Questions and Answers of Principles Managerial Finance

A certain firm with no debt that operates in perfect capital markets currently generates a 7.5% return for its shareholders and can issue debt at a cost of 5%. Determine the firm’s ROE at the
NoLeverage is a firm financed entirely with equity and Leverage is a firm financed with 50-50 equity and debt, but otherwise the two firms are identical. Both firms have an annual NOP of $2 million
Southside Systems has $60 million of outstanding debt with a 7% required rate of return. Southside has a required return on assets of 13%, an EBIT of $45 million, and corporate tax rate of 21%.a.
TK Implements is an unusual company that will operate for one year, generate cash flow just once, and then shut down.The value of TK Implements today is $4,075,600, a figure which includes both the
Assume that capital markets are perfect, then calculate the cost of debt for a group of firms that each are worth $6 million, have a weighted average cost of capital of 19%, and the following equity
Woods Construction Corp. has no debt and expects to earn annual NOP of $5.8 million indefinitely. Woods has a required return on assets of 11%, a corporate tax rate of 21%, and there are no taxes on
Galaxy Enterprises has earnings before interest and taxes of $9 million and $90 million of debt outstanding with a required rate of return of 7.3%. The required rate of return on assets in the
As the chief financial officer (CFO) of New Horizon Corporation, you are considering a recapitalization plan that will shift New Horizon’s capital structure from all common stock equity to 30% debt
What is the argument behind the prediction that dividend payments and share repurchases should not affect shareholder wealth? What does the evidence say about how stock prices react to shareholder
Is it easy for managers to dramatically pump up stock prices by repurchasing shares? In what ways might managers’ personal interests prompt them to buy back shares?
Figure 14.4 shows that every year, many more firms increase dividends than cut them. Comment on why you think that is true. FIGURE 14.4 U.S. Publicly Listed Companies Maintaining, Increasing, or
Arrange these events in chronological order: ex-dividend date, declaration date, date of record, payment date.
Weeks ago, the consumer products giant, Unilever, announced plans to buy back 700,000 shares using a Dutch auction. Since then the company has solicited interest from shareholders by asking how many
You own 10,000 shares of Broadcom, which currently sells for $304.50 and has announced its plan to pay a $4.50 dividend. You don’t need the cash flow and would prefer that Broadcom reinvest
WeDon’tWork Inc. is a company that provides shared leisure space for young adults. The company has $10 million in excess cash on hand, no debt, and 20 million shares of stock outstanding worth
Alternative dividend policies Given the earnings per share over the period 2014– 2021 shown in the following table, determine the annual dividend per share under each of the policies set forth in
On Friday, August 28, 2020, the stock of Tesla Inc. closed at $2,213.40 per share. On the following Monday, the company split its stock 5-for-1, and the stock price traded for $444.61 per share. Were
Assume that you are the CFO of a company contemplating a stock repurchase next quarter. Right now you forecast that the company’s EPS will be $2.09, but you receive a large bonus if EPS exceeds
U.S. companies had been cutting back on their working capital investments, most recently by dialing back inventories. Suppose that firms are managing their working capital assets to maximize
Regency Rug Repair Company, which currently offers cash sales only, is trying to decide whether to give customers 30 days to pay. The firm repairs 6,000 rugs per month at an average price of $32 each
Forrester Fashions has monthly credit sales of 20,000 units with an average collection period of 60 days. The company has a per-unit variable cost of $20 and a per-unit sale price of $30. Bad debts
Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million.
Explain why an increase in the rate at which a company uses a particular part increases the optimal order size of that part, while an increase in carrying costs decreases the optimal order size.
Tara’s Textiles currently has credit sales of $30 million per month, an average collection period of 60 days, and bad debts equal to 3% of sales. Assume that the price of Tara’s products is $60
Assume that you are a supplier to Tesco and have a payment term that allows Tesco to pay you in 60 days after the date of the invoice. This delay in payment is creating cash issues for you as they
To manage accruals better, Alliance Rental will switch from paying its employees every week to paying employees every two weeks. Alliance has 60 employees who work a 40-hour week and earn an average
Salem Instruments sold $475,000 worth of 120-day commercial paper for $468,000. What is the dollar amount of interest paid on the commercial paper? What is the effective 120-day rate on the paper?
On accepting the position of chief executive officer and chairman of Muse Inc., Dominic Howard changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s
Assume Credins Bank made a €10 million, one-year discount loan at 7% interest, requiring a compensating balance equal to 10% of the face value of the loan. Determine the effective annual rate
Bank has analyzed the accounts receivable of Maxtech, Inc. The bank has chosen eight accounts totaling $876,000 that it will accept as collateral. The bank’s terms include a lending rate set at
Inventory financing Heidelberg Cement faces a liquidity crisis: It needs a loan of €1,000,000 for two months. Having no source of additional unsecured borrowing, the firm must find a secured
Jon Jeffery is the new CFO of Sums Metal Casting, a UK-based company. Jon has decided to familiarize himself with the financial status of the business’ operations and is, therefore, interested in
Heidelberg Cement, a German building materials company, is considering leasing a new cement packaging machine for €250,000 per year. The lease arrangement calls for a six-year lease with an option
Hugh, an investment analyst in Brisbane, is analyzing three separate convertible bonds issued by Woolworths Limited, the Commonwealth Bank of Australia, and BHP Billiton. For each of them, calculate
Incredible Solutions issued a $1,120-par-value bond that is convertible at $28 per share. What is the bond’s conversion ratio? If the stock is currently selling at $30 per share, what is the
Woolworths Group recently sold a £1,000-par-value, five-year convertible bond with a 5% coupon rate. The interest payments will be paid annually at the end of each year and the principal will be
A three-month call option on 100 shares of ThyssenKrupp stock is selling for €150. The strike price for the option is :30, while the current stock price is € 26.30 per share. Ignoring brokerage
Just Water International Ltd. wants to purchase water purification equipment costing $250,000. The full amount needed to finance the asset can be borrowed at an interest rate of 12.5%. The terms of
PD Fishing Limited is attempting to determine whether to lease or purchase a new fishing boat for its crab business in Langkawi, Malaysia. The firm is in the 25% tax bracket, and its after-tax cost
Lease-versus-purchase decision Antonio Di Capri is looking to get the new Alfa Romeo Giulia, a luxury sport sedan. He can either buy it at a retail price of €38,000 or get a lease from an auto
Assume that BHP Billiton, an Anglo-Australian multinational public company, has issued the following convertible bonds. What is the conversion (or stock) value for each of these?a. A bond of A$1,000
The Volkswagen Group has just issued a convertible bond with a €1,000 par value. The bond is convertible into 20 shares of common stock. It has a 3% coupon rate and a 10-year maturity. The interest
Jackson Limited has an outstanding issue of 16-year convertible bonds with a £1,000 par value. These bonds are convertible into 100 shares of common stock. They have an 8% annual coupon rate,
Novartis International AG has warrants that allow the purchase of five shares of its outstanding common stock at CHf 7 per share. The common stock price per share and the market values of the warrant
Hans Gruber is evaluating BMW Group’s common stock and warrants to choose the better investment. The company’s stock is currently selling for €94.68 per share, while its warrants to purchase
Rajesh Chauhan is a successful doctor who is looking to invest some of his savings (INR 1,000,000) in Dr. Reddy’s Laboratories, an Indian multinational pharmaceutical company based in Hyderabad,
Terence Boyle is considering buying 1000 shares of GHB Corporation at €31 per share. Because he has read that the firm will probably soon receive certain large orders from abroad, he expects the
Before the COVID-19 pandemic hit the world, a number of hedge fund managers in the United Kingdom went on a short selling spree. This was similar to buying put options, which are bound to be
Luxe Foods is contemplating acquisition of Valley Canning Company for a cash price of $180,000. Luxe currently has high financial leverage and therefore has a cost of capital of 14%. As a result of
At the end of 2019, Lake Industries had 80,000 shares of common stock outstanding and had earnings available for common shareholders of $160,000. Butler Company, at the end of 2019, had 10,000 shares
Gas Natural Fenosa, a Spanish natural gas and electrical energy utilities company, is analyzing a possible merger with Energias de Portugal, a global energy company.Gas Natural has a tax loss
Banco Santander S.A. is considering the acquisition of Banco Popular Español, S.A., in a stock swap transaction. Currently, Banco Santander’s stock is selling for €5 per share. Although shares
SoftBank Group’s stock is currently trading at a price of ¥9,249 per share. The company is considering the acquisition of Vodafone Japan, whose stock is currently trading at ¥2,200 per share. The
Safran S.A. is considering a merger with Zodiac Aerospace. Safran had earnings of €15.78 billion last year, has 409 million shares outstanding, and expects earnings to grow at an annual rate of 5%.
Zenith Capital holds enough stock in Company X and Company Y to give it voting control of both firms. Consider the accompanying simplified balance sheets for these companies.a. What percentage of the
Assume that the Greek government is considering different options of voluntary settlement with its creditors. Classify each of the following options as an extension, a composition, or a combination
Suppose that Banco Espírito Santo has outstanding debt of €15,000,000. Classify each of the following voluntary settlements as an extension, a composition, or a combination of the two.a. Paying
Storm Financial Ltd. recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures.The firm currently has A$500,000 in outstanding debts and
Ben Stine is in a financial position where he owes more than he earns each month. Due to his lack of financial planning and a heavy debt load, Ben started missing payments and saw his credit rating
When a bankruptcy is imminent, employees and external creditors are likely to be least informed about the same. This may lead to a situation where managers transfer as much cash and assets out of the
From the point of view of a U.S.-based MNC, what are the key benefits of the Tax Cuts and Job Act of 2017?
What is the Euromarket?
Currency derivatives are used by Rolls-Royce to hedge against exchange rate movements that may affect its proceeds in non-sterling currencies. Suppose Rolls-Royce signed a contract to supply engines
Today the exchange rate between U.S. dollars and Japanese yen is 97.91(¥/$). A year ago the rate was 98.91(¥/$).a. Which currency appreciated and which currency depreciated over the course of the
Raiffeisen Bank International AG is an Austrian banking group whose Albanian subsidiary has a pretax income of €4,000,000; all after-tax income is available in the form of dividends to the parent
If BASF Corp. borrows Swedish krona (kr) at a nominal interest rate of 4% and during the year the krona appreciates by 15%, what will the effective annual interest rate be for the loan?
Jane Metal Works borrows Thai baht (THB) when the baht is trading at THB 35 (THB/GBP). If the nominal annual interest rate of the loan is 7% and at the end of the year the baht trades at THB 42
British Petroleum needs to borrow a specific amount of money for the next two months and can use two foreign lending facilities. It can borrow at a nominal annual interest rate of 0.5% in euros, or
Exchange rate movements Suppose a basket of goods in Paris costs € 133 and the same basket purchased in New York costs $153.a. At what exchange rate between euros and dollars is the cost of the
Translation of financial statements Daimler AG, a German-based MNC, has a subsidiary in Algeria (local currency, dinar, DZD). The balance sheet and income statement of the subsidiary follow. Assume
Suppose that Audi AG has two main subsidiaries, one in India (local currency is Indian rupee, INR) and one in Indonesia (local currency is Indonesian rupiah, IDR). Forecasts of business operations
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 intend to start a new aerospace business called Space Ace, but before launching your new enterprise some due diligence is necessary to evaluate your organizing, financing, and investing options.
Do you agree with the statement that in any economy, individuals are the net supplier of funds? What do you think will happen to financial markets if all individuals decide to consume more and not
Yin has been following market movements of her portfolio. In October 2020, she decided to sell a losing position in Volkswagen (VW) that she held on the Frankfurt Stock Exchange (Börse Frankfurt).
In June 2019, Forgefast PLC completed its IPO on Alternative Investment Market (AIM), an arm of the London Stock Exchange for smaller companies.Forgefast sold 20,000,000 shares of its stock at an
A Portuguese company called Albufeira Trading Ltd. listed itself on the Frankfurt Stock Exchange through an IPO on October 14, 2019.Albufeira issued a total of 12,345,000 shares to primary market
The UK Corporate Governance Code, expects directors to provide a notice to the stock exchange in advance if they intend to sell off any shares of the company they are working for. What ethical issues
Velocity Financial, Inc. conducted its IPO on January 17, 2020 for the principal purposes of increasing its capitalization and financial flexibility, creating a public market for its common stock,
Jatin Koorgi, CFO of South Trading Ltd., is working on the financial plans and projections for his next board meeting. South Trading trades in coffee and tea produced across India, and is one of the
In Table 3.5, a majority of the firms listed have current ratios that fall below their industry average. Why? One exception to this general pattern is Dillard’s, which is an upscale department
Tesla reported total sales of $5,179 million in the second quarter of 2020. The company also reported a gross profit margin of 25.4%. Calculate the cost of goods sold for this quarter.
Use the appropriate items from the following list to prepare L’Originelle Bakery’s balance sheet at December 31, 2020. Item Value at December 31, 2020 ( thousands) 900 Accruals 530 Accounts
Effect of net income on a firm’s balance sheet Barn Plc. reported net income of £2,650,000 for the year ended December 31, 2020, and the company paid out all earnings as dividends. Indicate how
Bauman Company’s total current assets, total current liabilities, and inventory for each of the past four years follow:a. Calculate the firm’s current and quick ratios for each year. Compare the
Common-size statement analysis A common-size income statement for Creek Enterprises’ 2021 operations follows. Using the firm’s 2022 income statement presented in Problem 3–16, develop the 2022
Financial information from fiscal year 2017 for two companies, Carson Sportswear and Boswell Dresses, which are competing businesses in the sportswear market in Utah, appears in the table below. All
McDougal Printing Inc. had sales totaling $37,500,000 in its recent fiscal year. Some ratios for the company for that year are listed below. Use this information to determine the dollar values of
Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2022, follow.a. Use the preceding financial statements to complete the following table. Assume
Complete ratio analysis, recognizing significant differences The CEO of Dinnington Glass Company has approached Anne Hersch, the company’s accountant, for an annual financial checkup. As the first
The chapter opener case described how a firm took advantage of its strong market position to fund its working capital through payables. Normally, negative working capital should negatively affect
In April 2020, Nike filed with the SEC its quarterly 10-Q, which revealed that the company earned EBIT of $1.19 billion that quarter with depreciation expense of $0.51 million. Nike’s financial
Bells Manufacturing estimates that the sales for the 2023 financial year will be $2.25 million. No new borrowing was obtained and, therefore, the interest expense remained unchanged at $24,500. Bells
Smyth Inc. has decided to do a scenario analysis for the year 2022. Their pessimistic prediction for sales is $360,000, the most likely amount of sale is $450,000, and the optimistic sales prediction
Basic Leonard Industries wishes to prepare a pro forma balance sheet for next year. The firm expects sales to total $3,000,000. The following information has been gathered:(1) A minimum cash balance
Randy & Whiskers Enterprises has 2021 sales of $15.5 million. It wishes to analyze expected performance and financing needs for 2022.You are requested to compile a pro forma balance sheet. Given
Abru Industries has decided to prepare financial plans. Use the financial statements and other information provided below to prepare the financial plans.(1) The firm has estimated that its sales for
Morten Metal Limited has assembled past (2020) financial statements (income statement and balance sheet follows) and financial projections for use in preparing financial plans for the coming year
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 2023 through December 2023.You have
As a 22-year-old finance graduate, you realize that you can quickly estimate your retirement age by knowing how much you need to retire, how much you can contribute each month to your retirement

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