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Questions and Answers of
Corporate Finance
Explain the difference between net income, or accounting profit, and net cash flow. Why do these numbers generally differ?
What is “free cash flow”? Can a company have a negative free cash flow and still be considered successful?
Following are the balance sheets for Batelan Corporation for the fiscal years 2014 and 2015. In the column to the right of the balance sheet amounts, indicate whether the change in the account
Explain the difference between net cash flow and operating cash flow. What causes these two numbers to differ?
Hindelang Corporation has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds through additional notes payable and use
W. F. Bailey Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover of five times, total current assets of $810,000, and cash and equivalents of $120,000 in 2015. If the cost
Coastal Packaging’s ROE last year was only 3 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent,
Last year, Z&B Paints reported its net income as $650,000. A review of its income statement shows that Z&B’s operating expenses (fixed and variable), excluding depreciation and amortization, were
Assume that you are given the following relationships for Zumwalt Corporation:Sales/total assets ………………………….. 1.5Return on assets (ROA) …………………..
Earth’s Best Company has sales of $200,000, a net income of $15,000, and the following balance sheet:a. The company’s new owner thinks that inventories are excessive and can be lowered to the
The consolidated balance sheets for Lloyd Lumber Company at the beginning and end of 2015 follow. The company bought $50 million worth of fixed assets. The charge for depreciation in 2015 was $10
Montejo Corporation expects 2015 sales to be $12 million. Operating costs other than depreciation are expected to be 75 percent of sales, and depreciation is expected to be $1.5 million in 2015. All
Data for Argile Textiles’ 2014 financial statements are given in Tables.a. Compute the 2014 values of the following ratios:b. Briefly comment on Argile’s 2014 financial position. Can you see any
Data for Campsey Computer Company and its industry averages follow.a. Calculate the indicated ratios for Campsey.b. Construct the DuPont equation for both Campsey and the industry.c. Outline
Complete the balance sheet and sales information in the table that follows for Isberg Industries using the following financial data:Debt ratio: 50%Quick ratio: 0.80×Total assets turnover: 1.5 ×Days
The Finnerty Furniture Company, a manufacturer and wholesaler of high-quality home furnishings, has experienced low profitability in recent years. As a result, the board of directors has replaced the
Cary Corporation’s forecasted 2016 financial statements follow, along with industry average ratios.a. Calculate Cary’s 2016 forecasted ratios, compare them with the industry average
Donna Jamison was recently hired as a financial analyst by Computron Indus tries a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the
Use the computerized model in File C07 to solve this problem.a. Refer to Problem. Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of
Wolken Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Wolken’s annual sales are $2 million; its average tax rate is 20 percent; and its net
What benefits can be derived from breakeven analysis? What are some problems with breakeven analysis?
Explain how profits or losses will be magnified for a firm with high financial leverage as opposed to a firm with lower financial leverage.
Discuss the relationship between a firm’s degree of total leverage and its perceived risk.
Assume that a firm is developing its long-run financial plan. What period should this plan cover—one month, six months, one year, three years, five years, or some other period? Justify your answer.
What data are required to construct a breakeven graph?
Explain how profits or losses will be magnified for a firm with high operating leverage as opposed to a firm with lower operating leverage.
What would be the effect of each of the following events on a firm’s breakeven point? Indicate the effect in the space provided with a (–) for an increase, a (+) for a decrease, and a (0) for no
What is a cash budget? For what purposes should cash budgets be created?
Following is information about the Super Shoe Store (SSS):Selling price per unit ........ $ 50Variable cost per unit ........ $ 30Fixed operating costs ........ $120,000a. What is SSS’s
At year-end 2015, total assets for Shome, Inc., amounted to $1.2 million and accounts payable were $375,000. Sales, which totaled $2.5 million in 2015, are expected to increase by 25 percent in
Straight Arrow Company manufactures golf balls. The following income statement information is relevant for Straight Arrow in 2016:Selling price per sleeve of balls (P) ............... $ 5.00Variable
The McGill Company’s sales are forecasted to increase from $1,000 in 2015 to $2,000 in 2016. Following is the December 31, 2015, balance sheet:McGill’s fixed assets were used to only 50
Craig Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Following is Craig’s balance sheet as of
Noso Textile’s 2015 financial statements follow.a. Suppose 2016 sales are projected to increase by 15 percent relative to 2015 sales. Determine Noso’s additional funds needed. Assume
Following is Van Auken Lumber’s 2015 income statement.Van Auken Lumber: Income Statement for December 31, 2015 ($ thousands)Sales ………………………………………………
Following are the 2015 balance sheet and income statement for the Woods Company.a. The firm operated at full capacity in 2015. During 2016, it expects sales to increase by 20 percent and dividends
The Weaver Watch Company manufactures a line of ladies’ watches that is sold through discount houses. Each watch is sold for $25; the fixed costs are $140,000 for 30,000 watches or less; variable
The following relationships exist for Dellva Industries, a manufacturer of electronic components. Each unit of output is sold for $45; the fixed costs are $175,000, of which $110,000 are annual
Patricia Smith recently leased space in the Southside Mall and opened a new business, Smith’s Coin Shop. Business has been good, but Smith frequently runs out of cash. This shortcoming has
Olinde Electronics, Inc., produces stereo components that sell for $100. Olinde’s fixed costs are $200,000; the firm produces and sells 5,000 components each year; EBIT is currently $50,000; and
Carol Moerdyk, owner of Carol’s Fashion Designs, Inc., is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016
Sue Wilson is the new financial manager of Northwest Chemicals (NWC), an Oregon producer of specialized chemicals that are sold to farmers for use in fruit orchards. She is responsible for
Use the model in File C08 to solve this problem. Stendardi Industries’ 2015 financial statements are shown in the following table.Assume that the firm has no excess capacity in fixed assets,
The Niendorf Corporation produces tea kettles, which it sells for $15 each. Fixed costs are $700,000 for output up to 400,000 units. Variable costs amount to $10 per kettle.a. What is the firm’s
Give a verbal definition of the term present value and illustrate it using a cash flow timeline with data from an example that you construct. As a part of your answer, explain why present values are
When financial institutions, such as banks or credit unions, advertise the rates on their loans, they often report the APR. If you wanted to compare the interest rates on loans from different
Under what conditions would the simple interest rate, or APR (remember rSIMPLE APR), equal the effective annual rate, rEAR?
What is an amortized loan? What is an amortization schedule and how is it used?
If you invest $500 today in an account that pays 6 percent interest compounded annually, how much will be in your account after two years?
What is the present value of an investment that promises to pay you $1,000 in five years if you can earn 6 percent interest compounded annually?
To the closest year, how long will it take a $200 investment to double if it earns 7 percent interest? How long will it take if the investment earns 18 percent?
Martell Corporation’s 2015 sales were $12 million. Sales were $6 million five years earlier. To the nearest percentage point, at what rate have sales grown?
Find the future value of the following ordinary annuities:a. $400 per year for 10 years at 10 percentb. $200 per year for five years at 5 percent
Find the future value of the following annuities due:a. $400 per year for 10 years at 10 percentb. $200 per year for five years at 5 percent
Find the present value of the following ordinary annuities:a. $400 per year for 10 years at 10 percentb. $200 per year for five years at 5 percent
Find the present value of the following annuities due:a. $400 per year for 10 years at 10 percentb. $200 per year for five years at 5 percent
Sue wants to buy a car that costs $12,000. She has arranged to borrow the total purchase price of the car from her credit union at a simple interest rate equal to 12 percent. The loan requires
While Steve Bouchard was a student at the University of Florida, he borrowed $12,000 in student loans at an annual interest rate of 9 percent. If Steve repays $1,500 per year, how long, to the
Jack just discovered that he holds the winning ticket for the $87 million mega lottery in Missouri. Now he needs to decide which alternative to choose: (1) a $44 million lump-sum payment today or (2)
Your broker offers to sell you a note for $13,250 that will pay $2,345.05 per year for 10 years. If you buy the note, what rate of interest (to the closest percent) will you be earning?
A mortgage company offers to lend you $85,000; the loan calls for payments of $8,273.59 per year for 30 years. What is the effective annual interest rate, rEAR, that the mortgage company is charging
Bank A pays 8 percent interest, compounded quarterly, on its money market account. The managers of Bank B want the rate on its money market account to equal Bank A’s effective annual rate, but
Jason worked various jobs during his teenage years to save money for college. Now it is his twentieth birthday, and he is about to begin his college studies at the University of South Florida (USF).
What is the present value of $1,552.90 due in 10 years at(1) A 12 percent discount rate(2) A 6 percent rate?
Which amount is worth more at 14 percent: $1,000 in hand today or $2,000 due in six years?
What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7 percent? If interest rates in general were to double and the appropriate discount rate rose to 14
Find the present values of the following cash flow streams under the following conditions:a. The appropriate interest rate is 8 percent.b. The appropriate interest rate is 0percent.
Find the amount to which $500 will grow in five years under each of the following conditions:a. 12 percent compounded annuallyb. 12 percent compounded semiannuallyc. 12 percent compounded quarterlyd.
Find the present value of $500 due in five years under each of the following conditions:a. 12 percent simple rate, compounded annuallyb. 12 percent simple rate, compounded semiannuallyc. 12 percent
Find the future values of the following ordinary annuities:a. FV of $400 each six months for five years at a simple rate of 12 percent, compounded semiannuallyb. FV of $200 each three months for five
Find the present values of the following ordinary annuities:a. PV of $400 each six months for five years at a simple rate of 12 percent, compounded semiannuallyb. PV of $200 each three months for
To complete your last year in business school and then go through law school, you will need $30,000 per year for four years, starting next year (that is, you will need to withdraw the first $30,000
You need to accumulate $10,000. To do so, you plan to make deposits of $1,750 per year, with the first payment being made one year from today, in a bank account that pays 6 percent annual interest.
Consider the decision you might have to make if you won a state lottery worth $105 million. Which would you choose: a lump-sum payment of $54 million today or a payment of $3.5 million each year for
Suppose that you deposit $1,000 into a savings account that pays 8 percent.a. If the bank compounds interest annually, how much will you have in your account in four years?b. What would your balance
Assume that you need $1,000 four years from today. Your bank compounds interest at an 8 percent annual rate.a. How much must you deposit one year from today to have a balance of $1,000 in your
Find the interest rates, or rates of return, on each of the following:a. You borrow $700 and promise to pay back $749 at the end of one year.b. You lend $700 and receive a promise to be paid $749 at
The First City Bank pays 7 percent interest, compounded annually, on time deposits. The Second City Bank pays 6.5 percent interest, compounded quarterly.a. Based on effective interest rates, in which
Krystal Magee invested $150,000 18 months ago. Currently, the investment is worth $168,925. Krystal knows the investment has paid interest every three months (i.e., quarterly), but she doesn’t know
Suppose you found a house that you want to buy, but you still have to determine what mortgage to use. Bank of Middle Texas has offered a 30-year fixed mortgage that requires you to pay 6.9 percent
Assume that your aunt sold her house on January 1 and that she took a mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or simple) interest rate of 10 percent, but
Lorkay Seidens Inc. just borrowed $25,000. The loan is to be repaid in equal installments at the end of each of the next five years, and the interest rate is 10 percent.a. Set up an amortization
Assume that AT&T’s pension fund managers are considering two alternative securities as investments:(1) Security Z (for zero intermediate year cash flows), which costs $422.41 today, pays
Sue Sharpe, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers three months in which to pay. However, Sue will have to borrow from her bank to carry the accounts payable. The
Brandi just received her credit card bill, which has an outstanding balance equal to $3,310. After reviewing her financial position, Brandi has concluded that she cannot pay the outstanding balance
Brandon just graduated from college. Unfortunately, Brandon’s education was fairly costly; the student loans that he took out to pay for his education total $95,000. The provisions of the student
Assume that you are on your way to purchase a new car. You have already applied and been accepted for an automobile loan through your local credit union. The loan can be for an amount up to $25,000,
A father is planning a savings program to put his daughter through college. His daughter is now 13 years old. She plans to enroll at the university in five years, and it should take her four years to
As soon as she graduated from college, Kay began planning for her retirement. Her plans were to deposit $500 semiannually into an IRA (a retirement fund) beginning six months after graduation and
Sarah is on her way to the local Chevrolet dealership to buy a new car. The list, or “sticker,” price of the car is $24,000. Sarah has $3,000 in her checking account that she can use as a down
Janet just graduated from a women’s college in Mississippi with a degree in business administration, and she is about to start a new job with a large financial services firm based in Tampa,
Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation (interview) process, you have been asked to take an exam that
Use the computerized model in the File C09 to solve this problem.a. Set up an amortization schedule for a $30,000 loan to be repaid in equal installments at the end of each of the next 20 years at an
Suppose that a bond has a yield to call (YTC) equal to 6.5 percent and a yield to maturity (YTM) equal to 6.3 percent. Explain the meanings of these numbers to bond investors.
Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. They also agree on the riskiness of the
How will the price of AT&T’s stock change if investors decide they want to earn a higher return for purchasing the stock? Assume all else remains constant. Will the price of AT&T’s stock change
How might an investor’s tax situation affect his or her decision to purchase stocks of companies in the early stages of their lives, when they are growing rapidly and paying little or no dividends,
How does the par value of common stock relate to its market value?
Everything else equal, how would each of the following affect the market value of a stock? Indicate by a plus (+), minus (–), or zero (0) if the factor would increase, decrease, or have an
How do you think that the process of valuing a real asset, such as a building, differs from the process of valuing a financial asset, such as a stock or a bond?
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