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principles managerial finance

Principles Of Managerial Finance Study Guide 10th Edition Gitman - Solutions

4–12 Present value concept Answer each of the following questions.a. What single investment made today, earning 12% annual interest, will be worth $6,000 at the end of 6 years?b. What is the present value of $6,000 to be received at the end of 6 years if the discount rate is 12%?c. What is the
4–11 Present values For each of the cases shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period noted. Case Single cash flow $ 7,000 End of Discount rate period (years) 12% 4
4–10 Present value calculation Without referring to tables or to the preprogrammed function on your financial calculator, use the basic formula for present value, along with the given opportunity cost, i, and the number of periods, n, to calculate the present value interest factor in each of the
4–9 Single-payment loan repayment A person borrows $200 to be repaid in 8 years with 14% annually compounded interest. The loan may be repaid at the end of any earlier year with no prepayment penalty.a. What amount will be due if the loan is repaid at the end of year 1?b. What is the repayment at
4–8 Future value calculation Misty need to have $15,000 at the end of 5 years in order to fulfill her goal of purchasing a small sailboat. She is willing to invest the funds as a single amount today but wonders what sort of investment return she will need to earn. Use your calculator or the time
4–7 Future value and time You can deposit $10,000 into an account paying 9%annual interest either today or exactly 10 years from today. How much better off will you be at the end of 40 years if you decide to make the initial deposit today rather than 10 years from today?
4–6 Inflation and future value As part of your financial planning, you wish to purchase a new car exactly 5 years from today. The car you wish to purchase costs$14,000 today, and your research indicates that its price will increase by 2% to 4% per year over the next 5 years.a. Estimate the price
4–5 Future value You have $1,500 to invest today at 7% interest compounded annually.a. Find how much you will have accumulated in the account at the end of(1) 3 years, (2) 6 years, and (3) 9 years.b. Use your findings in part a to calculate the amount of interest earned in(1) the first 3 years
4–4 Future values For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today that will be available at the end of the deposit period if the interest is compounded annually at the rate specified over the given period. Case Single cash
4–3 Future value tables Use the future value interest factors in Appendix Table A–1 in each of the cases shown in the following table to estimate, to the nearest year, how long it would take an initial deposit, assuming no withdrawals,a. To double.b. To quadruple. Case Interest rate A 7% B 40 C
4–2 Future value calculation Without referring to tables or to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, i, and the number of periods, n, to calculate the future value interest factor in each of the cases
4–1 Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000 at the end of years 2 and 3, $10,000 at the end of year 4, $8,000 at the end
ST 4–4 Deposits needed to accumulate a future sum Judi Janson wishes to accumulate$8,000 by the end of 5 years by making equal annual end-of-year deposits over the next 5 years. If Judi can earn 7% on her investments, how much must she deposit at the end of each year to meet this goal?
ST 4–3 Present values of single amounts and streams You have a choice of accepting either of two 5-year cash flow streams or single amounts. One cash flow stream is an ordinary annuity, and the other is a mixed stream. You may accept alternative A or B—either as a cash flow stream or as a
ST 4–2 Future values of annuities Ramesh Abdul wishes to choose the better of two equally costly cash flow streams: annuity X and annuity Y. X is an annuity due with a cash inflow of $9,000 for each of 6 years. Y is an ordinary annuity with a cash inflow of $10,000 for each of 6 years. Assume
ST 4–1 Future values for various compounding frequencies Delia Martin has $10,000 that she can deposit in any of three savings accounts for a 3-year period. Bank A compounds interest on an annual basis, bank B compounds interest twice each year, and bank C compounds interest each quarter. All
4–20 How can you determine the unknown number of periods when you know the present and future values—single amount or annuity—and the applicable rate of interest?
4–19 Which present value interest factors would be used to find (a) the growth rate associated with a series of cash flows and (b) the interest rate associated with an equal-payment loan?
4–18 Describe the procedure used to amortize a loan into a series of equal periodic payments.
4–17 How can you determine the size of the equal annual end-of-period deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
4–16 Differentiate between a nominal annual rate and an effective annual rate(EAR). Define annual percentage rate (APR) and annual percentage yield(APY).
4–15 How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
4–14 What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?
4–13 How is the future value of a mixed stream of cash flows calculated? How is the present value of a mixed stream of cash flows calculated?
4–12 What is a perpetuity? How can the present value interest factor for such a stream of cash flows be determined?
4–11 How can the present value interest factors for an ordinary annuity be modified to find the present value of an annuity due?
4–10 How can the future value interest factors for an ordinary annuity be modified to find the future value of an annuity due?
4–9 What are the most efficient ways to calculate the present value of an ordinary annuity? What is the relationship between the PVIF and PVIFA interest factors given in Tables A–2 and A–4, respectively?
4–8 What is the difference between an ordinary annuity and an annuity due?Which always has greater future value and present value for identical annuities and interest rates? Why?
4–7 How are present value and future value calculations related?
4–6 What effect does increasing the required return have on the present value of a future amount? Why?
4–5 What is meant by “the present value of a future amount”? What is the general equation for present value?
4–4 What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?
4–3 How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
4–2 Define and differentiate among the three basic patterns of cash flow: (1) a single amount, (2) an annuity, and (3) a mixed stream.
4–1 What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?
1-1 Go to the Best Depreciation Calculator at the Fixed Asset Info. site, www.fixedassetinfo.com/defaultCalc.asp. Use this calculator to determine the straight-line, declining balance (using 200%), and MACRS depreciation schedules for the following items, using half-year averaging (the half-year
3–19 Integrative—Pro forma statements Provincial Imports, Inc., has assembled statements and information to prepare financial plans for the coming year.Information related to financial projections for the year 2004:(1) Projected sales are $6,000,000.(2) Cost of goods sold includes $1,000,000 in
3–18 Integrative—Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided in what follows to prepare the financial plans.The following financial data are also available:(1) The firm has estimated that its sales
3–17 Pro forma balance sheet Peabody & Peabody has 2003 sales of $10 million. It wishes to analyze expected performance and financing needs for 2005—2 years ahead. Given the following information, respond to parts a and b.(1) The percents of sales for items that vary directly with sales are
3–16 Pro forma balance sheet—Basic Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2004. The firm expects 2004 sales to total$3,000,000. The following information has been gathered.(1) A minimum cash balance of $50,000 is desired.(2) Marketable securities are
3–15 Pro forma income statement—Sensitivity analysis Allen Products, Inc., wants to do a sensitivity analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic prediction is $1,280,000. Allen’s income
3–14 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2004 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2004. Metroline Manufacturing’s
3–13 Multiple cash budgets—Sensitivity 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
3–12 Cash budget—Sensitivity analysis Trotter Enterprises, Inc., has gathered the following data in order to plan for its cash requirements and short-term investment opportunities for October, November, and December. All amounts are shown in thousands of dollars.a. Prepare a sensitivity
3–11 Cash flow concepts The following represent financial transactions that Johnsfield & Co. will be undertaking in the next planning period. For each transaction, check the statement or statements that will be affected immediately. Transaction Cash sale Credit sale Accounts receivable are
3–10 Cash budget—Advanced The actual sales and purchases for Xenocore, Inc., for September and October 2003, along with its forecast sales and purchases for the period November 2003 through April 2004, follow.Year Month Sales Purchases 2003 September $210,000 $120,000 2003 October 250,000
3–9 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
3–8 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 3.9 and the following information in its preparation.Sales: February$500,000; March$500,000; April$560,000; May$610,000; June$650,000;
3–7 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
3–6 Finding operating and free cash flows Consider the balance sheets and selected data from the income statement of Keith Corporation that follow.a. Calculate the firm’s accounting cash flow from operations for the year ended December 31, 2003, using Equation 3.1.b. Calculate the firm’s
3–5 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N). Item Change (S) Item Change (S) Cash +100 Accounts receivable -700 Accounts payable -1,000 Net profits +600 Notes payable +500 Depreciation +100
3–4 Depreciation and accounting cash flow A firm in the third year of depreciating its only asset, which originally cost $180,000 and has a 5-year MACRS recovery period, has gathered the following data relative to the current year’s operations.a. Use the relevant data to determine the
3–3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax 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
3–2 Accounting cash flow A firm had earnings after taxes of $50,000 in 2003.Depreciation charges were $28,000, and a $2,000 charge for amortization of a bond discount was incurred. What was the firm’s accounting cash flow from operations (see Equation 3.1) during 2003?
3–1 Depreciation On March 20, 2003, 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
3–3 Pro forma income statement Euro Designs, Inc., expects sales during 2004 to rise from the 2003 level of $3.5 million to $3.9 million. Because of a scheduled large loan payment, the interest expense in 2004 is expected to drop to$325,000. The firm plans to increase its cash dividend payments
3–2 Cash budget and pro forma balance sheet inputs Jane McDonald, a financial analyst for Carroll Company, has prepared the following sales and cash disbursement estimates for the period February–June of the current year.Cash Month Sales disbursements February $500 $400 March 600 300 April 400
3–1 Depreciation and cash flow A firm expects to have earnings before interest and taxes (EBIT) of $160,000 in each of the next 6 years. It pays annual interest of$1,500. The firm is considering the purchase of an asset that costs $140,000, requires$10,000 in installation cost, and has a recovery
3–19 What is the financial manager’s objective in evaluating pro forma statements?
3–18 What are the two key weaknesses of the simplified approaches to preparing pro forma statements?
3–17 What is the significance of the “plug” figure, external financing required?Differentiate between strategies associated with positive and with negative values for external financing required.
3–16 Describe the judgmental approach for simplified preparation of the pro forma balance sheet.
3–15 Why does the presence of fixed costs cause the percent-of-sales method of pro forma income statement preparation to fail? What is a better method?
3–14 How is the percent-of-sales method used to prepare pro forma income statements?
3–13 What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches? TABLE 3.14 2004 Sales Forecast for Vectra Manufacturing Unit sales Model X Model Y 1,500 1,950 Dollar sales Model X ($25/unit) $ 37,500 Model Y ($50/unit) 97,500 Total
3–12 What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?
3–11 How can the two “bottom lines” of the cash budget be used to determine the firm’s short-term borrowing and investment requirements?
3–10 Briefly describe the basic format of the cash budget.
3–9 What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
3–8 Which three statements result as part of the short-term (operating) financial planning process?
3–7 What is the financial planning process? Contrast long-term (strategic)financial plans and short-term (operating) financial plans.
inflows differentiated from cash outflows on this statement?3–6 From a strict financial perspective, define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).
3–5 Describe the general format of the statement of cash flows. How are cash
3–4 Why is depreciation (as well as amortization and depletion) considered a noncash charge? How do accountants estimate cash flow from operations?
3–2 Describe the overall cash flow through the firm in terms of operating flows, investments flows, and financing flows. 3–3 Explain why a decrease in cash 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
3–1 Briefly describe the first four modified accelerated cost recovery system(MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS recovery periods.
1-1 Go to Web site www.yahoo.com. On the left side of the Yahoo! home page screen, click on the Finance category under Business and Economy. On the next screen click on Y! Finance.Using this screen, click on Symbol Lookup and find the symbol for Southwest Airlines. Click on this symbol to find the
2-1 Terri Spiro, an experienced budget analyst at Martin Manufacturing Company, has been charged with assessing the firm’s financial performance during 2003 and its financial position at year-end 2003. To complete this assignment, she gathered the firm’s 2003 financial statements, which follow.
2–23 Complete ratio analysis, recognizing significant differences Home Health, Inc., has come to Jane Ross for a yearly financial checkup. As a first step, Jane has prepared a complete set of ratios for fiscal years 2002 and 2003. She will use them to look for significant changes in the
2–22 Dupont system of analysis Use the following ratio information for Johnson International and the industry averages for Johnson’s line of business to:a. Construct the DuPont system of analysis for both Johnson and the industry.b. Evaluate Johnson (and the industry) over the 3-year period.c.
2–21 Integrative—Complete ratio analysis Given the following financial statements, historical ratios, and industry averages, calculate Sterling Company’s financial ratios for the most recent year. Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint.
2–20 Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2003, follow.a. Use the preceding financial statements to complete the following table.Assume that the industry averages given in the table are applicable for both 2002 and 2003.b.
2–19 Cross-sectional ratio analysis Use the following financial statements for Fox Manufacturing Company for the year ended December 31, 2003, along with the industry average ratios also given in what follows, to:a. Prepare and interpret a complete ratio analysis of the firm’s 2003
2–18 Ratio proficiency McDougal Printing, Inc., had sales totaling $40,000,000 in fiscal year 2003. Some ratios for the company are listed below. Use this information to determine the dollar values of various income statement and balance sheet accounts as requested.Calculate values for the
2–17 The relationship between financial leverage and profitability Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers.Some financial statement values for each company follow. Use them in a ratio analysis that compares their financial leverage and
2–16 Common-size statement analysis A common-size income statement for Creek Enterprises’ 2002 operations follows. Using the firm’s 2003 income statement presented in Problem 2–15, develop the 2003 common-size income statement and compare it to the 2002 statement. Which areas require
2–15 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 and Creek’s recent financial statements (which
2–14 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
2–13 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
2–12 Inventory management Wilkins Manufacturing has sales of $4 million and a gross profit margin of 40%. Its end-of-quarter inventories are Quarter Inventory 1 $ 400,000 2 800,000 3 1,200,000 4 200,000a. Find the average quarterly inventory and use it to calculate the firm’s inventory turnover
2–11 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
2–10 Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies that he is now invested in, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below.Assuming that
2–9 Changes in stockholders’ equity Listed are the equity sections of balance sheets for years 2002 and 2003 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 this
2–8 Statement of retained earnings Hayes Enterprises began 2003 with a retained earnings balance of $928,000. During 2003, the firm earned $377,000 after taxes. From this amount, preferred stockholders were paid $47,000 in dividends.At year-end 2003, the firm’s retained earnings totaled
2–7 Initial sale price of common stock Beck Corporation has one issue of preferred stock and one issue of common stock outstanding. Given Beck’s stockholders’equity account that follows, determine the original price per share at which the firm sold its single issue of common stock.
2–6 Impact 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, 2003. Show the effect of these funds on the firm’s balance sheet for the previous year (below) in each of the scenarios following the balance sheet.a. Conrad
2–5 Balance sheet preparation Use the appropriate items from the following list to prepare in good form Owen Davis Company’s balance sheet at December 31, 2003. Item Accounts payable Accounts receivable Accruals Value ($000) at December 31, 2003 $ 220 450 -55 Accumulated depreciation 265
2–4 Calculation of EPS and retained earnings Philagem, Inc., ended 2003 with net profit before taxes of $218,000. The company is subject to a 40% tax rate and must pay $32,000 in preferred stock dividends before distributing any earnings on the 85,000 shares of common stock currently
2–3 Income statement preparation On December 31, 2003, Cathy Chen, a selfemployed certified public accountant (CPA), completed her first full year in business.During the year, she billed $180,000 for her accounting services. She had two employees: a bookkeeper and a clerical assistant. In

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