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financial management

Fundamentals Of Financial Management 12th Edition Richard Bulliet, Eugene F Brigham, Brigham/Houston - Solutions

5-9 PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually.a. An initial $500 compounded for 1 year at 6%b. An initial $500 compounded for 2 years at 6%c. The present value of $500 due in
5-8 LOAN AMORTIZATION AND EAR You want to buy a car, and a local bank will lend you$20,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 12% with interest paid monthly. What will be the monthly loan payment? What will be the loan’s EAR?
5-7 PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and$500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is its present value? its future
5-4 TIME FOR A LUMP SUM TO DOUBLE If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?
5-3 FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?
5-7 Banks and other lenders are required to disclose a rate called the APR. What is this rate?Why did Congress require that it be disclosed? Is it the same as the effective annual rate?If you were comparing the costs of loans from different lenders, could you use their APRs to determine the loan
5-6 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: The answer is infinity, but explain why.)
5-5 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 flows constitute an annuity because the entire series is not an annuity. True or false? Explain.
5-3 If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.(Hint: If you aren’t sure, plug in some numbers and check it out.)
5-2 Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.
5-1 What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.
Suppose you borrowed $30,000 on a student loan at a rate of 8% and must repay it in three equal installments at the end of each of the next 3 years.How large would your payments be, how much of the first payment would represent interest, how much would be principal, and what would your ending
Suppose you deposited $1,000 in a credit union that pays 7% with daily compounding and a 365-day year. What is the EFF%, and how much could you withdraw after seven months, assuming this is seven-twelfths of a year?[EFF% ¼ (1 þ 0.07/365)365 − 1 ¼ 0.07250098 ¼ 7.250098%. Thus,your account
Suppose a company borrowed $1 million at a rate of 9%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would the firm have to pay in a 30-day month? What would the interest be if the bank used a 365-day year? [(0.09/360)(30)($1,000,000)
An investment costs $465 and is expected to produce cash flows of $100 at the end of Year 1, $200 at the end of Year 2, and $300 at the end of Year 3.What is the expected rate of return on this investment? (11.71%)
An investment costs $465 and is expected to produce cash flows of $100 at the end of each of the next 4 years, then an extra lump sum payment of$200 at the end of the fourth year. What is the expected rate of return on this investment? (9.05%)
Would a typical common stock provide cash flows more like an annuity or more like an uneven cash flow stream? Explain.
What’s the present value of the following uneven cash flow stream: $0 at Time 0, $100 in Year 1 (or at Time 1), $200 in Year 2, $0 in Year 3, and $400 in Year 4 if the interest rate is 8%? ($558.07)
What’s the present value of a 5-year ordinary annuity of $100 plus an additional $500 at the end of Year 5 if the interest rate is 6%? What is the PV if the $100 payments occur in Years 1 through 10 and the $500 comes at the end of Year 10? ($794.87; $1,015.21)
How could you use Equation 5-2 to find the PV of an uneven stream of cash flows?
What’s the present value of a perpetuity that pays $1,000 per year beginning one year from now if the appropriate interest rate is 5%? What would the value be if payments on the annuity began immediately? ($20,000,$21,000. Hint: Just add the $1,000 to be received immediately to the value of the
Assume that you are offered an annuity that pays $100 at the end of each year for 10 years. You could earn 8% on your money in other investments with equal risk. What is the most you should pay for the annuity? If the payments began immediately, how much would the annuity be worth? ($671.01;
What is the PVA of an ordinary annuity with 10 payments of $100 if the appropriate interest rate is 10%? What would the PVA be if the interest rate was 4%? What if the interest rate was 0%? How would the PVA values differ if we were dealing with annuities due? ($614.46; $811.09; $1,000.00;$675.90;
Compared to an ordinary annuity, why does an annuity due have a higher present value?
Assume that you plan to buy a condo 5 years from now and you need to save for a down payment. You plan to save $2,500 per year (with the first deposit made immediately), and you will deposit the funds in a bank account that pays 4% interest. How much will you have after 5 years? How much will you
What’s the difference between an ordinary annuity and an annuity due?
Microsoft’s 2007 earnings per share were $1.42, and its growth rate during the prior 10 years was 15.71% per year. If that growth rate was maintained, how long would it take for Microsoft’s EPS to double? (4.75 years)
How long would it take $1,000 to double if it was invested in a bank that paid 6% per year? How long would it take if the rate was 10%? (11.9 years;7.27 years)
Microsoft earned $0.33 per share in 1997. Ten years later in 2007 it earned$1.42. What was the growth rate in Microsoft’s earnings per share (EPS) over the 10-year period? If EPS in 2007 had been $0.90 rather than $1.42, what would the growth rate have been? (15.71%; 10.55%)
The U.S. Treasury offers to sell you a bond for $585.43. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond for $585.43? What rate would you earn if you could buy the bond
What would FV be if the growth rate was 10%? ($131.50; $13,780.61)
How much would $1, growing at 5% per year, be worth after 100 years?
A company’s sales in 2008 were $100 million. If sales grow at 8%, what will they be 10 years later, in 2018? ($215.89 million)
Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your answer change if the interest rate were 5% or 6% or 20%? ($2,249.73; $2,315.25; $2,382.03;$3,456.00)
l Discuss the basics of loan amortization.
l Explain the difference between nominal, periodic, and effective interest rates.
l Calculate the present value and future value of an uneven cash flow stream. You will use this knowledge in later chapters that show how to value common stocks and corporate projects.
l Identify the different types of annuities and calculate the present value and future value of both an ordinary annuity and an annuity due. You should also be able to calculate relevant annuity payments.
l Calculate the present value and future value of lump sums.
Construct a DuPont analysis for Ford and its peers. What are Ford’s strengths and weaknesses compared to those of its competitors?
Take a look at Ford’s inventory turnover ratio. How does this ratio compare with that of its peers? Have there been any interesting changes over time in this measure? Do you consider Ford’s inventory management to be a strength or a weakness? Explain.
What has happened to Ford’s liquidity position over the past 3 years? How does Ford’s liquidity compare with that of its peers? (Hint: You may use both the peer key financial ratios and liquidity comparison to answer this question.)
4-25 FINANCIAL STATEMENT ANALYSIS Part I of this case, presented in Chapter 3, discussed the situation of D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to “go national.”
4-24 RATIO ANALYSIS The Corrigan Corporation’s 2007 and 2008 financial statements follow, along with some industry average ratios.a. Assess Corrigan’s liquidity position and determine how it compares with peers and how the liquidity position has changed over time.b. Assess Corrigan’s asset
4-23 DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and
4-22 RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow.a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline Barry’s strengths and weaknesses as revealed by your analysis.d. Suppose Barry had doubled its
4-21 BALANCE SHEET ANALYSIS Complete the balance sheet and sales information using the following financial data:Debt ratio: 50%Current ratio: 1.8×Total assets turnover: 1.5×Days sales outstanding: 36.5 daysa Gross profit margin on sales: (Sales − Cost of goods sold)/Sales ¼ 25%Inventory
4-20 P/E AND STOCK PRICE Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $3.25 million. Over the next year, it also
4-19 DSO AND ACCOUNTS RECEIVABLE Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company’s average
4-18 CURRENT RATIO The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase
4-17 TIE RATIO AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI’s timesinterest-earned (TIE) ratio?
4-16 CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct?(Hint: Work Problem 4-15 before answering 4-16 and consider the solution setup for 4-15 as you think about 4-16.)a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the
4-14 RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of$15,000, and the following balance sheet:Cash $ 10,000 Accounts payable $ 30,000 Receivables 50,000 Other current liabilities 20,000 Inventories 150,000 Long-term debt 50,000 Net fixed assets 90,000 Common equity
4-13 RETURN ON EQUITY Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating plan that calls for a total debt ratio of 60%, which will result in annual interest charges of $300,000. Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it
4-12 TIE RATIO The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%. What is its TIE ratio?
4-11 RATIO CALCULATIONS Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio?
4-10 RATIO CALCULATIONS Assume the following relationships for the Brauer Corp.:Sales total assets 1.5×Return on assets (ROA) 3%Return on equity (ROE) 5%Calculate Brauer’s profit margin and debt ratio.
4-9 M/B AND SHARE PRICE You are given the following information: Stockholders’ equity ¼$3.75 billion, price/earnings ratio ¼ 3.5, common shares outstanding ¼ 50 million, and market/book ratio ¼ 1.9. Calculate the price of a share of the company’s common stock.
4-8 BASIC EARNING POWER Duval Manufacturing recently reported the following information:Net income $600,000 ROA 8%Interest expense $225,000 Duval’s tax rate is 35%. What is its basic earning power (BEP)?
4-7 DuPONT AND NET INCOME Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. The company is 50% equity financed. What is its net income?
4-6 DuPONT AND ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?
4-5 PRICE/EARNINGS RATIO A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0×. What is its P/E ratio?
4-4 MARKET/BOOK RATIO Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per share.What is Jaster’s
4-3 DuPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?
4-2 DEBT RATIO Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its debt ratio?
4-1 DAYS SALES OUTSTANDING Baker Brothers has a DSO of 40 days, and its annual sales are$7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.
4-10 Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (−) to indicate a decrease, and(0) to indicate either no effect or an indeterminate effect. Be prepared to state any necessary
4-9 Suppose you were comparing a discount merchandiser with a high-end merchandiser.Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you expect the three components to be the same for each company? If not, explain what balance sheet and
4-7 Give some examples that illustrate how (a) seasonal factors and (b) different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?
4-3 Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce
4-1 Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios they focus on?
What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance?
If a firm takes steps that increase its expected future ROE, does this necessarily mean that the stock price will also increase? Explain.
List several potential difficulties with ratio analysis.
List three types of users of ratio analysis. Would the different users emphasize the same or different types of ratios? Explain.
If competition causes all companies to have similar ROEs in the long run, would companies with high turnovers tend to have high or low profit margins? Explain your answer. (Low)
Why might railroads have such low total assets turnovers and food wholesalers and grocery stores such high turnovers? (Railroads require many long-term assets; while grocery companies have more perishable products and thus high turnovers.)
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion, financed half by debt and half by common equity. What is its profit margin? (5%) What is its ROA? (10%) What is its ROE? (20%) Would this firm’s ROA increase if it used less leverage? (yes) Would
Using more debt lowers profits and thus the ROA. Why doesn’t debt have the same negative effect on the ROE? (Debt lowers net income, but it also lowers the firm’s equity; and the equity reduction can offset the lower net income.)
Identify five profitability ratios and write their equations.
What is its DSO? (109.5 days)
A firm has annual sales of $100 million, $20 million of inventory, and $30 million of accounts receivable. What is its inventory turnover ratio? (5×)
How might different ages distort comparisons of different firms’ fixed assets turnover ratios?
If you wanted to evaluate a firm’s DSO, with what could you compare it?(Other companies and the same company over time)
Over the past few years, has there been a strong correlation between stock price performance and reported earnings? Explain.
Looking at the income statement, what are the company’s most recent sales and net income? Over the past several years, what has been the sales growth rate? What has been the growth rate in net income?
Looking at the statement of cash flows, what factors can explain the change in the company’s cash position over the last couple of years?
Does Starbucks have very much long-term debt? What are the chief ways in which Starbucks has financed assets?
Looking at the most recent year available, what is the amount of total assets on Starbucks’ balance sheet? What percentage is fixed assets, such as plant and equipment? What percentage is current assets? How much has the company grown over the years that are shown?
3-1 FINANCIAL STATEMENTS AND TAXES Donna Jamison, a 2003 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D’Leon Inc., a small food producer that operates in north Florida and whose specialty is
3-11 FINANCIAL STATEMENTS, CASH FLOW, AND TAXES Laiho Industries’ 2007 and 2008 balance sheets (in thousands of dollars) are shown.a. Sales for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000,
3-10 FREE CASH FLOW Financial information for Powell Panther Corporation is shown here.a. What was net working capital for 2007 and 2008?b. What was the 2008 free cash flow?c. How would you explain the large increase in 2008 dividends? Powell Panther Corporation: Income Statements For Year Ending
3-9 FINANCIAL STATEMENTS The Davidson Corporation’s balance sheet and income statement are provided here. Davidson Corporation: Balance Sheet as of December 31, 2008 (Millions of Dollars) Liabilities and Equity Assets Cash and equivalents $ 15 Accounts payable Accounts receivable 515 Notes
3-7 FREE CASH FLOW Bailey Corporation’s financial statements (dollars and shares are in millions) are provided here.3-8 INCOME STATEMENT Hermann Industries is forecasting the following income statement:The CEO would like to see higher sales and a forecasted net income of $2,500,000. Assume that
3-6 STATEMENT OF CASH FLOWS W.C. Cycling had $55,000 in cash at year-end 2007 and$25,000 in cash at year-end 2008. Cash flow from long-term investing activities totaled$250,000, and cash flow from financing activities totaled þ$170,000.a. What was the cash flow from operating activities?b. If
3-5 STATEMENT OF STOCKHOLDERS’ EQUITY Computer World Inc. paid out $22.5 million in total common dividends and reported $278.9 million of retained earnings at year-end.The prior year’s retained earnings were $212.3 million. What was the net income? Assume that all dividends declared were
3-4 BALANCE SHEET Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Explain and state the assumptions that underlie your answer.a. It issues $2 million of new common stock.b. It buys new plant and equipment at a cost of $3 million.c. It
3-3 STATEMENT OF STOCKHOLDERS’ EQUITY In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends were paid to shareholders during the year? Assume that all
3-2 INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
3-1 INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement and fill in the known values. Then divide$3 million of net income by (1 – T)

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