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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Using the bonds from problem 6B.1, recalculate the yields to maturity and the duration, assuming that the bonds pay semi-annual interest. How do the values change?Bond
The following bond prices were recorded on June 1, 2008. Assume each bond pays interest annually on June 1.Bond
Smolira Golf Corp. has 20,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2018 was $58. What is the price-earnings ratio? What are the dividends per
Prepare the 2018 statement of cash flows for Smolira Golf Corp.
Prince Albert Canning PLC had a net loss of ?29,157 on sales of ?315,650. What was the company?s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference?
Highly Suspect Corp. has current liabilities of $415,000, a quick ratio of .79, inventory turnover of 9.5, and a current ratio of 1.25. What is the cost of goods sold for the company?
Pop Evil Inc.’s net income for the most recent year was $16,481. The tax rate was 34 percent. The firm paid $3,681 in total interest expense and deducted $4,385 in depreciation expense. What was
Firm A and Firm B have debt-total asset ratios of 65 percent and 45 percent, respectively, and returns on total assets of 5 percent and 9 percent, respectively. Which firm has a greater return on
In response to complaints about high prices, a grocery chain runs the following advertising campaign: ?If you pay your child $1.50 to go buy $50 worth of groceries, then your child makes twice as
The Maurer Company has a long-term debt ratio of .35 and a current ratio of 1.30. Current liabilities are $955, sales are $7,210, profit margin is 8.3 percent, and ROE is 17.5 percent. What is the
A company has net income of $196,500, a profit margin of 6.8 percent, and an accounts receivable balance of $119,630. Assuming 65 percent of sales are on credit, what is the company’s days’
Y3K, Inc., has sales of $6,183, total assets of $2,974, and a debt equity ratio of .57. If its return on equity is 11 percent, what is its net income?
Sources and Uses of Cash [LO1] For each account on this company’s balance sheet, show the change in the account during 2018 and note whether this change was a source or use of cash. Do your numbers
Prepare the 2018 combined common-size, common-base year balance sheet for Just Dew It.
Prepare the 2018 common-base year balance sheet for Just Dew It.
Prepare the 2017 and 2018 common-size balance sheets for Just Dew It.
The market value of the equity of Hudgins, Inc., is $645,000. The balance sheet shows $53,000 in cash and $215,000 in debt, while the income statement has EBIT of $91,000 and a total of $157,000 in
Heritage, Inc., had a cost of goods sold of $68,314. At the end of the year, the accounts payable balance was $15,486. How long on average did it take the company to pay off its suppliers during the
Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.77, and ROE of 15.84 percent. What is this firm’s debt-equity ratio?
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every
Makers Corp. had additions to retained earnings for the year just ended of $415,000. The firm paid out $220,000 in cash dividends, and it has ending total equity of $5.6 million. If the company
Queen, Inc., has a total debt ratio of .46. What is its debt-equity ratio? What is its equity multiplier?
The King Corporation has ending inventory of $386,735, and cost of goods sold for the year just ended was $4,981,315. What is the inventory turnover? The days’ sales in inventory? How long on
Twist Corp. has a current accounts receivable balance of $537,810. Credit sales for the year just ended were $5,473,640. What is the receivables turnover? The days’ sales in receivables? How long
SDJ, Inc., has net working capital of $2,170, current liabilities of $4,590, and inventory of $3,860. What is the current ratio? What is the quick ratio?
The eXtensible Business Reporting Language (XBRL) is the future of financial reporting. XBRL is a computer language that “tags” each item and specifies what that item is. XBRL reporting has also
Suppose the current exchange rate for the Polish zloty is Z 4.04. The expected exchange rate in three years is Z 4.13. What is the difference in the annual inflation rates for the United States and
Heidi Pedersen, the treasurer for Wood Products, Inc., has just been asked by Justin Wood, the company?s president, to prepare a memo detailing the company?s ending cash balance for the next three
The owners’ equity accounts for Vidi International are shown here:Common stock ($.50 par value) ............................ $ 25,000Capital surplus
Ginger, Inc., has declared a $5.35 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the
a. On the next worksheet, fill in the values in each table. For the debt-equity ratio, create a spinner that changes the debt-equity ratio. The resulting debt equity ratio should range from 0 to 10
You want to calculate the WACC for auto parts retailer AutoZone (AZO). Complete the following steps to construct a spreadsheet that can be updated.a. Using an input for the ticker symbol, create
As we have seen, over the 1926–2016 period, small company stocks had the highest return and the highest risk, while U.S. Treasury bills had the lowest return and the lowest risk. While we certainly
Harper Industries is examining a new project to manufacture cell phones. The company has examined several alternatives for the manufacturing process. With Process I, the company would manufacture the
For this Master It! assignment, refer to the Conch Republic Electronics minicase below. For your convenience, we have entered the relevant values in the case such as the price and variable cost. For
Companies often buy bonds to meet a future liability or cash outlay. Such an investment is called a dedicated portfolio because the proceeds of the portfolio are dedicated to the future liability. In
Financial planning can be more complex than the percentage of sales approach indicates. Often, the assumptions behind the percentage of sales approach may be too simple. A more sophisticated model
Bishop, Inc., is obligated to pay its creditors $7,800 during the year. What is the market value of the shareholders’ equity if assets have a market value of $9,400? What if assets equal $6,700?
Prepare a 2018 balance sheet for Rogers Corp. based on the following information:Cash = $127,000; Patents and copyrights = $660,000; Accounts payable = $210,000; Accounts receivable =
During 2018, Raines Umbrella Corp. had sales of $705,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $445,000, $95,000, and $140,000, respectively. In
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
For each of the following U.S. investors, state whether the investor has a tax reason to (i) prefer the company’s payout to be in the form of dividends, (ii) prefer payout to be in the form of
In 2018, many investors borrowed money in countries such as Germany, where interest rates were low, and invested the money in countries such as the United States, where rates were higher. This is
River Cruises’ management now understands that the trade-off theory of optimal capital structure implies managers will increase debt as long as the value of additional interest tax shields exceeds
Pangbourne Whitchurch has preferred stock outstanding. The stock pays a dividend of $4 per share and sells for $40. The corporate tax rate is 21%. What is the percentage cost of the preferred stock?
Suppose Johnson & Johnson is considering a new investment in tractor production. What is the required rate of return for this venture? Explain why the expected return on Johnson & Johnson
Here are rates of return on a broad stock market index and on Treasury bills between 2013 and 2017: a. What was the risk premium on common stock in each year? b. What was the average risk
Use the data in Tables 11.1 and 11.4 to answer these questions: Table 11.1 Table 11.4 a. What was the average rate of return on large U.S. common stocks from 1900 to 2017? b. What was the average
A financial analyst has computed both accounting and NPV breakeven sales levels for a project using straight-line depreciation over a 6-year period. The project manager wants to know what will happen
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year, and variable costs are $60 per unit. The initial investment of $3,000 will be
A firm?s balance sheets for year-end 2018 and 2019 contain the following data. What happened to investment in net working capital during 2019? All items are in millions of dollars. Dec. 31, 2018
Talia’s Tutus bought a new sewing machine for $40,000 that will be depreciated over 5 years using double-declining-balance depreciation with a switch to straight-line.a. Find the depreciation
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and
Your firm purchased machinery for $10 million and received immediate 100% bonus depreciation. The project will end after 5 years. If the equipment can be sold for $4.5 million at the completion of
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straightline over 6 years, but, in fact,
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5
A project has a life of 10 years and a payback period of 10 years. Is the project NPV positive or negative?
Amazon has never paid a dividend, but in March 2018, the market value of its stock was greater than $760 billion. Does this invalidate the dividend discount model?
According to the International Monetary Fund, the inflation rate in Argentina in 2017 was about 1.9% per month. What was the annual inflation rate?
The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of .9. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI’s capital structure
The total book value of WTC’s equity is $10 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. The firm’s bonds have a face
Look at the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $2 a share. The common stock sells for $20 per
Here is a simplified balance sheet for Epicure Pizza (figures in $ millions): Epicure shares are currently priced at $12 each. a. You wish to calculate Epicure?s WACC. What is the relevant figure
Reactive Power Generation has the following capital structure. Its corporate tax rate is 21%. What is its WACC? Market Value Requlred Rate of Return n Security $20 million 10 millon 6% Debt
The following table shows betas for several companies. Calculate each stock’s expected rate of return using the CAPM. Assume the risk-free rate of interest is 4%. Use a 7% risk premium for the
Go to Connect and link to the material for Chapter 12, where you will find a spreadsheet containing 5 years of monthly prices for Hershey (HSY), U.S. Steel (X), and the S&P 500. Calculate the
Figure 12.10 plots monthly rates of return from 2014 to 2018 for the Snake Oil mutual fund. Was this fund fully diversified? 20 T 15+ 10 -20 -10 10 20 -5 15 -20 Market return (%) Snake Oil return (%)
The inflation rate in the United States has averaged 3% a year since 1900. What was the average real rate of return on Treasury bills, Treasury bonds, and common stocks in that period? Use the data
In February 2009, the Dow Jones Industrial Average was at a level of about 8,000. In mid-2018, it was about 24,500. Would you expect the Dow in 2018 to be more or less likely to move up or down by
True or false?a. If a company uses its company cost of capital to value all projects, it will overestimate the value of high-risk projects.b. It is okay to use the company cost of capital to
The total market value of the equity of Okefenokee Condos is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 1.2 and that
In 2018, Caterpillar Inc. had about 595 million shares outstanding. Their book value was $23.00 per share, and the market price was $154.80 per share. The company’s balance sheet shows that the
Micro Spinoffs Inc. issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,050. If the firm’s tax bracket is 21%, what is its
Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 30% of the company’s present value, and you
Match each of the following terms with the correct definition:a. additional paid-in capitalb. issued and outstandingc. retained earningsd. treasury stocke. authorized share capitalf. par valueA. The
The authorized share capital of the Alfred Cake Company is 100,000 shares. The equity is currently shown in the company’s books as follows:Common stock ($1 par
a. Rework Table 14.1, supposing that FedEx now issues 2 million shares at $250 a share. Which of the figures would change? b. What would happen to Table 14.1 if instead FedEx bought back 2 million
Haricot Corp. and Pinto Corp. both have profits of $100 million. Haricot is financed solely by equity, while Pinto has issued $150 million of 8% debt. If the corporate tax rate is 21%:a. How much tax
Match each of the following terms with the correct definition:a. Shelf registrationb. Seasoned issuec. Primary issued. Secondary issuee. Best effortsf. Underwriters’ spreadg. Blue-sky lawsh.
Establishment Industries borrows $800 million at an interest rate of 7.6%. Establishment will pay tax at an effective rate of 21%. What is the present value of interest tax shields if:a. It expects
Dusit is financed 30% by debt yielding 8%. Investors require a return of 15% on Dusit’s equity.a. What is the company’s weighted-average cost of capital if the corporate tax rate is 21%?b. What
Here is Icknield?s market-value balance sheet (figures in $ millions): The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be
Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The
House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter, the dividend is expected to grow
The Beyond the Page features for this chapter include the spreadsheets for Dynamic Mattress?s long-term plan. How would its financial plan change if the dividend payout ratio were cut to 40%? Use the
Here are the abbreviated financial statements for Planner?s Peanuts: INCOME STATEMENT, 2019Sales..............................$2,000Cost..................................1,500Net
Eagle Sports Supply has the following financial statements. Assume that Eagle?s assets are proportional to its sales. INCOME STATEMENT,
The following table shows income statement and balance sheet data for five U.S. industries in 2017. Calculate the cash cycle for each industry. INCOME STATEMENT AND BALANCE SHEET (Figures In $
Recalculate Dynamic Mattress?s 2019 financing plan (Table 19.6), assuming that the firm wishes to maintain a minimum cash balance of $30 million instead of $25 million. Assume the firm can convince
Here is a forecast of sales by National Bromide for the first 4 months of 2019 (figures in thousands of dollars): On average, 50% of credit sales are paid for in the current month, 30% in the next
The 2019 financial statements for Growth Industries are presented below. Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable
If Planner’s Peanuts dividend payout ratio in Problem 10 is fixed at 50%, calculate the required total external financing for growth rates in 2020 of(a) 15%,(b) 20%,(c) 25%.
Table 19.7 shows Dynamic Mattress?s year-end 2016 balance sheet, and Table 19.8 shows its income statement for 2017. Use these tables (and Table 19.2) to work out the statement of cash flows for
Paymore Products places orders for goods equal to 75% of its sales forecast in the next quarter. What will orders be in each quarter of the year if the sales forecasts for the next five quarters are
Each of the following events affects one or more of the tables in Sections 19.2 and 19.3. Show the effects of each event by adjusting the tables listed in parentheses. Treat each event
The following data are from the budget of Ritewell Publishers. Half the company?s sales are transacted on a cash basis. The other half are paid for with a 1-month delay. The company pays all of its
The Branding Iron Company sells its irons for $60 apiece wholesale. Production cost is $50 per iron. There is a 25% chance that a prospective customer will go bankrupt within the next half-year. The
Jim Khana, the credit manager of Velcro Saddles, is reappraising the company?s credit policy. Velcro sells on terms of net 30. Cost of goods sold is 85% of sales. Velcro classifies customers on a
In 2019, Cyrus Networks had sales of $618 million and cost of goods sold of $522 million. Its average inventory was $50 million.a. What was Cyrus’s average inventory period?b. How much would the
A firm sells its $1,000,000 receivables to a factor that specializes in collecting receivables for $960,000. The average collection period is 1 month. What is the effective annual rate on this

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