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Questions and Answers of Financial Management

Cumberland Industries' common stock has increased in price from $14.75 to $17.25 from the end of 2006 to the end of 2007, and its shares outstanding increased from 9 to 10 million shares during that
The current price of a stock is $40. In 1 year, the price will be either $60 or $30. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $42 and
Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $22, (2) strike price is $20, (3) time to expiration is 6 months, (4) annualized
Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. LCI's tax rate is 40% and
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000,
LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal
You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover's basic price is $50,000, and it would cost another $10,000
Katie Watkins, an entrepreneur, believes consolidation is the key to profit in the fragmented recreational equine industry. In particular, she is considering starting a business that will develop and
Betty Simmons, the new financial manager of Southeast Chemicals (SEC), a Georgia producer of specialized chemicals for use in fruit orchards, must prepare a financial forecast for 2008. SEC's 2007
Baxter Video Products’ sales are expected to increase from $5 million in 2007 to $6 million in 2008 or by 20%. Its assets totaled $3 million at the end of 2007. Baxter is at full capacity, so its
Van Auken Lumber’s 2007 financial statements are shown below. Van Auken Lumber: Balance Sheet as of December 31, 2007 (Thousands of Dollars)Van Auken Lumber: Income Statement for December 31, 2007
Suppose Barnsdale's financial consultants (see Problem ST-1) report (1) that the inventory turnover ratio is sales/inventory = 3 times versus an industry average of 4 times and (2) that Barnsdale
Refer to Problem 14-1. Return to the assumption that the company had $3 million in assets at the end of 2007, but now assume that the company pays no dividends. Under these assumptions, what
Bannister Legal Services generated $2.0 million in sales during 2007, and its yearend total assets were $1.5 million. Also, at year-end 2007, current liabilities were $500,000, consisting of $200,000
The Booth Company’s sales are forecasted to increase from $1,000 in 2007 to $2,000 in 2008. Here is the December 31, 2007, balance sheet:Booth’s fixed assets were used to only 50% of capacity
At year-end 2007, total assets for Bertin Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2007 were $2.5 million, are expected to increase by 25% in 2008. Total assets and
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton’s balance sheet as of December 31, 2007,
Stevens Textile’s 2007 financial statements are shown below.Stevens Textile: Balance Sheet as of December 31, 2007 (Thousands of Dollars)Suppose 2008 sales are projected to increase by 15% over
Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm's clients is Michelle DellaTorre, a
a. Find the present values of the following cash flow streams. The appropriate interest rate is 8%. (It is fairly easy to work this problem dealing with the individual cash flows. However, if you
Hanebury Corporation’s current sales were $12 million. Sales were $6 million 5 years earlier.a. To the nearest percentage point, at what rate have sales been growing?b. Suppose someone calculated
You have just obtained financial information for the past 2 years for Bridgewater Equine Corporation. Answer the following questions.a. What is the net operating profit after taxes (NOPAT) for
Last year Cole Furnaces had $5,000,000 in operating income (EBIT). The company had a net depreciation expense of $1,000,000 and an interest expense of $1,000,000; its corporate tax rate was 40%. The
The first part of the case, presented in Chapter 3, discussed the situation that Computron Industries was in after an expansion program. Thus far, sales have not been up to the forecasted level,
The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2007 the firm incurred a loss of
Argent Corporation had earnings per share of $4 last year, and it paid a $2 dividend. Total retained earnings increased by $12 million during the year, while book value per share at year-end was $40.
The following data apply to Jacobus and Associates (millions of dollars):Jacobus has no preferred stock—only common equity, current liabilities, and longterm debt.a. Find Jacobus’s (1) accounts
Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data: Debt ratio: 50% Quick ratio: 0.80x Total assets turnover:
Data for Morton Chip Company and its industry averages follow.a. Calculate the indicated ratios for Morton.b. Construct the extended Du Pont equation for both Morton and the industry.c. Outline
The Pennington Corporation issued a new series of bonds on January 1, 1984. The bonds were sold at par ($1,000), had a 12% coupon, and matured in 30 years, on December 31, 2013. Coupon payments are
The Jimenez Corporation’s forecasted 2008 financial statements follow, along with some industry average ratios. a. Calculate Jimenez’s 2008 forecasted ratios, compare them with the industry
Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the 5-year period.Assume that someone held a portfolio consisting of 50% of Stock A
You are planning to invest $200,000. Two securities, A and B, are available, and you can invest in either of them or in a portfolio with some of each. You estimate that the following probability
Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of –0.25, and a beta coefficient of –0.5. Security B has an
Ewald Company’s current stock price is $36, and its last dividend was $2.40. In view of Ewald’s strong financial position and its consequent low risk, its required rate of return is only 12%. If
Use the following income statements and balance sheets to calculate Garnet Inc.’s free cash flow for 2008. Garnet Inc. Income Statement Net sales Costs (except depreciation) Depreciation Total
The Rogers Company is currently in this situation: (1) EBIT = $4.7 million; (2) tax rate, T = 40%; (3) value of debt, D = $2 million; (4) rd = 10%; (5) rs = 15%; (6) shares of stock outstanding,
Lighter Industrial Corporation (LIC) is considering a large-scale recapitalization. Currently, LIC is financed with 25% debt and 75% equity. LIC is considering increasing its level of debt until it
Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding.When CMC's founder, who was also its research
Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10
In 2007 the Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. 2007 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 10%.
House Mountain Breweries (HMB) is planning an IPO. Its underwriters have said the stock will sell at $20 per share. The direct costs (legal fees, printing, etc.) will be $800,000. The underwriters
Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31, 2007 (thousands of dollars):Earnings before interest and taxes for both firms are
The Randolph Teweles Company (RTC) has decided to acquire a new truck. One alternative is to lease the truck on a 4-year guideline contract for a lease payment of $10,000 per year, with payments to
Connor Company recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 6% annual coupon. The second issue consisted of 10-year bonds with a 4.5% annual coupon
It is now March, and the current cost of debt for Wansley Construction is 12%. Wansley plans to issue $5 million in 20-year bonds (with coupons paid semiannually) in September, but is afraid that
The Calgary Company is attempting to establish a current assets policy. Fixed assets are $600,000, and the firm plans to maintain a 50% debt-to-assets ratio. Calgary has no operating current
The Verbrugge Publishing Company’s 2007 balance sheet and income statement are as follows (in millions of dollars).Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In
At the time it defaulted on its interest payments and filed for bankruptcy, Medford Fabricators Inc. had the following balance sheet (in millions of dollars). The court, after trying unsuccessfully
Green Mountain Breweries is considering an acquisition of Ritta Markets. Ritta currently has a cost of equity of 10%; 25% of its financing is in the form of 6% debt, the rest in common equity. Its
Suppose the exchange rate between U.S. dollars and EMU euros is €0.98 = $1.00, and the exchange rate between the U.S. dollar and the Canadian dollar is $1.00 = C$1.50. What is the cross rate of
Garlington Technologies Inc.’s 2007 financial statements are shown below.Garlington Technologies Inc.: Income Statement for December 31, 2007Suppose that in 2008 sales increase by 10% over 2007
Watkins Inc. has never paid a dividend, and when it might begin paying dividends is unknown. Its current free cash flow is $100,000, and this FCF is expected to grow at a constant 7% rate. The

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