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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Which of the following classes of securities is likely to have the lowest corporate borrowing cost?a. AAA rated bonds.b. A rated bonds.c. BB rated bonds.d. C rated bonds.e. All of the above will have
Serengeti Corp. has five-year bonds outstanding that pay a coupon rate of 8.8 percent. If these bonds are priced at $1,064.86, what is the yield to maturity on these bonds? Assume semiannual coupon
If interest rates are expected to increase, should investors look to long-term bonds or short-term bonds? Explain.
What are the main differences between the corporate bond markets and stock markets?
Peter knows that the covariance in the return on two assets is −0.0025. Without knowing the expected return of the two assets, explain what that covariance means.
In February 2017 the risk-free rate was 2.97 percent, the market risk premium was 6 percent, and the beta for Twitter stock was 0.99. What is the expected return that was consistent with the
What was the average annual return that Tanner earned over the 2012–2015 period in Problem 7.6?Data from problem 7.6Tanner invested $1,000 in large U.S. stocks at the beginning of 2012. This
Tanner invested $1,000 in large U.S. stocks at the beginning of 2012. This investment earned 15.98 percent in 2012, 32.41 percent in 2013, 13.69 percent in 2014, and 1.41 percent in 2015. What return
The CAPM is used to price the risk (estimate the expected return) for any asset. Our examples have focused on stocks, but we could also use CAPM to estimate the expected rate of return for bonds.
Which investment category included in Exhibit 7.3 has shown the greatest degree of risk in the United States since 1926? Explain why that makes sense in a world where the value of an asset in this
CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the risk-free rate is 5.5 percent, what is the appropriate required return of CSB (using the CAPM)?
During the period from 2011 through 2015 the annual returns on small U.S. stocks were -3.26 percent, 18.23 percent, 45.07 percent, 2.92 percent, and -3.60 percent, respectively. What would a $1
What type of return tells you the average compounded return earned by an investor?
Explain the relation between risk and return.
In the chapter text, you saw that the formula for a growing perpetuity can be obtained from the formula for the present value of a growing annuity if n is set equal to ∞. It is also possible to go
Compare an annuity due with an ordinary annuity. The payments for both are made annually and are of the same dollar amounts. The two annuities also have the same duration in years and the same
Trevor Diaz wants to purchase a Maserati Quattroporte sedan, which has an invoice price of $121,737 and a total cost of $129,482. Trevor plans to put down $20,000 and will pay the rest by taking on a
The Yan family is buying a new 3,500-square-foot house in Muncie, Indiana, and will borrow $237,000 from Bank One at a rate of 6.375 percent for 15 years. What will be their monthly loan payment?
Grant Productions borrowed some money from the California Finance Company at a rate of 17.5 percent for a seven-year period. The loan calls for a payment of $1,540,862.19 each year beginning today.
Carol Jenkins, a lottery winner, will receive the following payments over the next seven years. She has been approached by an investor who will pay Carol a lump sum today for the rights to those
Stephanie Watson is 20 years old and plans to make the following investments beginning next year. She will invest $3,125 in each of the next three years and will then make investments of $3,650,
Trigen Corp. management will invest $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75
Holding all else constant, what will happen to the present value of a future amount if you increase the discount rate? What if you increase the number of years?
Surmec, Inc., reported sales of $2.1 million last year. The company’s primary business is the manufacture of nuts and bolts. Since this is a mature industry, analysts are confident that sales will
Jared Goff , the number 1 draft pick of the NFL Los Angeles Rams in 2016, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the
Congress and the President have decided to increase the federal tax rate in an effort to reduce the budget deficit. Suppose that Caroline Weslin, from problem 5.29, will pay 35 percent of her bonus
Xenix Corp had sales of $353,866 in 2017. If management expects its sales to be $476,450 in three years, what is the rate at which the company’s sales are expected to grow?
You have just inherited $550,000. You plan to save this money and continue to live off the money that you are earning in your current job. If you can invest the money in a bond that pays 4.6 percent
Joe Mauer, a catcher for the Minnesota Twins, is expected to hit 15 home runs in 2018. If his home-run-hittingability is expected to grow by 12 percent every year for the following five years, how
Find the future value of a five year $100,000 investment that pays 8.75 percent and that has the following compounding periods:a. Quarterly.b. Monthly.c. Daily.d. Continuous.
If you were given a choice between investing in a savings account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both offered the same stated
Explain the difference between compounding and discounting.
If a company’s net profit margin is − 5 percent, its total asset turnover is 1.5 times, and its financial leverage ratio is 1.2 times, its return on equity is closest to:a. −9.0 percent.b.
Modern Appliances Corporation has reported its financial results for the year ended December 31, 2017.Using the information from the financial statements, complete a comprehensive ratio analysis for
The following are the financial statements for Nederland Consumer Products Company for the fiscal year ended September 30, 2017.Calculate all the ratios, for which industry figures are available
For the year ended June 30, 2017, Northern Clothing Company has total assets of $87,631,181, ROA of 11.67 percent, ROE of 21.19 percent, and a net profit margin of 11.59 percent. What are the
Blackwell Automotive€™s balance sheet at the end of its most recent fiscal year shows the following information:In addition, it was reported that the firm had a net income of $156,042 on
Complete the balance sheet of Flying Roos Corporation.You have the following information:Debt ratio = 40% DSO = 39 daysCurrent ratio = 1.5 Inventory turnover ratio = 3.375Net sales = $2.25
Nimitz Rental Company had depreciation expenses of $108,905, interest expenses of $78,112, and an EBIT of $1,254,338 for the year ended June 30, 2017. What are the times-interest-earned and cash
Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm’s balance sheet when assessing the firm’s fixed obligations?
National City Bank has 646,749,650 shares of common stock outstanding that are currently selling for $37.55 per share on the New York Stock Exchange. If National City€™s net income was
Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. Use the DuPont identity to calculate the return on equity (ROE). In the
Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. Calculate the following ratios:a. Inventory turnoverb. Days€™
Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. What are the company€™s current ratio and quick ratio? What do
The equity multiplier for Spiff y Corporation is 1.75, its EBIT return on assets (EROA) is 0.07, and the value of its equity is $850,000. What is the value of Spiff y’s total assets? What is the
Last year ABC companies had accounts receivable turnover of 15, total asset turnover of 4.5, and total assets of $1,000,000. What was the value of ABC’s accounts receivable? What was the value
Refer to the balance sheet and income statement for Abercrombie Supply Company for the year ended June 30, 2017. Calculate the following ratios:a. Inventory turnover.b. Days€™ sales
Using the 2017 data for the Abercrombie Supply Company, calculate the following liquidity ratios:a. Current ratio.b. Quick ratio.
Prepare a common-size balance sheet from the following information for Abercrombie Supply Company. Abercrombie Supply Company Balance Sheet as of June 30, 2017 ($ thousands) Liabilities and Equity:
The Abercrombie Supply Company reported the following information for 2017. Prepare a common-size income statement for the year ended June 30, 2017.Abercrombie Supply CompanyIncome Statement for the
Sun Devil Corporation reported EBITDA of $7,300,125 and net income of $3,328,950 for the fiscal year ended December 31, 2017. During the same period, the company had $1,155,378 in interest expense,
True Blue Company increased its investments in marketable securities by $323,370 and paid $1,220,231 for new fixed assets during 2017. The company also repaid $779,200 of existing long-term debt
Based on the financial statements for Tomkovick Golf Company in Problem 3.32, compute the cash flow invested in net working capital and the cash flow invested in long-term assets that you would use
Analysts following the Tomkovick Golf Company were given the following balance sheet information for the years ended June 30, 2017, and June 30, 2016:In addition, it was reported that the company
Vanderheiden Hog Products Corp. provided the following financial information for the quarter ending June 30, 2017:Net income: $189,425Depreciation and amortization: $63,114Increase in receivables:
Menomonie Casino Company earned $23,458,933 before interest and taxes for the fiscal year ending March 31, 2017. If the casino had interest expenses of $1,645,123, calculate its tax obligation
Eau Claire Paper Mill, Inc., had, at the beginning of the current fiscal year, April 1, 2016, retained earnings of $323,325. During the year ended March 31, 2017, the company produced net income
The Centennial Chemical Corporation announced that, for the period ending March 31, 2017, it had earned income after taxes of $2,768,028.25 on revenues of $13,144,680. The company’s costs
Refer to the information given in Problem 3.21. What is the cash flow from operating activity for Nimitz Rental?In Problem 3.21.Nimitz Rental Company provided the following information to its
Columbia Construction Company earned $451,888 during the year ended June 30, 2017. After paying out $225,794 in dividends, the balance went into retained earnings. If the firm’s total retained
Fraser Corporation has announced that its net income for the year ended June 30, 2017, was $1,353,412. The company had EBITDA of $4,967,855, and its depreciation and amortization expense was equal to
Sosa Corporation recently reported an EBITDA of $31.3 million and net income of $9.7 million. The company had $6.8 million in interest expense, and it’s average corporate tax rate was 35 percent.
Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2017, the company had revenues of $878,412, general and administrative expenses of $352,666,
Manz Property Management Company announced that in the year ended June 30, 2017, its earnings before taxes amounted to $1,478,936. Calculate its taxes usingExhibit 3.6. Assets 2017 2016 $ 33,411
Del Bridge Construction had long-term assets before depreciation of $990,560 on December 31, 2016, and $1,211,105 on December 31, 2017. How much cash flow was invested in long-term assets by Del
Hillman Corporation reported current assets of $3,495,055 on December 31, 2017, and current assets of $3,103,839 on December 31, 2016. Current liabilities for the firm were $2,867,225 and $2,760,124
During 2017, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed-assets acquisitions of $109,455, and had marketable securities of $14,215 mature. What
The Oakland Mills Company has disclosed the following financial information in its annual reports for the period ending March 31, 2017: sales of $1.45 million, cost of goods sold of $812,500,
The financial information for Laurel Electronics referred to in Problem 3.5 is all at book value. Suppose marking to market reveals that the market value of the firm’s inventory is 20 percent below
What is the difference between FIFO and LIFO accounting.
Given the following information about Elkridge Sporting Goods, Inc., construct a balance sheet for June 30, 2017. On that date the firm had cash and marketable securities of $25,135, accounts
What is a major reason for the accounting scandals in the early 2000s? How do firms sometimes attempt to meet Wall Street analysts’ earnings projections?
The Huntington Rain Gear Company had $633,125 in taxable income in the year ending September 30, 2017. Calculate the company€™s tax using the tax schedule inExhibit 3.6. (1) (2) (3)
You are given the following information about Clarkesville Plumbing Company. Revenues in 2017 totaled $896, depreciation expenses $75, costs of goods sold $365, and interest expenses $54. At the end
What are typically the main components of an executive compensation package?
Which one of the following characteristics does not pertain to corporations?a. Can enter into contracts.b. Can borrow money.c. Are the easiest type of business to form.d. Can be sued.e. Can own stock
What can happen if a firm is poorly managed and its stock price falls substantially below its maximum potential price?
What is the appropriate goal of financial managers? How do managers’ decisions affect how successful the firm is in achieving this goal?
What are the common forms of business organization discussed in this chapter?
What is a firm’s capital structure, and why is it important?
Explain why profit maximization is not the best goal for a company. What is a better goal?
What are the three fundamental decisions the financial manager is concerned with, and how do they affect the firm’s balance sheet?
If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?
You just purchased a share of IBM stock on the New York Stock Exchange. What kind of transaction was this?a. Primary market transaction.b. Secondary market transaction.c. Futures market
What are the two basic mechanisms through which funds flow through the financial system, and how do they differ?
You lent $100 to a friend for one year at a nominal rate of interest of 3 percent. Infl ation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of
What is strong-form market efficiency? Semistrong-form market efficiency? Weak-form market efficiency?
Identify seven mechanisms that can help better align the goals of managers with those of stockholders.
Which of the following is/are advantages of the corporate form of organization?a. Reduced start-up costs.b. Greater access to capital markets.c. Unlimited liability.d. Single taxation.
Identify three fundamental types of decisions that financial managers make and identify which part of the balance sheet each of these decisions affects.

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