the...

Q: Lyman Nurseries purchased seeds costing $25,000 with terms of

Lyman Nurseries purchased seeds costing $25,000 with terms of 3/15 net 30 EOM on January 12. How much will the firm pay if it takes the discount? What is the approximate cost of giving up the discount...

Q: Cleaner’s Inc. is switching to paying employees every 2 weeks rather

Cleaner’s Inc. is switching to paying employees every 2 weeks rather than weekly and will therefore “skip” 1 week’s pay. The firm has 25 employees who work a 60-hour week and earn an average wage of $...

Q: The end-of-year parties at Yearling, Inc.,

The end-of-year parties at Yearling, Inc., are known for their extravagance. To thank the employees for their hard work, management provides the best food and entertainment. During the planning for th...

Q: Jasmine Scents has been given two competing offers for short-term

Jasmine Scents has been given two competing offers for short-term financing. Both offers are for borrowing $15,000 for 1 year. The first offer is a discount loan at 8%, and the second offer is for int...

Q: Jackson Industries has borrowed $125,000 under a line-

Jackson Industries has borrowed $125,000 under a line-of-credit agreement. Although the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line requires...

Q: Horizon Telecom sold $300,000 worth of 120-day

Horizon Telecom sold $300,000 worth of 120-day commercial paper for $298,000. What is the dollar amount of interest paid on the commercial paper? What is the effective 120-day rate on the paper?

Q: N and M Corp. is considering leasing a new machine for

N and M Corp. is considering leasing a new machine for $25,000 per year. The lease arrangement calls for a 5-year lease with an option to purchase the machine at the end of the lease for $3,500. The f...

Q: During the past 2 years Meacham Industries issued three separate convertible bonds

During the past 2 years Meacham Industries issued three separate convertible bonds. For each of them, calculate the conversion price: a. A $1,000-par-value bond that is convertible into 10 shares of c...

Q: Newcomb Company has a bond outstanding with a $1,000

Newcomb Company has a bond outstanding with a $1,000 par value and convertible at $30 per share. What is the bond’s conversion ratio? If the underlying stock currently trades at $25 per share, what is...

Q: Crystal Cafes recently sold a $1,000-par-

Crystal Cafes recently sold a $1,000-par-value, 10-year convertible bond with a 7% coupon rate. The interest payments will be paid annually at the end of each year and the principal will be repaid at...

Q: A 6-month call option on 100 shares of SRS Corp

A 6-month call option on 100 shares of SRS Corp. stock is selling for $320. The strike price for the option is $80. The stock is currently selling at $79 per share. Ignoring brokerage fees, what price...

Q: Toni’s Typesetters is analyzing a possible merger with Pete’s Print Shop.

Toni’s Typesetters is analyzing a possible merger with Pete’s Print Shop. Toni’s has a tax loss carryforward of $200,000, which it could apply to Pete’s expected earnings before taxes of $100,000 per...

Q: Cautionary Tales Inc. is considering the acquisition of Danger Corp.

Cautionary Tales Inc. is considering the acquisition of Danger Corp. at its asking price of $150,000. Cautionary would immediately sell some of Danger’s assets for $15,000 if it makes the acquisition....