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Questions and Answers of
Corporate Finance
How is a stock split (versus a stock dividend) treated on the financial statements of a corporation?
Why might a stock dividend or a stock split be of limited value to an investor?
Does it make sense for a corporation to repurchase its own stock? Explain.
What advantages to the corporation and the stockholder do dividend reinvestment plans offer?
Moon and Sons Inc. earned $120 million last year and retained $72 million. What is the payout ratio?
Ralston Gourmet Foods Inc. earned $360 million last year and retained $252 million. What is the payout ratio?
Swank Clothiers earned $640 million last year and had a 30 percent payout ratio. How much did the firm add to its retained earnings?
Polycom Systems earned $553 million last year and paid out 25 percent of earnings in dividends.a. By how much did the company’s retained earnings increase?b. With 100 million shares outstanding and
The following companies have different financial statistics. What dividend policies would you recommend for them? Explain yourreasons.
Planetary Travel Co. has $240,000,000 in stockholders’ equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during
Squash Delight Inc. has the following balance sheet:AssetsCash $ 100,000Accounts receivable 300,000Fixed assets 600,000 Total assets $1,000,000Liabilities Accounts payable $
In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share.a. How much in total dividends per share
The stock of Pills Berry Company is currently selling at $60 per share. The firm pays a dividend of $1.80 per share.a. What is the annual dividend yield?b. If the firm has a payout rate of 50
The shares of the Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15. Forty percent of earnings is paid out in dividends. What is the firm’s dividend yield?
Peabody Mining Company’s common stock is selling for $50 the day before the stock goes ex-dividend. The annual dividend yield is 5.6 percent, and dividends are distributed quarterly. Based solely
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $6 per share.Common stock (50,000 shares at $2 par) .......$ 100,000Capital in
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:AssetsCash$ 386,000Accounts receivable
The Vinson Corporation has earnings of $500,000 with 250,000 shares outstanding. Its P/E ratio is 20. The firm is holding $300,000 of funds to invest or pay out in dividends. If the funds are
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. It will use the dividend valuation model originally presented
Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $55 to $80 per share. The firm’s current statement of stockholders’ equity is as
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as
Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows:Common stock (6,000,000 shares at $10 par) ...... $60,000,000Capital in excess of
Worst Buy Company has had a lot of complaints from customers of late and its stock price is now only $2 per share. It is going to employ a one-for-five reverse stock split to increase the stock
The Carlton Corporation has $5 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash.a. Compute the current price
The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders
Modern Furniture Company had finally arrived at the point where it had a sufficient excess cash flow of $4.8 million to consider paying a dividend. It had 3 million shares of stock outstanding and
Explain how rapidly expanding sales can drain the cash resources of a firm.
How is a cash budget used to help manage current assets?
“The most appropriate financing pattern would be one in which asset buildup and length of financing terms is perfectly matched.” Discuss the difficulty involved in achieving this financing
By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this
What is the significance to working capital management of matching sales and production?
A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?
Gary’s Pipe and Steel Company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20
Sharpe Knife Company expects sales next year to be $1,550,000 if the economy is strong, $825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30
Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12
Antivirus Inc. expects its sales next year to be $2,500,000. Inventory and accounts receivable will increase $480,000 to accommodate this sales level. The company has a steady profit margin of 15
Antonio Banderos & Scarves makes headwear that is very popular in the fall/winter season. Units sold are anticipated as:October .......... 1,250November ......... 2,250December ......... 4,500January
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:March ........ 3,250April ........ 7,250May
Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting
Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest
Assume that Hogan Surgical Instruments Co. has $2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the
Assume that Atlas Sporting Goods Inc. has $840,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will
Colter Steel has $4,200,000 in assets.Temporary current assets ......$1,000,000Permanent current assets ...... 2,000,000Fixed assets ........... 1,200,000Total assets ............
In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates.In Problem
Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets.
Lear Inc. has $840,000 in current assets, $370,000 of which are considered permanent current assets. In addition, the firm has $640,000 invested in fixed assets.a. Lear wishes to finance all fixed
Carmen€™s Beauty Salon has estimated monthly financing requirements for the next six months as follows:Short-term financing will be utilized for the next six months. Projected annual interest
In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? (Hint: Divide the interest payments
Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales:January
Bombs Away Video Games Corporation has forecasted the following monthly sales:Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to
Esquire Products Inc. expects the following monthly sales:Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following
Under what circumstances would it be advisable to borrow money to take a cash discount?
Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.
What is meant by hedging in the financial futures market to offset interest rate risks?
What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporate borrowers?
What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?
Briefly discuss three types of lender control used in inventory financing.
Compute the cost of not taking the following cash discounts.a. 2/10, net 40.b. 2/15, net 30.c. 2/10, net 45.d. 3/10, net 90.
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds?
Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest?
A pawnshop will lend $2,500 for 45 days at a cost of $35 interest. What is the effective rate of interest?
Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?
Mary Ott is going to borrow $10,400 for 120 days and pay $150 interest. What is the effective rate of interest if the loan is discounted?
Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 11 percent and
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 14 percent against the euro. What is the
Talmud Book Company borrows $24,900 for 60 days at 12 percent interest. What is the dollar cost of theloan?
McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,530. Its average daily sales are $10,680, and it collects accounts in 32 days.a. What is its net credit
Maxim Air Filters Inc. plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the
Digital Access Inc. needs $400,000 in funds for a project.a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow?b. Given your answer to part a and a stated
Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest? What would the
Randall Corporation plans to borrow $233,000 for one year at 20 percent from the Waco State Bank. There is a 21 percent compensating balance requirement. Randall Corporation keeps minimum transaction
The treasurer for the Macon Blue Sox baseball team is seeking a $23,600 loan for one year from the 4th National Bank of Macon. The stated interest rate is 10 percent, and there is a 15 percent
Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 percent interest. You would like to know the effective rate of interest for the following types
If you borrow $5,300 at $400 interest for one year, what is your effective interest rate for the following payment plans?a. Annual payment.b. Semiannual payments.c. Quarterly payments.d. Monthly
Zerox Copying Company plans to borrow $172,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 17½ percent (18 percent total) and
Lewis and Clark Camping Supplies Inc. is borrowing $51,000 from Western State Bank. The total interest is $15,700. The loan will be paid by making equal monthly payments for the next three years.
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/15, net 85. Mr. Warner never takes the discount offered, but he pays his suppliers in 75 days rather than
The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills.Mr. Duke, Reynolds
The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills.Mr. Duke, Vice President
Neveready Flashlights Inc. needs $340,000 to take a cash discount of 3/17, net 72. A banker will loan the money for 55 days at an interest cost of $10,400.a. What is the effective rate on the bank
Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will loan the money for 55 days at an interest cost of $13,300.a. What is the effective rate on the bank
Summit Record Company is negotiating with two banks for a $151,000 loan. Fidelity Bank requires a 28 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly
Charmin Paper Company sells to the 12 accounts listed next.Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the
Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?
What factors might influence a firm’s price-earnings ratio?
How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?
What approaches can be taken in valuing a firm’s stock when there is no cash dividend payment?
The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is:a.
Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is:a. 7
Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity
Barry’s Steroids Company has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in 40 years. If the percent yield to maturity is 13 percent, what percent of the total
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