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principles managerial finance

Principles Of Managerial Finance 7th Edition Lawrence J Gitman, Chad J Zutter - Solutions

P3–18 Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm’s financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages (see the top of the next page) and Creek’s
P3–17 Interpreting liquidity and activity ratios The new owners of Bluegrass Natural Foods, Inc., have hired you to help them diagnose and cure problems that the company has had in maintaining adequate liquidity. As a first step, you perform a liquidity analysis. You then do an analysis of the
P3–16 Accounts receivable management An evaluation of the books of Blair Supply, which follows, gives the end-of-year accounts receivable balance, which is believed to consist of amounts originating in the months indicated. The company had annual sales of $2.4 million. The firm extends 30-day
P3–15 Inventory management Wilkins Manufacturing has annual sales of $4 million and a gross profit margin of 40%. Its end-of-quarter inventories area. Find the average quarterly inventory and use it to calculate the firm’s inventory turnover and the average age of inventory.b. Assuming that the
P3–14 Liquidity ratio Josh Smith has compiled some of his personal financial data to determine his liquidity position. The data are as follows.a. Calculate Josh’s liquidity ratio.b. Several of Josh’s friends have told him that they have liquidity ratios of about 1.8. How would you analyze
P3–13 Liquidity management Bauman Company’s total current assets, total current liabilities, and inventory for each of the past 4 years follow:a. Calculate the firm’s current and quick ratios for each year. Compare the resulting time series for these measures of liquidity.b. Comment on the
P3–12 Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle.Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to one another.Some of his ratios are listed below.Assuming that
P3–11 Changes in stockholders’ equity Listed are the equity sections of balance sheets for years 2014 and 2015 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholders’ equity has risen from $2,000,000 to $7,500,000. Use the statements to discover how and why that
P3–9 Initial sale price of common stock Haymitch Brewing Corporation has one issue of preferred stock and one issue of common stock outstanding. Given Haymitch’s stockholders’ equity account that follows, determine the original price per share at which the firm sold its single issue of common
P3–8 Effect of net income on a firm’s balance sheet Conrad Air, Inc., reported net income of $1,365,000 for the year ended December 31, 2016. Show how Conrad’s balance sheet would change from 2015 to 2016 depending on how Conrad “spent” those earnings as described in the scenarios that
P3–7 Balance sheet preparation Adam and Arin Adams have collected their personal asset and liability information and have asked you to put together a balance sheet as of December 31, 2015. The following information is received from the Adams family.a. Create a personal balance sheet as of
P3–5 Calculation of EPS and retained earnings Everdeen Mining, Inc., ended 2015 with a net profit before taxes of $436,000. The company is subject to a 40% tax rate and must pay $64,000 in preferred stock dividends before distributing any earnings on the 170,000 shares of common stock currently
P3–4 Income statement preparation Adam and Arin Adams have collected their personal income and expense information and have asked you to put together an income and expense statement for the year ended December 31, 2015. The following information is received from the Adams family.a. Create a
P3–2 Financial statement account identification Mark each of the accounts listed in the following table as follows:a. In column (1), indicate in which statement—income statement (IS) or balance sheet (BS)—the account belongs.b. In column (2), indicate whether the account is a current asset
P3–1 Reviewing basic financial statements The income statement for the year ended December 31, 2015, the balance sheets for December 31, 2015 and 2014, and the statement of retained earnings for the year ended December 31, 2015, for Technica, Inc., are given below and on the following page.
E3–4 Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the
E3–1 You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager, who graduated from your alma mater 2 years ago, gives you the following list of accounts and asks you to prepare a simple income statement using those
ST3–2 Balance sheet completion using ratios Complete the 2015 balance sheet for O’Keefe Industries using the information that follows it.The following financial data for 2015 are also available:1. Sales totaled $1,800,000.2. The gross profit margin was 25%.3. Inventory turnover was 6.0.4. There
ST3–1 Ratio formulas and interpretations Without referring to the text, indicate for each of the following ratios the formula for calculating it and the kinds of problems, if any, the firm may have if that ratio is too high relative to the industry average. What if the ratio is too low relative
Capital gains taxes As part of its operations, Ferguson’s Plumbing has bought and sold several nondepreciable capital assets. The purchase and sale prices for these assets are contained in the following table. Assuming that Fergurson’s pays a 40%capital gains tax, complete the table by filling
P1–3 Cash flows It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account, and her bank loans money at 6 percent per year while it offers short-term investment rates of 5 percent. Jane’s cash
ST12–3 Optimal capital structure Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.a. Compute the estimated share value associated with each of the capital structures, using the
P12–2 Breakeven comparisons: Algebraic Given the price and cost data shown in the accompanying table for each of the three firms, F, G, and H, answer the questions that follow.a. What is the operating breakeven point in units for each firm?b. How would you rank these firms in terms of their risk?
P12–18 Capital structure Kirsten Neal is interested in purchasing a new house given that mortgage rates are low. Her bank has specific rules regarding an applicant’s ability to meet the contractual payments associated with the requested debt.Kirsten must submit personal financial data for her
P12–20 Debt and financial risk Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales.The firm has fixed operating costs of $75,000 and variable operating costs equal to 70% of the sales level. The company pays $12,000 in
P12–21 EPS and optimal debt ratio Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.a. Estimate the optimal debt ratio on the basis of the relationship between earnings per
P12–22 EBIT–EPS and capital structure Data-Check is considering two capital structures.The key information is shown in the following table. Assume a 40% tax rate.a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS
P12–23 EBIT–EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate.a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS
P12–24 Integrative: Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost
P12–25 Integrative: Optimal capital structure Nelson Corporation has made the following forecast of sales, with the associated probabilities of occurrence noted.The company has fixed operating costs of $100,000 per year, and variable operating costs represent 40% of sales. The existing capital
P12–26 Integrative: Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of$40,000,000. It has earnings before interest and taxes of $8,000,000 and is taxed at a rate of 40%.a. Create a spreadsheet
P12–27 Integrative: Optimal capital structure Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has made the following three sales estimates, with their probabilities noted.The firm wishes to analyze five possible capital structures:
1.. Starstruck Company would like to determine its optimal capital structure. Several of its managers believe that the best method is to rely on the estimated earnings per share (EPS) of the firm because they believe that profits and stock price are closely related. The financial managers have
1.. Summarize the pros and cons of operating leverage? Adobe Systems, one of the largest PC software companies in the United States, dominates the graphic design, imaging, dynamic media, and authoring-tool software markets. Website designers favor its Photoshop and Illustrator software
P12–28 ETHICS PROBLEM “Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or swap debt for equity.” Comment on this statement.What steps might a board of directors take to ensure that
P12–19 Various capital structures Charter Enterprises currently has $1 million in total assets and is totally equity financed. It is contemplating a change in its capital structure.Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following
P12–17 Integrative: Multiple leverage measures and prediction Carolina Fastener, Inc., makes a patented marine bulkhead latch that wholesales for $6.00. Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13,000 interest and preferred
P12–16 Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of$6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per unit,
P12–15 Integrative: Multiple leverage measures Play-More Toys produces inflatable beach balls, selling 400,000 balls per year. Each ball produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6,000,
P12–14 DFL and graphical display of financing plans Wells and Associates has an EBIT of$67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a 40% tax rate.a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm.b.
P12–13 Financial leverage Max Small has outstanding school loans that require a monthly payment of $1,000. He needs to buy a new car for work and estimates that this purchase will add $350 per month to his existing monthly obligations. Max will have$3,000 available after meeting all his monthly
P12–12 Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%.a. Using EBIT values of $80,000 and $120,000, determine the associated
P12–11 EPS calculations Southland Industries has $60,000 of 16% (annual interest)bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of$5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnings per share (EPS)
P12–10 Degree of operating leverage: Graphical Levin Corporation has fixed operating costs of $72,000, variable operating costs of $6.75 per unit, and a selling price of$9.75 per unit.a. Calculate the operating breakeven point in units.b. Compute the degree of operating leverage (DOL) using the
P12–9 Degree of operating leverage Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit.a. Calculate the operating breakeven point in units.b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units,
P12–8 EBIT sensitivity Stewart Industries sells its finished product for $9 per unit. Its fixed operating costs are $20,000, and the variable operating cost per unit is $5.a. Calculate the firm’s earnings before interest and taxes (EBIT) for sales of 10,000 units.b. Calculate the firm’s EBIT
P12–7 Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a few of the
P12–6 Breakeven point: Changing costs/revenues JWG Company publishes Creative Crosswords. Last year, the book of puzzles sold for $10, with a variable operating cost of $8 per book and a fixed operating cost of $40,000.a. How many books must JWG sell this year to achieve the breakeven point for
P12–5 Breakeven analysis Paul Scott has a 2008 Cadillac that he wants to update with a GPS system so that he will have access to up-to-date road maps and directions.Aftermarket equipment can be fitted for a flat fee of $500, and the service provider requires monthly charges of $20. In his line of
P12–4 Breakeven analysis Barry Carter is considering opening a video store. He wants to estimate the number of DVDs he must sell to break even. The DVDs will be sold for$13.98 each, variable operating costs are $10.48 per DVD, and annual fixed operating costs are $73,500.a. Find the operating
P12–3 Breakeven point: Algebraic and graphical Fine Leather Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are $473,000 annually, and its variable operating costs are $86.00 per unit.a. Find the firm’s operating breakeven point in units.b. Label
P12–1 Breakeven point: Algebraic Kate Rowland wishes to estimate the number of flower arrangements she must sell at $24.95 to break even. She has estimated fixed operating costs of $12,350 per year and variable operating costs of $15.45 per arrangement.How many flower arrangements must Kate sell
E12–5 Cobalt Industries had sales of 150,000 units at a price of $10 per unit. It faced fixed operating costs of $250,000 and variable operating costs of $5 per unit. The company is subject to a tax rate of 38% and has a weighted average cost of capital of 8.5%. Calculate Cobalt’s net operating
E12–4 Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base level of EBIT of $20,000?
E12–3 Chico’s has sales of 15,000 units at a price of $20 per unit. The firm incurs fixed operating costs of $30,000 and variable operating costs of $12 per unit. What is Chico’s degree of operating leverage (DOL) at a base level of sales of 15,000 units?
E12–2 The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box. If the firm has a potential investment that would simultaneously raise its fixed costs to $16,500 and allow it to
E12–1 Canvas Reproductions has fixed operating costs of $12,500 and variable operating costs of $10 per unit and sells its paintings for $25 each. At what level of unit sales will the company break even in terms of EBIT?
ST12–2 EBIT–EPS analysis Newlin Electronics is considering additional financing of$10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12%(annual interest) bond issue or through the sale of
ST12–1 Breakeven point and all forms of leverage TOR most recently sold 100,000 units at$7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of$5 (annual dividend) preferred
12–15 What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?
12–14 Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?
12–13 Explain the EBIT–EPS approach to capital structure. Include in your explanation a graph indicating the financial breakeven point; label the axes. Is this approach consistent with maximization of the owners’wealth?
12–12 How do the cost of debt, the cost of equity, and the weighted average cost of capital (WACC) behave as the firm’s financial leverage increases from zero? Where is the optimal capital structure? What is its relationship to the firm’s value at that point?
12–11 How does asymmetric information affect the firm’s capital structure decisions?How do the firm’s financing actions give investors signals that reflect management’s view of stock value?
12–10 Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?
12–9 What are business risk and financial risk? How does each of them influence the firm’s capital structure decisions?
12–8 What is the major benefit of debt financing? How does it affect the firm’s cost of debt?
12–7 In what ways are the capital structures of U.S. and non–U.S. firms different? How are they similar?
12–6 What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?
12–5 What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?
12–4 What is financial leverage? What causes it? How is the degree of financial leverage (DFL) measured?
12–3 What is operating leverage? What causes it? How is the degree of operating leverage (DOL) measured?
12–2 What is the operating breakeven point? How do changes in fixed operating costs, the sale price per unit, and the variable operating cost per unit affect it?
12–1 What is meant by the term leverage? How are operating leverage, financial leverage, and total leverage related to the income statement?
LG 6 R eview the return and risk of alternative capital structures, their linkage to market value, and other important considerations related to capital structure.
LG 5 Discuss the EBIT–EPS approach to capital structure.
LG 4 E xplain the optimal capital structure using a graphical view of the firm’s cost-of-capital functions and a zerogrowth valuation model.
LG 3 Describe the types of capital, external assessment of capital structure, the capital structure of non–U.S.firms, and capital structure theory.
LG 2 U nderstand operating, financial, and total leverage and the relationships among them.
LG 1 Discuss leverage, capital structure, breakeven analysis, the operating breakeven point, and the effect of changing costs on the breakeven point.
1. Assume that Monsanto Corporation is considering the replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has
P1–6 ETHICS PROBLEM What does it mean to say that managers should maximize shareholder wealth “subject to ethical constraints”? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?
P1–5 Identifying agency problems, costs, and resolutions Explain why each of the following situations is an agency problem and what costs to the firm might result from it.Suggest how the problem might be handled short of firing the individual(s) involved.a. The front desk receptionist routinely
P1–4 Marginal cost–benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total
P1–2 Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2014, Thomas shipped
P1–1 Liability comparisons Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Merideth in each of the following situations.a. Southwest Development Company is
E1–5 Recently, some branches of Donut Shop, Inc., have dropped the practice of allowing employees to accept tips. Customers who once said, “Keep the change,” now have to get used to waiting for their nickels. Management even instituted a policy of requiring that the change be thrown out if a
E1–4 You have been made treasurer for a day at AIMCO, Inc. AIMCO develops technology for video conferencing. A manager of the satellite division has asked you to authorize a capital expenditure in the amount of $10,000. The manager states that this expenditure is necessary to continue a
E1–3 The end-of-year parties at Yearling, Inc., are known for their extravagance. Management provides the best food and entertainment to thank the employees for their hard work.During the planning for this year’s bash, a disagreement broke out between the treasurer’s staff and the
E1–2 As chief financial officer, it is your responsibility to weigh the finanical pros and cons of the many investment opportunities developed by your company’s research and development division. You are currently evaluating two competing 15-year projects that differ in several ways. Relative
E1–1 Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions.One disagreement, however, concerns the legal form of their business. Ann has tried for the past 2 years to get Jack to agree
1. Emphasis on Cash Flows Worldwide Rugs is a rug importer located in the United States that resells its import products to local retailers. Last year, Worldwide Rugs imported $2.5 million worth of rugs from around the world, all of which were paid for prior to shipping. On receipt of the rugs, the
1-18 How do market forces—both shareholder activism and the threat of takeover—act to prevent or minimize the agency problem? What role do institutional investors play in shareholder activism?
1-17 How can the firm structure management compensation to minimize agency problems? What is the current view with regard to the execution of many compensation plans?
1-16 Define agency problems, and describe how they give rise to agency costs.Explain how a firm’s corporate governance structure can help avoid agency problems.
1-15 What is corporate governance? How has the Sarbanes-Oxley Act of 2002 affected it? Explain.
1–14 What are the two primary activities of the financial manager that are related to the firm’s balance sheet?
1–13 What are the major differences between accounting and finance with respect to emphasis on cash flows and decision making?
1–12 What is the primary economic principle used in managerial finance?
1–11 In what financial activities does a corporate treasurer engage?

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