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business
corporate finance

Questions and Answers of Corporate Finance

What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.
What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the
What are the primary disadvantages of the corporate form of organization? Name at least two advantages of corporate organization?
In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to go dark delist their stock. Why might a company choose this route? What are the costs of going dark?
In a large corporation what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?
What goal should always motivate the actions of a firm’s financial manager?
Who owns a corporation? Describe the process whereby the owners control the form’s management. What is the main reason that an agency relationship exist in the corporate forms of organization? In
You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a company’s securities. Is an IPO a primary market transaction or a secondary market transaction?
What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
Suppose you were the financial manager of a not-for-profit business (a not-for-profit hospital, perhaps). What kind of goals do you think would be appropriate?
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety,
Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?
Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding
Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large
Critics have charged that compensation to top managers in the Units States is simply too high and should be cut back. For example, focusing on large corporations, Larry Ellison of Oracle has been one
What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.
Why might the revenue and cost figures shown on a standard income statement not be representative of the actual cash inflows and outflows that occurred during a period?
In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?
In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in
Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why
Suppose a company’s cash flow from assets is negative for a particular period. Is this necessarily a good sign or a bad sign?
Suppose a company’s operating cash flow has been negative for several ye running. Is this necessarily a good sign or a bad sign?
Could a company’s change in NWC be negative in a given year? Explain how this might come about. What about net capital spending?
Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?
Referring back to the Merrill Lynch example used at the beginning of the chapter, note that we suggested that Merrill Lynch’s stockholders probably didn’t suffer as a result of the reported loss.
A firm’s enterprise value is equal to the market value of its debt and equity, less the firm’s holdings of cash and cash equivalents. This figure is particularly relevant to potential purchasers
Companies often try to keep accounting earnings growing at a relatively steady pace, thereby avoiding large swings in. earnings from period to period. They also try to me earnings targets. To do so
Building Balance Sheet Predator Pucks, Inc., has current assets of $4,000, net fixed assets of $22,500, current liabilities of $3,400, and long-term debt of $6,800. What is the value of the
Building an Income Statement Mama Roach Exterminators, inc., has sales of $634,000, costs of $305,000, depreciation expense of $46,000, interest expense of $29,000, and a tax rate of 35 percent. What
Dividends and Retained Earnings Suppose the firm in Problem 2 paid out $86,000 in cash dividends. What is the addition to retained earnings?
Per-Share Earnings and Dividends suppose the firm in Problem 3 had 30,000 shares of common stock outstanding. What are the earnings per share, or EPS, figure? What are the dividends per share figure?
Market Values and Book Values Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $7 million. The machinery can be sold to the Romulans today for $3.7 million. Klingon’s
Calculating Taxes The Baryla Co. had $325,000 in 2007 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2007 income taxes.
Tax Rates In Problem 6, what is the average tax rate? What is the marginal tax rate?
Calculating OCF Prather, Inc., has sales of $14,200, costs of $5,600, depreciation expense of $1,200, and interest expense of $680. If the tax rate is 35 percent, what is the operating cash flow, or
Calculating Net Capital Spending Kahne Driving School’s 2006 balance sheet showed net fixed assets of $4.6 million, and the 2007 balance sheet showed net fixed assets of $5.2 million. The
Calculating Additions to NWC The 2006 balance sheet of Rock ‘N’ Roll Records, Inc., showed current assets of $1,400 and current ‘liabilities of $870 the 2007 balance sheet showed current
Cash Flow to Creditors The 2006 balance sheet of Maria’s Tennis Shop, Inc., showed long-term debt of $3.1 million, and the 2007 balance sheet showed long-term debt of $3.3 million. The 2007
Cash Flow to Stockholders the 2006 balance sheet of Maria’s Tennis Shop, Inc., showed $860,000 in the common stock account and $6.9 million in the additional paid-in surplus account. The 2007
Calculating Total Cash Flows Given the information for Maria’s Tennis Shop, Inc., in Problems 11 and 12, suppose you also know that the firm’s net capital spending for 2007 was $760,000, and that
Calculating Total Cash Flows Bedrock Gravel Corp. shows the following information on its 2007 income statement: sales $162,000; costs = $93,000; other expenses = $5,100: depreciation expense =
Using Income Statements Given the following information for Mama Mia Pizza Co., calculate the depreciation expense: sales = $34,000; costs = $16,000; addition to retained earnings = $4,300; dividends
Preparing a Balance Sheet Prepare a 2007 balance sheet for Haltiwanger Corp. based on the following information: cash = $210,000; patents and copyrights $720,000; accounts payable = $430,000;
Residual Claims Clapper’s Clippers, Inc., is obligated to pay its creditors $6,100 during the year. a. What is the market value of the shareholders’ equity if assets have a market value of
Marginal versus Average Tax Rates (Corporation Growth has $82,000 in taxable income, and Corporation Income has $8.200,000 in taxable income.a. What is the tax bill for each firm?b. Suppose both
Net Income and OCF During 2007, Raines Umbrella Corp. had sales of $840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $625,000, $120,000, and $130,000,
Accounting Values versus Cash Flows in Problem 19, suppose Raines Umbrella Corp. paid out $30,000 in cash dividends. Is this possible? If spending on net fixed asset and net working capital was zero,
Calculating Cash Flows Brewer industries had the following operating results for 2007: sales = $15,200; cost of goods sold = $11,400; depreciation expense = 2,700; interest expense $520; dividends
Calculating Cash Flows Consider the following abbreviated financial statements for Parrot head Enterprises: a. What is owners?? equity for 2006 and 2007? b. What is the change in net working capital
Net Fixed Assets and Depreciation On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account (which records the acquisition cost of fixed assets) minus
Tax rates refer to the corporate marginal tax rate information in Table 2.3. a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then
Financial Statements draw up an income statement and balance sheet for this company for 2006 and 2007.
Calculating Cash Flow for 2007, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
Current Ratio What effect would the following actions have on a firm’s current ratio assume that net working capital is positive.a. Inventory is purchased.b. A supplier is paid.c. A short-term bank
Current Ratio and Quick Ratio In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company
Current Ratio Explain what it means for a firm to have a current ratio equal to .50. Would the firm be better off if the current ratio were 1.50? What if it were 15.0? Explain your answers.
Financial Ratios fully explain the kind of information the following financial ratios provide about a firm:a. Quick ratio.b. Cash ratio.c. Total asset turnover.d. Equity multiplier.e. Long-term debt
Standardized Financial Statements What types of information do common-size financial statements reveal about the firm? What is the best use for these common-size statements? What purpose do
Peer Group Analysis Explain what peer group analysis is. As a financial manager, how could you use the results of peer group analysis to evaluate the performance of your firm? How is a peer group
Du Pont Identity Why is the Du Pont identity a valuable tool for analyzing the performance of a firm discuss the types of information ii reveals compared to ROE considered by itself.
Industry-Specific Ratios Specialized ratios are sometimes used in specific industries, For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93
Industry-Specific Ratios So-called same-store sales are a. very important measure for companies as diverse as McDonald’s and Sears. As the name suggests, examining same-store sales means comparing
Industry-Specific Ratios there are many ways of using standardized financial information beyond those discussed in this chapter. The usual goal is to put firms on an equal footing for comparison
Statement of Cash Flows In recent years, several manufacturing companies have reported the cash flow from the sale of Treasury securities in the cash from operations section of the statement of cash
Statement of Cash Flows Suppose a company lengthens the time it takes to pay suppliers. How would this affect the statement of cash flows? How sustainable is the change in cash flows from this
Calculating Liquidity Ratios SDJ, Inc., has net working capital of $l,570 current liabilities of $4,380, and inventory of $1,875. What is the current ratio? What is the quick ratio?
Calculating Profitability Ratios Country Boy, Inc., has sales of $24 million, total assets of $18 mil lion, and total debt of $7 million. If the profit margin is 8 percent, what is net income? What
Calculating the Average Collection Period Pujols Lumber Yard has a current accounts receivable balance of $387,615. Credit sales for the year just ended were $2,945,600. What is the receivables
Calculating Inventory Turnover The Mississippi Moon Corporation has ending inventory of $324,600, and cost of goods sold for the year just ended was $2,987,165. What is the inventory turnover? The
Calculating Leverage Ratios Star Lakes, Inc., has a total debt ratio of .29. What is its debt-equity ratio? What is its equity multiplier?
Calculating Market Value Ratios Baryca Corp. had additions to retained earnings for the year just ended of $350,000. The firm paid out $160,000 in cash dividends, and it has ending total equity of
Du Pont Identity If Roten Rooters, Inc., has an equity multiplier of 1.35, total asset turn-over of 1.30, and a profit margin of 8.5 percent, what is its ROE?
Du Pont Identity Braam Fire Prevention Corp. has a profit margin of 8.70 percent. Total asset turnover of 1.45, and ROE of 18.67 percent. What is this firm’s debt-equity ratio?
Sources and Uses of Cash Based only on the following information for Angkaw Corp., did cash go up or down? By how much classify each event as a source or use of cash.Decrease in inventory
Calculating Average Payables Period Minnow, Inc., had a cost of goods sold of $21.587. At the end of the year, the accounts payable balance was $5,832. How long on average did it take the company to
Cash Flow and Capital Spending For the year just ended, Ratter man Frozen Yogurt shows an increase in its net fixed assets account of $625. The company took $170 in depreciation expense for the year.
Equity Multiplier and Return on Equity Bettles Fried Chicken Company has a debt-equity ratio of 0.80. Return on assets is 9.2 percent, and total equity is $520,000. What is the equity multiplier?
Preparing Standardized Financial Statements prepare the 2006 and 2007 common-size balance sheets for Just Dew It.
Preparing Standardized Financial Statements prepare the 2007 common—base year balance sheet for Just Dew It.
Preparing Standardized Financial Statements Prepare ‘the 2007 combined common-size, common—base year balance sheet for Just Dew It.
Sources and Uses of Cash For each account on this company’s balance sheet show the change in the account during 2007 and note whether this change was a source or use of cash. Do your numbers add up
Calculating Financial Ratios Based on the balance sheets given for Just Dew It, calculate the following financial ratios for each year:a. Current ratio.b. Quick ratioc. Cash ratio.d. NWC to total
Using the Du Pont Identity Y3K, Inc., has sales of $4,800, total assets of $2,685, and a debt—equity ratio of 1.20. If its return on equity is 16 percent, what is its net income?
Days’ Sales in Receivables a company has net income of $195,000, a profit margin of 9.40 percent, and an accounts receivable balance of $106,851. Assuming 75 percent of sales are on credit, what
Ratios and Fixc4 Assets The Richmond Company has a long-term debt ratio of .60 and a current ratio of 1:30. Current liabilities are $980, sales are $5,105, profit margin is 95 percent, and ROE is
Profit Margin hi response to complaints about high prices, a grocery chain runs the following advertising campaign: If you pay your child $2 to go buy $50 worth of groceries, then your child makes
Return on Equity Firm A and firm B have debt—total asset ratios of 55% and 45% and returns on total assets of 20% and 28%, respectively. Which firm has a greater return on equity?
Calculating the Cash Coverage Ratio Kat Inc.’s net income for the most recent year was $10,157. The tax rate was 34 percent. The firm paid $3,405 in total interest expense and deducted $2,186 in
Cost of Goods Sold Holliman Corp. has current liabilities of $410,000, a quick ratio of 1.8, inventory turnover of 4.2, and a current ratio of 3.3. What is the cost of goods sold for the company?
Ratios and Foreign Companies Prince Albert Canning PLC had a net loss off 18,465 on sales off 151,387 (both in thousands of pounds). What was the company's profit margin? Does the fact that these
Du Pont Identity Construct the Du Pont identity for Smolira Golf Corp.
Statement of Cash Flows Prepare the 2007 statement of cash flows for Smolira Golf Corp
Tobin’s Q what is Tobin’s Q for Smolira Golf? What assumptions are you making about the book value of debt and the market value of debt? What about the book value of assets and the market value
Sales Forecast Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales, the key input?
Sustainable Growth In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If
External Financing Needed Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When sales grow by 15 percent, the firm has a negative projected EFN. What does this
EFN and Growth Rates Broslofski Co, maintains a positive retention ratio and keeps its debt-equity ratio constant every year when sales grow by 20 percent, the firm has a negative projected EFN: What
Product Sales Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?
Cash Flow The Grandmother Calendar Company clearly had a cash flow problem. In the context of the cash flow analysis we developed in Chapter 2, what was the impact of customers not paying until

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