Questions and Answers of Foundations Financial Management

Express Courier (EC) needs $141 million to support future growth. If it issues common stock to raise the needed funds, EC will have to pay its investment banker 6 percent of the issue’s total
How do financial institutions in the United States differ from financial institutions in other parts of the world? Why?
Do you think that the financial services industry will be more reregulated or deregulated in the future? Explain.
When the SEC approves a stock issue, it does not provide an opinion about the value of the stock. Do you think the SEC should give an opinion to investors on the appropriate value of the stock being
Do you think investors can earn abnormal returns in financial markets that are at least semi strong-form efficient?
What does it mean for a financial market to be considered (a) Informationally efficient (b) Economically efficient?
How do financial markets that run freely and efficiently affect the standard of living in a country?
North/South Airlines generated the following information from its financial statements: (1) P/E ratio equals 15.0, (2) Common stock market price per share is $30, (3) Fixed assets
Sixty (60) percent of Extreme Well Drilling’s assets are financed with common equity, which is the only type of equity financing the company has. Extreme’s current ratio is 5.0, its total assets
Fido’s Dog Spa’s financial statements show that its total assets equal $100,000, its return on assets (ROA) is 3 percent, and its return on equity (ROE) is 5 percent. (a) Compute the
Horatio’s Hot Dogs’ current assets equal $260,000. The company’s return on assets (ROA) is 4 percent, its net income is $140,000, its long-term debt equals $1,755,000, and 35 percent of its
Duncan Boutique’s total assets are $440,000, its return on assets (ROA) is 8 percent, and its debt ratio is 20 percent. What are Duncan’s (a) Net income and(b) Return on equity (ROE)?
Smitty’s Finger-Licking BBQ has a total assets turnover equal to 2.0, a return on equity (ROE) equal to 15 percent, and a debt ratio equal to 60 percent. If Smitty’s is financed with debt and
Wiley’s Wilderness pays 6 percent interest on its outstanding debt, which equals $200,000. The company’s sales are $540,000, its tax rate is 40 percent, and its net profit margin is 4
At the end of the year, Water Works International (WWI) had $10,000 in total assets. Its total assets turnover was 2.5, and its return on assets (ROA) was 4 percent. What were WWI’s (a) Sales
The balance sheet for Panoramic Open Pictures (POP) shows $300,000 in total assets and $200,000 in total liabilities. POP’s return on assets (ROA) is 5 percent. Compute POP’s (a) Net income
Credit Card of America (CCA) has a current ratio of 3.5 and a quick ratio of 3.0. If its total current assets equal $73,500, what are CCA’s (a) Current liabilities (b) Inventory?
Crooked Golf’s most recent income statement shows that net income was $90,000, depreciation was $25,000, and taxes were $60,000. What was Crooked Golf’s net cash flow?
Robust Robots (RR) recently issued 100,000 shares of common stock at $7 per share. The stock has a par value equal to $3 per share. What amount of the $700,000 that RR raised should be reported in
Discuss some of the limitations associated with performing ratio (financial statement) analysis. What is the most important ingredient (input) in completing ratio analysis? Explain why.
Differentiate (compare) among the information that is provided in each of the following financial statements: (a) Balance sheet, (b) Income statement, (c) Statement of cash flows.
What kind of financial information is a publicly traded company required to provide to its stockholders? Which financial statement do you think provides the best information for investors?
Discuss the validity of the following statement: “When a firm’s stock price falls, it is evidence that the firm’s managers are not acting in the best interests of the shareholders.”
Discuss the possibility of agency problems in a business that is a (a) Proprietorship, (b) Partnership with five partners, (c) Corporation with 100,000 stockholders.
What does it mean to be ethical in business dealings? Should unethical business behavior be encouraged by business owners (stockholders) if such behavior increases the value of the stock they own in
Why do you think hybrid forms of business, such as limited liability partnerships (LLP) and limited liability companies (LLC), have evolved over time?
Describe the major differences among the three primary forms of business organization (a proprietorship, a partnership, and a corporation).
Describe the four general areas included in the study of finance. Why is it important for a person who works in the financial markets to understand the responsibilities of a person who works in
What are some factors that make financial decision making more complicated for firms that operate in foreign countries than for purely domestic firms?
Why do U.S. corporations go international?
What is corporate governance? How does corporate governance affect the returns generated for stockholders?
Suppose you are the president of a large corporation located in Seattle, Washington. How do you think the stockholders will react if you decide to increase the proportion of the company’s assets
If you were the owner of a proprietorship, would you make decisions to maximize the value of your business or your personal satisfaction?
Why should persons who pursue careers in business have a basic understanding of finance even if their jobs are in areas other than finance, such as marketing or information systems?
What is finance? What types of decisions do people in finance make?
Helmsdale Excursions is considering investing $250,000 in a project that will begin to produce returns in the fourth year. From the end of the fourth year until the end of the twelfth year (9
Dan Teasin's Furs And Coats Ltd. has decided to acquire a cooling machine. Its cost is $50,000. In five years it can be salvaged for $15,000. The Cloister Bank has agreed to advance funds for the
Alpha Biogenetics was founded 13 years ago by Steve Menger, PhD, M.D. At the time, the company consisted of little more than a one-room laboratory, Dr. Menger, and a lab assistant. However, Dr.
Preston Toy Co. has warrants outstanding that allow the holder to purchase one conunon share at $22 per share (option price). The common stock is currently selling for $28. The warrant is selling
The warrants of Slowbus Transportation Corporation allow the holder to buy a share of stock at $17.50 and are selling for $2.75. The share price is currently $15.00. To what price must the share go
Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $15 per share. The stock is currently selling at $18 per share.a. What is the intrinsic (minimum)
Mr. John Hailey has $1,000 to invest in the market. He is considering buying 50 shares of the Comet Airlines at $20 per share. His broker suggests that he may wish to consider purchasing warrants
Using the foreign exchange rates for June 2017, presented in Table 21-1, determine the number of Canadian dollars required to buy the following amounts of foreign currencies:a. 10,000 eurosb. 2,000
From the base price level of 100 in 1974, Swiss and Canadian price levels in 2017 stood at 200 and 421, respectively. If the 1974 $/Sf exchange rate was $0.40/Sf, what should the exchange rate be
A firm pays a $1.50 dividend at the end of year one. it has a share price of $60 (P0) and a constant growth rate (g) of 9 percent.a. Compute the required (expected) rate of return (K.). Also indicate
Freudian Slips has just paid a dividend of $2.12 for the year and it is expected to grow at 6 percent per year. With a current share price of$54.50 what is Freudian's required (expected) rate of
Louisa and Bart are twins, aged 20. Advanced for their age in some respects, they were both working and also planning their financial future. Both felt they could conunit $5,000 per year for their
AI Counsel purchased 357 shares of Eco-Survival Tours on July 1, 2016 for $5.00 per share. Find his annual rate of return if he sold the stocka. On June 30, 2017, for $6.00 per share.b. On December
April Wine bought 425 shares of stock at $5.50 per share. Four years later she sold the stock for $21 per share. What was her annual growth rate (rate of return, ROR) for her capital?
On January 1, 2016, Charley Dow bought 1,000 shares of stock at $12 per share. On December 31, 2018, he sold the stock for $18 per share. What was his annual rate of return?
Amy Hirt started a paper route on January 1, 2012. Every three months, she deposits $300 in her bank account, which earns 8 percent annually but is compounded quarterly. On December 31 , 2015, she
Rapier Fencing requires $750,000 in financing for a 60-day period. Three alternatives are being considered. Which alternative should be selected?a. Establish a line of credit with the bank at an
Rockette Dancers requires $0.5 million in financing for a 60-day per,iod. Three alternatives are being considered. Which alternative should be selected?a. Establish a line of credit with the bank
What is an asset-backed public offering?
Bonsay Dance has seen its inventory turnover drop from 12 to 8 times per year with its annual cost of goods sold remaining at $10 million per year. Its financing costs are at 5 percent. How much is
In January 2010 the Status Quo Company was formed. Total assets were $500,000, of which $300,000 consisted of capital assets. Status Quo uses straight-line amortization, and in 2010 it estimated its
Jasper Corporation has determined that its average bondholder has a marginal tax rate of 45 percent. Jasper's corporate tax rate is 27 percent. A current bond issue would require a 7 percent yield.
Billie Fruit lives in Alberta and her income fluctuates from year to year ranging from over $320,000 to about $75,000. She has two investments of$20,000 each in shares, both achieving a return of 7
Given the following information, prepare, in good form, an income statement for the Nix Corporation. Use the corporate tax rates in Chapter 2 (13%) to calculate taxes. Nix is a CCPC manufacturer in
Coastal Pipeline Corp. anticipates cash flows from operating activities of $8 million in 20XX. It will need to spend $1.5 million on capital investments in order to remain competitive within the
Bradley Bus Inc. had earnings last year of $600,000 with 300,000 shares outstanding.On January 1 of the current year, the firm issued 40,000 new shares. Earnings after tax increased by 25 percent
Assume that today is December 31, 2005, and the following information applies to Vermeil Airlines:• After-tax operating income [EBIT(1 - T), also called NOPAT] for 2006 is expected to be $500
Assume that it is now January 1, 2006. Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the
Harrison Clothiers’ stock currently sells for $20 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6 percent a
What’s the difference between NOPAT and net income? How does debt affect the relationship between these two items?
Smitty’s Home Repair Company, a regional hardware chain that specializes in “do-it-yourself” materials and equipment rentals, is cash rich because of several consecutive good years. One of the
TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld’s analysts project
Petersen Securities recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $40 a share. What is the bonds’ conversion ratio, CR?
The Hadaway Company was planning to finance an expansion in the summer of 2005 with a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if
Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States,
Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually
Solitaire Machinery is a Swiss multinational manufacturingcompany. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United States. The project’s
After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to
Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 22 years later, in July 2005 that exchange rate had fallen to 111 yen to $1. Assume the price of a Japanese-manufactured
Chamberlain Canadian Imports has agreed to purchase 15,000 cases of Canadian beer for 4 million Canadian dollars at today’s spot rate. The firm’s financial manager, James Churchill, has noted the
Assume that interest rate parity holds and that 90-day risk-free securities yield 5 percent in the United States and 5.3 percent in Britain. In the spot market 1 pound 1.65 dollars.a. Is the 90-day
In the spot market 7.8 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same
Look up the 3 currencies in Problem 19-8 in the foreign exchange section of a current issue of The Wall Street Journal. What is the current exchange rate between Swedish kronas and pounds?Problem
Suppose the exchange rate between the U.S. dollar and the Swedish krona was 10 krona $1.00, and the exchange rate between the dollar and the British pound was £1 $1.50. What was the exchange
Look up the 6 currencies in Problem 19-5 in the foreign exchange section of a current issue of The Wall Street Journal. a. What is the current exchange rate for changing dollars into 1,000 units
Table 19-1 lists foreign exchange rates for July 25, 2005. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars, EMU
A television set costs $500 in the United States. The same set costs 725 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 4.0828 Israeli shekels or for 111.23 Japanese yen. What is the crossexchange rate between the yen and
A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share. a. What is the exercise value of the call
Why do options typically sell at prices higher than their exercise values?
Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2006.NWC’s
Use a spreadsheet model to forecast the financial statements in Problems 17-13 and 17-14.Problem 17-13:Morrissey Technologies Inc.’s 2005 financial statements are shown here. Morrissey
Excess capacity Krogh Lumber’s 2005 financial statements are shown here.a. Assume that the company was operating at full capacity in 2005 with regard to all items except fixed assets; fixed assets
Morrissey Technologies Inc.’s 2005 financial statements are shown here.Morrissey Technologies Inc.: Balance Sheet as of December 31, 2005.a. Suppose that in 2006 sales increase by 10 percent over
Pierce Furnishings generated $2.0 million in sales during 2005, and its year-end total assets were $1.5 million. Also, at year-end 2005, current liabilities were $500,000, consisting of $200,000 of
At year-end 2005, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2005 were $2.5 million, are expected to increase by 25 percent in 2006. Total
At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):Looking ahead to the following year, the company’s CFO has assembled the following
Refer to Problem 17-1 and assume that the company had $3 million in assets at the end of 2005. However, now assume that the company pays no dividends. Under these assumptions, what would be the
Refer to Problem 17-1. What would the additional funds needed be if the company’s year-end 2005 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different
Carter Corporation’s sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so
Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2006 and 2007:May
What are two techniques that are used to help monitor accounts receivable? How would an easy versus a tight credit policy affect the results of these two monitoring techniques?
In 2005 the Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2005 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 10
Why do public utilities generally use different capital structures than drug companies?
If Congress increased the personal tax rate on dividends and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital

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