Questions and Answers of Principles Of Finance

Shirley Manufacturing paid $1 million in interest payments last year. The company is in the 21% tax bracket and has $15 million in debt outstanding. How much was the company’s interest tax shield
Unlevered equity refers to ________.a. The equity in a firm with no debtb. A firm’s equity minus the firm’s debtc. The equity in a firm in the absence of taxation and transaction costsd. The
In perfect capital markets, ________.a. A company’s WACC does not change as it changes its capital structureb. A company can lower its WACC by using more debt in its capital structurec. A company
King Medical Supplies has issued preferred stock that pays a yearly dividend of $4 per share. This preferred stock is trading at a price of $47 per share. What is King’s cost of preferred stock
The interest tax shield occurs because ________.a. Interest payments are a tax-deductible expenseb. Interest payments are made from after-tax incomec. Investors require a lower rate of return the
As a company increases the weight of debt in its capital structure, ________.a. Its cost of debt capital fallsb. The weight of equity capital also increasesc. The value of the interest tax shield
McPherson Pharmaceutical has common stock that is trading for $75 per share. The company paid a dividend of $5.25 last year. This dividend is expected to increase at a rate of 3% per year. What is
Issuing new stock ________.a. Costs the same as retaining earningsb. Will not impact a company’s WACCc. Is the most expensive source of capital because of flotation costsd. Is the cheapest source
A company is said to be in financial distress if ________.a. It is not fully exploiting the interest tax shieldb. It needs to raise capital to finance a new projectc. It has difficulty meeting its
ABC Company has the following data for its monthly sales. Complete the % of Annual Sales row. Gross Sales % of Annual Sales Jan Apr May Jun Jul Aug Sep Oct Nov Dec $40,000 $42,000 $47,000 $56,000
If a bond with a face value of $1,000 has a conversion ratio of 10 shares, the conversion price is ________.a. $0.01b. $10c. $100d. $1,000
Which type of financial statement analysis is most commonly used to create a baseline estimate for a financial forecast?a. Trend analysisb. Common-size analysisc. Ratio analysisd. Liquidity analysis
Javier’s firm has created a forecasted income statement that shows the firm with a net profit of $25,000 for the coming year. What can we assume about Javier’s cash flows?
What is a pro forma financial statement? What are some scenarios in which you might find a pro forma financial statement helpful?
What key element of the income statement is used to estimate several other key income statement lines?a. Cost of goods soldb. Gross marginc. Salesd. Fixed costs
ABC Company anticipates its sales being a bit lower than normal in January and February of the coming year due to major road construction on the street where it is located, which will draw away foot
Lulu’s firm’s sales grew by 9%, 11%, and 10% over the past three years, respectively. Lulu wants to take her first pass at forecasting sales for next year. What percent sales growth would you
Why might someone compile a pro forma financial statement that is intentionally inaccurate? What factors contribute to the accuracy of a pro forma?
Jamal wants to forecast sales for the first quarter of next year. His first assumption is that sales will likely grow by 3% in the coming year. If Jamal’s monthly sales were $10,000, $9,000, and
Aria wants to create a set of pro forma financial statements. Her goal is to plan for future cash flows and operations as well as help envision her long-term strategy. What time frames should Aria
Assume you are the financial manager for a large electronics retailer. What benefits could you gain from preparing a cash forecast?
Amelia wants to use a formula in Excel to estimate her sales for each month. She believes her sales for the next year will be about 7% higher than this year’s. She also has a big new ad campaign
In the context of a firm’s financial statements, what does pro forma mean?a. Forward lookingb. Historicalc. Board approvedd. Audited
Use the partial income statement generated in Problem 4 along with the following additional information to complete ABC Company’s forecasted income statement in Excel.a. Rent expense is $1,000 per
What information might you use to calculate the ending balance for retained earnings on a forecasted balance sheet?
Assume you are the financial manager for a large electronics retailer. You are going to prepare a cash forecast. What key cash inflows and outflows do you anticipate will be in your forecast?
What is the most common length of a forecast if the goal is to forecast cash and assess possible shortterm growth?a. 3 monthsb. 12 monthsc. 3 yearsd. 5 years
Damon estimates his beginning cash balance for June to be $10,000, with cash inflows of $4,000 and cash outflows of $6,000 for the month. What is Damon’s forecasted ending balance for June?
When completing a first pass at a forecasted income statement, which type of costs are assumed to be tied directly to sales?a. Fixed costsb. Period costsc. Variable costsd. Sunk costs
Tanneh wants to use an Excel formula to help her estimate sales for January in her forecasted income statement. She already has her sales estimate for the full year. Assuming she wants to use the
In the cash forecast, if cash inflows exceed cash outflows, what does this create?a. A cash surplusb. A cash deficitc. A long-term liabilityd. An undeclared dividend
Amelia wants to use a formula in Excel to estimate her utilities expense for each month. She normally pays her utilities within 30 days. What formula or link might she use in Excel to estimate her
Intelligent Cookies Inc. (ICI) sold $30,000,000 of product in a year that had a cost of goods sold of $10,000,000. The average inventory carried by ICI was $500,000. On average, it takes 35 days for
Shown below are account balances for Electra Engines Inc., a manufacturer. The accounts are shown in a random order. What is the amount of net working capital? Net Working Capital $_ Property,
Why isn’t the net income reported on a corporate balance sheet a good estimate of the increase in cash that occurred during the year?
The term working capital is synonymous with ________.a. Accounts payableb. Current assetsc. Equityd. Current liabilities
The formula for net working capital is ________.a. Current Assets – Current Liabilitiesb. Fixed Assets – Current Assetsc. Assets – Liabilitiesd. Current Assets – Liabilities
Shown below are account balances for Electra Engines Inc., a manufacturer. The accounts are shown in a random order. What is the current ratio and the quick ratio? Property, Plant, and
What is the difference between a corporate cash budget and a projected statement of cash flows?
Imagine that these are the cash collection cycles for some well-run companies:What types of conclusions can you reach when you see this kind of variability?Imagine that those cash conversion cycles
When sales are made on credit, which current assets typically increase at the time of the sale?a. Cashb. Notes receivablec. Accounts receivabled. Marketable securities
Accelerated Growth Inc. has the following account balances at year-end. What is the cash ratio?a. 1.29b. 1.43c. 1.71d. .088 Property, Plant, and Equipment Accounts Payable Intangible
Explain this statement: Accounts payable and accounts receivables are essentially financial opposites.
Which of the following is NOT a goal of working capital management?a. Meet the operational needs of the companyb. Satisfy obligations (current liabilities) as they come duec. Maintain an optimal
Accounts payable is often called “interest-free financing.” As such, explain why a company would choose to pay the amount owed on its purchases of inventory 50 days early. Base your answer on
What is the estimated annual percentage rate (APR) of not taking advantage of the early payment discount based on these terms: 4/15, n/45?
Aspire Excellent Inc. is a book publisher. On March 1, Aspire sells $25,000 of books to Get Your Books Inc. (YBI), a large bookstore chain. The sale is made on account with terms net 60. Aspire’s
Which of the following is true of these credit terms: 3/15, n/30?a. 15 Percent discount if the payable is paid within 3 days of the invoice dateb. 3 Percent discount if the payable is paid in the
If you were a credit manager reviewing a potential customer’s request for a $20,000 line of credit, what would you analyze? Generally, how would the 5Cs of Credit guide your analysis and help lead
The sales for Re-Works Inc., a company that fabricates iron fencing from recycled metals, are all on account. For the first three months of the year, Re-Works management expects the following
The financial manager of New England Blissful Dairies, a distributor of milk, cream, and ice cream products, has finished the 12-month operating budget. For the month of June, the following
When reviewing its budgets, including the cash budget, management of Transcend Inc. have considered best-case and worst-case scenarios. As they completed their analysis, it was decided because of the
A large retailer has more than $100 million of cash and cash equivalents on its balance sheet. Which of the following would not be part of the cash equivalents?a. Cash in banks (checking account
An account receivable is created when ________.a. A customer pays its billb. A company accepts a credit card, such as VISA or MasterCardc. A company sells to a customer on an open accountd. A company
Jackson’s Moonshine LLC has a receivables collection period of 47 days. Which the following would be reasonable conclusions?a. Jackson’s Moonshine LLC is most likely experiencing serious
Two Way Power Ltd. (2WP) stocks an inventory item, BB3, that is projected to be in great demand over the next 12 months. In discussing its sales forecasts with its suppliers, a reasonable estimate
If a company has significant inventory in each element of the value chain, it most likely is descriptive of ________.a. The cost of goods sold of a retailerb. The inventory balances held by
Which of the following does a financial manager want to do to maximize the value of the firm?a. Decrease the speed of money coming into the firmb. Speed up cash going out and slow down cash coming
What is the difference between someone using a derivative security to hedge risk and someone using a derivative security to speculate?
The Olive Orchard is a US retail outlet for high-quality olive oils. One of the major suppliers of olive oil for the company is a farm in Greece. The Olive Orchard must pay the Greek farm 5.00 euros
How volatile are oil prices, and how large of an impact does that volatility have on the cost structure of an airline?
In finance, risk is ________.a. The same thing as profitb. Ignored because it is inevitablec. Thought of as uncertainty or unpredictabilityd. Something that financial managers should strive to
Gary Kelly states that he sees fuel prices as the largest single business risk Southwest Airlines faces and that hedging that risk has become more expensive. Why do you think it became more expensive
Explain how vertical integration may be used as a method of hedging against commodity price risk.
International Automobile Parts (IAP) holds a call option to purchase US dollars. The strike price on the call option is JPY 115/USD. IAP paid JPY 10 for the option. The spot price is JPY 120/USD, and
American Jeans Corp. purchases a cotton farm. The cotton grown on the farm will be used to make denim cloth for the company’s jeans. This is an example of ________.a. Striking a priceb. Vertical
Global Producers (GP) holds a put option to sell US dollars. The strike price on the put option is JPY 114/ USD. GP paid JPY 10 for the option. The spot price is JPY 120/USD, and the option expires
In the video, the potential car buyer is concerned about the impact of the value of the euro on the price of the BMW. Why, if he is paying for the car in US dollars, do you think that he is impacted
The price that a holder of an option pays to buy the underlying asset when exercising a call option is known as ________.a. The strike priceb. The maturity pricec. The exchange priced. The underlying
You are considering purchasing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive
How do you think opening plants in the United States, and in other parts of the world, provides a currency hedge for BMW?
Which of the following gives the holder the right, but not the obligation, to purchase an underlying asset?a. A call optionb. A forward contractc. A European put optiond. An American put option
You are considering writing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive at
An American option allows the holder to ________.a. Exercise the option only on the expiration dateb. Exercise the option at any time up to and including the expiration datec. Sell stocks, and a
Why are options considered to be a “zero-sum game”?
The holder of a(n) ________ has the right to buy and the holder of a(n) ________ has the right to sell an underlying asset.a. call option; put optionb. put option; call optionc. American option;
The three main categories of foreign exchange risk a company faces are ________.a. Economic risk, business risk, and exposure riskb. Exposure risk, fluctuation risk, and forward riskc. Transaction
In January, the exchange rate between the South Korean won and the US dollar was KWN 1,100 = USD 1. Three months later, the exchange rate was KWN 1,200 = USD 1. This means that ________.a. The Korean
In January, the exchange rate between the South Korean won and the US dollar was KWN 1,100 = USD 1. Three months later, the exchange rate was KWN 1,200 = USD 1. This means that ________.a. It will
A foreign exchange forward contract ________.a. Is a standardized contract that is inflexibleb. Occurs when a company swaps its translation exposure for transaction exposurec. Is a contractual
Which of the following is a measure of interest rate risk?a. LIBORb. Durationc. Translation exposured. Contract inflexibility
A swap occurs when ________.a. A company exchanges obligations with another company to make specified payment streamsb. A company purchases commodities from a company in another country, exposing it
Continuing Problem 6 above, assume that as Tony receives each payment from the buyer, he can immediately invest it in a fund that returns a guaranteed 3.5% compounded annually. If he accepts the
The price-to-book (P/B) ratio is also called the _______________ ratio.a. Market-to-bookb. Enterprise-to-bookc. Asset-to-priced. Liability-to-book
Briefly describe the required inputs for the discounted cash flow (DCF) model.
What were SuperDOT and SOES, and what were they designed to do?
In which of the following ways does preferred stock differ from common stock?a. Preferred stock carries voting rights for its ownership.b. Preferred stock must be purchased through a broker dealer.c.
Based on nominal average annual returns over the period 1980–2020, list the order of returns by asset class from highest to lowest.a. Large company stocks, Baa bonds, small company stocks,
Compare and contrast an SEO, IPO, and SPAC. If Ford Motor Company wished to raise new equity capital, which of these vehicles would they use?
How would a decrease in inflation affect the interest rate on an adjustable-rate debenture?
If inflation unexpectedly rises by 3%, would a corporation that had recently borrowed money by issuing fixed-rate bonds to pay for a new investment benefit or lose?
If wages on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
Identify at least one item that you use regularly whose price has changed significantly.
What has been the average annual rate of inflation between 1985 and 2020? What is the long-run average annual rate of inflation over the last century?
Between 1985 and 2020, what year had the lowest realized annual rate of inflation in the United States? Why do you think inflation was so low in this particular year?
Go to https://www.usinflationcalculator.com/ (https://openstax.org/r/usinflationcalculator). How much money would it take today to purchase what one dollar would have bought in 1950, in 1975, and in
At the end of 2020 and the beginning of 2021, coupon rates on long-term T-notes and T-bonds were near historic lows. Further, the federal government was running a historically large budget deficit in
Which group of securities earned a higher average annual return from 2000 to 2020, T-bonds or Baa bonds? Why do think this was so?
Why is standard deviation of returns a reasonable measure of risk for a portfolio of equity securities?
Over the last 120 years, few countries have achieved the realized rate of returns enjoyed by US equity markets. Does this mean investors should ignore international investments and focus only on

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