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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
A stock has an expected return of 13 percent, the risk-free rate is 5 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
A stock has an expected return of 10 percent, its beta is .9, and the risk-free rate is 6 percent. What must the expected return on the market be?
Asset W has an expected return of 17 percent and a beta of 1.4. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset Wand a risk-free asset. Illustrate the
Consider the following information on Stocks I and II:The market risk premium is 10 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most
A stock has an expected return of 14 percent, a beta of 1.6, and the expected return on the market is 11 percent. What must the risk-free rate be?
A stock has a beta of 1.1 and an expected return of 15 percent. A risk-free asset currently earns 5 percent.a. What is the expected return on a portfolio that is equally invested in the two assets?b.
You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of
Stock Y has a beta of 1.45 and an expected return of 17 percent. Stock Z has a beta of .85 and an expected return of 12 percent. If the risk-free rate is 6 percent and the market risk premium is 7.5
Download the annual income statements for Sharper Image (SHRP). Looking back at Table 2.3, what is the marginal income tax rate for Sharper Image? Using the total income tax and the pretax income
Penguin Pucks, Inc., has current assets of $3,000, net fixed assets of $6,000, current liabilities of $900, and long-term debt of $5,000. What is the value of the shareholders’ equity account for
Find the most recent abbreviated balance sheets for General Dynamics at finance.yahoo.com. Enter the ticker symbol “GD,” follow the “Research” link, and the “Financials” link. Using the
Papa Roach Exterminators, Inc., has sales of $432,000, costs of $210,000, depreciation expense of $25,000, interest expense of $8,000, and a tax rate of 35 percent. What is the net income for this
Find the annual balance sheets for American Electric Power (AEP) and Lands’ End (LE). Calculate the net working capital for each company. Is American Electric Power’s net working capital
The home page for Coca-Cola Company can be found at www.coca-cola.com. Locate the most recent annual report, which contains a balance sheet for the company. What is the book value of equity for
Suppose the firm in Problem 2 paid out $65,000 in cash dividends. What is the addition to retained earnings?Data from Problem 2Papa Roach Exterminators, Inc., has sales of $432,000, costs of
Find the annual income statements for Harley Davidson (HDI), Hawaiian Electric Industries (HE) and AOL Time Warner (AOL). What are the earnings per share (EPS Basic from operations) for each of these
Duke Energy is one of the world’s largest energy companies. Go to the company’s home page at www.dukeenergy.com, follow the link to the investor’s page, and locate the annual reports. What was
Suppose the firm in Problem 3 had 30,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?Data from Problem 3Suppose the firm
Download the annual balance sheets and income statements for Landry’s Seafood Restaurants (LNY). Using the most recent year calculate the cash flow identity for Landry Seafood. Explain your answer.
Cooper Tire and Rubber Company provides financial information for investors on its web site at www.coopertires.com. Follow the “Investor Information” link and find the most recent annual report.
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5 million. The machinery can be sold to the Romulans today for $1.5 million. Klingon’s current balance sheet shows net
The Bradley Co. had $185,000 in 2002 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2002 income taxes.Table 2.3 $ Taxable
Find the most recent income statement for IBM at www.ibm.com. What is the marginal tax rate for IBM? What is the average tax rate for IBM? Is the average tax rate 35 percent? Why or why not?
Gonas, Inc., has sales of $9,750, costs of $5,740, depreciation expense of $1,000, and interest expense of $240. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
Andretti Driving School’s December 31, 2001, balance sheet showed net fixed assets of $3.1 million, and the December 31, 2002, balance sheet showed net fixed assets of $3.5 million. The company’s
The December 31, 2001, balance sheet of Venus’s Tennis Shop, Inc., showed current assets of $1,200 and current liabilities of $720. The December 31, 2002, balance sheet showed current assets of
The December 31, 2001, balance sheet of Serena’s Tennis Shop, Inc., showed long-term debt of $3.1 million, and the December 31, 2002, balance sheet showed long-term debt of $3.6 million. The 2002
The December 31, 2001, balance sheet of Serena’s Tennis Shop, Inc., showed $750,000 in the common stock account and $7.2 million in the additional paid-in surplus account. The December 31, 2002,
Given the information for Serena’s Tennis Shop, Inc., in Problems 11 and 12, suppose you also know that the firm’s net capital spending for 2002 was $600,000, and that the firm reduced its net
Bedrock Gravel Corp. shows the following information on its 2002 income statement: sales = $130,000; costs = $82,000; other expenses = $3,500; depreciation expense = $6,000; interest expense =
Given the following information for Soprano Pizza Co., calculate the depreciation expense: sales = $21,000; costs = $10,000; addition to retained earnings = $4,000; dividends paid = $800; interest
Prepare a balance sheet for Tim’s Couch Corp. as of December 31, 2002, based on the following information: cash = $300,000; patents and copyrights = $775,000; accounts payable = $700,000; accounts
Corporation Growth has $80,000 in taxable income, and Corporation Income has $9,000,000 in taxable income. (Refer to Table 2.3.) a. What is the tax bill for each firm?b. Suppose both firms have
Clapper’s Clippers, Inc., is obligated to pay its creditors $2,900 during the year.a. What is the market value of the shareholders’ equity if assets have a market value of $3,600?b. What if
During 2002, Lambert Limo Corp. had sales of $900,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $600,000, $170,000, and $105,000, respectively. In
In Problem 19, suppose Lambert Limo Corp. paid out $25,000 in cash dividends. Is this possible? If no new investments were made in net fixed assets or net working capital, and if no new stock was
Use the following information for Taco Swell, Inc., (assume the tax rate is 34 percent):Draw up an income statement and balance sheet for this company for 2001 and 2002. Sales Depreciation Cost of
Faulk Industries had the following operating results for 2002: sales = $12,200; cost of goods sold = $9,000; depreciation expense = $1,600; interest expense = $200; dividends paid = $300. At the
Use the following information for Taco Swell, Inc., (assume the tax rate is 34 percent):For 2002, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
SDJ, Inc., has net working capital of $1,050, current liabilities of $4,300, and inventory of $1,300. What is the current ratio? What is the quick ratio?
Use the balance sheets for Amazon.com (AMZN), Bethlehem Steel (BS), American Electric Power (AEP), and Pfizer (PFE) to calculate the equity multiplier for each company over the most recent two years.
You can find financial statements for Walt Disney Company on the “Investor” link at Disney’s home page, www.disney.com. For the three most recent years, calculate the Du Pont identity for
Music Row, Inc. has sales of $32 million, total assets of $43 million, and total debt of $9 million. If the profit margin is 7 percent, what is net income? What is ROA? What is ROE?
Use the financial statements for Dell Computer Corporation (DELL) and Boeing Company (BA) to calculate the inventory turnover for each company over the past three years. Is there a difference in
You want to examine the financial ratios for Dell Computer Corporation. Go to www.marketguide.com and type in the ticker symbol for the company (DELL). Next, go to the comparison link. You should
Stargell Lumber Yard has a current accounts receivable balance of $392,164. Credit sales for the year just ended were $2,105,620. What is the receivables turnover? The days’ sales in receivables?
Find the SIC codes for Papa Johns’ International (PZZA) and Darden Restaurants (DRI) on each company’s home page. What is the SIC code for each of these companies? What does the business
Go to the “Investor” link for Enron located at www.enron.com and locate the income statement and balance sheet for the two most recent years.a. Prepare the common-size income statements and
Golden Corporation has ending inventory of $423,500, and cost of goods sold for the year just ended was $2,365,450. What is the inventory turnover? The days’ sales in inventory? How long on average
Find the annual income statements and balance sheets for Anheuser-Busch (BUD) and Gateway (GTW). Calculate the Du Pont identity for each company for the most recent three years. Comment on the
Paulette’s Plants, Inc., has a total debt ratio of .62. What is its debt-equity ratio? What is its equity multiplier?
Look under “Valuation” and download the “Profitability” spreadsheet for Southwest Airlines (LUV) and Continental Airlines (CAL). Find the ROA (Net ROA), ROE (Net ROE), PE ratio (P/E-High and
Find the most recent financial statements for Kmart at www.bluelight.com and Boeing at www.boeing.com. Calculate the asset utilization ratio for these two companies. What does this ratio measure? Is
Bethesda Co. had additions to retained earnings for the year just ended of $275,000. The firm paid out $150,000 in cash dividends, and it has ending total equity of $6 million. If Bethesda currently
If Roten Rooters, Inc., has an equity multiplier of 1.90, total asset turnover of 1.20, and a profit margin of 8 percent, what is its ROE?
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every
Based only on the following information for Sweeney Corp., did cash go up or down? By how much? Classify each event as a source or use of cash. Decrease in inventory Decrease in accounts
Finley Fire Prevention Corp. has a profit margin of 7 percent, total asset turnover of 1.94, and ROE of 23.70 percent. What is this firm’s debt-equity ratio?
For 2002, BDJ, Inc., had a cost of goods sold of $10,432. At the end of the year, the accounts payable balance was $2,120. How long on average did it take the company to pay off its suppliers during
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.Prepare the 2001 and 2002 common-size balance sheets for Just Dew It. Assets Current assets Cash Accounts
For the year just ended, Wallin Frozen Yogurt shows an increase in its net fixed assets account of $490. The company took $160 in depreciation expense for the year. How much did Wallin spend on new
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.Prepare the 2002 common–base year balance sheet for Just Dew It. Assets Current assets Cash Accounts
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.Prepare the 2002 combined common-size, common–base year balance sheet for Just Dew It. Assets Current
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.For each account on this company’s balance sheet, show the change in the account during 2002 and note
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.Based on the balance sheets given for Just Dew It, calculate the following financial ratios for each year:a.
Y3K, Inc., has sales of $2,300, total assets of $1,020, and a debt-equity ratio of 1.00. If its return on equity is 18 percent, what is its net income?
As you may (or may not) know, many companies incorporate in Delaware for a variety of reasons. Visit Bizfilings at www.bizfilings.com to find out why. Which state has the highest fee for
The organizational structure chart in the text is a simplified version. Go to www.conference-board.org, follow the “Organization Charts” link, and then the “Click here to see a sample chart”
Critics have charged that compensation to top management in the United States is simply too high and should be cut back. For example, focusing on large corporations, Millard Drexler of clothing
If accounts payable on the balance sheet decreases by $10,000 from the beginning of the year to the end of the year, is this a source or a use of cash? Explain your answer.
In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child 50 cents to go buy $25 worth of groceries, then your child makes twice
The Alcala Company has a long-term debt ratio of 0.65 and a current ratio of 1.30. Current liabilities are $900, sales are $4,680, profit margin is 9.5 percent, and ROE is 22.4 percent. What is the
The Raggio Company has net income of $52,300. There are currently 21.50 days’ sales in receivables. Total assets are $430,000, total receivables are $59,300, and the debt-equity ratio is 1.30. What
Tommy Badfinger Inc.’s net income for the most recent year was $8,175. The tax rate was 34 percent. The firm paid $2,380 in total interest expense and deducted $1,560 in depreciation expense. What
For the most recent year, ICU Windows, Inc., had sales of $380,000, cost of goods sold of $110,000, depreciation expense of $32,000, and additions to retained earnings of $41,620. The firm currently
Prince Albert Canning PLC had a 2002 net loss of £10,418 on sales of £140,682 (both in thousands of pounds). What was the company’s profit margin? Does the fact that these figures are quoted in a
Some recent financial statements for Smolira Golf Corp. follow.Find the following financial ratios for Smolira Golf Corp. (use year-end figures rather than average values where appropriate):
Some recent financial statements for Smolira Golf Corp. follow.For how many days could Smolira Golf Corp. continue to operate if its cash inflows were suddenly suspended? Assets Current
Some recent financial statements for Smolira Golf Corp. follow.Prepare the 2002 statement of cash flows for Smolira Golf Corp. Assets Current assets Cash Accounts receivable Inventory Total Fixed
Some recent financial statements for Smolira Golf Corp. follow.Smolira Golf Corp. has 1,250 shares of common stock outstanding, and the market price for a share of stock at the end of 2002 was $63.
Find the income statements and balance sheets for Huffy Corporation (HUF), the bicycle manufacturer. Assuming sales grow by 10 percent, what is the EFN for Huffy next year? Assume non-operating
Consider the following simplified financial statements for the Lafferty Ranch Corporation (assuming no income taxes):Lafferty Ranch has predicted a sales increase of 10 percent. It has predicted that
Go to quote.yahoo.com and enter the ticker symbol “IP” for International Paper. When you get the quote, follow the “Research” link. What is the projected sales growth for International Paper
In the previous question, assume Lafferty Ranch pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma
Locate the most recent annual financial statements for Du Pont at www.dupont.com under the “Investor Center” link. Locate the annual report. Using the growth in sales for the most recent year as
The most recent financial statements for Bradley’s Bagels, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are
You can find the home page for Caterpillar, Inc., at www.caterpillar.com. Go to the web page, select “Cat Stock,” and find the most recent annual report. Using the information from the financial
The most recent financial statements for 2 Doors Down, Inc., are shown here:Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. 2 Doors Down maintains
The most recent financial statements for Schism, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. Adividend of $1,445.40 was paid, and Schism wishes to
The most recent financial statements for Barely Heroes Co. are shown here:Assets and costs are proportional to sales. Debt and equity are not. Barely Heroes maintains a constant 20 percent dividend
For the company in the previous problem, what is the sustainable growth rate?Data from Problem 6 The most recent financial statements for Barely Heroes Co. are shown here:Assets and costs are
If Highfield Hobby Shop has a 12 percent ROA and a 25 percent payout ratio, what is its internal growth rate?
If the Hlinka Corp. has an 18 percent ROE and a 30 percent payout ratio, what is its sustainable growth rate?
Based on the following information, calculate the sustainable growth rate for Kovalev’s Kickboxing:Profit margin = 9.2%Capital intensity ratio = .60Debt-equity ratio = .50Net income =
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 1.60Profit margin = 7.5%Equity multiplier = 1.95Payout ratio = 40%
Straka Mfg., Inc., is currently operating at only 75 percent of fixed asset capacity. Current sales are $425,000. How fast can sales grow before any new fixed assets are needed?
For the company in the previous problem, suppose fixed assets are $310,000 and sales are projected to grow to $620,000. How much in new fixed assets are required to support this growth in sales?
Lang Co. wishes to maintain a growth rate of 8 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 60 percent. The ratio of total assets to sales is constant at 1.60. What
A firm wishes to maintain a growth rate of 11.5 percent and a dividend payout ratio of 50 percent. The ratio of total assets to sales is constant at .8, and profit margin is 9 percent. If the firm
A firm wishes to maintain a growth rate of 9 percent and a dividend payout ratio of 40 percent. The current profit margin is 12 percent and the firm uses no external financing sources. What must
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