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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

What is the ex-dividend date, and why is it important to investors?
A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 45% debt and 55% equity. If the residual dividend policy is used, what is the firm’s
What are dividend reinvestment plans?
What are dividend reinvestment plans. What are their advantages and disadvantages from both stockholders’ and firms’ perspectives?
Identify the four broad sets of factors that affect dividend policy.
What constraints affect dividend policy?
How do investment opportunities affect dividend policy?
How does the availability and cost of outside capital affect dividend policy?
What are stock dividends and stock splits?
How do stock dividends and splits affect stock prices?
In what situation should a firm pay a stock dividend?
In what situation should a firm split its stock?
Suppose you have 100 common shares of Tillman Industries. The EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share. Now Tillman announces a twofor-one split. Immediately after the
Explain how repurchases can (1) help stockholders limit taxes and (2) help firms change their capital structures.
What are three procedures a firm can use to repurchase its stock?
What are some advantages and disadvantages of stock repurchases?
How can stock repurchases help a company operate in accordance with the residual dividend model?
Define each of the following terms:a. Target payout ratio; optimal dividend policyb. Dividend irrelevance theory; bird-in-the-hand fallacyc. Information content (signaling) hypothesis; clienteles;
Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When CMC’s founder, who was also its research
Discuss the pros and cons of having the directors formally announce a firm’s future dividend policy.
Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 45% with a $20
Brooks Sporting Inc. is prepared to report the following 2021 income statement(shown in thousands of dollars).Prior to reporting this income statement, the company wants to determine its annual
Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.75 out of annual earnings per share of $2.25. Currently, Rubenstein Bros.’ stock is selling for $12.50 per share.
In 2020, Keenan Company paid dividends totaling$3,600,000 on net income of $10.8 million. Note that 2020 was a normal year and that for the past 10 years, earnings have grown at a constant rate of
In this chapter’s opening vignette, we discussed Apple’s decision to establish a dividend payout policy in 2012 and the establishment of a share repurchase program that has returned $200 billion
How did the term working capital originate?
Differentiate between working capital and net working capital.
Differentiate between net working capital and net operating working capital.
Identify and explain three alternative current assets investment policies.
Use the DuPont equation to show how working capital policy affects a firm’s expected ROE.
Differentiate between permanent current assets and temporary current assets.
What does maturity matching mean, and what is the advantage of this financing policy?
What are the advantages and disadvantages of short-term versus long-term debt as identified in this section?
How would a reduction in the cash conversion cycle increase profitability?
What are some actions a firm can take to shorten its cash conversion cycle?
How could the cash budget be used when the terms of a bank loan are negotiated?
Suppose a firm’s cash flows do not occur uniformly throughout the month. What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget? How
What two definitions of cash are commonly encountered?
Differentiate between marketable securities held for operating (transactions) purposes and securities held for other reasons.
How has the development of credit and debit cards affected firms’ currency holdings?
How would the use of credit cards affect a firm’s cash conversion cycle assuming it previously allowed customers 30 days to pay for their purchases?
How does a firm’s ability to borrow affect its optimal holdings of cash and securities?
Common stocks that are traded on the NYSE are liquid in the sense that they can be sold and converted to cash on short notice. Are stocks a good choice for a firm’s marketable securities portfolio?
What are the three primary tasks of the financial manager regarding inventory management?
What are credit terms?
Define days sales outstanding (DSO). What can be learned from it, and how is it affected by seasonal sales fluctuations?
What is credit quality, and how is it assessed?
How does collection policy influence sales, the collection period, and the bad debt loss percentage?
Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle.Chastain’s 2021 sales (all on credit) were
Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion
Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2021 and
CaSh BUDGetING Rework Problem 16-10 using a spreadsheet model. After completing parts a throughd, respond to the following: If Bowers’ customers began to pay late, collections would slow down, thus
Dan Barnes, financial manager of Ski Equipment Inc. (SKI), is excited, but apprehensive. The company’s founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan of
What are the key elements of a corporation’s strategic plan?
How is the financial plan related to the other parts of a firm’s overall strategic plan?
How can the financial plan be used to help management provide guidance to security analysts?
Why is an accurate sales forecast critical for financial planning?
How would an increase in each of the following factors affect the AFN?i. Payout ratio ii. Capital intensity ratio, A0*/S0iii. Profit margin iv. Days sales outstanding, DSO v. Sales growth rate If the
Is it possible for the AFN to be negative? If so, what would this indicate?If the key ratios are expected to remain constant, the AFN equation can be used to forecast the need for external funds.
If excess capacity exists, how would that affect the calculated AFN?If the key ratios are expected to remain constant, the AFN equation can be used to forecast the need for external funds. Write out
What advantages does the forecasted financial statement method have over the AFN equation for forecasting financial requirements?
Why should a marketing or management major be interested in financial forecasting?
Would financial forecasting be relevant for nonfinance majors when they graduate and enter the workforce? Explain.
Examine the following statement: Using regression to predict items such as inventories is better than basing such predictions on last year’s Inventory/Sales ratio because regression helps smooth
Define each of the following terms:a. Mission statement; corporate scope; statement of corporate objectives; corporate strategiesb. Operating plan; financial planc. Spontaneously generated fundsd.
Weatherford Industries Inc. has the following ratios:A0*/S0 = 1.6; L0*/S0 = 0.4; profit margin = 0.10; and payout ratio = 0.45, or 45%. Sales last year were $100 million. Assuming that these ratios
Suppose Weatherford’s financial consultants report (1) that its Sales/Inventory ratio = 3 times versus an industry average of 4 times and (2) that Weatherford can reduce inventories and thus raise
Carlsbad Corporation’s sales are expected to increase from $5 million in 2021 to $6 million in 2022, or by 20%. Its assets totaled $3 million at the end of 2021.Carlsbad is at full capacity, so its
Refer to Problem 17-1. What additional funds would be needed if the company’s year-end 2021 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from
Refer to Problem 17-1 and assume that the company had $3 million in assets at the end of 2021. However, now assume that the company pays no dividends.Under these assumptions, what additional funds
Austin Grocers recently reported the following 2021 income statement (in millions of dollars):For the coming year, the company is forecasting a 25% increase in sales, and it expects that its year-end
At year-end 2021, total assets for Arrington Inc. were$1.8 million and accounts payable were $450,000. Sales, which in 2021 were $3.0 million, are expected to increase by 25% in 2022. Total assets
Paladin Furnishings generated $4 million in sales during 2021, and its year-end total assets were $3.2 million. Also, at year-end 2021, current liabilities were$500,000, consisting of $200,000 of
Morrissey Technologies Inc.’s 2021 financial statements are shown here.Suppose that in 2022, sales increase by 10% over 2021 sales. The firm currently has 100,000 shares outstanding. It expects to
Krogh Lumber’s 2021 financial statements are shown here.a. Assume that the company was operating at full capacity in 2021 with regard to all items except fixed assets; fixed assets in 2021 were
Use a spreadsheet model to forecast the financial statements in Problems 17-13 and 17-14.Problems 17-14Krogh Lumber’s 2021 financial statements are shown here.a. Assume that the company was
FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial
Clothing retailer Abercrombie & Fitch enjoyed phenomenal success in the late 1990s. Between 1996 and 2000, its sales grew almost fourfold—from $335 million to more than $1.2 billion—and its stock
Storm Software wants to issue $100 million in new capital to fund new opportunities. If Storm were to raise the $100 million of new capital in a straight-debt 20-year bond offering, Storm would have
Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but the division
It is now December 31, 2005, and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2004 accident. She requested recovery of lost wages, plus $100,000 for
You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions. a. Draw time lines for
The Davidson Corporation’s balance sheet and income statement are given here: Davidson Corporation: Balance Sheet as of December 31, 2005 (Millions of Dollars) Davidson Corporation: Income
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the extended Du Pont equation. The firm has no lease payments, but has a
Here is the condensed 2005 balance sheet for Skye Computer Company (in thousands of dollars): Skye’s earnings per share last year were $3.20, the common stock sells for $55, last year’s dividend
Use a spreadsheet model to evaluate the project analyzed in Problem 13-13.Data in Problem 13-13.Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is
The Severn Company plans to raise a net amount of $270 million to finance new equipment and working capital in early 2006. Two alternatives are being considered: Common stock may be sold to net $60
Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40 percent with
One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment.a. Explain what a residual dividend policy implies,
Austin Grocers recently reported the following 2005 income statement (in millions of dollars): This year the company is forecasting a 25 percent increase in sales, and it expects that its year-end
The Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s 2005 sales (all on credit) were
Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2006. Prior to reporting this income statement, the company wants to determine

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