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Principles Of Managerial Finance 13th Edition Lawrence J. Gitman, Chad J. Zutter - Solutions

What is corporate governance? How has the Sarbanes-Oxley Act of 2002 affected it? Explain.
Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.
How can the firm structure management compensation to minimize agency problems? What is the current view with regard to the execution of many compensation plans?
How do market forces—both shareholder activism and the threat of takeover—act to prevent or minimize the agency problem? What role do institutional investors play in shareholder activism?
Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions. One disagreement, however, concerns the legal form of their business. Ann has tried for the past 2 years to get Jack to agree to
The end-of-year parties at Yearling, Inc., are known for their extravagance. Management provides the best food and entertainment to thank the employees for their hard work. During the planning for this year’s bash, a disagreement broke out between the treasurer’s staff and the controller’s
You have been made treasurer for a day at AIMCO, Inc. AIMCO develops technology for video conferencing. A manager of the satellite division has asked you to authorize a capital expenditure in the amount of $10,000. The manager states that this expenditure is necessary to continue a long-running
Recently, some branches of Donut Shop, Inc., have dropped the practice of allowing employees to accept tips. Customers who once said, “Keep the change,” now have to get used to waiting for their nickels. Management even instituted a policy of requiring that the change be thrown out if a
Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Ms. Harper in each of the following situations.a. Southwest Development Company is a sole proprietorship owned
Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2009, Thomas shipped and billed book titles totaling $760,000.
It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account, and her bank loans money at 6% per year while it offers short-term investment rates of 5%. Jane's cash flows during August were as
Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today’s dollars) over the next 5 years. The
Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be dealt with short of firing the individual(s) involved.a. The front desk receptionist routinely takes an extra 20 minutes of lunch time to run personal
What does it mean to say that managers should maximize shareholder wealth “subject to ethical constraints”? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?
Who are the key participants in the transactions of financial institutions? Who are net suppliers, and who are net demanders?
What role do financial markets play in our economy? What are primary and secondary markets? What relationship exists between financial institutions and financial markets?
What is the money market? What is the Eurocurrency market?
What is the capital market? What are the primary securities traded in it?
What are broker markets? What are dealer markets? How do they differ?
Briefly describe the international capital markets, particularly the Eurobond market and the international equity market.
What are efficient markets? What determines the price of an individual security in such a market?
What is securitization, and how does it facilitate investment in real estate assets?
What is a mortgage-backed security? What is the basic risk associated with mortgage-backed securities?
How do rising home prices contribute to low mortgage delinquencies?
Why do falling home prices create an incentive for homeowners to default on their mortgages even if they can afford to make the monthly payments?
Why does a crisis in the financial sector spill over into other industries?
Why do you think so many pieces of important legislation related to financial markets and institutions were passed during the Great Depression?
What different aspects of financial markets do the Securities Act of 1933 and the Securities Exchange Act of 1934 regulate?
Describe the tax treatment of ordinary income and that of capital gains. What is the difference between the average tax rate and the marginal tax rate?
How does the tax treatment of dividend income by the corporation moderate the effects of double taxation?
What benefit results from the tax deductibility of certain corporate expenses?
What does it mean to say that individuals as a group are net suppliers of funds for financial institutions? What do you think the consequences might be in financial markets if individuals consumed more of their incomes and thereby reduced the supply of funds available to financial institutions?
You are the chief financial officer (CFO) of Gaga Enterprises, an edgy fashion design firm. Your firm needs $10 million to expand production. How do you think the process of raising this money will vary if you raise it with the help of a financial institution versus raising it directly in the
For what kinds of needs do you a think firm would issue securities in the money market versus the capital market?
Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential mortgages. List some of the questions you
Reston, Inc., has asked your corporation, Pruro, Inc., for financial assistance. As a long-time customer of Reston, your firm has decided to give that assistance. The question you are debating is whether Pruro should take Reston stock with a 5% annual dividend or a promissory note paying 5% annual
Tantor Supply, Inc., is a small corporation acting as the exclusive distributor of a major line of sporting goods. During 2010 the firm earned $92,500 before taxes. a. Calculate the firm?s tax liability using the corporate tax rate schedule given in Table 2.1. b. How much are Tantor Supply?s 2010
Using the corporate tax rate schedule given in Table 2.1, perform the following:a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of corporate earnings before taxes: $10,000; $80,000; $300,000; $500,000; $1.5 million; $10 million; and $20 million.b.
Using the corporate tax rate schedule given in Table 2.1, perform the following:a. Find the marginal tax rate for the following levels of corporate earnings before taxes: $15,000; $60,000; $90,000; $200,000; $400,000; $1 million; and $20 million.b. Plot the marginal tax rates (measured on the y
During the year just ended, Shering Distributors, Inc., had pretax earnings from operations of $490,000. In addition, during the year it received $20,000 in income from interest on bonds it held in Zig Manufacturing and received $20,000 in income from dividends on its 5% common stock holding in
Michaels Corporation expects earnings before interest and taxes to be $40,000 for the current period. Assuming an ordinary tax rate of 40%, compute the firm’s earnings after taxes and earnings available for common stockholders (earnings after taxes and preferred stock dividends, if any) under the
Perkins Manufacturing is considering the sale of two non depreciable assets, X and Y. Asset X was purchased for $2,000 and will be sold today for $2,250. Asset Y was purchased for $30,000 and will be sold today for $35,000. The firm is subject to a 40% tax rate on capital gains.a. Calculate the
What roles do GAAP, the FASB, and the PCAOB play in the financial reporting activities of public companies?
Describe the purpose of each of the four major financial statements.
Why are the notes to the financial statements important to professional securities analysts?
How is the current rate (translation) method used to consolidate a firm’s foreign and domestic financial statements?
With regard to financial ratio analysis, how do the viewpoints held by the firm’s present and prospective shareholders, creditors, and management differ?
What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?
What types of deviations from the norm should the analyst pay primary attention to when performing cross-sectional ratio analysis? Why?
Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?
Under what circumstances would the current ratio be the preferred measure of overall firm liquidity? Under what circumstances would the quick ratio be preferred?
In Table 3.5, most of the specific firms listed have current ratios that fall below the industry average. Why? The exception to this general pattern is Whole Foods Market, which competes at the very high end of the retail grocery market. Why might Whole Foods Market operate with
To assess the firm’s average collection period and average payment period ratios, what additional information is needed, and why?
What is financial leverage?
What ratio measures the firm’s degree of indebtedness? What ratios assess the firm’s ability to service debts?
What three ratios of profitability are found on a common-size income statement?
What would explain a firm’s having a high gross profit margin and a low net profit margin?
Which measure of profitability is probably of greatest interest to the investing public? Why?
How do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a feel for the firm’s return and risk?
Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is of the greatest concern to creditors?
Describe how you would use a large number of ratios to perform a complete ratio analysis of the firm.
What three areas of analysis are combined in the modified DuPont formula? Explain how the DuPont system of analysis is used to dissect the firm’s results and isolate their causes.
You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager, who graduated from your alma mater 2 years ago, gives you the following list of accounts and asks you to prepare a simple income statement using those accounts.
Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?
Cooper Industries, Inc., began 2012 with retained earnings of $25.32 million. During the year it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The firm had
Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm€™s motto is €œIf you need it, we can make it.€ The CEO of Bluestone recently held a board meeting during which he
If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by
The income statement for the year ended December 31, 2012, the balance sheets for December 31, 2012 and 2011, and the statement of retained earnings for the year ended December 31, 2012, for Technica, Inc., are given below and on the following page. Briefly discuss the form and informational
Mark each of the accounts listed in the following table as follows:a. In column (1), indicate in which statement€”income statement (IS) or balance sheet (BS)€”the account belongs.b. In column (2), indicate whether the account is a current asset (CA), current liability (CL),
On December 31, 2012, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees, a bookkeeper and a clerical assistant. In addition to her monthly salary of
Adam and Arin Adams have collected their personal income and expense information and have asked you to put together an income and expense statement for the year ended December 31, 2012. The following information is received from the Adams family.a. Create a personal income and expense statement for
Philagem, Inc., ended 2012 with a net profit before taxes of $218,000. The company is subject to a 40% tax rate and must pay $32,000 in preferred stock dividends before distributing any earnings on the 85,000 shares of common stock currently outstanding.a. Calculate Philagem’s 2012 earnings per
Use the appropriate items from the following list to prepare in good form Owen Davis Company€™s balance sheet at December 31,2012.
Adam and Arin Adams have collected their personal asset and liability information and have asked you to put together a balance sheet as of December 31, 2012. The following information is received from the Adams family.a. Create a personal balance sheet as of December 31, 2012. It should be
Conrad Air, Inc., reported net income of $1,365,000 for the year ended December 31, 2013. Show how Conrad€™s balance sheet would change from 2012 to 2013 depending on how Conrad €œspent€ those earnings as described in the scenarios that appear below.a. Conrad paid no
Beck Corporation has one issue of preferred stock and one issue of common stock outstanding. Given Beck’s stockholders’ equity account that follows, determine the original price per share at which the firm sold its single issue of common stock.Stockholders’ Equity ($000)Preferred stock
Hayes Enterprises began 2012 with a retained earnings balance of $928,000. During 2012, the firm earned $377,000 after taxes. From this amount, preferred stockholders were paid $47,000 in dividends. At year-end 2012, the firm’s retained earnings totaled $1,048,000. The firm had 140,000 shares of
Listed are the equity sections of balance sheets for years 2011 and 2012 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholders€™ equity has risen from $2,000,000 to $7,500,000. Use the statements to discover how and why this happened.The company paid total
Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below.Assuming that his uncle was a wise
Bauman Company€™s total current assets, total current liabilities, and inventory for each of the past 4 years follow:a. Calculate the firm€™s current and quick ratios for each year. Compare the resulting time series for these measures of liquidity.b. Comment on the
Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. The data are as follows. Account AmountCash ............ $3,200Marketable securities ...... 1,000Checking account ...... 800Credit card payables ..... 1,200Short-term
Wilkins Manufacturing has annual sales of $4 million and a gross profit margin of 40%. Its end-of-quarter inventories are Quarter Inventory1 ........ $ 400,0002 ........ 800,0003 ........ 1,200,0004 ........ 200,000a. Find the average quarterly inventory and use it to
An evaluation of the books of Blair Supply, which follows, gives the end-of-year accounts receivable balance, which is believed to consist of amounts originating in the months indicated. The company had annual sales of $2.4 million. The firm extends 30-day credit terms.Month of origin
The new owners of Bluegrass Natural Foods, Inc., have hired you to help them diagnose and cure problems that the company has had in maintaining adequate liquidity. As a first step, you perform a liquidity analysis. You then do an analysis of the company€™s short-term activity ratios. Your
Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages and Creek's recent financial statements (following), evaluate and
A common-size income statement for Creek Enterprises€™ 2011 operations follows. Using the firm€™s 2012 income statement presented in Problem 3€“18, develop the 2012 common-size income statement and compare it to the 2011 statement. Which areas require further analysis
Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms€™ financial leverage and profitability.a. Calculate the following debt and
McDougal Printing, Inc., had sales totaling $40,000,000 in fiscal year 2012. Some ratios for the company are listed below. Use this information to determine the dollar values of various income statement and balance sheet accounts as requested.McDougal Printing, Inc.Year Ended December 31,
Use the financial statements below and on page 106 for Fox Manufacturing Company for the year ended December 31, 2012, along with the industry average ratios below, to:a. Prepare and interpret a complete ratio analysis of the firm€™s 2012 operations.b. Summarize your findings and
The financial statements of Zach Industries for the year ended December 31, 2012, follow.a. Use the preceding financial statements to complete the following table. Assume the industry averages given in the table are applicable for both 2011 and 2012.b. Analyze Zach Industries€™ financial
Given the following financial statements historical ratios, and industry averages, calculate Sterling Company€™s financial ratios for the most recent year. (Assume a 365-day year.)Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your
Use the following ratio information for Johnson International and the industry averages for Johnson's line of business to:a. Construct the DuPont system of analysis for both Johnson and the industry.b. Evaluate Johnson (and the industry) over the 3-year period.c. Indicate in which areas Johnson
Briefly describe the first four modified accelerated cost recovery system (MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS recovery periods.
Describe the overall cash flow through the firm in terms of operating flows, investments flows, and financing flows.
Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow (use) in preparing the statement of cash flows.
Why is depreciation (as well as amortization and depletion) considered a noncash charge?
Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement?
Why do we exclude interest expense and taxes from operating cash flow?
From a strict financial perspective, define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).
What is the financial planning process? Contrast long-term (strategic) financial plans and short-term (operating) financial plans.

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