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Questions and Answers of Finance

Assume the following options are currently available for British pounds (£):• Call option premium on British pounds = $.04 per unit.• Put option premium on British pounds = $.03 per unit.•
Refer to the previous question, but assume that the call and put option premiums are $.035 per unit and $.025 per unit, respectively.a. Construct a contingency graph for a long pound straddle.b.
The following information is currently available for Canadian dollar (C$) options:• Put option exercise price = $.75.• Put option premium = $.014 per unit.• Call option exercise price =
For the following options available on Australian dollars (A$), construct a worksheet and contingency graph for a long strangle. Locate the break-even points for this strangle.• Put option strike
Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Japanese yen (¥) are
A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06
Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit, respectively.a. Describe how a
1. If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $.00756 or the call option with the exercise price of $.00792? Describe the
1. How can the Sports Exports Company use currency futures contracts to hedge against exchange rate risk? Are there any limitations of using currency futures contracts that would prevent the Sports
Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust
Using the information provided, will Mesa expect the pound to appreciate or depreciate in the future? Explain.
Mesa believes international capital flows shift in response to changing interest rate differentials. Is there any reason why the changing interest rate differentials in this example will not
Based on your answer to question 4, should Mesa consider hedging its exchange rate risk? If so, explain how it could hedge using forward contracts, futures contracts, and currency options.
Assume that the following data relative to Metro Co. for 20x1 is available:Net Income (30% tax rate): $3,200,000Transactions in common shares1/1 beginning number 1,000,000 shares3/1 Purchase of
A manager must determine which of two products to market. From market studies the manager constructed the following payoff matrix of the present value of all future net profits under all the
Count Cash pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and
Discuss the importance of the calculation and interpretation of ratios, to complete an effective financial ratio analysis.
a. From the library or internet search, try to find the average real rate of return and standard deviation (as a measure of risk) from the 1920s until the present for1. Common stock2. Long-term
Warner Motors's stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases
The trial balance of the Parton Wholesale Company contained the following accounts at December 31, 2010 the end of the company's calendar year.Adjustment data:1. Depreciation is $10,000 on buildings
Data concerning the most recent year appear below:Sales ...............$ 14,040,000Net operating income ......... $ 1,193,400Average operating assets ....... $ 5,200,000The Chief Financial Officer of
Use these financial statements to answer the question.Income StatementNet Sales ............$32,700Costs ............... 20,705Depreciation ............ 2,510EBIT ............... 9,485Interest
Kay owns XYZ Corporation stock with a basis of $20,000. She exchanges this for $24,000 of ABC stock and $8,000 of ABC securities as part of a tax-free reorganization.What is Kay's realized gain?
Sit Well Corporation manufactured and sold 25,000 chairs this year. Total cost to manufacture per unit was $180. Sit well earned a 25% return on its investment of $6 million. Calculate the markup and
A software company has to decide which of two advertising strategies to adopt: TV commercials or newspaper ads. The marketing department has estimated that sales and their probability under each
At December 31, 2010, Benjamin Company had 700 shares of common stock outstanding. On September 1, 2011, an additional 300 shares of common stock were issued. In addition, Benjamin had $20,000 of 8
The Shallow Pan Company has 85 obsolete pans in inventory at a cost of $5,000. The obsolete pans can’t be sold in their current condition. The pans can be upgraded to tri-ply for $2,000. The
Baker Mfg Inc. wishes to compare its inventory turnover to those of industry leaders, who have turnover of about 13 times per year and 8% of their assets invested in inventory.a. What is Bakers
Staal Enterprises is considering a change from its current capital structure. Staal currently has an all-equity capital structure and is considering a capital structure with 35% debt. There are
Williams Oil Company had a return on stockholders’ equity of 18 percent during 2010. Its total asset turnover was 1.0 times, and its equity multiplier was 2.0 times. Calculate the company’s net
For this Distinguished Scholar Project, use this file to obtain the information about a fictitious company, Using the financial statements provided calculate the financial ratios for the year
If the population of a country is 25,000 people, its labor force consists of 145,000 people, and 35,000 people are unemployed, the unemployment rate is:A.22.1%B.14.0%C.24.1%D.19.4%
Assume that both portfolios a and b are well diversified? that E(rA)=12% and E(rB)=9%. If the economy has only one factor and beta=1.2 whereas beta=.8, what must be the risk-free rate?
Suppose that there are two independent economic factors, F1 and F2. The risk free rate is 6%, and all stocks have independent firm specific components with a standard deviation of 45%. The following
An index model regression applied to past monthly returns in Ford’s stock price produces the following estimates, which are believed to be stable over time:RF =.10% +1.1 rmIf the market index sub
The monthly of return on t-bills is 1%. The market went up this month by 1.5%. In addition, AmbChaser,Inc., which has an equity beta of 2, surprisingly just won a lawsuit that awards it $1 million
The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,000,000 in the current year. The company is considering the issuance of 1 million additional
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since
In early 2009 Giant Inc.'s management was considering making an offer to buy Micro Corporation. Micro's projected operating income (EBIT) for 2009 was $30 million, but Giant believes that if the two
One year ago, you purchased 400 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.50 a share. What is your total dollar return
Suppose an analyst reformulates financial statements to prepare the alternative decomposition of ROCE for a firm with no debt. The analyst determines that the company holds excess cash as large
A firm has experienced an increasing current ratio but a decreasing operating cash flow to current liabilities ratio during the last three years. What is the likely explanation for these results?
A firm has experienced a decrease in its current ratio but an increase in its quick ratio during the last three years. What is the likely explanation for these results?
While a firm’s sales and net income have been steady during the last three years, the firm has experienced a decrease in its accounts receivable and inventory turnovers and an increase in its
A firm had the following values for the four debt ratios discussed in the chapter:Liabilities to Assets Ratio: less than 1.0Liabilities to Shareholders’ Equity Ratio: equal to 1.0Long-Term Debt to
Identify the assumptions underlying the interest coverage ratio needed to make it an appropriate measure for analyzing long-term solvency risk.
In what sense is the interest coverage ratio more a measure for assessing short-term liquidity risk than it is a measure for assessing long-term solvency risk?
Empirical research cited in the text indicates that firms with an operating cash flow to current liabilities ratio exceeding 0.40 portray low short-term liquidity risk. Similarly, firms with an
Altman’s bankruptcy prediction model places a coefficient of 3.3 on the earnings before interest and taxes divided by total assets variable but a coefficient of only 1.0 on the sales to total
Market equity beta measures the covariability of a firm’s returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as
Altman’s bankruptcy risk model utilizes the values of the variables at a particular point in time (balance sheet variables) or for a period of time (income statement values). For the most part,
Refer to the financial statement data for Hasbro in Problem 4.23 in Chapter 4. Exhibit 5.15 presents risk ratios for Hasbro for Year 2 and Year 3.Requireda. Calculate the amounts of these ratios for
Refer to the financial statement data for Abercrombie & Fitch in Problem 4.24 in Chapter 4. Exhibit 5.16 presents risk ratios for Abercrombie & Fitch for fiscal Year 3 and Year 4.Requireda. Compute
Refer to the profitability ratios of Coca-Cola in Problem 4.25 in Chapter 4. Exhibit 5.17 presents risk ratios for Coca-Cola for 2006-2008. As we did within the chapter for PepsiCo, we utilize
Delta Air Lines is one of the largest airlines in the United States. It has operated on the verge of bankruptcy for several years. Exhibit 5.18 presents selected financial data for Delta Air Lines
Sun Microsystems develops, manufactures, and sells computers for network systems. Exhibit 5.19 presents selected financial data for Sun Microsystems for each of the five years ending June 30, 2005,
Exhibit 5.20 presents selected financial data for Best Buy and Circuit City for fiscal 2008 and 2007. Best Buy and Circuit City operate as specialty retailers offering a wide range of consumer
Exhibit 5.21 presents selected financial data for Harvard Industries and Marvel Entertainment for fiscal Year 5 and Year 6. Harvard Industries manufactures automobile components that it sells to
Exhibit 5.22 presents selected financial data for Tribune Company and Washington Post for fiscal 2006 and 2007. The Washington Post Company is an education and media company. It owns, among others,
Exhibit 5.23 presents selected financial statement data for Enron Corporation for 1997, 1998, 1999, and 2000. These data reflect amounts from the financial statements as originally reported for each
Exhibit 5.24 presents balance sheets for 2007 and 2008 for Whole Foods; Exhibit 5.25 presents income statements for 2006–2008.Requireda. Prepare the standard Dupont decomposition of ROCE. Use
Exhibit 5.26 presents risk ratios for Starbucks for 2006 and 2007. Exhibits 1.26, 1.27, and 1.28 in Chapter 1 present the financial statements for Starbucks.Requireda. Compute the values of each of
Massachusetts Stove Company manufactures wood-burning stoves for the heating of homes and businesses. The company has approached you, as chief lending officer for the Massachusetts Regional Bank,
Douglas C. Mather, founder, chair, and chief executive of Fly-by-Night International Group (FBN), lived the fast-paced, risk-seeking life that he tried to inject into his company. Flying the
Millennial Technologies, a designer, manufacturer, and marketer of PC cards for portable computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall
Describe the directional effect (increase, decrease, or no effect) of each transaction on the components of the book value of common shareholders' equity shown in the charta. Issuance of $1 par value
Assume that a start-up manufacturing company raises capital through a series of equity issues.a. Using the financial statement template below, summarize the financial statement effects of the
Following is the shareholders’ equity section of All-Wood Doors on a day its common stock is trading at $130 per share.Common stock ($2 par value, 40,000 shares issued and outstanding) ...$
Identify where the cash flow effect of each of the following transactions is reported in the statement of cash flows: operating, investing, or financing section. State the direction of each change.
Assume that on December 31, 2010, The Coca-Cola Company borrows money from a consortium of banks by issuing a $900 million promissory note. The note matures in four years on December 31, 2014, and
Assume that Circuit City owes Synovus Bank $1,000,000 on a 4-year, 7% note originally issued at par. After one year of making scheduled payments, Circuit City faces financial difficulty. At the end
Assume that Great Beef Co. owes Bank of America $5,000,000 on a 3-year, 9% note originally issued at par. After one year of making scheduled payments, the firm faces financial difficulty. At the end
Determine and compare the financial reporting (debt versus equity classification) of redeemable preferred stock with the following characteristics under U.S. GAAP and IFRS.a. Redemption will occur at
Assume that John Deere Co. issues 2,000 shares of $100 par, 6% convertible preferred stock for $105 per share. Shareholders have the right to exchange each share of convertible preferred stock for
ARTL Company issued 3%, 10-year convertible bonds on January 1, 2010, at their par value of $500 million. Each $1,000 bond is convertible into 40 shares of ARTL’s $1 par value common stock. Use
The text states that loss contingencies may or may not give rise to accounting liabilities. Financial reporting requires firms to recognize a loss contingency when two criteria are met. Describe the
Firms such as Deere & Company and Macy’s, Inc., often sell their receivables as a means of obtaining financing. Should firms selling receivables remove the receivables from the balance sheet,
Firms such as Deere & Company and Macy’s, Inc., often sell their receivables as a means of obtaining financing. Should firms selling receivables remove the receivables from the balance sheet, or
All leases for financial reporting purposes are treated as either capital (finance) leases or operating leases. The effects of the two reporting techniques on the financial statements differ
The use of the term reserve in the title of a financial statement account is not acceptable in the United States, primarily because its purpose is often too vague. However, informal use of the term
Historically, technology firms have been the most aggressive users of stock-based compensation in the form of stock options granted to almost all employees of the firms. What is the rationale for
Patrick Company wants to raise $50 million cash but for various reasons does not want to do so in a way that results in a newly recorded liability. The firm is sufficiently solvent and profitable, so
Ford Motor Credit Company discloses the following information with respect to finance receivables (amounts in millions).Requireda. Applying the criteria for the sale of receivables from FASB
a. International Paper Company (IP) needs $100 million of additional financing, but because of restrictions in existing debt covenants, it cannot place any more debt on its balance sheet. To obtain
Some retailing companies own their own stores or acquire their premises under capital leases. Other retailing companies acquire the use of store facilities under operating leases, contracting to make
Exhibit 6.16 includes a footnote excerpt from the annual report of The Coca-Cola Company for Year 4. The beverage company offers stock options to key employees under plans approved by
Eli Lilly and Company produces pharmaceutical products for humans and animals. Exhibit 6.17 includes a footnote excerpt from the quarterly report of Lilly for the period ending March 31, Year 5. The
Exhibits 6.16 and 6.17 provide footnote excerpts to the financial reports of The Coca-Cola Company and Eli Lilly and Company that discuss the stock option grants given to the employees of the two
Exhibit 6.18 summarizes the information disclosed by General Electric Company (GE) regarding its stock option plans for Year 2 to Year 4. Assume an income tax rate of 35 percent.Requireda. The
A common practice of fast-food and retail coffee shop chains such as Starbucks is to lease some or all of their retail space. Starbucks’ Form 10-K filing states that the firm “leases retail
A sales-based ranking of software companies provided by Yahoo! Finance on November 5, 2008, places Oracle Corporation third behind sales leaders Microsoft Corporation and IBM Software. Typical of
The first decade of the 21st century witnessed a flurry of losses, bankruptcies, acquisitions, and strategic partnerships in the airline industry. The heavily levered firms in the industry are
When a firm incurs costs on an item to be used in operations, management must decide whether to treat the cost as an asset or an expense. Assume that a company used cash to acquire machinery expected
Assume that a company needs to acquire a large special-purpose materials handling facility. Given that no outside vendor exists for this type of facility and that the company has available
The three types of costs incurred in oil production are acquisition costs (costs to acquire the oil fields, minus the cost of the land, plus the present value of future cash flows necessary to
U.S. GAAP requires firms to expense immediately all internal expenditures for R&D costs. Alternatively, GAAP could require firms to capitalize and subsequently amortize all internal expenditures on
In practice, very few firms capitalize costs of developing computer software. However, Statement No. 86 requires that firms capitalize (and subsequently amortize) development costs once the
Goodwill is an intangible asset that firms report on their balance sheets as a result of acquiring other firms. Goodwill generally has an indefinite life and should not be amortized, but should be
Earnings management entails managers using judgment and reporting estimates in such a way as to alter reported earnings to their favor.a. Discuss the three factors that must be estimated in measuring
Not every acquisition results in goodwill reported in the consolidated balance sheet. Describe the valuation procedures followed by the acquiring firms to determine whether any goodwill should be

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