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principles managerial finance
Principles of Managerial Finance 15th edition Chad J. Zutter, Scott B. Smart - Solutions
For many non-financial firms, extending trade credit is an important part of doing business. A challenge for these firms is that, unlike banks, they often lack long experience managing such accounts––thereby opening the door to employee or customer fraud. A recent survey by the Association of
Harte Textiles Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclical downturn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a target payout ratio of 40%. Management is
Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $122 per share. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 3-for-1. Just before the stock split, Monster Beverage shares were trading
Given the earnings per share over the period 2012– 2019 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d.Year
Over the past 10 years, a firm has had the earnings per share shown in the following table.a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for each year?b. If the firm had a
Bennett Farm Equipment Sales Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm’s stockholders. Therefore, the firm has
The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as shown in the following table.Based on Kopi’s historical dividend payout ratio, discuss whether a
Bristol’s Bistro, Inc., has declared a dividend of $1.25 per share for shareholders of record on Tuesday, December 3. The firm has 350,000 shares outstanding and will pay the dividend on December 28. How much cash will be needed to pay the dividend? When will the stock begin selling ex dividend?
Stock repurchases, or buybacks, have become the preferred way for large firms to shuttle cash to shareholders. From the end of the Great Recession through 2016, S&P 500 companies spent $3.3 trillion repurchasing shares–– compared with paying just $2.3 trillion in dividends. Finance theory
Southland Industries has $60,000 of 6% (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) for the following levels
Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his car requires a flat fee of $500, and the service provider requires monthly charges of $20. In his
On September 15, 2008, Lehman Brothers filed for Chapter 11––the largest such bankruptcy in American history. The move stunned global financial markets and, many argue, triggered the ensuing financial crisis. Founded in 1850, Lehman had weathered many financial panics and recessions (including
What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?
Scenario analysis Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was reopening an old gold mine that had ceased operations in the past due to low gold prices—is
Kiosk Corp. produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in a local library. The company makes two types of machines. One distributes soft drinks, and the other distributes snack foods. Kiosk expects both machines to
Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. The following table shows these
Boardman Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Boardman will be the exclusive supplier
The Sleek Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. The up-front cost of the equipment is $690,000. The company expects the equipment to produce steady income throughout its
Power switch Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects along with their initial investments and their IRRs are listed in the following table. Using the data given, prepare an
Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) for each project,
Like most firms in its industry, Culinary Cafe uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0 to 10. The scale is re-created in the following table.The firm is analyzing two projects based
You wish to evaluate a project requiring an initial investment of $59,500 and having a useful life of 7 years. What minimum amount of annual cash inflow do you need if your firm has an 8.7% cost of capital? If the project is forecast to earn $11,400 per year over the 7 years, what is its IRR? Is
Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years. The company’s cost of capital is 10.87%. Known with less certainty are the actual after-tax cash
With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an old gold mine that had ceased operations in the past due to low gold prices. Reopening the mine
Marcus Tube, a manufacturer of high quality aluminum tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 3% per year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the firm is considering
Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs related to the proposed project, explain whether each would be treated as a sunk cost or an opportunity
Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.a. If project A, which requires an initial investment of $4,650,000, is a replacement for project B and the $1,550,000 initial investment shown for project
Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers.a. An outlay of $27,600 for a marketing research reportb. A $275 outlay for an office machinec. An outlay of $1,750,000 to purchase copyrights
Bryson Sciences is planning to purchase a high-powered microscopy machine for $385,000 and incur an additional $31,300 in installation expenses. It is replacing older microscopy equipment that can be sold for $116,500, resulting in taxes from a gain on the sale of $42,600. Because of this
Landscapes Unlimited has spent $2,200 evaluating a new service area for expanding its business territory. The expansion will require the purchase of a new truck for $35,000, and fitting the truck with a flatbed that will cost $6,500 to install. The company would realize $8,250 in after-tax proceeds
A core concept in economics is marginal analysis––decisions should depend on incremental costs and benefits. Costs already incurred that cannot be recovered––sunk costs––are irrelevant. Surprisingly, businesses often wrongly consider sunk costs, a practice sometimes called the Concorde
Diagram and describe the three types of net cash flows for a capital budgeting project.
How do you calculate the book value of an asset?
White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.Year Cash
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern.Year
Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the master’s program will have an up-front cost of $50,000. If she enrolls in an MBA program, Jenny will quit her current job, which pays $50,000 per
Using a 10% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. Cash flows (CF;) in thousands A Year B D -$250 -$375 -$550 -$750 -$1,150 50 45 350 200 80 90 55 210 235 135 3 140 65 165 250 190
Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $360,000 and will generate after-tax cash inflows of $62,650 per year for 8 years. For each of the costs of capital listed, (1) calculate the net present value (NPV), (2) indicate whether to accept
Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%.a. Initial investment is $1,000,000; cash inflows are $150,000 per year.b. Initial investment is $2,500,000; cash inflows are $320,000
The Ball Shoe Company is considering an investment project that requires an initial investment of $542,000 and returns after-tax cash inflows of $75,000 per year for 10 years. The firm has a maximum acceptable payback period of 8 years.a. Determine the payback period for this project.b. Should
Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $52,500 and generate cash inflows of $24,500 per year for the next 3 years. Project Thompson involves replacement of the existing system; it
Volkswagen had come a long way. In 1934, Hitler challenged German industry to come up with an inexpensive vehicle for ordinary families––“a People’s Car.” Ferdinand Porsche’s design got the nod, and construction began on a factory to produce Beetles in modern-day Wolfsburg,
WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10%, the cost of
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $70.67. The firm just recently paid a dividend of $4. The firm has been increasing dividends regularly. Five years ago, the dividend was just $2.99.After under
Cost of common stock equity: CAPM Netflix common stock has a beta, b, of 0.8. The risk-free rate is 3%, and the market return is 10%.a. Determine the risk premium on Netflix common stock.b. Determine the required return that Netflix common stock should provide.c. Determine Netflix’s cost of
Cost of preferred stock Determine the cost for each of the following preferred stocks. Preferred stock Par value Sale price Annual dividend Flotation cost 11% $100 40 35 30 $101 38 37 26 $9.00 A B $3.50 8% $4.00 5% of par $2.50 $5.00 $3.00 20 20 9%
Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be paid.a. Calculate the cost of the preferred stock.b. If the firm sells the preferred stock with a 10%
Bella Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer or take out a second mortgage on her
Before-tax cost of debt and after-tax cost of debt David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 per month over the next 30 years.
Duke Energy has been paying dividends steadily for 20 years. During that time, dividends have grown at a compound annual rate of 3%. If Duke Energy’s current stock price is $78 and the firm plans to pay a dividend of $6.50 next year, what is the required return on Duke’s common stock?
Your firm, People’s Consulting Group, has been asked to consult on a potential preferred stock offering by Brave New World. This 9% preferred stock issue would be sold at its par value of $55 per share. Flotation costs would total $3 per share. Calculate the cost of this preferred stock.
Gertrude Stein––who shaped 20th century art and literature through discussions in her 1920s Paris home with the likes of Pablo Picasso and Ernest Hemingway––famously wrote of Oakland, California, “There is no there, there.” Had she lived until September 2016, she might have said the
Capital asset pricing model (CAPM) For each case in the following table, use the capital asset pricing model to find the required return. Risk-free Market Case Beta, ß rate, Rp return, rm A 1% 8% 1.30 B 2 0.90 13 -0.20 D 12 1.00 4 10 0.60
A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10 years, 2009–2018.a. On a set of “market return (x-axis)–asset return (y-axis)” axes, use the
Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is an innovative market player. However, Mike realizes that any time you consider a technology stock,
Your portfolio has three asset classes. U.S. government T-bills account for 45% of the portfolio, large-company stocks constitute another 40%, and small-company stocks make up the remaining 15%. If the expected returns are 2% for the T-bills, 10% for the large-company stocks, and 15% for the
Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine
Constant growth Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table.Year Dividend per share2019.......................................
Constant growth The common stock of Barr Labs Inc. trades for $114 per share. Investors expect the company to pay a $1.35 dividend next year, and they expect that dividend to grow at a constant rate forever. If investors require a 15.8% return on this stock, what dividend growth rate do they
Constant growth Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends:Year Dividend per
Zero growth Kelsey Drums Inc. is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $2.80 per share per year for the last 12 years. Management expects to continue to pay at that amount for
In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid? Dividend per share per period Periods of dividends passed 3 Par value Case Type Cumulative Noncumulative
Acura Labs Inc. has an outstanding issue of preferred stock with a $40 par value and an 8% annual dividend.a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter?b. If the preferred stock is noncumulative and the board of directors has passed the
Mark Goldsmith’s broker has shown him two bonds issued by different companies. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by Crabbe Waste Disposal Corporation and has a coupon rate of 6.324% paid annually. The second bond,
The Salem Company bond currently sells for $867.59, has a 6% coupon rate and a $1,000 par value, pays interest annually, and has 15 years to maturity.a. Calculate the yield to maturity (YTM) on this bond.b. Explain the relationship that exists between the coupon rate and yield to maturity and the
Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 per year for each of the next 4 years and $15,000 in 5 years. Her research indicates that she must earn 4% on low-risk assets, 7% on average-risk assets, and 14% on high-risk assets.a. Determine what is
Using the information provided in the following table, find the value of each asset today. Cash flow Appropriate required return Asset Year Amount $ 3,000 A 8% 2 3,000 3 3,000 1 through oo 500 B 5% 6% 2 4 5 45,000 $ 1,500 1 through 5 D 4% 8,500 $ 2,000 7% 3,000 5,000 7,000 4 5 4,000 1,000
Imagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an apartment. If you buy the condo, during each of the next 4 years you will have to pay property taxes and maintenance expenditures of about $6,000 per year, but you will
Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matures on May 15, 2027, has a current price quote of 97.708, and has a yield to maturity (YTM) of 6.034%. Given this information, answer the following questions:a. What was the dollar price of the
In January 2016, Anheuser-Busch issued an outstanding bond that pays a 3.3% coupon rate, matures in January 2023, and has a yield to maturity of 2.82%. In January 2017, Santander Holdings issued an outstanding bond that pays a 3.571% coupon rate, matures in January 2023, and has a yield to maturity
A 1-year Treasury bill currently offers a 5% rate of return. A 2-year Treasury note offers a 5.5% rate of return. Under the expectations theory, what rate of return do investors expect a 1-year Treasury bill to pay next year?
Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money.a. Suppose the expected rate of inflation is 1%
Economic forecasters predict that the rate of inflation will hold steady at 2% per year indefinitely. The table below shows the nominal interest rate paid on Treasury securities having different maturities.Maturity
The real rate of return Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 1.5%. He has decided to use the
Assume that the rate of inflation expected over the coming year is 3.3%. Explain how a 1-year T-bill could earn a negative real rate of return over the next year. How could it have a zero real rate of return? What minimum rate of return must the T-bill earn to meet your requirement of a 2% real
The nominal, risk-free rate on T-bills is 1.23%. If the real rate of interest is 0.80%, what is the expected inflation rate?
Nationally Recognized Statistical Rating Organizations (NRSROs), or creditrating agencies, provide investors with independent assessments of a debt issuer’s ability to make scheduled interest and principal payments. NRSROs assess corporate bonds, government bonds, municipal bonds, and debt
Samantha Fong sold her home in San Francisco in 2017 for$1.5 million, which was the median home price for that city. Samantha had lived inthat house for 17 years, having purchased it from Michael Shoven in 2000 for$545,000. What average annual rate of return did Samantha earn on her home,ignoring
On January 1, 2010, she bought shares of stock in Amazon, Chipotle Mexican Grill, and Netflix. The table below shows the price she paid for each stock, the price she received when she eventually sold her shares, and the date on which she sold each stock. Calculate the average annual growth in each
Tim Smith is shopping for a used luxury car. He has found one priced at $30,000. The dealer has told Tim that if he can come up with a down payment of $5,000, the dealer will finance the balance of the price at a 6% annual rate over 3 years (36 months).a. Assuming that Tim accepts the dealer’s
Joan Messineo borrowed $45,000 at a 4% annual rate of interest that she must repay over 3 years. The loan is amortized into three equal, end-of-year payments.a. Calculate the end-of-year loan payment.b. Prepare a loan amortization schedule showing the interest and principal breakdown of each of the
Developing the mine will cost $10 million right away, but cash flows of $4 million will arrive starting in 1 year and then continuing for the next 4 years (i.e., years 2 through 5). After that, no coal will remain, and Herr must spend $22 million to restore the land surrounding the mine to its
You are evaluating an investment that will pay $75 in 1 year, and it will continue to make payments at annual intervals thereafter, but the payments will grow by 4% forever.a. What is the present value of the first $75 payment if the discount rate is 10%?b. How much cash will this investment pay
Suppose that today’s date is January 1, 2019. You have the opportunity to make an investment that will pay you $100 on January 1 of every year, starting in 2020 and continuing forever. Assume the relevant discount rate is 7%.a. What would you pay now for this investment?b. Suppose the
Emily Jacob is 45 years old and has saved nothing for retirement. Fortunately, she just inherited $75,000. Emily plans to put a large portion of that money into an investment account earning an 11% return. She will let the money accumulate for 20 years, when she will be ready to retire. She would
Marian Kirk wishes to select the better of two 10-year annuities. Annuity 1 is an ordinary annuity of $2,500 per year for 10 years. Annuity 2 is an annuity due of $2,300 per year for 10 years.a. Find the future value of both annuities 10 years from now, assuming that Marian can earn (1) 6% annual
In exchange for a $23,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 9%.Alternative ....................................Single amountA ..............................................$28,500 at end of 3
You have $100 to invest. If you put the money into an account earning 5% interest compounded annually, how much money will you have in 10 years? How much money will you have in 10 years if the account pays 5% simple interest?
As the housing market began to boom at the end of the twentieth century and into the early twenty-first, the market share of subprime mortgages climbed from near 0% in 1997 to about 20% of mortgage originations in 2006. Several factors combined to fuel the rapid growth of lending to borrowers with
As a finance major, 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 account, and what rate of return you can earn on your retirement investments. With that information, you can solve for
You want to buy a new car as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount. Using the information provided at MyLab Finance, find the monthly payment amount for the car you are considering.
Rather than comparing future values, you often compare the effective annual rates of various investment opportunities with differing compounding frequencies. Using the information provided at MyLab Finance, solve for the effective annual rates of several investment opportunities with different
What if your short-term investments provide continuous compounding?Using the information provided at MyLab Finance, determine the future value of an investment opportunity based on continuous compounding.
You are responsible for managing your company’s short-term investments and you know that the compounding frequency of investment opportunities is quite important. Using the information provided at MyLab Finance, calculate the future value of an investment opportunity based on various compounding
To give yourself a financial head start after college, you have decided to work summer jobs and invest the money you earn until after graduation. You expect that your earnings each summer will vary depending on the job you get. Using the information provided at MyLab Finance, find the value of your
Rather than making contributions to an IRA at the end of each year, you decide to make equal contributions at the beginning of each year. Using the information provided at MyLab Finance, 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 contributions to your IRA at the end of every year. Using the information provided at MyLab Finance, calculate the future value of your IRA contributions when you retire.
It is never too soon to begin investing for a child’s college education. Using the information provided at MyLab Finance, determine the present value you would need to invest today to ensure that your child receives the college education she deserves.
It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Using the information provided at MyLab Finance, find the future value of an IRA contribution that grows until you retire.
Provincial Imports Inc. has assembled past (2019) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year (2020).Information related to financial projections for the year 2020 is as follows:(1) Projected
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