Questions and Answers of Foundations of Finance

At present, 20-year U.K. government gilts are yielding 5.4 percent, while some 20-year U.K. corporate bonds that you are interested in are yielding 9.6 percent.Assuming that the maturity-risk premium
If the 10-year Hong Kong government bond rate is 4.5 percent, the inflation premium is 2.3 percent, and the maturity-risk premium on the 10-year Hong Kong government bonds is 0.15 percent, assuming
You’ve just taken a job at the central bank and are given the job of calculating the appropriate nominal interest rate for a number of different Treasury bonds with different maturity dates. You
You’re looking at some corporate bonds issued by Mazda, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk-free interest rate
You want to invest your savings of S$28,000 (Singapore dollar) in Singapore Government Securities (SGS) for the next 2 years. Currently, you can invest either in a security that pays interest of 7.5
Currently, you have RM60,000 (Malaysian ringgit) that you would like to invest for 2 years and are considering buying a Malaysian government security maturing in 1 year that pays 4 percent annually.
On the first day of your summer internship, you’ve been assigned to work with the chief financial officer (CFO) of Carat Designs Corporation. As one of your assignments, you have been asked to
Explain how depreciation generates actual cash flows for a firm.
Go to the Wall Street Journal home page at www.wsj.com. Search for any firm of your choice. Find its earnings announcements.What did you learn about the company from the announcements?Also, search
If the Australian Mining Corporation earned A$$550,000$ (Australian dollar) in net income, spent A$$110,000$ in cost of goods sold, had A$$45,000$ of general and administrative expenses,
If Indian Telecom Company earned INR 350,000 (Indian rupee) in net income, and paid cash dividends of INR 70,000, what are Indian Telecom’s earnings per share if it has 100,000 shares outstanding?
Prepare an income statement and a common-sized income statement from the following information about the accounts of the Uzbekistan Timber Corporation (in Uzbekistani so‘m). Sales Cost of goods
Prepare a balance sheet for Anzac Properties, based in Australia, from the following information.What is the net working capital and debt ratio? Cash A$50,000 Accounts Receivable 43,800 Accounts
Prepare a balance sheet and a common sized balance sheet for Siam Cement Group (SCG), based in Thailand, from the following information (in Thai baht). Cash Accounts Receivable. Accounts Payable
Prepare a balance sheet and income statement for Lieberman Inc. from the following information. Inventory $6,500 Common stock 45,000 Cash Operating expenses Short-term notes payable Interest expense
Prepare a balance sheet and income statement for Kronlokken Company from the following scrambled list of items.a. Prepare a common-sized income statement and a common-sized balance sheet. Interpret
Prepare an income statement and a balance sheet for Lippo Group from the following scrambled list of items. What is the firm’s net working capital and debt ratio?In addition, the firm has 12,000
Given the following information, prepare a statement of cash flows. Increase in accounts receivable $25 Increase in inventories Operating income Interest expense 30 75 12 25 Increase in accounts
Interpret the following information regarding Westlake Corporation’s cash flows. Net income Depreciation expense Profits before depreciation $680 125 805 Increase in accounts receivables (200)
Given the following information, prepare a statement of cash flows. Beginning cash Dividends Increase in common stock $20 $25 27 Increase in accounts receivable 65 Increase in inventories Operating
Prepare a statement of cash flows for the New Zealand Dairy Company for the year ended January 31, 2018. Interpret your results.New Zealand Dairy Company Balance Sheet for 01/31/2017 and
Prepare a statement of cash flows for Tsingtao Breweries, China, from the following scrambled list of items. Increase in inventories 8,000 Operating income Dividends 220,000 30,000 Increase in
Given the information below for Mexicana Cement, Inc.:a. How much is the firm’s net working capital and what is the debt ratio?b. Complete a common-sized income statement, a commonsized balance
Based on the information for Norwegian Bristling Company for the year ended December 31, 2018:a. How much is the firm’s net working capital and what is the debt ratio?b. Complete a statement of
Below are the financial statements for two entertainment firms, Crosby Co. and Prairie Inc. for 2017 and 2018a. How did Crosby Co.’s profit margins change from 2017 to 2018?To what would you
Given the following information, compute the firm’s free cash flows and the financing cash flows. Dividends $25 Change in common stock $ 27 Change in inventories $ 32 Change in accounts receivable
Interpret the following information regarding Maness Corporation’s free cash flows and financing cash flows. Maness Corporation Free Cash Flows and Financing Cash Flows Free cash flows Operating
In problem 3-13, you were asked to prepare a statement of cash flows for New Zealand Dairy Company. Use the information given in the problem to compute the firm’s free cash flows and the financing
Knapp Inc.’s financial statements are provided below. Using this information, compute the firm’s free cash flows and the financing cash flows, and interpret your results.We should be subtracting
Identify the main drawbacks of a corporate firm.
Using the following criteria, specify the differences between each form of legal business organization:(a) number of owners, (b) liability for firm’s debts,(c) change in ownership and/or
The SKC Corporation plans to borrow $1,000 for a 90-day period. At maturity the firm will repay the $1,000 principal amount plus $30 interest. How can the effective annual rate of interest for the
M&M Beverage Company has a $300,000 line of credit that requires a compensating balance equal to 20 percent of the loan amount. The rate paid on the loan is 10 percent per annum; $200,000 is borrowed
The EPG Manufacturing Company uses commercial paper regularly to support its needs for short-term financing. The firm plans to sell $100 million in 270-day-maturity paper, on which it expects to pay
The A. B. Good Company sells electrical supplies to building contractors on terms of net 60. The firm’s average monthly sales are $100,000; thus, given the firm’s 2-month credit terms, its
Alta Ltd., which sells computers, had the following receivables and payables: cash sales of 50 percent; credit sales of 50 percent with terms of payment 15-20 days after sales; inventory purchase all
What are the main determinants of net working capital?
What should be the key consideration when selecting a short-term credit or loan?
Differentiate between permanent and temporary assets. Which of them is usually used in working capital?
The balance sheet from 2011 to 2014 for Amaze Online Ltd., a consultancy firm, has been provided (figures in thousands):a. Compute current and debt ratios for 4 years.b. What is your opinion of the
The data for Sharmtraiding Company across the last 6 years have been provided:Since Sharmtraiding saw an increase in sales, the management decided to hold more inventories. Assuming the cost of goods
To finance its working capital needs, Omega company needs to borrow $600,000 for a period of 6 months. For this purpose, Omega is considering three options:a. A loan from a microfinance organization
Trading Company Ltd. is considering getting an unsecured transaction loan from a local bank. The loan is for a period of 4 months with value of $250,000. The bank offered 11 percent for the loan and
Alex is considering getting a 6-months loan with a face value of $150,000 to build a new apartment. His current balance is $10,000 at a bank that offered an unsecured loan for 15 percent. The bank
Why do U.S. companies invest overseas?
What is a spot transaction? What is a direct quote? An indirect quote?
Who is an arbitrageur? How does an arbitrageur make money?
What is a forward exchange rate?
Describe exchange rate risk in direct foreign investment.
In simple terms, what does the interest rate parity theory mean?
What does the law of one price say?
What is the international Fisher effect?
Define the types of risk that are commonly referred to as political risk, and give some examples of them.
What is exchange rate risk? Why would a multinational firm be concerned about it?
An American business must pay 1,000 euros to a German firm on June 8, 2015. Using the information in Table 16-2, how many dollars will be required for this transaction? TABLE 16-2 Foreign Exchange
Calculate the Canadian dollar/Swiss franc and Swiss Franc/Canadian dollar exchange rates using the cross rates listed in columns 2 and 4 of Table 16-3. TABLE 16-3 Key Currency Cross Rates, Thursday,
Using the information from Table 16-4, calculate the percent-per-annum discount on the 90-day or 3-month pound. TABLE 16-4 U.S.-Dollar Forward Exchange Rates U.S. $ Equivalent 0.7701 0.7679 0.7638
If one euro is priced at bid 9.15 /ask 9.22 Swedish crowns, how many euros can you purchase for 50 Swedish crowns?
Suppose 90-day investments in Poland have a 2 percent annualized return and a 0.5 percent quarterly (90-day) return. In India, 90-day investments of similar risk have a 7 percent annualized return
For your job as an assistant cash manager at The Giordano Industries, you are asked to put together a series of internal notes on multinational finance and the international currency markets for unit
Describe the typical cash flow cycle for a firm.
What are the three motives for holding cash?
Describe the relationship between the firm’s cash management program and the firm’s risk of insolvency.
What are the fundamental decisions that the financial manager must make with respect to cash management?
Define float and its origins in the cash management process (that is, mail processing and transit).
What is a lockbox arrangement, and how does its use reduce a firm’s float?
Describe the use of the break-even concept with respect to the management of cash.
Define the terms financial risk and interest rate risk.
What are the key decision variables at the firm’s disposal for managing the level of the firm’s accounts receivable balance?
Why is managing the firm’s level of accounts receivable important?
What is credit scoring, and how is it used to manage accounts receivable?
Describe the types of inventory that firms have.
What is the fundamental objective of the EOQ formula?
What assumptions underlie the EOQ formula?
Suppose that we want to estimate the value of a 1-day float reduction for Starbucks Corporation (SBUX). Starbucks’ 2014 sales revenues were reported at $16.448 billion. Let’s assume that prudent
Nikora Ltd., based in Georgia, produces meat and milk products. The company sold old machinery for 100,000 Georgian Lari (GEL) and decided to put this amount in a term deposit, which usually pays 10
Nadja from Austria wants to make a single investment and have $100,000 after her graduation in 5 years. She did found a microfinance organization that offered her 15 percent per annum; however, Nadja
In September 1963, the first issue of the comic book X-MEN was issued. The original price for that issue was $0.12. By September 2016, 53 years later, the value of the near-mint copy of this comic
Maria wants to buy an apartment in the city center after her graduation in 4 years. An apartment costs $20,000 and the price is expected to increase by 4 percent each year. Maria wants to sell her
Anurag wants to earn $500,000 in 15 years by making equal semi-annual deposits. The bank will pay an interest of 10 percent annually. What must Anurag’s semi-annual deposit be?
A construction company called Alians Group is considering buying new machinery for one of its projects. Leasing Company, which deals in heavy machinery, owns that particular equipment and is looking
Pension fund offers two types of plans for retirement, which is 25 years away. Plan 1 requires you to have a deposit of $1,000 each year during the first 10 years—a total of $10,000, after which
Hotel Victoria purchased a new building for $150,000 in Brisbane, Australia. It paid $25,000 down and agreed to sign a leasing contract with a bank for the next 10 years in 10 equal end-of-year
Nina is planning to pay $50,000 for her master’s degree 4 years from today. She wants to accumulate these funds through semi-annual equal savings in a bank that offers 10 percent annual interest
Maria wants to sponsor her son for high school. She plans to withdraw $2,000 at the beginning of each year for 10 years, from a special account that will pay 12 percent annually. In order to achieve
7 years ago Alfa Bank invested $1,000,000 at a 5 percent annual interest rate. If the bank invests an additional $20,000 a year for 15 years, at the beginning of each year, at a 5 percent annual
George is considering buying a new house and has to borrow $50,000 to pay for it. He plans to take a mortgage loan from a bank for 10 years, which requires monthly payments and the interest rate is
George Andronikashvili has a trade credit with balance of $6,000. George signed a special note, which enables him to pay 4 percent of the debt balance each month, which is $240. How many months
When we speak of “benefits” from investing in an asset, what do we mean?
Why is it difficult to measure future cash flows?
How is risk defined?
How does the standard deviation help us measure the riskiness of an investment?
Does greater risk imply a bad investment?
What is the additional compensation for assuming greater risk called?
In Figure 6-2, which rate of return is the risk-free rate? Why? FIGURE 6-2 Historical Rates of Return Securities Small- company stocks Large- company stocks Intermediate-term government bonds
Give specific examples of systematic and unsystematic risk. How many different securities must be owned to essentially diversify away unsystematic risk?
What method is used to measure a firm’s market risk?
After reviewing Figure 6-5, explain the difference between the plotted dots and the firm’s characteristic line. What must be done to eliminate the variations? FIGURE 6-5 Monthly Holding-Period
How does opportunity cost affect an investor’s required rate of return?
What are the two components of the investor’s required rate of return?

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