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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+a. Calculate a firm’s tax liability, after-tax earnings, and average tax rate for the following levels of corporate earnings before taxes: $20,000; $70,000; $300,000;$700,000; $1.2 million; $16 million; and $22 million.
=+b. Plot the average tax rate (measured on the y-axis) and the pretax income levels(measured on the x-axis).
=+Explain the relationship between average tax rate and pretax income level.
=+P1–8 Marginal corporate tax rates Using the corporate tax rate schedule given in the previous problem, perform the following:
=+a. Find the marginal tax rate for the following levels of corporate earnings before taxes: $12,000; $40,000; $70,000; $90,000; $300,000; $550,000; $1.3 million;and $22 million.
=+b. Plot the marginal tax rate (measured on the y-axis) against the pretax income levels (measured on the x-axis).
=+ Explain the relationship between the marginal tax rate and pretax income levels.
=+LG 6 P1–9 Interest versus dividend income Depot Logistics Inc. has declared pretax income from its operations of $560,000. In addition, it also received interest payment of$40,000 on bond stock held in Warehouse PLC. During the year they also received$40,000 in income from dividends on its 20%
=+a. Calculate the tax liability for Depot Logistics on its operating income.
=+b. Calculate the tax and after-tax income attributable to the interest income received on account of bond stock, from Warehouse PLC.
=+c. Find the tax and after-tax income owing to the dividend income received on account of common stock, from Zephir PLC.
=+d. Compare and comment on the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c.
=+e. What is the firm’s total tax liability for the year?
=+LG 6 P1–10 Interest versus dividend expense Derwent Ltd., has announced that the earnings before income and taxes is going to be £300,000 for the current year. Assuming corporate tax rate for Derwent Ltd., is a flat 30%, compute the firm’s profit after taxes and earnings available for
=+a. The firm pays £70,000 in interest.
=+b. The Firm pays £70,000 in preferred stock dividends.
=+P1–11 Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate tax consequences of such a decision. Currently, Hemingway generates beforetax yearly income of $200,000 and has no debt
=+a. What is Hemingway’s current annual corporate tax liability?
=+b. What is Hemingway’s current average tax rate?
=+c. If Hemingway finances its expansion using cash reserves, what will be its new corporate tax liability and average tax rate?
=+d. If Hemingway finances its expansion using debt, what will be its new corporate tax liability and average tax rate?
=+e. What would you recommend the firm do? Why?
=+LG 2 P1–12 ETHICS PROBLEM One of the key risk areas that corporates need to manage is“ethical risks.” Do you think that management of ethical risks is as important for businesses as management of financial risks? Explain how ethical problems may affect a firm’s profits and stock price.
=+Assume that Monsanto Corporation is considering the replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled
=+Create a spreadsheet to conduct a marginal cost–benefit analysis for Monsanto Corporation, and determine.
=+a. The marginal benefits of the proposed new equipment.
=+b. The marginal costs of the proposed new equipment.
=+c. The net benefit of the proposed new equipment.
=+d. What would you recommend the firm do? Why?
=+2–1 What are financial institutions? Describe the role they play within the financial market environment.
=+2–2 Who are the key customers of financial institutions? Who are net suppliers, and who are net demanders of funds?
=+2–5 What is a private placement versus a public offering?
=+2–6 What is the money market? What is the Eurocurrency market?
=+2–7 What is the capital market? What are broker markets? What are dealer markets? How do they differ?
=+2–10 What different aspects of financial markets do the Securities Act of 1933 and the Securities Exchange Act of 1934 regulate?
=+2–11 What is the difference between an angel investor (angel) and a venture capitalist (VC)?
=+2–12 What four ways do VCs use to organize their businesses? How do they structure and price their deals?
=+2–13 What general procedures must a private firm follow to go public via an initial public offering (IPO)?
=+2–14 What role does an investment bank play in a public offering? Describe an underwriting syndicate.
=+2–15 What is securitization, and how does it facilitate investment in real estate assets?
=+2–16 What is a mortgage-backed security? What basic risk is associated with mortgage-backed securities?
=+2–17 How do rising home prices contribute to low mortgage delinquencies?
=+2–18 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?
=+2–19 Why does a crisis in the financial sector spill over into other industries?
=+ST2–1 Transaction costs Assume that you use a TD Ameritrade brokerage account and place your stock trades through the Interactive Voice Response (IVR) Phone System, which charges a $34.99 commission per stock trade. You would like to sell 1,500 shares of Microsoft Corporation, which is listed
=+a. What is the current bid/ask spread for Microsoft?
=+b. If you place the sell order and TD Ameritrade routes the order to Microsoft’s listing exchange, what are your likely total transaction costs? (Hint: Nasdaq is a dealer market.)
=+c. What are your total transaction costs if the Nasdaq dealer who receives your order decides to act as broker and allows a public order to buy 1,500 shares of Microsoft to satisfy your order?
=+d. Regardless of how your trade is executed, based on the bid/ask spread what is the market value of your trade?
=+E2–1 What does it mean when we say that individuals as a group are net suppliers of funds for financial institutions? What do you think the consequences might be for financial markets if individuals consumed more of their incomes and thereby reduced the supply of funds available to financial
=+LG 2 E2–2 FastFood Ltd. manufactures vending machines for schools. To meet the increasing demand, FastFood decides to build a new factory. The company requires £5 million to expand production. How do you think the process of raising this money will differ if FastFood borrows it from financial
=+LG 3 E2–3 What are the sources of short-term funding available to large corporations? Differentiate these sources from those needed to raise funds for a long-term capital investment.
=+P2–1 Transaction costs You would like to purchase one Class A share of Berkshire Hathaway through your Scottrade brokerage account. Scottrade charges a $7 commission for online trades. You log into your account, check the real-time quotes for Berkshire Hathaway (you see a bid price of
=+a. What is the current bid/ask spread for Berkshire Hathaway Class A shares?
=+b. If Scottrade routes your buy order to the NYSE, where Berkshire Hathaway is listed, what’s the potential minimum your total transaction costs will be?
=+c. If, instead, Scottrade routes your buy order to the Nasdaq, where Berkshire Hathaway is not listed, what’s the potential maximum your total transaction costs will be?
=+d. Regardless of how your trade is executed, based on the bid/ask spread what is the market value of your trade?
=+LG 3 P2–2 Transaction costs In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year.However, since you
=+a. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed?
=+b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not.
=+c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed?
=+d. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?
=+LG 5 P2–3 Initial public offering On April 13, 2017, Yext Inc. completed its IPO on the NYSE.Yext sold 10,500,000 shares of stock at an offer price of $11 with an underwriting discount of $0.77 per share. Yext’s closing stock price on the first day of trading on the secondary market was
=+a. Calculate the total proceeds for Yext’s IPO.
=+b. Calculate the percentage underwriter discount.
=+c. Calculate the dollar amount of the underwriting fee for Yext’s IPO.
=+d. Calculate the net proceeds for Yext’s IPO.
=+e. Calculate Yext’s IPO underpricing.
=+f. Calculate Yext’s market capitalization.
=+LG 5 P2–4 Initial public offering A Brazilian company called Netshoes completed its IPO on April 12, 2017, and listed on the NYSE. Netshoes sold 8,250,000 shares of stock to primary market investors at an IPO offer price of $18, with an underwriting discount of 6.5%. Secondary market
=+a. Calculate the total proceeds for Netshoes’ IPO.
=+b. Calculate the dollar amount of the underwriting fee for Netshoes’ IPO.
=+c. Calculate the net proceeds for Netshoes’ IPO.
=+d. Calculate market capitalization for Netshoes’ outstanding stock.
=+e. Calculate IPO underpricing for Netshoes’ IPO.
=+f. Explain the IPO underpricing for Netshoes.
=+MuleSoft, Inc. conducted its IPO on March 17, 2017 for the principal purposes of increasing its capitalization and financial flexibility, creating a public market for its Class A common stock, and enabling access to the public equity markets for it and its stockholders. MuleSoft sold 13 million
=+Create a spreadsheet to conduct an analysis of MuleSoft’s IPO, and determine the following:a. Calculate the total proceeds for MuleSoft’s IPO.b. Calculate the percentage underwriter discount for MuleSoft’s IPO.c. Calculate the dollar amount of the underwriting fee for MuleSoft’s IPO.
=+d. Calculate the net proceeds for MuleSoft’s IPO.
=+e. Calculate the percentage IPO underpricing for MuleSoft’s IPO.
=+f. Calculate the market capitalization for MuleSoft’s IPO after the first day of trading in the secondary market.
=+a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the most positive aspects of this option, and what are the biggest drawbacks?
=+b. Do the same for option 2.
=+c. Which option do you think Sara should recommend to the board, and why?
=+3–10 In Table 3.5, most of the specific firms listed have current ratios that fall below the industry average. Why? One 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 greater-than-average liquidity?
=+3–14 What three ratios of profitability appear on a common-size income statement?
=+3–16 A firm’s ROE is typically not equal to its ROA. Why? When would a firm’s ROA equal its ROE?
=+ST3–1 Ratio formulas and interpretations Without referring to the text, indicate for each of the following ratios the formula for calculating it and the kinds of problems, if any, the firm may have if that ratio is too high relative to the industry average. What if the ratio is too low relative
=+ST3–2 Balance sheet completion using ratios Complete the 2019 balance sheet for O’Keefe Industries, using the information that follows it.
=+The following financial data for 2019 are also available:1. Sales totaled $1,800,000.2. The gross profit margin was 25%.3. Inventory turnover was 6.0.4. There are 365 days in the year.5. The average collection period was 40 days.6. The current ratio was 1.60.7. The total asset turnover ratio was
=+E3–1 You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager gives you the following list of accounts and asks you to prepare a simple income statement using those accounts.WARM-UP EXERCISES Select problems are available
=+a. Arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit, operating profit, and net profit before taxes.
=+b. Using a 21% tax rate, calculate taxes paid and net profit after taxes.
=+c. Assuming a dividend of $1.10 per share with 4.25 million shares outstanding,
=+calculate EPS and additions to retained earnings.
=+LG 3 E3–4 Crane Housing PLC has a current ratio of 2.5 and total current assets worth £5 million. Crane housing also has some long-term borrowings where the bank has stipulated that the current ratio of the firm should not drop below 1.5. The management has planned to take on a new housing
=+Explain whether they will be able to follow this plan. Suggest any alternative sources to fund this increase in inventory without affecting the current ratio.
=+LG 6 E3–5 Geotherm Energy Ltd. has a net profit margin of 6%, a financial leverage multiplier of 1.5, and total asset turnover of 1.2. What is the ROE? What is the advantage of using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders
=+P3–1 Financial statement account identification Mark each of the accounts listed in the following table as follows:
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