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financial management theory
Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions
(Selecting a benchmark company) Below you will find the income statements and balance sheets for Sears Holdings (SHLD) and Target Corp (TGT). Assume that you are a financial manager at Sears and want to compare your firm’s situation with that of Target. Calculate representative ratios for
(Selecting a benchmark company) The National Semiconductor Corporation (NSM)develops and manufactures semiconductors for electronic systems. The firm’s products are used in a variety of applications including LED lighting, high speed communication, renewable energy, and security and surveillance.
(Analyzing market values using financial ratios) On May 25, 2009 the stock of Emerson Electric (EMR) was trading for $32.18 per share while the stock of its larger rival, the General Electric Corporation (GE) was trading for only $13.11. Interpret the relative pricing of the two firm’s shares
(Analyzing market values using financial ratios) On August 1, 2007 the Dell Computer Corporation’s stock closed trading at $27.76 per share while Apple Corporation’s shares closed at $133.64. Does this mean that because Apple’s stock price is roughly four times that of Dell’s, Apple is the
(Financial statement analysis) The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year
(Financial statement analysis) The annual sales for Salco, Inc. were $4.5 million last year. The firm’s end-of-year balance sheet was as follows:a. Calculate Salco’s total asset turnover, operating profit margin, and operating return on assets.b. Salco plans to renovate one of its plants and
(Financial statement analysis) Using the following financial statements for Pamplin, Inc:a. Compute the following ratios for both 2009 and 2010 using the financial statements that follow.
(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross profits -h sales) of 30% and sales of $9 million last year. Seventy-five percent of the firm’s sales are on credit, and the remainder are cash sales. Brenmar’s current assets equal $1.5 million, its current
(Profitability analysis) The R. M. Smithers Corporation earned an operating profit margin of 10% based on sales of $10 million and total assets of $5 million last year.a. What was Smithers’ total asset turnover ratio?b. During the coming year, the company’s president has set a goal of attaining
(Financial statement analysis) The last two years of financial statements for Carver Industries are found below: Carver Industries Balance Sheets for December 31, 2009 and 2010 Cash Accounts receivable Inventories Total current assets Land Buildings and equipment Less: Accumulated depreciation
(Financial statement analysis) Carson Electronics’ management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are found below:a. Calculate the following ratios
(Calculating financial ratios) The balance sheet and income statement for the J. P.Robard Mfg. Company are as follows:Calculate the following ratios:Current ratio Operating return on assets Times interest earned Debt ratio Inventory turnover Average collection period Total asset turnover Fixed
(Liquidity analysis) When firms enter into loan agreements with their bank it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the
(Liquidity analysis) The Mitchem Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months.At present, the firm has a current ratio of 2.5 and current assets of $2.5 million. If Mitchem expands its receivables and
(Market value analysis) Lei Materials’ balance sheet lists total assets of $1 billion,$100 million in current liabilities, $400 million in long-term debt, $500 million in common equity, and 50 million shares of common stock. If Lei’s current stock price is$50, what is the firm’s
(Market value analysis) The balance sheet for Larry Underwood Motors shows a book value of stockholders’ equity (book value per share X total shares outstanding) of$1,300,000. Furthermore, the firm’s income statement for the year just ended has a net income of $500,000, which is $0.25 per share
(Related to Checkpoint 4.4 on page 97) (Market value analysis) Greene, Inc.’s balance sheet indicates that the book value of stockholders’ equity (book value per share X total shares outstanding) is $750,500. The firm’s earnings per share are $3, which produces a price-earnings ratio of
(Profitability analysis) Last year Triangular Resources earned $5 million in net operating income and had an operating profit margin of 20%. If the firm’s total asset turnover ratio was 1.5, what was the firm’s investment in total assets?
(Related to Checkpoint 4.1 on page 83) (Liquidity analysis) The most recent balance sheet of Raconteurs, Inc., (in millions) is found below:a. Calculate Raconteurs’ current ratio and acid-test (quick) ratio.b. Benchmark ratios for the current and acid-test (quick) ratio are 1.50 and 1.20,
(Capital structure analysis) Last year the Rondoelea Products Company had$140 million in annual sales and a net profit margin of 10%. In addition, Rondoelea’s average tax rate was 30%. If Rondoelea had $40 million of debt outstanding with an average interest rate of 10%, what is the firm’s
(DuPont analysis) Bryley, Inc. earned a net profit margin of 5% last year and had an equity multiplier of 3.0. If its total assets are $100 million and its sales are $150 million, what is the firm’s return on equity?
(DuPont analysis) Dearborn Supplies has total sales of $200 million, assets of$100 million, a return on equity of 30%, and a net profit margin of 7.5%. What is the firm’s debt ratio?
(DuPont analysis) Triangular Chemicals has total assets of $100 million, a return on equity of 40%, a net profit margin of 5%, and an equity multiplier of 2.5. How much are the firm’s sales?
(DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of 80%. What is the firm’s equity multiplier? How is the equity multiplier related to the firm’s use of debt financing (i.e., if the firm increased its use of debt financing would this increase
(Profitability and capital structure analysis) In the yearjust ended, Callaway Lighting had sales of $5,000,000 and incurred cost of goods sold equal to $4,500,000.The firm’s operating expenses were $130,000 and its increase in retained earnings was$40,000 for the year. There are currently
(Related to Checkpoint 4.3 on page 91) (Profitability analysis) Last year the P. M.Postern Corporation had sales of $400,000, with a cost of goods sold of $112,000. The firm’s operating expenses were $130,000, and its increase in retained earnings was$58,000. There are currently 22,000 shares of
(Efficiency analysis) ALei Industries has credit sales of $ 150 million a year. ALei’s management reviewed its credit policy and decided that it wants to maintain an average collection period of 40 days.a. What is the maximum level of accounts receivable that ALei can carry and have a 40-day
(Efficiency analysis) Baryla Inc. manufactures high quality decorator lamps in a plant located in Eastern Tennessee. Last year the firm had sales of $100 million and a gross profit margin of 40%.a. How much inventory can Baryla hold and still maintain an inventory turnover ratio of at least 6.0
(Related to Checkpoint 4.3 on page 91) (Profitability analysis) The Allen Corporation had sales in 2010 of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the company’s debt is 6 percent, and its tax rate is 35%. The operating profit margin is
(Capital structure analysis) The Karson Transport Company currently has net operating income of $500,000 and pays interest expense of $200,000. The company plans to borrow $1 million on which the firm will pay 10% interest. The borrowed money will be used to finance an investment that is expected
(Related to Checkpoint 4.2 on page 86) (Capital structure analysis) The liabilities and owners’ equity for Campbell Industries is found below:Accounts payable Notes payable Current liabilities Long-term debt Common equity Total liabilities and equity$ 500,000 250.000$
The company’s managers want to reduce the firm’s cash holdings down to $1,000,000 by paying $500,000 in cash to expand the firm’s truck fleet and using $1,500,000 in cash to retire a short-term note. If they carry this plan through, what will happen to the firm’s current ratio?
(Liquidity analysis) The King Carpet Company has $3,000,000 in cash and a total of$12,000,000 in current assets. The firm’s current liabilities equal $6,000,000 such that the firm’s current ratio equals
(Related to Checkpoint 4.1 on page 83) (Liquidity analysis) Airspot Motors, Inc. has$2,145,000 in current assets and $858,000 in current liabilities. The company’s managers want to increase the firm’s inventory, which will be financed using short-term debt. How can the firm increase its
(Using common size financial statements) The S&H Construction Company expects to have total sales next year totaling $15,000,000. In addition, the firm pays taxes at 35% and will owe $300,000 in interest expense. Based on last year’s operations the firm’s management predicts that its cost of
(Analyzing common size financial statements) Use the common size financial statements prepared for problem 4-1 above to respond to your boss’ request that you write up your assessment of the firm’s financial condition. Specifically, write up a brief narrative that responds to the following
(Preparing common size financial statements) The balance sheet and income statement for Carver Enterprises, Inc. are found below:Prepare a common size balance sheet for Carver Enterprises,a. Prepare a common size income statement for Carver Enterprises.
(Related to Finance in a Flat World on page 98) In the Finance in a Flat World box we note that differences in accounting standards around the world can influence financial ratios. Describe how differences in the way that goodwill is treated in the United States versus Hong Kong might influence
(Related to The Business of Life: Your Cash Budget and Personal Savings Ratio on page 96) In The Business ofLife: Your Cash Budget and Personal Savings Ratio box feature we defined something called your Personal Savings Ratio. What is this ratio and how can it be used when thinking about gaining
What are the limitations of industry average ratios as a source of benchmarks for firm financial condition? Discuss briefly.
What can we learn about a firm from its price-earnings ratio and market-to-book ratio?
What is the DuPont system of financial statement analysis and how is it applied to the analysis of a company’s return on equity?
What are the two determinants of a firm’s operating return on assets?
What are the differences between gross profit margin, operating profit margin, and net profit margin?
What two ratios are typically used to measure how a firm has financed its assets (i.e., its capital structure)?
What does the term “liquidity” mean in the context of a firm’s financial condition and what financial ratios can the analyst use to assess liquidity?
List and describe the five basic questions used to discuss financial statement analysis.
What are common size financial statements and how are they constructed?
Why do financial analysts engage in the analysis of a firm’s financial statements?
How are financial ratio comparisons like clues in solving a puzzle?
Why is picking a peer group a limitation of financial ratio analysis?
What is the DuPont system of financial analysis, and why is it a useful tool for analyzing financial performance?
What are the five basic questions that we address with financial statement analysis?
Why are ratios helpful in financial statement analysis?
What are some of the firms that engage in external financial statement analysis and what are their motives?
What are some common reasons for analyzing a firm's financial statements?
(Analyzing the cash flow statement) The cash flow statements for retailing giant BigBox, Inc. spanning the period 2007-2010 are found below:a. Does BigBox generate positive cash flow from its operations?b. How much did BigBox invest in new capital expenditures over the last four years?c. Describe
(Related to Checkpoint 3.3 on page 60) (Analyzing the cash flow statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the last four years. The cash flow statements for Goggle, Inc. spanning the period 2007-2010 are found below:a. Is Goggle
(Review of financial statements) Prepare a balance sheet and income statement for the Warner Company from the following scrambled list of items found below:a. Prepare an income statement for the Warner Company.b. Prepare a balance sheet for the Warner Company.c. What can you say about the firm’s
(Related to Checkpoint 3.2 on page 52) (Review of financial statements) A scrambled list of accounts from the income statement and balance sheet of Belmond, Inc. is found below:a. How much is the firm’s net working capital?b. Complete an income statement and a balance sheet for Belmond.c. If you
(Related to Checkpoint 3.2 on page 52) (Working with the balance sheet) The Caraway Seed Company grows heirloom tomatoes and sells their seeds. The heirloom tomato plants are preferred by many growers for their superior flavor. At the end of the most recent year the firm had current assets of
(Corporate income tax) Boisjoly Productions had taxable income of $19 million.a. Calculate Boisjoly’s federal income taxes.b. Now calculate Boisjoly’s average and marginal tax rates.
(Corporate income tax) Meyer Inc. has taxable income (earnings before taxes) of$300,000. Calculate Meyer’s federal income tax liability using the tax table in this chapter. What are the firm’s average and marginal tax rates?
(Corporate income tax) G. R. Edwin Inc. had sales of $6 million during the past year.The cost of goods sold amounted to $3 million. Operating expenses totaled $2.6 million, and interest expense was $30,000. Determine the firm’s tax liability. What are the firm’s average and marginal tax rates?
(Corporate income tax) Sales for J. P. Hulett Inc. during the past year amounted to$4 million. Gross profits totaled $ 1 million, and operating and depreciation expenses were $500,000 and $350,000, respectively. Dividend income for the year was $12,000, which was paid by a firm in which Hulett owns
(Corporate income tax) The Robbins Corporation is an oil wholesaler. The firm’s sales last year were $1 million, with the cost of goods sold equal to $600,000. The firm paid interest of $200,000 and its cash operating expenses were $100,000. Also, the firm received $40,000 in dividend income from
(Corporate income tax) Last year Sanderson, Inc. had sales of $3 million. The firm’s cost of its goods sold came to $2 million, and operating expenses excluding depreciation of $100,000 were $400,000, and the firm paid $150,000 in interest on its bank loans. Also, the corporation received $50,000
(Corporate income tax) Barrington Enterprises earned $4 million in taxable income(earnings before taxes) during its most recent year of operations. Use the corporate tax rates found in the chapter to calculate the firm’s tax liability for the year. What are the firm’s average and marginal tax
(Working with the income statement) If the Marifield Steel Fabrication Company earned $500,000 in net income and paid a cash dividend of $300,000 to its stockholders, what are the firm’s earnings per share if the firm has 100,000 shares of stock outstanding?
(Working with the income statement) Sandifer Manufacturing Co. (from the previous problem) plans to reinvest $50,000 of its earnings back in the firm. What does this plan leave for the payment of a cash dividend to Sandifer’s stockholders?
(Related to Checkpoint 3.1 on page 43) (Working with the income statement) At the end of its third year of operations, the Sandifer Manufacturing Co. had $4,500,000 in revenues, $3,375,000 in cost of goods sold, $450,000 in operating expenses which included depreciation expense of $150,000, and had
(Related to Finance in a Flat World: GAAP vs. IFRS on page 58) In the Finance in a Flat World: GAAP vs. IFRS box feature we learned that GAAP, the financial reporting system used in the United States, is not the same as that used throughout the rest of the world. However, the U.S. system is
(Related to The Business of Life: Your Personal Balance Sheet and Income Statement on page 54) In The Business ofLife: Your Personal Balance Sheet and Income Statement box feature we learned that individuals have financial statements just like firms. Prepare your personal balance sheet using the
The Cash Flow Statement is one of the four basic financial statements. Define the objective in preparing this statement and discuss some of the types of questions that can be addressed using its content.
In 2010 RubKing Barbeque Sauce, Inc. purchased a new bottling machine at a cost of$1.5 million. The new machine is expected to last for 10 years and the firm plans to depreciate it using straight line depreciation of $150,000 per year. What is the cash flow consequence of the purchase for 2010?
Appleby Southern Inc. had an accounts payable balance of $5 million at the end of 2009 and the balance rose to $7 million in 2010. What is the cash flow consequence of this change in accounts payable?
When a firm’s accounts receivable balance increases from one period to the next, the firm has experienced a use of cash. How is it that an increase in an asset such as accounts receivable represents a use of cash?
What is a firm’s net working capital and what does it tell you about the liquidity of a firm?
From the firm’s perspective, how are dividends different from interest payments?
How do gross profits, operating income, and net income differ?
Describe _the content of the balance sheet and the income statement.
When an asset balance increases this indicates that the firm has more of that asset, so why is this a use of cash?
Is a decrease in accounts payable a source of cash or use of cash? Explain.
Is an increase in accounts receivable a source of cash or a use of cash? Explain.
Describe the content and purpose of the cash flow statement.
What does the term net working capital mean and how is it computed?
Describe the basic categories of assets and liabilities reported in a firm's balance sheet.
How are dividends received by corporations taxed?
What is the marginal tax rate for a firm that currently eams $75,000 in eamings before taxes and expects to earn $80,000 next year?
What is the difference between average and marginal tax rates?
What does the acronym GAAP stand for?
List the entries in the income statement.
What information can we derive from a firm's income statement?
Describe the revenue recognition, matching, and historical cost principles as they are applied in the construction of a firm's financial statements.
What are the three uses of a firm's financial statements for the firm's management?
Name the four basic financial statements that make up the published financial reports of a firm and describe the basic function of each.
Go to the Motley Fool website (www.fool.com) and select the Retirement tab.Describe the information available here for planning for your retirement.
Go to the Smartmoney.com website (http://www.smartmoney.com) and select the tab titled “Investing, Personal Finance.” What are the “Breaking News” stories of the day? Select one of the stories and prepare a brief summary to share with the class.
Calculate the value of the total shareholder wealth for Google, Inc. using the number of common shares outstanding and the current price of the firm’s shares. You can obtain the necessary information from the Yahoo! Finance website.
Go to the CNN-Money website (http://money.cnn.com) and go to the Personal Finance section by clicking on “Personal Finance” on the top banner. This is a great website for information and help in managing your personal finances. Find an article you like, read it, and write a summary of it. Also,
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