Questions and Answers of Principles Managerial Finance

Use the financial statements below for Fox Manufacturing Company for the year ended December 31, 2015, along with the industry average ratios below to do the following:a. Prepare and interpret a
The financial statements of Zach Industries for the year ended December 31, 2015, follow.a. Use the preceding financial statements to complete the following table. Assume that the industry averages
The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have
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 $15,000. The firm is considering the
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.McDonald notes that,
Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.
Euro Designs, Inc., expects sales during 2016 to rise from the 2015 level of $3.5 million to $3.9 million. Because of a scheduled large loan payment, the interest expense in 2016 is expected to drop
Rubber Incorporated purchased a new machine for $12,000 to shape rubber. It is estimated that the new machine will have a recovery period of 3 years with an expected salvage value of $2,500. Use the
MACRS 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
The following data are available for a firm’s current year’s operations. The firm has only one asset, which has a 3-year recovery period. The cost of the asset one year ago was $165,000. The
Consider the following summary of Summer Breeze Corporation’s financial statements.a. Using Equation 4.1, calculate the firm’s net operating profit after tax (NOPAT) for the year ended December
A firm reported actual sales of $65,000 in the month of June and $70,000 in July. The sales forecasts indicate that sales are expected to be $85,000, $92,000, and $95,750 for the months of August,
The Coffee Specialist Corporation approached you to compile a cash disbursement schedule for the months of March, April, and May. Use the following information and Table 4.9 as a guide to prepare
Initial sale price of common stock B&J Dental Group has one issue of preferred stock and one issue of common stock outstanding. Given B&J’s stockholders’ equity account that follows, determine
Effect of net income on a firm’s balance sheet Relaxing Resort Group reported net income of $1,736,000 for the year ended December 31, 2015. Show how Relaxing Resort Group’s balance sheet would
Maximizing shareholder wealth is your company’s primary financial objective. Many firms do whatever it takes to maximize shareholder wealth, including paying bribes when doing business in other
Delicious Burgers is a U.S.-based MNC with two subsidiaries, one in Japan (local currency, yen, ¥) and one in Brazil (local currency, Brazilian real, R$). The MNC’s economists forecasted the
Investors use international stocks to diversify their investment portfolio in an attempt to counteract the movements in the economies of the world. Therefore, many individual investors prefer to
Ricky is considering purchasing an apartment costing $700,000. He will pay a 30% down payment and take out a mortgage for the remainder. Since he just got married and wants to save some money for
You want to buy a new car that costs $48,000. Dealer A offers to lend you the entire $48,000 for a zero-interest 2-year loan with monthly payments that start the next month. Dealer B requires you to
You want to borrow $24,000 for a tax payment. Your friend offers you a loan, and he claims that he will only charge you 10% interest. He calculates that the total interest of the loan will be $24,000
In July 2012, Beijing had the heaviest rains in over six decades. More than 2 million people were affected by the rainfall, roads were flooded, and the whole transport system had to be suspended for
Calculating the number of periods You want to borrow $600,000 to buy an apartment, and you can only afford $4,000 a month to repay the loan. Suppose the bank charges you a fixed interest rate of 4%
As the financial manager for a large multinational corporation (MNC), you have been asked to assess the firm’s economic exposure. The two major currencies, other than the U.S. dollar, that affect
Ram Electric Company is being considered for acquisition by Cavalier Electric. Cavalier expects the combination to increase its cash flows by $100,000 for each of the next 5 years and by $125,000 for
Morris Company, a small manufacturing firm, wants to acquire a new machine that costs $30,000. Arrangements can be made to lease or purchase the machine. The firm is in the 40% tax bracket. The firm
Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle, Inc. The option to sell 100 shares of
Your company is considering manufacturing carrying cases for the portable video game machines that are currently popular. Management decides to borrow $200,000 from each of two banks—First American
The current balance in accounts receivable for Eboy Corporation is $443,000. This level was achieved with annual (365 days) credit sales of $3,544,000. The firm offers its customers credit terms of
One way to lower the market price of a firm’s stock is via a stock split. Rock-O Corporation finds itself in a different situation: Its stock has been selling at relatively low prices. To increase
Harte Textiles, Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclic downturn in the home furnishings business. The company has
Isis Corporation has two projects that it would like to undertake. However, due to capital restraints, the two projects—Alpha and Beta—must be treated as mutually exclusive. Both projects are
Damon Corporation, a sports equipment manufacturer, has a machine currently in use that was originally purchased 3 years ago for $120,000. The firm depreciates the machine under MACRS using a 5-year
Jane is considering investing in three different stocks or creating three distinct two-stock portfolios. Jane considers herself to be a rather conservative investor. She is able to obtain forecasted
CSM Corporation has a bond issue outstanding at the end of 2012. The bond has 15 years remaining to maturity and carries a coupon interest rate of 6%. Interest on the bond is compounded on a
At the end of 2012, Uma Corporation was considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments determined the
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 2013 through December 2013.You have
The income statement and balance sheet are the basic reports that a firm constructs for use by management and for distribution to stockholders, regulatory bodies, and the general public. They are the
Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk
Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision they have asked you to calculate the corporate tax consequences of their
Tantor Supply, Inc., is a small corporation acting as the exclusive distributor of a major line of sporting goods. During 2010 the firm earned $92,500 before taxes.a. Calculate the firm’s tax
The economies of the world tend to rise and fall in cycles that offset each other. International stocks can provide possible diversification for a portfolio heavy on U.S. equities. Because research
A U.S.-based MNC has a subsidiary in France (local currency, euro, ;). The balance sheet and income statement of the subsidiary follow. On December 31, 2112, the exchange rate is US$1.20/;. Assume
Scully Corporation holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets for these companiesa. What
Calculate the conversion price for each of the following convertible bonds:a. A $1,000-par-value bond that is convertible into 20 shares of common stock.b. A $500-par-value bond that is
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its
Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and O’Brien Public Accountants and started Track
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 2011 and 2012. She will use them to look for
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
Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2016 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an
A group of angry shareholders has placed a corporate resolution before all shareholders at a company’s annual stockholders’ meeting. The resolution demands that the company stretch its accounts
Float Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 3.0 days. Once received, the
Gardner Company currently makes all sales on credit and offers no discount. The firm is considering offering a 2% discount for payment within 15 days. The firm’s current average collection period
Tiger Corporation purchases 1,400,000 units per year of one component. The fixed cost per order is $55. The annual carrying cost of the item is 27% of its $10 cost.a. Determine the EOQ if (1) the
Camp Manufacturing turns over its inventory 5 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm has annual sales of $3.5 million and
American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid
What is the decision rule that managers follow when they use the IRR method to accept or reject investment proposals? How is that decision rule related to the firm’s market value?
What decision rule do managers follow when they use NPV to accept or reject investment ideas? How is an investment’s NPV related to the firm’s market value?
Ross Company, a manufacturer of pharmaceuticals, has pretax ordinary income of $500,000 and has just sold for $150,000 an asset purchased 2 years ago for $125,000. Using Table 1.2, calculate the tax
What does it mean to say that corporations face a double taxation problem?
If managers do not act in the best interests of shareholders, what role might incentives play in explaining that behavior?
Why is it important that managers recognize that a tradeoff exists between risk and return? Why does that tradeoff exist?
Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm’s other stakeholders?
What is risk? Why must financial managers consider risk as well as return when they evaluate a decision alternative or action?
Translation of financial statements A U.S.-based MNC has a subsidiary in France (local currency, euro, €). The balance sheet and income statement of the subsidiary follow. Assume that on December
There is nothing like an extended stay in a foreign country to get a different perspective on world events, and there are sound career-enhancing reasons to work abroad. International experience can
“Fair trade” has caught fire; from 2004 to 2014, retail sales of fair-trade products grew an average of 26% per year. The movement has several goals, but the most important is improving the lives
In the chapter opener you read about how appreciation of the yen against the dollar led to large currency losses at Mazda. Suppose that Mazda’s quarterly operating profit in the United States
Teldar Paper has 33 different vice presidents, each earning over $200,000 a year. I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do
In July 2005, Australian-based media giant News Corp launched a series of acquisitions involving U.S. assets. The first was a $580 million buyout of Intermix Media, owner of Myspace. com, the fifth
Just before the public learned about the potential LBO of Dell, Inc., the company’s stock price was trading for $10 per share. What is the size of the premium that Silver Lake and Michael Dell were
Susan Michaels is evaluating the Burton Tool Company’s common stock and warrants to choose the better investment. The firm’s stock is currently selling for $16 per share; its warrants to
Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have an 8% annual coupon rate,
Calculate the conversion price for each of the following convertible bonds:a. A $1,000-par-value bond that is convertible into 40 shares of common stock.b. A $1,000-par-value bond that is convertible
A 6-month call option on 100 shares of SRS Corp. stock is selling for $320. The strike price for the option is $80. The stock is currently selling at $79 per share. Ignoring brokerage fees, what
Crystal Cafes recently sold a $1,000-par-value, 10-year convertible bond with a 7% coupon rate. The interest payments will be paid annually at the end of each year and the principal will be repaid at
Newcomb Company has a bond outstanding with a $1,000 par value and convertible at $30 per share. What is the bond’s conversion ratio? If the underlying stock currently trades at $25 per share,
During the past 2 years Meacham Industries issued three separate convertible bonds. For each of them, calculate the conversion price:a. A $1,000-par-value bond that is convertible into 10 shares of
Options may not provide funding for non-financial firms, but they are central to modern finance. Not only are millions traded daily, the valuation framework yields insight into corporate decisions
Once upon a time, Sears was the undisputed king of American retailers, but in 2017 the company’s proud history seemed to be approaching its end. In its 10-K filing that year, Sears acknowledged
AMD 10-year convertible bond issue in which each investor could exchange his or her $1,000 par value bond for 125 shares of AMD common stock. When these bonds were issued, AMD’s stock was trading
A financial institution made a $4 million, 1-year discount loan at 6% interest, requiring a compensating balance equal to 5% of the face value of the loan. Determine the effective annual rate
When Waverly Wear Inc. merged with Southerly Inc., Waverly’s employees were switched from a weekly to a biweekly pay period. Waverly’s weekly payroll amounted to $389,500. The annual cost of
Mark and Stacy McCoy are set to move into their first apartment. They visited Levin Furniture, looking for a dining room table and buffet. Dining room sets are typically one of the more expensive
Determine the date when a firm must pay for purchases made and invoices dated on June 19 under each of the following credit terms:a. Net 30 date of invoice.b. Net 30 EOM.c. Net 45 date of invoice.d.
Companies finance investment projects with internal and external funds. Although the specific mix differs across industries, one theme emerges––most companies borrow from banks, even when they
Mama Leone’s Frozen Pizzas uses 50,000 pounds of cheese per year. Each pound costs $5.50. The ordering cost for the cheese is $250 per order, and its carrying cost is $1.50 per pound per year.
Everdeen Inc. has a 90-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its cash
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
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
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
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
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
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
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
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
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.
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
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

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