Questions and Answers of Advanced Accounting

BigCo has a market value of $1 billion and a beta of .9. It has three divisions: chemical processing, oil and gas distribution, and plastic products. The company is thinking about buying another
Food Express is a well-established grocery chain. Computer Power is an up-and-coming computer software developer for business. Bridge Steel is an integrated steel producer, focusing on steel for
Conglomerated Industries has 4 divisions, each worth about one-quarter of the firm's market value. The following chart summarizes the possible returns on the divisions as well as on the market
If the risk-free rate is 4% and the expected market risk premium is 7%, is a security with a beta of 1.25 and an expected rate of return of 11% overpriced or underpriced?
You need to estimate the value of BCCI. You have the following forecasts (in millions of dollars) of Buildwell's earnings and of its future investments in new plant and working capital:From year 5
Turn back to University Products' balance sheet from problem 16. If the preferred stock pays a dividend of $2 per share, the beta of the common stock is 1.5, the market risk premium is 7%, the
University Products is evaluating a new venture into home computer systems (see problems 16 and 17). The internal rate of return on the new venture is estimated at 13.4%. WACCs of firms in the
The total market value of Muskoka Real Estate Company is $6 million and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the
Big Door Company has 10 million shares outstanding, which are currently trading for about $15 per share and have an equity beta of 1.2. Big Door has 20,000 outstanding bonds, with a 6% coupon rate,
Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier Pizza, a frozen pizza manufacturer. Forecasted annual sales for the coming year are $ 10 million, with
Risky Business's outstanding debt are 6% bonds, paying interest annually and maturing 1 year from today. The bonds currently sell for $569 per $1,000 par value. The company is experiencing severe
Refer back to problem 23. Suppose Big Oil starts from the financing mix in Table 13.2, and then borrows an additional $200 million from the bank. It then pays out a special $200 million dividend,
Use the required rates of return calculated in Chapter 12, problem 25, to estimate the weighted-average cost of capital for the five companies. For their capital structures, go to
Suppose Micro Spinoffs's cost of equity is 12.5%. What is its WACC if equity is 50%, preferred stock is 20%, and debt is 30% of total capital?
BCCI is evaluating a project with an internal rate of return of 12%. Should it accept the project? If the project will generate a cash flow of $100,000 per year for 7 years, what is the most BCCI
The authorized share capital of the Alfred Cake Company is 100,000 shares. Currently 20,000 shares are issued and outstanding. The equity is currently shown in the company's books as follows: Common
In Table 14.1, we showed examples of securities issued by George Weston Ltd. Try to construct a similar table for another company, say Enbridge Inc., by looking up its annual report on the Web. An
Now try to retrieve the annual report of another large company, Bell Canada Inc., by either going to its Web site or through the SEDAR site. You can always search and find the Web site of Bell Canada
In Figure 14.3, we calculated the book and market long-term debt-to-equity ratios of George Weston Ltd. Using Enbridge's annual report calculate the company's book long-term debt-to-equity ratio for
Blackberry used to be known as Research In Motion Ltd. Retrieve the annual reports of Research In Motion Ltd. and Aastra Technologies Ltd. from their Web sites. Compare the major sources and uses of
a. Retrieve the annual report of Heineken International by going to the "Investors" section of its Web site (www.heinekeninternational.com/investors.aspx). Examine Heineken's internal and external
Look back at problem l. What would happen to the company's books if instead it bought back 1,000 shares at $5 per share? The average issue price of these shares was $5. Common
Look back at Table 14.2.a. Suppose that George Weston issues 10 million shares at $55 a share. Rework the table to show the company's equity after the issue.b. Suppose that George Weston subsequently
E-Books.com currently has a 10-year $1 million bond issue outstanding (5 years remaining to maturity) with an 11% coupon interest rate and a $1,000 par value. The call premium on these bonds is 5%.
Food-Galore, Inc., has a $10 million outstanding bond issue, carrying a 12% coupon interest rate with 20 years remaining to maturity. This issue was sold 5 years ago and can be called by the company
Universal Heavy Equipment is looking into the possibility of refunding its 30-year $100 million outstanding bond issue, carrying a 14% coupon rate, which was sold 10 years ago. If the company goes
In 2013, Pandora, Inc., makes a rights issue at a subscription price of $S a share. One new share can be purchased for every 4 shares held. Before the issue there were 10 million shares outstanding,
Go to the Globe and Mail Investor Web site (www.theglobeandmail.com/globe·investor). Search for Telus Corp. (T) and Shaw Communications Inc. (SJR). Which company has the higher price-earnings ratio?
Jay Ritter's home page (site.warrington.ufl.edu/ritter) is a gold mine of information on IPOs. Look up his table of under-pricing by year. Is under-pricing less of a problem now than in the boom IPO
In Appendix l5B we give you the flavor of an IPO prospectus, but you can see what an actual prospectus or registration statement looks like by using the System for Electronic Document Analysis and
For each of the following pairs of issues stare which of the two you would expect to involve the lower proportionate underwriting and administrative costs, other things being equal: a. A large issue/
Look at the illustrative new-issue prospectus in Appendix 158.a. Is this issue a primary offering, a secondary offering, or both?b. What are the direct costs of the issue as a percentage of the total
Mutt.Com was founded in 2011 by two graduates of the University of Wisconsin with help from Georgina Sloberg, who had built up an enviable reputation for backing new startup businesses. Mutt.com's
This chapter has provided Web site information for several venture capital sources and angel investing networks. Use the Internet to explore these sites. Also, see whether you can identify other
Based on your Internet research in problem 1, can you answer the following? a. We described different types of venture capital funds that exist in Canada. What are the main differences in investment
Venture capitalists and many angel investors are often actively involved with the ventures in which they invest. How does this benefit the entrepreneur? Does this benefit the venture capitalist and
To find out what is happening in the venture capital industry in the United States, look at the National Venture Capital Association site (www.nvca.org). Now find the NVCA's Yearbook 2010 in the &
True or false? MM's leverage-irrelevance proposition says that a. The value of the firm does not depend on the fraction of debt versus equity financing. b. As financial leverage increases, the value
Suppose an investor is unhappy with River Cruises' decision to borrow $250,000. What modifications can she make to her own investment portfolio to offset the effects of the firm's additional
Calculate the ratio of price to expected earnings for River Cruises both before and after it borrows the $250,000. Why does the P /E ratio fall after the increase in leverage?
Now suppose that the corporate tax rate is Tc = .35. Demonstrate that when River Cruises borrows the $250,000, the combined after-tax income of its debt-holders and equity-holders increases (compared
True or false? a. It makes sense to evaluate the credit managers performance by looking at the proportion of bad debts. b. When a company becomes bankrupt, it is usually in the interests of the
Increasing financial leverage can increase both the cost of debt, (rdebt), and the cost of equity, (requity)· How can the overall cost of capital stay constant? (Assume the firm pays no taxes.)
AstraZeneca PLC's finance (interest) expense in 2010 was $1,033 million. If the tax rate is 35%, what is AstraZeneca' annual interest tax shield? What is the present value of the annual tax shield if
Here is Establishment Industries' marketÂ· value balance sheet ($ millions):The debt is yielding 7.6% and the cost of equity is 14%. The tax rate is 37%. Investors expect this level of debt to
Explain how financial distress can lead to conflicts of interest between debt and equity investors. Then explain how these conflicts can lead to costs of financial distress.
Log in to ca.finance.yahoo.com and find the profile for Magna International (MGA). Construct the debt ratio, debt/(debt + equity), for the firm. Now calculate Magna's debt ratio by using the market
Go to Nasdaq site at www.nasdaq.com. Review the financial ratios under the "Financial" section of "Fundamentals" for one or more of the following companies: Hertz Global Holdings (HTZ), Sprint
a. Go to finance.yahoo.com and find the profiles for PepsiCo (PEP) and IBM (IBM) and then look at each firm's annual balance sheet and income statement under "Financials" Calculate the present value
Give three examples of the types of costs incurred by firms in financial distress.
In March 2015, the management team of Londonderry Air (LA) met to discuss a proposal to purchase 5 short-haul aircraft at a total cost of $25 million. There was general enthusiasm for the investment,
Use the information in problem 9 to create a table similar to Table 17.1 and value the lease. Is it the same value found in problem 9? It should be!
Look again at the backhoe-loader lease described in Table 17.1. Consider each question separately.a. What is the value of the lease if Greenfield's tax rate is 20%?b. What would the lease value be if
A company can calculate the internal rate of return of the incremental after-tax cash flows from financial leases when evaluating a lease. Calculate the IRR of the lease cash flows in question 5.
Recalculate the value of the lease to Greenfield Construction if the company pays no taxes until year 3. Calculate the lease cash flows by modifying Table 17.1. Remember that the after-tax borrowing
Retrieve the most recent annual reports of Walmart and Abercrombie & Fitch from their Web sites. Compare the leverage ratios of 2 retailers for the past 2 years. Can you guess which company relies
QEF's Consulting Services' Web site at www.leasingcanada.com has information about leasing in Canada. Click on "LeaseGuide" and then on "Lease Glossary." Identify the terms that deal with the
In the same Web site as for problem 25, click on "Leasing for Business" under "LeaseGuide" and read the arguments about why businesses should consider leasing. What do you think about the
The "Lease vs. Buy Calculator-Canada" at www.helpsme.com shows the cash flows of a lease versus a loan. This calculator assumes that the asset pool is not closed at the end of the lease. A neat
True or false? Explain your answers. a. It makes sense to enter into an operating lease if you are sure that you want to keep the asset for a long time. b. Leasing is advantageous because it provides
Suppose that National Waferonics has before it a proposal for a four-year financial lease. The firm constructs a table like Table 17.1. The bottom line of its table shows the lease cash flows:These
ABC Brickworks proposes to lease a $75,000 forklift. Five annual lease payments of $ 15,000 are due in advance. ABC's tax rate is 35%. If it purchases the forklift, it will be in its own 25% CCA
Printing World thinks it may need a new colour printing press. The press will cost $500,000 but will substantially reduce annual operating costs by $215,000 a year, before tax. The press has a 30%
BigCo is considering leasing the new equipment that it requires, for $155,000 a year, payable in advance. The cost of the equipment is $900,000, has a CCA rate of 25% and will last for 6 years. The
Rachel Gold, a newly recruited financial analyst at Halverton Corporation, had just been asked to analyze a proposal to acquire a new dredger. She reviewed the capital appropriation request. The
Now suppose that Payout again changes its mind and decides to issue a 2% stock dividend instead of either issuing the cash dividend or repurchasing 2% of the outstanding stock. How would this action
Suppose that the tax rate on dividends is 28%, and the tax rate on capital gains is zero. Eagle Net Resources is about to pay a $2 per share dividend.a. By how much will Eagle Net's share price fall
Now suppose that instead of paying a dividend, Good Values (from problem 14) plans to repurchase $10,000 worth of stock. a. What will be the stock price before and after the repurchase? b. Suppose an
a. Log in to a search engine such as Yahoo or Google and search the news section to find information on recent or planned stock repurchases. What reasons have the companies given for the repurchases?
Suppose all investments offered the same expected return before tax. Consider two equally risky shares, Hi and Lo. Hi shares pay a generous dividend and offer low expected capital gains. Lo shares
True or false? If false, correct the statement. a. A company may not generally pay a dividend out of legal capital. b. A company may not generally pay a dividend if it is insolvent. c. The effective
For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have
Go to The Globe and Mail's Investors page (www.theglobeandmail.com/globe-investor). Review the dividend policy of Enbridge (ENB), BCE (BCE), and the Royal Bank of Canada (RY). Review the dividend
Shares in Raven Products are selling for $40 per share. There are one million shares outstanding. What will be the share price in each of the following situations? Ignore taxes. a. The stock splits
You own 1,000 shares of Patriot Corporation, which is about to raise its dividend from $.75 to $ 1 per share. The share price is currently $50. You would prefer that the dividend remain at its
While dividend yields in the United States in the late 1990s were at historically low levels, share repurchases were at historical highs. Was this a coincidence?
If the dividend payout ratio in problem 9 is fixed at 50%, calculate the required total external financing for growth rates in 2016 of 15%, 20%, and 25%.Income Statement,
a. What is the maximum possible growth rate in 2016 for Planners Peanuts (see problem 9) if the payout ratio remains at 50% andIncome Statement,
If Eagle Sports Supply's 2016 dividend payout ratio is 70% and the equity-to-asset ratio is 2/3, what is the 2016 internal growth rate and sustainÂ· able growth rate? Calculate the required
How would Yummy Food's 2015 required external financing change if the 2015 dividend payout ratio were cut to one-third? Use this revision to the financing model to generate a new financial plan for
Yummy Food's financial manager believes that sales in 20 IS could rise by as much as 20% or by as little as 5%. The planned divitdend payout ratio is 2/3, interest expense is based on the debt at the
A firm wants to maintain its capital structure and is currently 100% equity-financed. It perceives its optima l dividend policy to be a 40% payout ratio. Current asset turnover (sales/initial
If the profit margin of the firm in the previous problem is 6%, what is the maximum payout ratio that will allow it to grow at 8% without resorting to external financing?
If the profit margin of the firm in problem 23 is 6%, what is the maximum possible growth rate that can be sustained without external financing?
The 2014 financial statements for Growth Industries are presented here. Sales and costs in 2015 are projected to be 20% higher than in 2014. Both current assets and accounts payable are projected
For many firms, cash and inventory needs may grow less than proportionally with sales. When we recognize this fact, will the firm's internal growth rate be higher or lower than the level predicted by
Use a spreadsheet like that in Figure 19.2 to answer the following questions about Yummy Food:a. What would be required external financing each year if the growth rate is 15% and the dividend payout
Use the spreadsheet from problem 30 to examine the impact of various scenarios. Add formulas to calculate ratios to examine the effect on leverage (debt ratio and times interest earned),
Use the 2014 financial statements for Dynastatics, problem I6, and build a financial plan using a spreadsheet like that in Figure 19.2. Add $3,000,000 gross long-term assets and accumulated
Use Dynastatics' pro forma income statements and balance sheet from problem 32(a) to assess the cash flows for each forecast year.a. What is the capital expenditure each year? b. Start the statement
Go back to problem 12 and build a financial planning model based on percentage of sales for Eagle Sports Supply using a spreadsheet similar to Figure 19.2.a. Assume 2013 sales grow at the sustainable
Go to finance.yahoo.com or ca.moneycentral.msn.com to get financial statements for companies to calculate and compare their internal growth rates and sustainable growth rates. At Yahoo dividend
A discount bank loan has a quoted annual rate of 6%. a. What is the effective rate of interest if the loan is for 1 year and is paid off in 1 payment at the end of the year? b. What is the effective
A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a balance of 25% of the amount of the loan, and the balance does not earn any interest. a. What is the effective rate
Here is a forecast of sales by National Bromide for the first 4 months of 2015 (figures in thousands of dollars):On average, 50% of credit sales are paid for in the current month, 30% in the next
Assuming that Paymore's labour and administrative expenses are $65 per quarter and that interest on long-term debt is $40 per quarter, work out the net cash inflow for Paymore for the coming year
Now assume that Paymore can borrow up to $100 from a line of credit at an interest rate of 2% per quarter. Prepare a short-term financing plan. Use Table 20.7 to guide your answer.
Recalculate Dynamic Mattress's financing plan (Table 20.7) assuming that the firm wishes to maintain a minimum cash balance of $10 million instead of $5 million. Assume the firm can convince the bank
The Treasury Management Association of Canada is Canada's only association of treasury and finance professionals. They list treasury management career opportunities on their site at www
We mentioned that the interest rate on longer-term bank loans is not usually fixed for the term of the loan, but adjusted up or down as the general level of interest rates changes. Often the interest

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