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principles managerial finance

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

List and discuss the advantages and disadvantages of leasing.
What is the general relationship between the intrinsic and market values of a warrant? In what circumstances are these values quite close?What is a warrant premium?
Describe the procedures typically used by an acquirer to value a target company, whether it is being acquired for its assets or as a going concern.
Discuss macro and micro political risk. What is the emerging third path to political risk?
Compare the following risk preferences: (a) risk averse, (b) risk neutral, and(c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk aversion and risk tolerance?
Define return, and describe how to find the total rate of return on an investment.
Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growth rate of dividends is expected to
Explain each of the three other approaches to common stock valuation:(a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?
How does a rights offering protect a firm’s stockholders against ownership dilution?
What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM. Why is the YTM a good measure of the required return on a bond?
If the required return on a bond differs from its coupon rate, describe the behavior of the bond price over time as the bond moves toward maturity.
What relationship between the required return and the coupon rate will cause a bond to sell at a discount? At a premium? At its par value?
What procedure is used to value a bond that pays annual interest?Semiannual interest?
How is the cost of bond financing typically related to the cost of shortterm borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?
List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium.
What does each of the following yield curves reflect about interest rates: (a) downward sloping, (b) upward sloping, and (c) flat? What is the “normal” shape of the yield curve?
What is the real rate of interest? Differentiate it from the nominal rate of interest.
What role does an investment bank play in a public offering? Describe an underwriting syndicate.
What is the capital market? What are broker markets? What are dealer markets? How do they differ?
ETHICS PROBLEM One of the key risk areas that corporates need to manage is“ethical risks.” Do you think that management of ethical risks is as important for businesses as management of financial risks? Explain how ethical problems may affect a firm’s profits and stock price.
Corporate taxes and the use of debt Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate tax consequences of such a decision. Currently, Hemingway generates before-tax yearly income of
Interest versus dividend expense Derwent Ltd. has announced that the earnings before income and taxes is going to be £300,000 for the current year. Assuming corporate tax rate for Derwent Ltd. is a flat 30%, compute the firm’s profit after taxes and earnings available for common stockholders
Interest versus dividend income Depot Logistics Inc. has declared pretax income from its operations of $560,000. In addition, it also received interest payment of$40,000 on bond stock held in Warehouse PLC. During the year, it also received$40,000 in income from dividends on its 20% common stock
Double taxation and implied cost of limited liability You are contemplating starting a new business as either a sole proprietorship or a corporation. On the one hand you really value the limited liability provided by incorporating, but on the other hand you are not fond of the double taxation issue
Marginal corporate tax rates Using the corporate tax rate schedule given in the previous problem, perform the following:a. Find the marginal tax rate for the following levels of corporate earnings before taxes: $12,000; $40,000; $70,000; $90,000; $300,000; $550,000; $1.3 million;and $22 million.b.
Average corporate tax rates Ordinary income in 2017 was taxed subject to the rates shown in the accompanying table. Using the data in the table, perform the following:a. Calculate a firm’s tax liability, after-tax earnings, and average tax rate for the following levels of corporate earnings
Corporate taxes Southern Textile Ltd. is a manufacturer of sportswear and supplies products to a number of European retail stores. Its registered office is in Singapore.During 2017, the firm earned SGD 112,000 before taxes. Singapore’s corporate tax rate is 20%. Firms are eligible for a tax
Identifying agency problems, costs, and resolutions You are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson Corporation. To obtain all the stock of Nelson Corporation, Pollack Enterprises is willing to pay
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 benefits of
Marginal cost–benefit analysis and the goal of the firm Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system.The new system would require an initial cash outlay of $250,000. The current system could be sold for $55,000. The monetary benefit of
Cash flows Sheldon Smith spends many hours monitoring his personal cash flows every month. Sheldon earns 5% on his short-term investments while paying prime plus 2% (prime is 9%) on the mortgage. The cash inflows and outflows for the month of March are as follows:LG 4 Item Cash inflow Cash outflow
Accrual income versus cash flow for a period The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the end of the financial year, the dealer still owed The Motor Corporation $350,000. The cost of the vehicles sold was $400,000, and this cost was incurred and
For the current year, Ross Corporation had pretax ordinary income of $500,000 and sold for $150,000 an asset purchased previously for $125,000. Calculate the total tax liability for the company.
You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments toward LED-based lighting solutions instead of traditional light bulbs. You are currently evaluating two
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. For the past two years, Ann has tried to convince Jack to
You want to purchase a new car for $43,000 as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount due at the beginning of each month for a six-year loan with a 4.9% nominal annual interest rate. Use Excel to find the monthly payment
How can you determine the size of the equal, end-of-year deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
Rather than comparing future values, you often compare the effective annual rates of various investment opportunities with differing compounding frequencies. Use Excel to calculate the effective annual rates based on a 14% nominal annual rate of return with annual, semiannual, monthly, and daily
What if your short-term investments in the previous review question provide continuous compounding? Use Excel to determine the future value of your company’s short-term investments based on continuous compounding.
You are responsible for managing your company’s $1,000,000 worth of short-term investments over the next four years, and you know that the compounding frequency is quite important. Use Excel to calculate the future value of your short-term investments in four years based on a 6% nominal annual
You have just graduated from college and begun your new career, and now it is time to buy your first home. You qualify for a 3.65%mortgage interest rate, and you can afford to make a $780 monthly mortgage payment. Use Excel to determine how much you can spend for your new dream home (assume that
Rather than making contributions to an IRA at the end of each year, you decide to make equal $5,000 contributions at the beginning of each year for 30 years. Assuming a 9.5% annual rate of return, use Excel to solve for the future value of your IRA contributions when you retire.
Because tax time comes around every year, you smartly decide to make equal $5,000 contributions to your IRA at the end of every year for 30 years. Assuming a 9.5% annual rate of return, use Excel to calculate the future value of your IRA contributions when you retire in 30 years.
What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate? Why doesn’t this chapter provide an equation showing you how to calculate the future value of a perpetuity?
It is never too soon to begin investing for a child’s college education.Assume it will cost $108,000 for your child’s college education and that you can safely earn 4% annually for the next 18 years. Use Excel to determine the amount you would need to invest today to ensure that you can cover
It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Use Excel to find the future value of a $5,000 IRA contribution that will grow at 9.5% until you retire in 30 years.
What is the difference between future value and present value? Which approach is generally preferred by financial managers?
Describe the judgmental approach for preparing the pro forma balance sheet.
Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method?
Define and differentiate between a firm’s operating cash flow (OCF)and its free cash flow (FCF).
Why do we exclude interest expense from operating cash flow?
Why is depreciation considered a noncash charge?
Explain why a decrease in the cash account is classified as a cash inflow(source) and why an increase in cash is classified as a cash outflow(use) in preparing the statement of cash flows.
What is the financial planning process? Contrast long-term (strategic)financial plans with short-term (operating) financial plans.
What three areas of analysis are combined in the modified DuPont formula?Explain how the manager uses the DuPont system of analysis to dissect the firm’s results and isolate their causes.
What three ratios of profitability appear on a common-size income statement?
When performing cross-sectional ratio analysis, the analyst should pay primary attention to what types of deviations from the norm?Why?
P3–28 ETHICS PROBLEM Do some reading in periodicals or on the Internet to find out more about the Sarbanes-Oxley Act’s provisions for companies. Select one of those provisions, and indicate why you think financial statements will be more trustworthy if company financial executives implement
P3–19 Profitability analysis In early 2013, Pepsi reported revenues of $65.64 billion with earnings available for common stockholders of $6.12 billion. Pepsi’s total assets at the time were $74.64 billion. Meanwhile, one of Pepsi’s competitors, Dr. Pepper, reported sales of$6.01 billion with
P3–10 Statement of retained earnings Hayes Enterprises began 2015 with a retained earnings balance of $928,000. During 2015, the firm earned $377,000 after taxes. From this amount, preferred stockholders were paid $47,000 in dividends. At year-end 2015, the firm’s retained earnings totaled
P3–3 Income statement preparation On December 31, 2015, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees, a bookkeeper and a clerical assistant. In
E3–5 If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders
E3–3 Cooper Industries, Inc., began 2015 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The
E3–2 Explain why the income statement can also be called a “profit-and-loss statement.”What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?
3–20 What three areas of analysis are combined in the modified DuPont formula?Explain how the DuPont system of analysis is used to dissect the firm’s results and isolate their causes.
3–19 Describe how you would use a large number of ratios to perform a complete ratio analysis of the firm.
3–18 Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is of the greatest concern to creditors?
3–17 How do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a feel for the firm’s return and risk?
3–16 Which measure of profitability is probably of greatest interest to the investing public? Why?
3–15 What would explain a firm’s having a high gross profit margin and a low net profit margin?
3–14 What three ratios of profitability are found on a common-size income statement?
3–13 What ratio measures the firm’s degree of indebtedness? What ratios assess the firm’s ability to service debts?
3–12 What is financial leverage?
3–11 To assess the firm’s average collection period and average payment period ratios, what additional information is needed, and why?
3–10 In Table 3.5, most of the specific firms listed have current ratios that fall below the industry average. Why? The exception to this general pattern is Whole Foods Market, which competes at the very high end of the retail grocery market. Why might Whole Foods Market operate with
3–9 Under what circumstances would the current ratio be the preferred measure of overall firm liquidity? Under what circumstances would the quick ratio be preferred?
3–8 Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?
3–7 To what types of deviations from the norm should the analyst pay primary attention when performing cross-sectional ratio analysis?Why?
3–6 What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?
3–5 With regard to financial ratio analysis, how do the viewpoints held by the firm’s present and prospective shareholders, creditors, and management differ?
3–4 How is the current rate (translation) method used to consolidate a firm’s foreign and domestic financial statements?
3–3 Why are the notes to the financial statements important to professional securities analysts?
3–2 Describe the purpose of each of the four major financial statements.
3–1 What roles do GAAP, the FASB, and the PCAOB play in the financial reporting activities of public companies?
LG 6 Use a summary of financial ratios and the DuPont system of analysis to perform a complete ratio analysis.
LG 5 Use ratios to analyze a firm’s profitability and its market value.
LG 4 Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt.
LG 3 Use ratios to analyze a firm’s liquidity and activity.
LG 2 Understand who uses financial ratios and how.
LG 1 Review the contents of the stockholders’ report and the procedures for consolidating international financial statements.
1... You have been assigned the task of putting together a statement for the ACME Company that shows its expected inflows and outflows of cash over the months of July 2016 through December 2016.You have been given the following data for ACME Company:(1) Expected gross sales for May through
P4–21 ETHICS PROBLEM The SEC is trying to get companies to notify the investment community more quickly when a “material change” will affect their forthcoming financial results. In what sense might a financial manager be seen as “more ethical”if he or she follows this directive and issues
P4–14 Multiple cash budgets: Scenario analysis Brownstein, Inc., expects sales of $100,000 during each of the next 3 months. It will make monthly purchases of $60,000 during this time. Wages and salaries are $10,000 per month plus 5% of sales. Brownstein expects to make a tax payment of $20,000
P4–9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and$60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and$100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the
P4–8 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 4.9 on page 125 and the following information in its preparation.Sales: February = $500,000; March = $500,000; April = $560,000;May = $610,000;
P4–7 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only source of cash inflows and that half of them are for cash and the remainder are collected evenly over the
P4–3 MACR depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $430,000 this year.The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders
P4–2 Depreciation In early 2015, Sosa Enterprises purchased a new machine for $10,000 to make cork stoppers for wine bottles. The machine has a 3-year recovery period and is expected to have a salvage value of $2,000. Develop a depreciation schedule for this asset using the MACRS depreciation
P4–1 Depreciation On March 20, 2015, Norton Systems acquired two new assets. Asset A was research equipment costing $17,000 and having a 3-year recovery period.Asset B was duplicating equipment having an installed cost of $45,000 and a 5-year recovery period. Using the MACRS depreciation
E4–5 Rimier Corp. forecasts sales of $650,000 for 2016. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed costs of $28,000 and a variable portion equal to 7.5% of sales. Interest expenses for the coming

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