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Finance
The common stock for the Kingsford Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4 percent per year into the indefinite future. If
The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year was $2.25. Five years ago the firm paid $2.10 per share, and dividends are expected to grow at
In August 2015 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) was as follows: ($ Millions) ________________ Book Value _____________Market
Waygone Industries is planning on issuing 30-year bonds that will be rated AA. Use Figure 14.3 to estimate the yield to maturity on the bond issue. What is the spread to Treasury for the debt issue
In the spring of last year, the management of the Silver Steel Company learned that the firm would need to reevaluate the company's weighted average cost of capital following a significant issue of
The target capital structure for J&J Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 15 percent, the cost of
You are working as a consultant to the Lulu Athletic Clothing Company, and you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse
Compute the cost of capital for each of the following sources of financing:a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. Interest
The Boston Brewery Corporation is a craft brewer of premium beers. The firm is planning on issuing common stock at a market price of $13 a share. Last year the firm paid an annual dividend of $1.45,
In Regardless of Your Major: Capital Structure Matters to You! on page 484, we learned about the dangers of using a high proportion of debt financing faced by both General Motors (GM) and Lehman
What are interest tax savings, and how do they affect the relevance of a firm's financing decisions?
What are financial distress costs, and how are they related to the firm's financing decisions?
How does the presence of financial distress costs, combined with the tax deductibility of interest (and the resulting interest tax savings), affect a firm's weighted average cost of capital as the
What are agency costs, and how do they become a relevant consideration in determining a firm's capital structure?
What does the term benchmarking mean with respect to making financing decisions?
Describe how each of the four financial ratios found in Table 15.3 is used to help managers make financing decisions.
What is EBIT-EPS analysis, and how is it used in making financing decisions?
The Ballard Corporation is considering adding more debt to its capital structure and has asked you to provide it with some guidance. After looking at future levels of Ballard's EBIT, you feel very
Do you think firms with stable income streams should use higher or lower levels of debt in their capital structures? Why?
How does a firm's financial structure differ from its capital structure?
What is financial flexibility, and why is it an important consideration when evaluating a financing decision?
A firm is considering replacing its current production facility with a new robotics production facility. As a result of this move, the firm's fixed costs will increase dramatically. To finance this
In Finance in a Flat World: Capital Structures Around the World on page 510, we learned that capital structures differ dramatically in different countries around the world. What are some possible
Use Figure 15-9 to describe potential differences between leasing a piece of equipment with a capital lease and purchasing the equipment using a bank loan.In figure 15-9
The tax implications of leasing versus buying a piece of equipment can sometimes favor leasing and at other times favor buying. Explain.
What are non-interest-bearing liabilities? Give some examples. Why are noninterest bearing liabilities not included in the firm's capital structure?
What is financial leverage? What is meant by the use of the terms favorable and unfavorable with regard to financial leverage?
What is the significance of the notion that a firm's financing decisions are irrelevant? What does this mean to the financial manager?
What are the two fundamental assumptions that are used to support the M&M capital structure theory? Describe each in commonsense terms.
Under the conditions of the M&M capital structure theory, the firm's financing decisions do not have an impact on firm value. When this theory holds (i.e., is true), how do the firm's financing
Describe why capital structure is relevant to the value of the firm. Discuss the potential violations of both of the basic assumptions that support the M&M capital structure theory.
The income statements for Lowe's Companies, Inc. (LOW), spanning the period 2014-2016 (just before the housing crash, so these are representative years) are as follows:a. Calculate the times interest
Home Depot, Inc. (HD), had 1,244 million shares of common stock outstanding in 2016 whereas Lowe's Companies, Inc. (LOW), had 929 million shares outstanding. Given the 2016 earnings levels found in
The income statements for Home Depot, Inc. (HD), spanning the period 2014-2016 (just before the housing crash, so these are representative years) are as follows:a. Calculate the times interest earned
Why is a stable dividend payout policy popular from the viewpoint of the corporation? Is it also popular with investors? Why?
Under what conditions is the firm's dividend policy not important to its investors?
Your Uncle Bob has no formal education in business or finance but has been investing in the stock market for many years. At a recent family reunion, Uncle Bob told you that he liked to invest in
What is the current U.S. tax policy with regard to the taxation of dividend income and capital gains income resulting from a share repurchase? If the individual stockholder could choose whether to
In Regardless of Your Major: Firms Almost Never Decrease Their Dividend on page 528, we learned that firms try to sustain their dividend payout even during economic downturns. Use the internet to
Explain what a firm's dividend policy is as if you were talking to your grandmother, who has had no formal education in business.
A firm's dividend policy is generally characterized in terms of two attributes. Explain each.
What is a stock dividend, and how is it similar to a stock split?
Your Aunt Mary recently called to ask you about a letter she had just received from her stockbroker. She said that the letter notified her that one of the stocks she owns will be paying a 10 percent
Describe the dividend distribution process, including the importance of the declaration date, date of record, and ex-dividend date.
Cousin Harold runs a pharmacy but likes to dabble in common stock investing as a hobby. One day last week he called you to find out what had happened to his portfolio because one of the stocks he
The Welmar Corporation operates membership warehouses that offer a wide variety of branded and private-label products in no-frills, self-service warehouse facilities. In 2016, the company paid total
Dimmick Skate Boarding Enterprises has declared a $3 dividend for its common stock. On the day before the ex-dividend date, the firm's shares are trading for $40 a share. What do you expect the price
Kingwood Corporation has a stock price of $120 per share and is contemplating the payment of a large, one-time cash dividend of $40 per share. The underlying motivation for the large payout comes
The stock price of Perkiman Go Inc. is currently $40 a share. If the firm announces a 10 percent stock dividend, what do you expect the ex-dividend stock price to be? What about a 20 percent stock
In Regardless of Your Major: Financial Planning Engages Everyone on page 554, we learned that financial planning engages everyone throughout the organization. How do marketing and accounting
Forecasting a firm's future sales is the key element in developing a financial plan, yet forecasting can be extremely difficult in some industries. If forecast accuracy is very poor, does this mean
Describe the percent-of-sales method of financial forecasting.
Distinguish among the three components of a firm's overall planning process: the short-term operating financial plan, the long-term operating financial plan, and the strategic plan.
Compare and contrast discretionary and spontaneous sources of short-term financing.
In the spring of 2016, the Caswell Publishing Company established a custom publishing business for its business clients. These clients consisted principally of small- to medium-size companies in
The Sharpe Corporation's projected sales for the first eight months of 2017 are as follows:Of Sharpe's sales, 10 percent are for cash, another 60 percent are collected in the month following the
Harrison Printing has projected its sales for the first eight months of 2017 as follows:Harrison collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale,
Beason Manufacturing forecasts its sales next year to be $6 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs
The current balance sheet Murphy Forklifts, Inc., is as follows:Murphy Forklifts, Inc.Balance Sheet, December 31, 2016 ($ millions)Murphy had sales for the year ended December 31, 2016, of $50
The most recent balance sheet for the ADB Distribution Company is shown in the following table. The company is about to embark on an advertising campaign that is expected to raise sales from the
Bates Fabricators, Inc., estimates that it invests $0.25 in assets for each $1 of new sales. However, $0.05 in profits is produced by each $1 of additional sales, of which $0.01 can be reinvested in
Harrison Electronics, Inc., operates a chain of electrical lighting and fixture distribution centers throughout northern Arizona. The firm is anticipating expansion of its sales in the coming year as
In the chapter introduction, we noted that computer company Dell is an industry leader in its working-capital management practices. Describe how the firm came to have this reputation.
Describe the meaning of the following trade credit terms: "2/10, net 30"; "4/20, net 60"; and "3/15, net 45."
Credit Scoring on page 595, we learned about the determinants of your credit score. Describe the five components of a credit score and the relative weight or importance of each.
In Regardless of Your Major: Conflicting Objectives Lead to Problems in Managing a Firm's Working Capital on page 578, we learned that the objectives of a firm's sales force and the goal of
What is a firm's net working capital, and how is it related to the current ratio and the firm's overall liquidity?
What is the risk-return tradeoff that arises when a firm manages its working capital?
How does a firm's use of short-term debt, as opposed to long-term debt, subject the firm to a greater risk of illiquidity?
Finance for Life: Credit Scoring on page 595 described the credit scoring system used to determine whether credit will be extended. What is a good credit score?
CL Marshall Liquors owns and operates a chain of beer and wine shops throughout the Dallas-Fort Worth metroplex. As a result of the rapidly expanding population of the area, the firm requires a
On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with
A corporation desires to enter a particular foreign market. The direct foreign investment analysis indicates that a direct investment in the plant in the foreign country is not profitable. What other
Working in a Flat World on page 608, why do businesses operate internationally, and what different types of businesses tend to operate in the international environment? Why are the techniques and
International Investing on page 620, why is the diversification that international investing provides to individual investors of value?
What are the markets and mechanics involved in engaging in simple arbitrage?
How do purchasing-power parity, interest rate parity, and the International Fisher Effect explain the relationships among the current spot rate, the future spot rate, and the forward rate?
Define exchange rate risk and political risk.
What steps can a firm take to reduce foreign exchange rate risk? Indicate at least two different techniques.
The forward rate for the Indian currency, the rupee, is not quoted in the New York exchange market. If you were exposed to exchange risk in rupees, how could you cover your position?
Welcome to a Risky World on page 634, the need to engage in risk management was linked to the day-to-day activities of firm employees from multiple functional areas, including operations, marketing,
Define a call option, and contrast it with a put option.
What is a swap contract? How are swap contracts used to hedge interest rate risk?
Define the term risk management.
A firm's cash flows are risky for a number of reasons. Identify and discuss five sources of risk or volatility in firm cash flows.
Firms regularly use insurance as a means of managing their risk exposure. What are some of the types of risks that are typically transferred to insurance companies through the use of insurance
Finance for Life: Do You Need Life Insurance? on page 638 discussed factors involved in the decision to purchase life insurance. What are some commonsense guidelines that can be used to answer the
What is a forward contract, and how does it typically differ from an exchange traded futures contract?
Describe how forward contracts can be used to hedge the risk of fluctuating commodity prices for firms that must purchase these commodities in the future.
What are the limitations of the use of forward contracts to construct a hedge against price risk? How does a futures exchange control for these limitations?
Declan Ross wants to sell his business. The firm has no debt and earns an 8% return (ROE) on equity of $150,000. The business can borrow at an after tax rate of 5%. A consultant has advised that the
The Lindscomb family had the following income in 2015: Salaries: __________ Mark ______________ $63,500 ...........................Ashley ......................57,900 Interest on
The Benjamin family had wage earnings of $185,000 in 2015. They received interest of $4,500 on corporate bonds and $1,500 on bonds issued by the state. Their dividend income was $500, and they had a
Joan and Harry Leahy both had income in 2015. Harry made $72,500 in wages. Joan has an incorporated small business that paid her a salary of $50,000. In addition, the business had profits of $15,000,
Microchip Inc had the following profits and losses in the years indicated 2013............................. $5,000,000 2014............................. $ 350,000 2015..........................
Inky Inc. reported the following financial information in 2015.Operating income (EBIT)............................................
Calculate all of the ratios discussed in the chapter for the Axtel Company of problem 5. Assume Axtel had leasing costs of $7,267,000 and amortization of $1,416,000 in 20X1, and had 1,268,000 shares
Milford Inc. has the following summarized financial statements ($000):Income StatementIncome Statement
Describe the nature and purpose of dark pools. Who runs dark pools for whose benefit?
How does High Frequency Trading (HFT) work? How do regulators feel about HFT?
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