Questions and Answers of Foundations of Finance

What is the approach by which we can effectively interpret a firm’s financial ratios?
What cautionary step should be taken when standards (norms) are used to interpret a firm’s financial ratios? Discuss briefly.
Go to the website of Siemens. Download the company’s latest annual report and look at segment C, which provides details of Siemen’s financial performance.Explore which ratios are presented and
In 2015, Token Corporation reported $1,230,000 in sales, cost of goods sold of $520,000, and operating expenses of $440,000. The increase in the retained earnings was $50,000. The number of common
Blackberry Co. has experienced some difficulties financing its short-term expansion plans for its business. Blackberry Co. financed the construction of a new warehouse with a long-term loan from a
In 2015, Noble Corporation earned an operating profit margin of 15 percent and realized total asset turnover of 2.a. Calculate the operating return on assets in 2015.b. If the sales were $1 million
Star Inc. has two divisions, A and B, and would like to evaluate the contribution of each division to the value of the company as a whole. Star Inc. traditionally uses operating return on investment
In order to be able to use industry average or benchmark to interpret a firm’s performance, it is necessary to determine the industry to which the firm belongs. Eurostat, a provider of statistics
Bubble Co. has $10 million in assets that are financed 60 percent by equity and 40 percent by debt. The interest rate on debt is 7 percent while the opportunity cost of equity capital is estimated to
Superior Europe, is a medium-sized company, located in the Netherlands, and has successfully been doing business in the matting industry for 15 years now. Its business model is based on the sales of
Principle 2 states that “money has a time value.” Explain this statement.
Explain the formula FVn = PV(1 + r)n.
What is an amortized loan?
What is the relationship between the interest rate and number of years on an amortized loan and the total amount of interest paid?
Why does the future value of a given amount increase when interest is compounded nonannually as opposed to annually?
How do you adjust the present and future value formulas when interest is compounded monthly?
How would you calculate the present value of an investment that produced cash flows of $100 received at the end of year 1 and $700 at the end of year 2?
When r, the annual interest (or discount) rate, increases, what happens to the present value of a perpetuity? Why?
Suppose you are considering taking consumer loan from bank for one year. Usually, for short-term loans, the bank offers 12 percent interest that compounds annually.Your credit application has been
If we place $1,000 in a savings account paying 5 percent interest compounded annually, how much will our account accrue to in 10 years?
If we invest $500 in a bank where it will earn 8 percent interest compounded annually, how much will it be worth at the end of 7 years?
If you put $1,000 into an investment paying 20 percent interest compounded annually, how much will your account grow to in 10 years?
What is the present value of $500 to be received 10 years from today if our discount rate is 6 percent?
You’re on vacation in a rather remote part of Florida and see an advertisement stating that if you take a sales tour of some condominiums “you will be given $100 just for taking the tour.”
What is the present value of an investment that yields $1,000 to be received in 7 years and $1,000 to be received in 10 years if the discount rate is 6 percent?
How much must we deposit in an 8 percent savings account at the end of each year to accumulate $5,000 at the end of 10 years?
What is the present value of a 10-year $1,000 annuity discounted back to the present at 5 percent?
Forty-three states run lotteries, and most of those lotteries are similar: You must select 6 out of 44 numbers correctly in order to win the jackpot. If you come close, there are some significantly
You’ve just received your first credit card and the problem is the rate. It looks pretty high to you. The quoted rate, or APR, is 21.7 percent, and when you look closer, you notice that the
If we place $100 in a savings account with an APR of 12 percent compounded quarterly, what will our investment grow to at the end of 5 years?
In 2015 the average U.S. household owed about $10,000 in credit card debt, and the average APR on credit card debt was about 13.0 percent compounded monthly. On many credit cards the minimum monthly
What is the present value of a $500 perpetuity discounted back to the present at 8 percent?
New Wave Surfing Stuff Inc. is a manufacturer of surfboards and related gear thatsells to exclusive surf shops located in several Atlantic and Pacific mainland coastaltowns as well as several
What are the two major objectives of the firm’s cash management system?
You own $10,000. The dollar spot rate in Tokyo is 216.6743. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital.
U.S. firm needs to pay 10,000 Swiss francs to a firm in Switzerland, how much is this in U.S. dollars? COUNTRY CONTRACT S/FOREIGN CURRENCY Canada-dollar Spot 0.8437 30-day 0.8417 90-day 0.8395
Is the evaluation of a direct foreign investment more complicated than the evaluation of a domestic investment?
On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with
On February 3, 2018, the Burlington Western Company plans a commercial paper issue of $25 million. The firm has never used commercial paper before but has been assured by the firm placing the issue
Historical data for the sales, accounts receivable, inventories, and accounts payable for the Crimson Mfg. Company follow:a. Calculate Crimson’s days of sales outstanding and days of sales in
Ramsey Liquors owns and operates a chain of beer and wine shops throughout the Dallas-Fort Worth metroplex. The rapidly expanding population of the area has resulted in the firm requiring a growing
Lewis Printing has projected its sales for the first 8 months of 2019 as shown in the table below.Lewis collects 20 percent of its sales in the month of the sale, 50 percent in the month following
The Sharpe Corporation’s projected sales for the first 8 months of 2019 are shown in the corresponding table.Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the
Findlay Instruments produces a complete line of medical instruments used by plastic surgeons and has experienced rapid growth over the past 5 years. In an effort to make more accurate predictions of
The Caraway Seed Company has grown rapidly over the last decade and is trying to forecast the firm’s inventory requirements for the next 5 years. Historical sales and inventories for the last 10
In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Barker is a small
The balance sheet of the Boyd Trucking Company (BTC) shows that BTC had sales for the year ended December 31, 2018, of $25 million. The firm follows a policy of paying all net earnings out to its
Use the following industry-average ratios to construct a pro forma balance sheet for Karen’s Beauty Products, Inc. Total asset turnover 2.0 times Average collection period (assume 365-day year) 30
Jimmie’s micro brewery is located in downtown Ruston, Louisiana in a restored section of the old Ford dealership. Jimmie sells his beer both to retail customers that visit his brewery and also
T. Jarmon, Inc. has been in business for 1 year, and the CFO expects that the relationship between firm sales and its operating expenses, current assets, its assets, and current liabilities will
Define each of the following dates and place them in their proper order with respect to the payment and receipt of cash dividends: date of record, ex-dividend date, declaration date, and payment date.
The Patterson Trucking Company needs to expand its fleet by 40 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities
Final earnings estimates for the Smithfield Meat MyLab Packing Company have been prepared for the CFO of the company and are shown in the following table. The firm has 4,000,000 shares of common
Explain the notion of a perfect capital market. Use common-sense language such as you might use in explaining the concept to your grandfather who has never taken a finance class.
Cranfield Enterprises has just completed its annual planning and budgeting process and needs to raise $20 million to finance its capital expenditures for the coming year. The firm earned $18 million
In May of 2017, Apple (AAPL) announced that it would increase its dividend to $13.22 billion annually which surpassed Exxon Mobil’s (XOM) $12.77 billion payout. Apple’s 2017 net income was $48.35
How does a firm’s liquidity position affect the payment of dividends?
What is meant by the term dividend payout ratio?
Camping USA Inc. has been operating for only 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as
Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado’s Rocky Mountains. Your firm manufactures
Wildhorse Resource Development of Houston, TX (WRD) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas, and NGL
A group of retired college professors has decided to form a small manufacturing operation that will produce a full line of traditional office furniture. The investors have proposed two financing
Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international
The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $300 and the associated
Rockstar, Inc. manufactures a complete line of men’s and women’s casual shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for
Specialty Steel, Inc. will manufacture and sell 400,000 units next year. Fixed costs will total $350,000, and variable costs will be 70 percent of sales.a. The firm wants to achieve a level of
You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday.Sales
Which of the following sources of new earnings volatility demonstrates the effect of business versus financial risk (discuss the rationale for your decisions):a. Bowson Mfg, Inc. recently constructed
Explain what is meant by the EBIT-EPS indifference point as it applies to making a financing decision.
What is the primary weakness of using EBIT-EPS analysis as a tool for evaluating the merits of borrowing versus issuing more stock?
Break-even analysis assumes linear revenue and cost functions. In reality, these functions may not always be linear over large output and sales levels. Why?
Distinguish between business risk and financial risk. How do these sources of risk contribute to the overall risk of a firm?
In 2012 AT&T (T) borrowed $3 billion by issuing bonds in the public bond market. Although this may sound like a lot of money, AT&T owed almost $65 billion in corporate debt at the end of
The Shome Corporation, a firm in the 21 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction
Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of
Traid Winds Corporation, a firm in the 21 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. This project involves the
Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per
The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of
You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years (after which time this project is expected to shut down when it is learned that being fit is
At present, Solartech Skateboards is considering expanding its product line to include gas-powered skateboards; however, it is questionable how well they will be received by skateboarders. Although
Assume that a new project will annually generate revenues of $2 million for the next 3 years. Cash expenses including both fixed and variable costs will be $800,000 per year, bonus depreciation will
Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in
Racin’ Scooters is introducing a new product and has an expected change in EBIT of $475,000. Racin’ Scooters has a 21 percent marginal tax rate. Bonus depreciation will be $250,000 in year 1. In
The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 5 years ago, had an expected life of 10 years and an expected salvage value of
Scorchy’s Tacos restaurant is considering expanding into suburban markets in Houston, Texas, with three new locations. Because of the floods in 2017, many restaurants never reopened, creating a
The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the
Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce free cash inflows of $150,000 each year at the end of years 1 through
Assuming an appropriate discount rate of 11 percent, what is the discounted payback period on a project with an initial outlay of $100,000 and the following free cash flows?Year 1 = $30,000Year 2 =
What is the payback period for the following set of cash flows?YEAR CASH FLOWS1
Saddle River Operating Company (SROC) is a Dallas-based independent oil and gas firm. In the past, the firm’s managers have used a single firm-wide cost of capital of 11 percent to evaluate new
In May of this year Newcastle Mfg. Company’s capital investment review committee received two major investment proposals. One of the proposals was issued by the firm’s domestic manufacturing
ABBC, Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise funds for its planned expansion into the Northwest.
Crawford Enterprises is a publicly held company located in Arnold, Kansas. The firm began as a small tool and die shop but grew over its 35-year life to become a leading supplier of metal fabrication
Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity.
Compute the costs for the following sources of financing:a. A $1,000 par value bond with a market price of $970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be
The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a
The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $945. The coupon interest rate is 12
Carraway Seed Company is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $850 for the bond. Flotation costs will be 3 percent
In the spring of 2018, the Brille Corporation was involved in issuing new common stock at a market price of $35. Dividends last year were $1.50 and are expected to grow at an annual rate of 8 percent
Compute the cost of the following:a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 9 percent. A new issue would have a flotation cost of 5 percent of the

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