Questions and Answers of Contemporary Financial Management

1. Begin by looking at the historical performance of the overall stock market. Typically, on most of the financial websites you can enter S&P 500 and go right to the index’s summary page. You
Answer the following questions:a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years.b. What is the investment?s FV at rates of 0%, 5%, and 20% after 0, 1, 2, 3, 4, and 5 years?c.
Sawyer Corporation’s 2017 sales were $5 million. Its 2012 sales were $2.5 million.a. At what rate have sales been growing?b. Suppose someone made this statement: “Sales doubled in 5 years. This
Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2018 and 2019:May
McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts,while the other 60% pay, on average, 70 days
Lancaster Lumber buys $8 million of materials(net of discounts) on terms of 3/5, net 55, and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require
Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.5 million.What is Leyton’s DSO, what would it be
Parramore Corp has $12 million of sales, $3 million of inventories,$3.25 million of receivables, and $1.25 million of payables. Its cost of goods sold is 75% of sales,and it finances working capital
Define each of the following loan terms, and explain how they are related to one another:the prime rate, the rate on commercial paper, the simple interest rate on a bank loan calling for interest to
Fisher-Gardner Corporation (FGC) began operations 5 years ago as a small firm serving customers in the Chicago area. However, its reputation and market area grew quickly. Today FGC has customers all
Carlsbad Corporation’s sales are expected to increase from $5 million in 2018 to $6 million in 2019, or by 20%. Its assets totaled $3 million at the end of 2018.Carlsbad is at full capacity, so its
Would you agree that computerized corporate planning models were a fad during the 1990s but that because of a need for flexibility in corporate planning, they are no longer used by most firms?
Austin Grocers recently reported the following 2018 income statement (in millions of dollars): Sales
Williamson Industries has $7 billion in sales and $1.944 billion in fixed assets. Currently, the company’s fixed assets are operating at 90% of capacity.a. What level of sales could Williamson
At year-end 2018, total assets for Arrington Inc. were$1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3.0 million,are expected to increase by 25% in 2019. Total assets
Paladin Furnishings generated $4 million in sales during 2018, and its year-end total assets were $3.2 million. Also, at year-end 2018, current liabilities were$500,000, consisting of $200,000 of
Morrissey Technologies Inc.€™s 2018 financial statements are shown here. Suppose that in 2019, sales increase by 10% over 2018 sales. The firm currently has 100,000 shares
Earleton Manufacturing Company has $3 billion in sales and $787,500,000 in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity.a. What level of sales could Earleton
Krogh Lumber€™s 2018 financial statements are shown here.a. Assume that the company was operating at full capacity in 2018 with regard to all items except fixed assets; fixed assets
A call option on Rosenstein Corporation stock has a market price of $7. The stock sells for $31 a share, and the option has an exercise price of $25 a share.a. What is the exercise value of the call
The exercise price on one of Boudreaux Company’s call options is $14, its exercise value is $20, and its premium is $5. What are the option’s market value and the stock’s current price?
Assume that you have been given the following information on Fiore Industries: Using the Black€“Scholes Option Pricing Model, what is the value of the option? Current stock price = $16
What is the implied nominal interest rate on a 10-year U.S. T-notes ($100,000)futures contract that settled at 103–060? If interest rates increased by 3%, what would be the contract’s new value?
A television costs $750 in the United States. The same television costs 637.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
The current price of a stock is $55. In 1 year, the price will be either $50 or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expires in 1 year.a. Find the range
a. What is a multinational corporation? Why do firms expand into other countries?b. What are the five major factors that distinguish multinational financial management from financial management as
If British pounds sell for $1.30 (U.S.) per pound, what should dollars sell for in pounds per dollar?
Arvin Australian Imports has agreed to purchase 15,000cases of Australian wine for 4 million Australian dollars at today€™s spot rate. The firm€™s financial manager, Sarah
Early in June 1983, it took 245 Japanese yen to equal $1. In August 2017, that exchange rate had fallen to 109 yen to $1. Assume that the price of a Japanese-manufactured automobile was $9,000 in
You are the vice president of Worldwide Info X change, headquartered in Minneapolis, Minnesota. All shareholders of the firm live in the United States. Earlier this month you obtained a loan of 10
Assume that interest rate parity holds and that 90-day risk-free securities yield a nominal annual rate of 3% in the United States and a nominal annual rate of 3.5% in the United Kingdom. In the spot
In the spot market, 17.6 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same
Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.009144, while in the 90-day forward market 1 Japanese yen=$0.009184. In Japan, 90-day risk-free securities yield 2%.
Suppose the exchange rate between the U.S. dollar and the Swedish krona was 7.97 krona 5 $1, and the exchange rate between the dollar and the British pound was£1 5 $1.29. What would be the
Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in problem 19-5.a. What is the current exchange rate for changing dollars into 1,000
Table 19.1 lists foreign exchange rates for August 25, 2017. On that day, how many dollars would be required to purchase 1,000 units of each of the following:British pounds, Canadian dollars, EMU
Six-month T-bills have a nominal rate of 2%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.25%. In the spot exchange market, 1 yen equals $0.0091. If interest
A currency trader observes that in the spot exchange market, 1 U.S.dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the cross-exchange rate between the yen and the
After all foreign and U.S. taxes, a U.S. corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year.The exchange rate at the end of the year is expected to be
Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s
Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually
Whiston Securities recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $20 per share. What is the bonds’ conversion ratio, CR?
Two textile companies, Mc Nulty-Grunewald Manufacturing and Jackson-Kenny Mills, began operations with identical balance sheets.A year later both required additional manufacturing capacity at a cost
Distinguish between operating leases and financial leases. Would a firm be more likely to finance a fleet of trucks or a manufacturing plant with an operating lease? Explain.
Sullivan-Swift Mining Company must install $1.2 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the required amount.Alternatively, a Nevada investment banking firm
One alleged advantage of leasing voiced in the past was that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This
Potter Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for parts a, b, and c.)a. Calculate the
Rubash Company recently issued two types of bonds. The first issue consisted of 20-year straight (no warrants attached) bonds with a 9% annual coupon. The second issue consisted of 20-year bonds with
Cordell Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The
In the summer of 2018, the Gallatin Company was planning to finance an expansion with a convertible security. It considered a convertible debenture but feared the burden of fixed interest charges if
Suppose there were no IRS restrictions on what constitutes a valid lease. Explain in a manner that a legislator might understand why some restrictions should be imposed.
Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9% and $50 million of nonconvertible bonds with a coupon rate of 12%. Both bonds have the same maturity.
Storm Software wants to issue $100 million in new capital to fund new opportunities. If Storm raised the $100 million of new capital in a straight-debt 20-year bond offering, Storm would have to
Visscher currently expects to pay a year-end dividend of $1.99 a share (D1 =$1.99). Visscher’s dividend is expected to grow at a constant rate of 5% a year, and its betais 0.8. What is the current
TransWorld Communications Inc., a large telecommunications company,is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld€™s analysts
Aubey Appliance Corporation is considering a merger with the Velmore Vacuum Company. Velmore is a publicly traded company, and its current beta is 1.30. Velmore has been barely profitable, so it has
The Stanton Stationery Shoppe wants to acquire The Carlysle Card Gallery for $450,000. Stanton expects the merger to provide incremental earnings of about $70,000 a year for 10 years. Carol Stanton
In the spring of 1984, Disney Productions’ stock was selling for about $3.125 per share. (All prices have been adjusted for 4-for-l splits in 1986 and 1992.) Then Saul Steinberg, a New York
Hastings estimates that if it acquires Visscher, the year-end dividend will remain at $1.99 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the
A rookie quarterback is negotiating his first NFL contract.His opportunity cost is 7%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end
You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions:a.Draw time lines
You are considering an investment in Justus Corporation’s stock, which is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25) and has a beta of 0.9. The risk-free rate
Investors require an 8% rate of return on Mather Company’s stock (i.e., rs = 8%).a. What is its value if the previous dividend was D0 = $1.25 and investors expect dividends to grow at a constant
How do non-operating assets impact a firm’s valuation using the corporate valuation model?
This chapter discusses the discounted dividend and corporate valuation models for valuing common stocks. Three alternative approaches, the P/E multiple, Enterprise Values, and EVA approaches, were
Suppose Chance Chemical Company’s managementconducted a study and concluded that if it expands its consumer products division (which is less risky than its primary business, industrial chemicals),
If a stock is not in equilibrium, explain how financial markets adjust to bring it into equilibrium.
The risk-free rate of return, rRF, is 6%; the required rate of return on the market, rM, is 10%, and Upton Company’s stock has a beta coefficient of 1.5.a. If the dividend expected during the
For a stock to be in equilibrium, what two conditions must hold?
a. Describe briefly the legal rights and privileges of common stockholders.b. 1. Write a formula that can be used to value any stock, regardless of its dividend pattern.2. What is a constant
Bartman Industries's and Reynolds Inc.'s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2012 - 2017. The Winslow 5000 data are adjusted to include
Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the period 2013 through 2017.b. Assume that someone held a portfolio consisting of
ABC Company’s stock earned a return of 10% this past year. Investors’ required return for this stock based on the SML equation was 9%. Where would this stock plot on the SML? What can you say
Suppose you own Stocks A and B. Based on data over the past decade, the Sharpe ratio for Stock A is 1.3, while the Sharpe ratio for Stock B is 0.8. Briefly explain which stock has performed better.
Suppose you are the moneymanager of a $4.82 million investment fund. The fund consists of four stocks with the following investments and betas:If the market€™s required rate of return is 8%
Stocks A and B have the following probability distributions of expected future returns:a. Calculate the expected rate of return, r'B, for Stock B (r'A= 12%).b. Calculate the standard deviation of
Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of 20.3, and a beta coefficient of 20.5. Stock B has an expected
Assume that the risk-free rate is 3.5% and the market risk premium is 4%. What is the required return for the overall stock market'n What is the required rate of return on a stock with a beta of 0.8?
Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 2?
a. 1. Why is the T-bill€™s return independent of the state of the economy? Do T-bills promise a completely risk-free return? Explain.2. Why are High Tech€™s returns expected to
A stock€™s returns have the following distribution:Assume the risk-free rate is 2%. Calculate the stock€™s expected return, standard deviation, coefficient of variation, and
Bond X is noncallable and has 20 years to maturity, an 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You (and the
It is now January 1, 2018, and you are considering the purchase of an outstanding bond that was issued on January 1, 2016. It has an 8% annual coupon and had a 30-year original maturity. (It matures
Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200.a. What
Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in
An investor purchased the following five bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates
An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon,
a. What effect would each of the following events likely have on the level of nominal interest rates?1. Households dramatically increase their savings rate.2. Corporations increase their demand for
Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bond yields 7%, what is the 1-year interest rate that
The real risk-free rate is 2.05%. Inflation is expected to be 3.05% this year, 4.75% next year, and 2.3% thereafter. The maturity risk premium is estimated to be 0.05 X (t - 1)%, where t = number of
Assume that yields on U.S. Treasury securities were as follows:a. Plot a yield curve based on these data.b. What type of yield curve is shown?c. What information does this graph tell you?d. Based on
a. What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?b. What is the real risk-free rate of interest (r*) and the nominal
It is now December 31, 2017 (t 5 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2016 accident. She requested recovery of lost wages plus $300,000
Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an Apple iPhone 7 for $372.71. The minimum payment on the card is only $10 per month.a. If Simon
Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day.
a. Find the present values of the following cash flow streams at a 5% discount rate.b. What are the PVs of the streams at a 0% discount rate? 3 5 2 Stream A Stream B $150 $250 $150 $0 $450 $450 $450
The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I : PV = PMT/I. What is the future value of a perpetuity of PMT dollars per year? (Hint:
To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash
If you deposit $2,000 in a bank account that pays 6% interest annually, how much will be in your account after 5 years?
The Corrigan Corporation€™s 2017 and 2018 financial statements follow, along with some industry average ratios.a. Assess Corrigan€™s liquidity position, and determine how it

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