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Questions and Answers of Finance

Which three statements result as part of the short-term (operating) financial planning process?
What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
Briefly describe the basic format 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?
What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?
What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches?
How is the percent-of-sales method used to prepare pro forma income statements?
Why does the presence of fixed costs cause the percent-of-sales method of pro forma income statement preparation to fail? What is a better method?
Describe the judgmental approach for simplified preparation of the pro forma balance sheet.
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
What are the two basic weaknesses of the simplified approaches to preparing pro forma statements?
What is the financial manager’s objective in evaluating pro forma statements?
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
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
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
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
Rimier Corp. forecasts sales of $650,000 for 2013. Assume the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed costs of
On March 20, 2012, Norton Systems acquired two new assets. Asset A was research equipment costing $17,000 and having a 3-year recovery period. Asset B was duplicating equipment having an installed
In early 2012, Sosa Enterprises purchased a new machine for $10,000 to make cork stoppers for wine bottles. The machine has a 3-year recovery period and is expected to have a salvage value of $2,000.
Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new
A firm in the third year of depreciating its only asset, which originally cost $180,000 and has a 5-year MACRS recovery period, has gathered the following data relative to the current year’s
Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither(N).
Consider the balance sheets and selected data from the income statement of Keith Corporation that appear below and on shown below.Keith Corporation Income Statement Data (2012)Depreciation expense
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
Maris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 4.9 (on page 130) and the following information in its preparation.Sales:
Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000
Sam and Suzy Sizeman need to prepare a cash budget for the last quarter of 2013 to make sure they can cover their expenditures during the period. Sam and Suzy have been preparing budgets for the
The actual sales and purchases for Xenocore, Inc., for September and October 2012, along with its forecast sales and purchases for the period November 2012 through April 2013, follow. The firm makes
The following represent financial transactions that Johnsfield & Co. will be undertaking in the next planning period. For each transaction, check the statement or statements that will be
Trotter Enterprises, Inc., has gathered the following data to plan for its cash requirements and short-term investment opportunities for October, November, and December. All amounts are shown in
Brownstein, Inc., expects sales of $100,000 during each of the next 3 months. It will make monthly purchases of $60,000 during this time. Wages and salaries are $10,000 per month plus 5% of sales.
The marketing department of Metroline Manufacturing estimates that its sales in 2013 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay
Allen Products, Inc., wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic
Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2013. The firm expects 2013 sales to total $3,000,000. The following information has been gathered.(1) A minimum cash
Peabody & Peabody has 2012 sales of $10 million. It wishes to analyze expected performance and financing needs for 2014€”2 years ahead. Given the following information, respond to parts a
Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.The following financial data are also
Provincial Imports, Inc., has assembled past (2012) financial statements (income statement below and balance sheet on page 156) and financial projections for use in preparing financial plans for the
The SEC is trying to get companies to notify the investment community more quickly when a “material change” will affect their forthcoming financial results. In what sense might a financial
What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?
Define and differentiate among the three basic patterns of cash flow:(1) A single amount, (2) An annuity, and (3) A mixed stream.
How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
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?
What is meant by “the present value of a future amount”? What is the general equation for present value?
What effect does increasing the required return have on the present value of a future amount? Why?
How are present value and future value calculations related?
What is the difference between an ordinary annuity and an annuity due? Which is more valuable? Why?
What are the most efficient ways to calculate the present value of an ordinary annuity?
How can the formula for the future value of an annuity be modified to find the future value of an annuity due?
How can the formula for the present value of an ordinary annuity be modified to find the present value of an annuity due?
What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate?
How is the future value of a mixed stream of cash flows calculated? How is the present value of a mixed stream of cash flows calculated?
What effect does compounding interest more frequently than annually have on (a) Future value and(b) The effective annual rate (EAR)? Why?
How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).
How can you determine the size of the equal, annual, end-of-period deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
Describe the procedure used to amortize a loan into a series of equal periodic payments.
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?
Assume a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?
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
Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years.
Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the savings shown in the following table over its 5-year life:Year
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.
Jack and Jill have just had their first child. If college is expected to cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each year to accumulate
The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000
Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate
You have $100 to invest. If you can earn 12% interest, about how long does it take for your $100 investment to grow to $200? Suppose the interest rate is just half that, at 6%. At half the interest
For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today at the end of the deposit period if the interest is compounded annually at the
You have $1,500 to invest today at 7% interest compounded annually. a. Find how much you will have accumulated in the account at the end of (1) 3 years, (2) 6 years, and (3) 9 years.b. Use your
As part of your financial planning, you wish to purchase a new car exactly 5 years from today. The car you wish to purchase costs $14,000 today, and your research indicates that its price will
You can deposit $10,000 into an account paying 9% annual interest either today or exactly 10 years from today. How much better off will you be at the end of 40 years if you decide to make the initial
Misty needs to have $15,000 at the end of 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
A person borrows $200 to be repaid in 8 years with 14% annually compounded interest. The loan may be repaid at the end of any earlier year with no prepayment penalty.a. What amount will be due if the
Without referring to the preprogrammed function on your financial calculator, use the basic formula for present value, along with the given opportunity cost, r, and the number of periods, n, to
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
Answer each of the following questions.a. What single investment made today, earning 12% annual interest, will be worth $6,000 at the end of 6 years?b. What is the present value of $6,000 to be
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.
An Iowa state savings bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest (compounded
You just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaranteed by the state in which you live, opportunities exist to sell the
In exchange for a $20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.Alternative
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
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
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 your
Present value of an annuity 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
Marian Kirk wishes to select the better of two 10-year annuities, C and D. Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due of $2,200 per year for 10
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
An insurance agent is trying to sell you an immediate-retirement annuity, which for a single amount paid today will provide you with $12,000 at the end of each year for the next 25 years. You
You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you
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 (that is, $1,000,000 over 25 years) or as a single amount of
Perpetuities Consider the data in the following table.Determine the present value of eachperpetuity.
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
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%,
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 at the closing of the transaction or will pay the amounts shown
Find the present value of the streams of cash flows shown in the following table. Assume that the firm€™s opportunity cost is12%.
Consider the mixed streams of cash flows shown in the following table.a. Find the present value of each stream using a 15% discount rate. b. Compare the calculated present values and discuss them in
Harte Systems, Inc., a maker of electronic surveillance equipment, is considering selling to a well-known hardware chain the rights to market its home security system. The proposed deal calls for the
As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following
Using the information in the accompanying table, answer the questions that follow.Year (t) Cash flow1 ............... $ 8002 ............... 9003 ............... 1,0004
The table below shows a mixed cash flow stream, except that the cash flow for year 3 is missing.Year 1 ....... $10,000Year 2 ....... 5,000Year 3 ....... Year 4 ....... 20,000Year 5 .......
Using annual, semiannual, and quarterly compounding periods for each of the following, (1) calculate the future value if $5,000 is deposited initially, and (2) determine the effective annual rate
For each of the cases in the following table:a. Calculate the future value at the end of the specified deposit period.b. Determine the effective annual rate, EAR.c. Compare the nominal annual rate,

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