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financial management theory
Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions
(Related to Checkpoint 18.2 on page 598) (Calculating the cash conversion cycle)Network Solutions just introduced a new, fully automated manufacturing plant that produces 2,000 wireless routers per day with materials costs of $50 per router and no other costs. The average number of days a router is
(Identifying spontaneous, temporary, and permanent sources of financing) Classify each of the following sources of new financing as spontaneous, temporary, or permanent(explain):a. A manufacturing firm enters into a loan agreement with its bank that calls for annual principal and interest payments
(Identifying permanent and temporary asset investments) Classify each of the investments in assets as either permanent or temporary (explain):a. A seasonal increase in a card shop’s inventory of Valentine cards.b. The acquisition of a new forklift truck that is expected to have a useful life of 5
(Related to Checkpoint 18.1 on page 591) (Measuring firm liquidity) The following table contains current asset and current liability balances for Microsoft Corporation (MSFT):
(Related to Checkpoint 18.1 on page 591) (Measuring firm liquidity) The following table contains current asset and current liability balances for Deere and Company (DE):($ thousands) 2008 2007 2006 Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Total
(Related to The Business of Life: Credit Scoring on page 608) In The Business ofLife: Credit Scoring boxed feature 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.
What factors determine the size of the investment a firm makes in accounts receivable?Which of these factors are under the control of the financial manager?
Describe verbally the meaning of the following trade credit terms' “2/10 net 30”' “4/20 net 60”; and “3/15, net 45.”
How can the basic interest expense formula “interest = principle X rate X time” be used to estimate the annualized cost of short-term credit?
(Related to The Business of Life: Credit Scoring on page 608) The boxed feature The Business ofLife: Credit Scoring describes the credit scoring system used to determine whether credit will be extended. What is a good credit score?
Define the following terms:a. Permanent asset investmentsb. Temporary asset investmentsc. Permanent sources of financingd. Temporary sources of financinge. Spontaneous sources of financing
What is the principle of self-liquidating debt and how can it be used to manage a firm’s 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?
What is the risk-return tradeoff that arises when a firm manages its working capital?
What is the firm’s net working capital and how is it related to the current ratio and a firm’s overall liquidity?
Why is the current ratio used to measure a firm’s liquidity?
(Related to Regardless of Your Major: Conflicting Objectives Lead to Problems in Managing a Firm’s Working Capital on page 590) In the Regardless ofYour Major feature box we learned that the objectives of a firm’s sales force and the goal of maximizing shareholder wealth are not always in sync
In the chapter introduction we noted that Dell Computers (DELL) is an industry leader in its working capital management practices. Describe how the firm came to have this reputation.
What are the fundamental decisions that the financial manager must make with respect to cash management?
Describe the relationship between the firm's cash management program and the firm's risk of not being able to pay its bills on time.
What is the APR equation and how is it used?
What is a bank line of credit?
What does a factor do?
Give some examples of unsecured and secured forms of current liabilities.
What is the firm's cash conversion cycle and how does it differ from the operating cycle?
What is a firm's operating cycle?
What makes trade credit a source of spontaneous financing?
What are some examples of permanent and temporary investments in current assets?
What is the principle of self-liquidating debt and how can it be used to help the firm manage its liquidity?
How does the use of short-term as opposed to long-term liabilities affect firm liquidity?
How does investing more heavily in current assets, other things remaining the same, increase firm liquidity?
(Preparation of a cash budget) Harrison Printing has projected its sales for the first eight months of 2011 as follows:January $100,000 May $275,000 February 120,000 June 200,000 March 150,000 July 200,000 April 300,000 August 180,000 Harrison collects 20 percent of its sales in the month of the
(Preparation of a cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2011 are as follows:January $ 90,000 May $300,000 February 120,000 June 270,000 March 135,000 July 225,000 April 240,000 August 150,000 Of Sharpe’s sales, 10 percent is for cash, another 60
(Related to Checkpoint 17.1 on page 472) (Discretionary financing needs) In the spring of 2010 the Caswell Publishing Company established a custom publishing business for its business clients. These clients consisted principally of small to medium size companies in Round Rock, Texas. However, the
(Related to Checkpoint 17.1 on page 472) (Discretionary financing needs) 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 a result of lecent
(Related to Checkpoint 17.1 on page 472) (Discretionary financing needs) Fishing Charter, Inc. estimates that it invests 30 cents in assets for each dollar of new sales.However, 5 cents in profits are produced by each dollar of additional sales, of which 1 cent can be reinvested in the firm. If
(Related to Checkpoint 17.1 on page 472) (Discretionary financing needs and growth)The most recent balance sheet for the Armadillo Dog Biscuit Co. is shown in the following table. The company is about to embark on an advertising campaign which is expected to raise sales from the current level of $5
(Financial forecasting) The balance sheet of the Thompson Trucking Company (TTC)follows:Thompson Trucking Company Balance Sheet, December 31, 2010 ($ millions)Current assets $10 Accounts payable $ 5 Net fixed assets 15 Notes payable 0 Total $25 Bonds payable 10 Common equity 10 Total $25 TTC had
(Financial forecasting) Which of the following accounts would most likely vary directly with the level of firm sales? Discuss each briefly.Yes No Cash _ _ Notes payable _ _ Marketable securities __ __ Plant and equipment _ __ Accounts payable _ _ Inventories _ _
(Pro forma balance sheet construction) Use the following industry average ratios to construct a pro forma balance sheet for Carlos Menza, Inc.
(Financial forecasting—percent ofsales) Tulley Appliances, Inc. projects next year’s sales to be $20 million. Current sales are at $15 million, based on current assets of$5 million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Tulley forecasts that
(Financial forecasting) Sambonoza Enterprises projects its sales next year to be$4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions(projections): 1.Current assets are equal
(Financial forecasting) Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its Chief Financial Officer predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will
(Related to The Business of Life: Your Personal Budget on page 571) In The Business of Life feature box we learned about a three-step process for using budgets to manage our personal finances. Spend a few minutes to think about the three steps of the process and make a first pass at preparing your
A cash budget is usually thought of as a means of planning for future financing needs.Why would a cash budget also be important for a firm that has excess cash on hand?
What would be the probable effect of each of the following on a firm’s cash position?a. A new advertising campaign that results in more rapidly rising sales.b. A delay in the payment of the firm’s accounts payable.c. Offering a more liberal credit policy (to the firm’s customers).d. Holding
Compare and contrast discretionary and spontaneous sources of short-term financing.
Distinguish between 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.
Describe the percent of sales method of financial forecasting.
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 that the financial planning process is not worthwhile? Explain your answer.
What is the primary objective of the financial planning process?
(Related _to Regardless of Your Major: Developing a Financial Plan for the Firm Engages Everyone on page 564) In the Regardless ofYour Major feature, we learned that financial planning engages everyone throughout the organization. How do marketing and accounting specialists contribute to the
How is a cash budget used in financial planning?
What are the basic elements of a cash budget?
Give some examples of spontaneous and discretionary sources of financing?
What is the percent of sales method of financial forecasting?
Why are sales forecasts so important to developing a firm's financial forecast?
Distinguish between a firm's short-term financial plan, long-term financial plan, and strategic plan.
What are the fundamental benefits of financial planning?
(Dividend irrelevance of the timing of cash dividends) After more than 40 years of operation, the Tyler Brick Mfg. Company has decided it is time to shut down the business. The firm has $125,000 available for distribution as a cash dividend immediately and plans to shut down its business at the end
(Cash dividend and taxes) The Barryman Drilling Company from problem 16-10 is reconsidering its plan to repurchase $1 million of its common stock and instead plans to pay a $1 million cash dividend, which amounts to $2 per share of common stock. If dividends are taxed at 15%, what tax liability
(Stock repurchase and taxes) The Barryman Drilling Company is planning on repurchasing $1 million worth of the company’s 500,000 shares of stock, which is currently trading at a price of $10 per share. Stan Barryman is the founder of the company and still holds 10,000 shares of company stock that
(Cash dividends) Marshall Pottery Barn is a privately owned importer of Mexican pottery and garden supplies. The firm plans on paying a $1.50 per share dividend on each of its 5,000 shares of common stock. The firm’s most recent balance sheetjust before payment of the dividend looks like the
(Stock splits and stock dividends) Chaney’s Fatburner Gyms, Inc. operates a chain of exercise facilities throughout the Midwest. The firm appeals to middle-aged men who suffer from obesity problems and want to improve their health by entering an exercise program. The firm currently has 8,000,000
If the firm’s board of directors decided to use a stock split rather than a stock dividend, how many new shares should the firm issue for each outstanding share?
(Stock split) Reconsider the problem faced by Templeton Care Facilities, Inc. from problem
(Stock dividend) In the spring of 2009, Templeton Care Facilities, Inc. was contemplating a stock dividend. The firm’s stock price had risen over the last three years and was trading at $150 per share. The firm’s board of directors felt that the trading range should be around $50 to $100, so
(Stock dividend) The stock price ofAlpine Inc. is currently $30 a share. If the firm pays a 10% stock dividend, what would you expect the ex-dividend stock price to be?What about a 20% stock dividend?
(Ex-dividend stock price) Elco Electric Corporation has a stock price of $150 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 from management's belief that the firm has more cash than it can
(Ex-dividend stock price) Paylin 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 $28 a share. What do you expect the price of Paylin's shares to be on the day following the ex-dividend date? Why do you expect the
(Dividend payout ratio) The Costco Wholesale Corporation (COST) operates membership warehouses that offer a wide variety of branded and private label products in no-frills, self-service warehouse facilities. In 2008 the company paid total cash dividends of $265,029,000 and had net income of
(Dividend payout ratio) Calculate the cash dividend paid per share for each of the firms in the following table using their earnings per share and dividend payout ratio:
(Related to Finance in a Flat World: Dividends Abroad on page 554) In the Finance in a Flat World boxed feature we learned that dividend payout practices differ across the major developed countries of the world. How does the U.S. compare to other countries?
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 receive a cash dividend or have the firm engage in a share repurchase, which should they prefer?
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 stocks such as Emerson Electric (EMR) since it had a very long history of paying cash dividends. Do you
Under what conditions is the firm’s dividend policy not important to its investors?
Why is a stable dollar dividend policy popular from the viewpoint of the corporation?Is it also popular with investors? Why?
Cousin Harold runs a pharmacy but likes to dabble in common stock investing as a hobby. One day last week Harold called you to find out what had happened to his portfolio since one of the stocks he owns had announced the decision to purchase 10% of the outstanding shares of the company. How will
(Related to The Business of Life: The Importance of Dividends on page 549) In The Business ofLife boxed feature we learned about the importance of dividend reinvestment to creating personal wealth through investing in stocks. Many companies offer what is called dividend reinvestment plans. What are
Describe the dividend distribution process including the importance of the declaration date, date of record, and ex-dividend date.
Your Aunt Mary recently called to ask you about a letter she had just received from her stock broker. She said that the letter notified her that one of the stocks she owns was paying a 10% stock dividend such that her 100 shares would now be 110 shares.Since the stock was trading at $20 a share
What is a stock dividend and how is it similar to a stock split?
A firm’s dividend policy is generally characterized in terms of two attributes. Explain each.
Explain what a firm’s dividend policy is as if you were talking to your grandmother, who has had no formal education in business.
(Related to Regardless of Your Major: Firms Almost Never Decrease Their Dividend on page 536) In the feature titled Regardless ofYour Major, we learned that firms try to sustain their dividend payout even in economic downturns. Use the Internet to determine what General Electric (GE) did with
In the _introduction, we pointed out that Emerson Electric Co. (EMR) had paid cash dividends for 53 consecutive years. Look up the company’s cash dividend for the most recent year. What is the dividend for that year?
What are the key factors considered by firms when determining their dividend payout policies?
Why is a stable payout policy for cash dividends preferred by so many firms?
How is a stock dividend like a stock split and why do financial managers sometimes use one or the other?
What are the three different methods that firms use to repurchase their shares?
Identify three motives that might encourage a firm to buy back its common stock shares.
What is the frequency with which cash dividends are typically paid to investors?
What are the two forms of cash distributions that firms typically use?
(EBIT-EPS break-even analysis) Home Depot, Inc. (HD) had 1.7 billion shares of common stock outstanding in 2008 while the Lowes Companies, Inc. (LOW) had 1.46 billion shares outstanding. Given both firms’ 2008 earnings levels found in problems 15-10 and 15-11, and assuming a 35% tax rate for both
(EBIT-EPS analysis) Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North
(Related to Checkpoint 15.2 on page 513) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line
(Leverage and EPS) You have developed the following pro forma income statement for your corporation. It represents the most recent year’s operations, which ended yesterday.Sales $45,750,000 Variable costs t22.800.000i Revenue before fixed costs $22,950,000 Fixed costs f9.200.000t EBIT $13,750,000
(Coverage ratio analysis) Abbreviated income statements for the Lowes Companies, Inc. (LOW) spanning the period 2006-2008 are found below:a. Calculate the times interest earned ratio for each of the years for which you have data.b. What is your assessment of how the firm’s ability to service its
(Related to Checkpoint 15.1 on page 509) (Coverage ratio analysis) The income statements for the Home Depot, Inc. (HD) spanning the period 2006-2008 are found below:2008 2007 2006 Earnings before interest and taxes $7,316,000 $9,7000,000 $9,425,000 Interest expense (696.0001 (392.0001 (143.0001
(Computing interest tax savings) Presently, H. Swank, Inc. does not use any financial leverage and has total financing equal to $1 million. It is considering refinancing and issuing $500,000 of debt that pays 5% interest and using that money to buy back half the firm’s common stock. Assume that
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