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Questions and Answers of
Corporate Finance
Betsy Ross owns 927 shares in the Hanson Fabrics Company. There are 15 directors to be elected. Thirty-three thousand five hundred shares are outstanding. The firm has adopted cumulative voting.a.
The Beasley Corporation has been experiencing declining earnings, but has just announced a 50 percent salary increase for its top executives. A dissident group of stockholders wants to oust the
Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 12 members of the board are
Mr. Michaels controls proxies for 40,000 of the 75,000 outstanding shares of Northern Airlines. Mr. Baker heads a dissident group that controls the remaining 35,000 shares. There are seven board
Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class
Boles Bottling Co. has issued rights to its shareholders. The subscription price is $45 and four rights are needed along with the subscription price to buy one of the new shares. The stock is selling
Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 1,400 shares of Computer Graphics stock. Four rights plus $54 cash are needed to buy one of the new shares.
Todd Winningham IV has $4,800 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus $48 cash
Mr. and Mrs. Anderson own two shares of Magic Tricks Corporation’s common stock. The market value of the stock is $58. The Andersons also have $46 in cash. They have just received word of a rights
Walker Machine Tools has 5.5 million shares of common stock outstanding. The current market price of Walker common stock is $52 per share rights-on. The company’s net income this year is $17.5
The Omega Corporation has some excess cash it would like to invest in marketable securities for a long-term hold. Its vice-president of finance is considering three investments (Omega Corporation is
National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $8 per share. The company has been losing money and has not paid preferred
Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 690,000 preferred shares outstanding, and the annual dividend is $6.50 per share. The
Enterprise Storage Company has $440,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $7.75. It is six years in arrears in its dividend payments.a. How much in
The treasurer of Kelly Bottling Company (a corporation) currently has $150,000 invested in preferred stock yielding 8 percent. He appreciates the tax advantages of preferred stock and is considering
Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate
The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its Vice-President of Finance and
Dr. Robert Grossman founded Electro Cardio Systems Inc. (ECS) in 2001. The principal purpose of the firm was to engage in the research and development of heart pump devices. Although the firm did not
Capital budgeting has three phases:(a) Identification of potential investments,(b) Selection of investments, and(c) Post-audit of investments.What is the accountant’s role in each phase?
“The higher the required rate of return, the higher the price that a company will be willing to pay for cost-saving equipment.” Do you agree? Explain.
“The DCF model assumes certainty and perfect capital markets. Thus, it is impractical to use it in most real-world situations.” Do you agree? Explain.
“Double-counting of costs occurs if depreciation is separately considered in DCF analysis.” Do you agree? Explain.
Does the IRR model make significantly different decisions than does the NPV model? Why or why not?
What does the real options model recognize that the NPV and IRR models do not?
“The NPV model should not be used for investment decisions about advanced technology, such as computer-integrated manufacturing systems.” Do you agree? Explain.
“Congress should pass a law forbidding corporations to keep two sets of books.” Do you agree? Explain.
Distinguish between tax avoidance and tax evasion.
Explain why accelerated depreciation methods are superior to straight-line methods for income tax purposes.
Study Appendix 11. What are the three components of market (nominal) interest rates?
Study Appendix 11. Describe how internal consistency is achieved when considering inflation in a capital-budgeting model.
When a company elects to invest in a project with a positive NPV, what will generally happen to the value of the company? What will happen to this value when the company invests in a negative NPV
1. Suppose you borrow $300,000 now at 10% interest, compounded annually. You will repay the borrowed amount plus interest in a lump sum at the end of 4 years. How much must you repay? Use Table B-1
Rajagopal Company expects to receive $600 at the end of each of the next 3 years and an additional $3,500 at the end of the third year. Therefore, the total payments will be $5,300. What is the NPV
The City of Industry parks department is considering the purchase of a new, more efficient pool heater for its Campbell Swimming Pool at a cost of $28,000. It should save $7,000 in cash operating
A manager of the engineering department of Manchester University is contemplating acquiring 120 computers. The computers will cost £240,000 cash, have zero terminal salvage value, and a useful life
The head of the oncology department of FH Research Center is considering the purchase of some new equipment. The cost is $420,000, the economic life is 5 years, and there is no terminal disposal
The Metropolitan Transit Authority (MTA) has included a cafeteria car on the passenger train it operates. Yearly operations of the cafeteria car have shown a consistent loss, which is expected to
On January 1, 20X1, Melbourne Company sold an asset with a book value of $250,000 for cash. Assume two selling prices: $305,000 and $230,000. For each selling price, prepare a tabulation of the gain
Assume that the combined federal and state income tax rate for Kafka Company is 30%.1. The book value of an old machine is $40,000. Kafka sold the machine for $35,000 cash. What is the effect of this
“When there are income taxes, depreciation is a cash outlay.” Do you agree? Explain.
“If DCF approaches are superior to the payback and the accounting rate-of-return methods, why should we bother to learn the others? All it does is confuse things.” Answer this contention.
Explain how a conflict can arise between capital-budgeting decision models and performance evaluation methods.
“It is impossible to use DCF methods for evaluating investments in R&D. There are no cost savings to measure, and we don’t even know what products might come out of our R&D activities.” This is
A manufacturing company recently considered replacing one of its forming machines with a newer, faster, more accurate model. What cash flows would this decision be likely to affect? List both cash
The U.S. tax law is complex. Sometimes the line between tax avoidance and tax evasion is not clear. Discuss the legal and ethical implications of the following two capital investment decisions:a. A
Serena Madison wishes to purchase a $820,000 house. She has accumulated a $180,000 down payment, but she wishes to borrow $640,000 on a 15-year mortgage. For simplicity, assume annual mortgage
Suppose Pfizer wishes to borrow money from Bank of America. They agree on an annual rate of 4%.1. Suppose Pfizer agrees to repay $750 million at the end of 10 years. How much will Bank of America
Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:1. Lump sum of $250,000 five years hence. How much will you
Because of a salary cap, NBA teams are not allowed to exceed a certain annual limit in total player salaries. Suppose the Minnesota Timberwolves had scheduled salaries exactly equal to their cap of
Fill in the blanks.
The Montevideo Office Equipment Company has offered to sell some new packaging equipment to the Cortez Company. The list price is $65,000, but Montevideo has agreed to allow a trade-in allowance of
City View Restaurant is about to open at a new location. Operating plans indicate the following expected cash flows:1. Compute the NPV for all these cash flows. This should be a single amount. Use a
Blanchard Company has an opportunity to invest $15,000 in a new automated lathe that will reduce annual operating costs by $2,300 per year and will have an economic life of 12 years.1. Suppose
Czick Company is considering an investment in a machine that costs $36,048 and would result in cash savings of $10,000 per year for 5 years. The company’s cost of capital is 10%.1. Compute the
Mack and Myer, LLP, a law firm, is considering the replacement of its old accounting system with new software that should save $10,000 per year in net cash operating costs. The old system has zero
Chippewa County Jail currently has its laundry done by a local cleaner at an annual cost of $46,000. It is considering a purchase of washers, dryers, and presses at a total installed cost of
Fill in the unknowns (in thousands of dollars):
The 20X9 income statement of United Cable Company included the following:Compute the total after-tax effect on cash. Use the format of the second part of Exhibit 11-3, page 446, “Annual Cash Flow
In 20X8, Tebow Athletic Shoe Company acquired the following assets and immediately placed them into service.1. Special tools (a 3-year-MACRS asset) that cost $55,000 on February 1.2. A desktop
Compute the PV of the MACRS tax savings for each of the following five assets:
Snuffy’s Drive-In is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of
Stallone Company is considering two possible investments, each of which requires an initial investment of $36,000. Investment A will provide a cash flow of $4,000 at the end of each year for 20
The head of the corporate tax division of a major public relations firm has proposed investing $290,000 in personal computers for the staff. The useful life and recovery period for the computers are
Study Appendix 11. Enrique Mendoza, the president of a Mexican wholesale company, is considering whether to invest 420,000 pesos in new semiautomatic loading equipment that will last 5 years, have
Midwestern University is considering replacing some Xerox copiers with faster copiers purchased from Brother. The administration is very concerned about the rising costs of operations during the last
Suppose the Burlington Northern Railway is considering replacement of a power jack tamper, used for maintenance of track, with a new automatic raising device that can be attached to a production
Mildred Driver, the owner of a nine-hole golf course on the outskirts of a large city, is considering a proposal that the course be illuminated and operated at night. Ms. Driver purchased the course
The Soho Ale Company has an old brewing machine with a net disposal value of £12,000 now and £4,000 five years from now. A new brewing machine is offered for £57,000 cash or £45,000 with a
Green Lighting Company produces industrial and residential lighting fixtures at its manufacturing facility located in Scottsdale, Arizona. The company currently ships products to an eastern warehouse
Mr. Hiramatsu bought a new $50,000 freezer for his grocery store on January 2, 2013. The freezer has a 5-year economic life and recovery period, Mr. Hiramatsu’s required rate of return is 12%, and
The Donald Company estimates that it can save $20,000 per year in annual operating cash costs for the next 3 years if it buys a special-purpose machine at a cost of $46,000. Residual value is
The Scranton Clinic, a for-profit medical facility, is planning to spend $35,000 for modernized MRI equipment. It will replace equipment that has zero book value and no salvage value, although the
Aaron Hersch is a real estate developer who specializes in residential apartments. A complex of 20 run-down apartments has recently come on the market for $332,500. Hersch predicts that after
Suppose that Mitsubishi Chemical Corporation is planning to buy new equipment to expand its production of a popular solvent. Estimated data are as follows (monetary amounts are in thousands of
Consider a new video game developed by Dynamic Gaming, Inc. (DGI). DGI’s development team was formed at the end of 2009 and has been working on the development of the game for several years.After
Museum Clinic has been under pressure to keep costs down. The clinic administrator has been managing various revenue-producing centers to maximize contributions to the recovery of the operating costs
Deer Valley Lodge, a ski area near Salt Lake City, has plans to eventually add five new chairlifts. Suppose that one of the lifts costs $2.2 million, and preparing the slope and installing the lift
Berradi Corp. is considering the purchase of a new stamping machine to manufacture its product. The following information is available:New MachinePurchase cost new ………………………..
Study Appendix 11. (This problem is similar to Problem 11-56, but the numbers are different and it includes taxes and inflation elements.) The Green Lighting Company produces industrial and
Study Appendix 11. MLK Elementary School is considering the purchase of a photocopying machine for $7,000 on December 31, 20X0. The machine will have a useful life of 5 years and no residual value.
Aswega AS is an Estonian manufacturer of electromagnetic flowmeters, heatmeters, and calibration equipment located in Tallinn. Suppose that it is considering the installation of a computer-aided
Nashville Tool Company is considering installation of a CIM system as part of its implementation of a JIT philosophy. Gretchen Torres, company president, is convinced that the new system is
The Sydney Manufacturing Company produces a single model of a high-quality DVD player that it sells to Australian manufacturers of sound systems. It sells each DVD player for $210, resulting in a
International Hoists is one of the largest producers of hoists of all types. An especially complex part of a particular auto hoist needs special tools that are not useful for other products. The
Examine Nike’s financial statements and notes 1 and 3 to those statements in Appendix C.1. What method of depreciation does Nike use in reporting to shareholders? Do you think it uses the same
Abrielle Rossi had recently been appointed controller of the soup division of a major food company. The division manager, Asim Sharma, was known as a hard-driving, intelligent, uncompromising
Many companies strive to continue to grow and develop. Some companies grow through the expansion of existing operations and increased utilization of existing assets. Others grow through the
A manager of Cascade Mutual Funds is contemplating acquiring servers to operate its website. The servers will cost $660,000 cash and will have zero terminal salvage value. The recovery period and
Managers of Northwest Forge are considering whether to buy some equipment for the company’s Fargo plant. The equipment will cost $2 million cash and will have a 10-year useful life and zero
Use the appropriate table to compute the following:1. You have always dreamed of taking a safari in Africa. What lump sum do you have to invest today to have the $22,000 needed for the trip in 5
The president of Big Fish Games, an online gaming company, is considering the purchase of some equipment used for the development of new games. The cost is $400,000, the economic life and the
The general manager of a New Mexico mining company has a chance to purchase a new drill at a total cost of $300,000. The recovery period is 5 years. Additional annual pretax cash inflow from
How has the study of finance changed since the beginning of the twentieth century?
Why is it important for business students to study finance even if the topic is not their major?
How can knowledge of financial decision making by corporate financial managers help you make personal financial decisions?
In general, how is value measured? What general factors determine value? How does each factor affect value?
Can a firm stay in business if it does not consider the impact of its decisions on all stakeholders, including the environment?
Under what circumstances do you think the government will impose greater regulations on financial markets and businesses? When does the government tend to favor deregulation and take a more
How does the goal of value maximization relate to lean manufacturing?
Samantha Sampson retired a few years ago at the age of 55. Because she is bored with retirement and still relatively young, Samantha has considered starting a business of her own. However, she
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