Questions and Answers of Fundamentals Of Financial Management

Define the following terms:a. Proxy; proxy fight; takeoverb. Preemptive rightc. Classified stock; founders’ sharesd. Marginal investor; intrinsic valuee. Required rate of return, expected rate of
Fletcher Company’s current stock price is $36.00, its last dividend was $2.40, and its required rate of return is 12%. If dividends are expected to grow at a constant rate, g, in the future, and if
Snyder Computers Inc. is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6%
Shome Industries retains and reinvests all its earnings. So, Shome does not pay any dividends, and it has no plans to pay dividends any time soon. A major pension fund is interested in purchasing
What three areas of finance does this book cover? Are these areas independent of one another, or are they interrelated in the sense that someone working in one area should know something about each
Who is the CFO, and where does this individual fit into the corporate hierarchy? What are some of his or her responsibilities?
Does it make sense for not-for-profit organizations such as hospitals and universities to have CFOs? Why or why not?
What is the relationship among economics, finance, and accounting?
What are the key differences among proprietorships, partnerships, and corporations?
How are LLCs and LLPs related to the other forms of organization?
What is an S corporation, and what is its advantage over a C corporation? Why don’t firms such as IBM, GE, and Microsoft choose S corporation status?
What are some reasons why the value of a business other than a small one is generally maximized when it is organized as a corporation?
What’s the difference between a stock’s current market price and its intrinsic value?
Do stocks have known and “provable” intrinsic values, or might different people reach different conclusions about intrinsic values? Explain.
Should managers estimate intrinsic values or leave that to outside security analysts?Explain.
If a firm could maximize either its current market price or its intrinsic value, what would stockholders (as a group) want managers to do? Explain.
Should a firm’s managers help investors improve their estimates of the firm’s intrinsic value? Explain.
What are three techniques stockholders can use to motivate managers to maximize their stock’s long-run price?
Should managers focus directly on the stock’s actual market price or its intrinsic value, or are both important? Explain.
Why might conflicts arise between stockholders and debtholders?
How might astute bondholders react if stockholders take on risky projects?
How can bondholders protect themselves from managers’ actions that negatively impact bondholders?
Is maximizing shareholder value inconsistent with being socially responsible?Explain.
When Boeing decides to invest $5 billion in a new jet airliner, are its managers certain of the project’s effects on Boeing’s future profits and stock price? Explain.
How would you define business ethics?
Can a firm’s executive compensation plan lead to unethical behavior? Explain.
Unethical acts are generally committed by unethical people. What are some things companies can do to help ensure that their employees act ethically?
Define each of the following terms:a. Sarbanes-Oxley Actb. Proprietorship; partnership; corporationc. S corporation; limited liability company (LLC); limited liability partnership (LLP)d. Intrinsic
Name three ways capital is transferred between savers and borrowers.
Why are efficient capital markets necessary for economic growth?
Distinguish between physical asset markets and financial asset markets.
What’s the difference between spot markets and futures markets?
Distinguish between money markets and capital markets.
Differentiate between private and public markets.
What’s the difference between a commercial bank and an investment bank?
List the major types of financial institutions, and briefly describe the primary function of each.
What are some important differences between mutual funds, exchange-traded funds, and hedge funds? How are they similar?
What are the differences between the physical location exchanges and the NASDAQ stock market?
What is the bid-ask spread?
Differentiate between closely held and publicly owned corporations.
Differentiate between primary and secondary markets.
What is an IPO?
What is a Dutch auction, and what company used this procedure for its IPO?
Would you expect a portfolio that consisted of the NYSE stocks to be more or less risky than a portfolio of NASDAQ stocks?
If we constructed a chart like Figure 2.2 for a typical S&P 500 stock, do you think it would show more or less volatility? Explain.Figure 2.2 FIGURE 2.2 Returns (%) 50.00 40.00 30.00 20.00 -
What does it mean for a market to be “efficient”?
Is the market for all stocks equally efficient? Explain.
Why is it good for the economy that markets be efficient?
Is it possible that the market for individual stocks could be highly efficient, but the market for whole companies could be less efficient? Explain.
What is arbitrage?
What is behavioral finance? What are the implications of behavioral finance for market efficiency?
Define each of the following terms:a. Spot markets; futures marketsb. Money markets; capital marketsc. Primary markets; secondary marketsd. Private markets; public marketse. Derivativesf. Investment
What is the annual report, and what two types of information does it provide?
What four financial statements are typically included in the annual report?
Why is the annual report of great interest to investors?
What is the balance sheet, and what information does it provide?
How is the order in which items are shown on the balance sheet determined?
Explain in words the difference between net working capital and net operating working capital.
Explain in words the difference between total debt and total liabilities.
What items on Allied’s December 31 balance sheet would probably be different from its June 30 values? Would these differences be as large if Allied were a grocery chain rather than a food
Why is earnings per share called “the bottom line”? What is EBIT, or operating income?
What is EBITDA?
Which is more like a snapshot of the firm’s operations—the balance sheet or the income statement? Explain your answer.
What is the statement of cash flows, and what are some questions it answers?
If during the year a company has high cash flows from its operations, does this mean that cash on its balance sheet will be higher at the end of the year than it was at the beginning of the year?
What information does the statement of stockholders’ equity provide?
Why do changes in retained earnings occur?
Explain why the following statement is true: The retained earnings account reported on the balance sheet does not represent cash and is not “available” for dividend payments or anything else.
Can investors be confident that if the financial statements of different companies are accurate and are prepared in accordance with GAAP, the data reported by one company will be comparable to the
Why might different companies account for similar transactions in different ways?
What is free cash flow (FCF)?
Why is FCF an important determinant of a firm’s value?
Define the terms market value added (MVA) and economic value added (EVA).
How does EVA differ from accounting net income?
Explain this statement: “Our tax rates are progressive”.
What’s the difference between individual marginal and average tax rates?
Refer to Allied’s balance sheets shown in Table 3.1 to answer the following questions:a. What was Allied’s net working capital on December 31, 2020?b. What was Allied’s net operating working
Refer to Allied’s balance sheets shown in Table 3.1. What was Allied’s total debt on December 31, 2020?Table 3.1 Allied Food Products: December 31 Balance Sheets (millions of dollars) Assets
A company has EBIT of $30 million, depreciation of $5 million, and a 25% tax rate. It needs to spend $10 million on new fixed assets and $15 million to increase its operating current assets. It
Refer to the box titled, “A Quick Glance at the Aggregate Balance Sheets of Households and Nonprofits, 2000–2019,” when answering parts a and b.a. What has happened to net worth levels since
Would it be possible for a company to report negative free cash flow and still be highly valued by investors; that is, could a negative free cash flow ever be viewed optimistically by investors?
Byron Books Inc. recently reported $15 million of net income. Its EBIT was $20.8 million, and its tax rate was 25%. What was its interest expense? (Hint: Write out the headings for an income
Patterson Brothers recently reported an EBITDA of $7.5 million and net income of $2.625 million. It had $1.5 million of interest expense, and its corporate tax rate was 25%. What was its charge for
Barton Industries has operating income for the year of $3,500,000 and a 25% tax rate.Its total invested capital is $20,000,000 and its after-tax percentage cost of capital is 8%.What is the firm’s
For 2021, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost
Hampton Industries had $39,000 in cash at year-end 2020 and $11,000 in cash at year-end 2021. The firm invested in property, plant, and equipment totaling $210,000—the majority having a useful life
Arlington Corporation’s financial statements (dollars and shares are in millions) are provided here.a. What was net operating working capital for 2020 and 2021? Assume that all cash is excess cash;
Edmonds Industries is forecasting the following income statement:The CEO would like to see higher sales and a forecasted net income of $3,000,000. Assume that operating costs (excluding depreciation
The Davidson Corporation’s balance sheet and income statement are provided here.a. Construct the statement of stockholders’ equity for December 31, 2021. No common stock was issued during 2021.b.
Financial information for Powell Panther Corporation is shown here.a. What was net operating working capital for 2020 and 2021? Assume the firm has no excess cash.b. What was the 2021 free cash
Mary Jarvis is a single individual who is working on filing her tax return for the previous year. She has assembled the following relevant information:● She received $82,000 in salary.● She
Laiho Industries’s 2020 and 2021 balance sheets (in thousands of dollars) are shown.a. Sales for 2021 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were
Donna Jamison, a 2016 graduate of the University of Florida, with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D’Leon Inc., a small food
Dunkin’ Brands Group, Inc. operates under the Dunkin’ Donuts and Baskin-Robbins brands worldwide and has over 13,000 Dunkin’ Donuts and over 8,100 Baskin-Robbins restaurants.Using financial
What are the characteristics of a liquid asset? Give examples of some liquid assets.
What question are the two liquidity ratios designed to answer?
Which is the least liquid of the firm’s current assets?
A company has current liabilities of $500 million, and its current ratio is 2.0. What is the total of its current assets? ($1,000 million) If this firm’s quick ratio is 1.6, how much inventory does
Write the equations for four ratios that are used to measure how effectively a firm manages its assets.
If one firm is growing rapidly and another is not, how might this distort a comparison of their inventory turnover ratios?

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