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Questions and Answers of
Corporate Finance
According to John Lintner, what is the adjustment factor β? Interpret the calculated adjustment factor.
Calculate ROE and ROI given thefollowing.
1. Which of the following is not a warning sign of potential liquidity problems?a. Declines in working capital and daily cash flowsb. Increases in accounts receivable and longer collection periodsc.
Explain how trade credit allows firms to use their suppliers as sources of short-term funds.
State the characteristics of sound net working capital management.
For 2012, Ontario Manufacturing Company provided the following accounting information:a. Which of the above are sources of funds?b. Which of the above are uses of funds?c. What is the overall
Christmas Inc. is a wholesaler of Christmas decorations and wrapping paper. It is a seasonal business and, due to the timing of cash inflows and outflows, it frequently experiences a cash shortfall
A firm has estimated its sales, purchases from suppliers, and wages and miscellaneous operating cash outlays for the first four months of next year as follows:It estimates that 50 percent of its
Calculate the ending cash balance of the current month for thefollowing:
A firm collects 60 percent of its monthly sales immediately and the rest a month later; its production costs are 80 percent of sales, and it holds two months of sales in inventory. It pays 40 percent
Atlantic Transport collects 75 percent of its monthly sales immediately and the rest at the end of the month; has production costs that are 50 percent of sales; pays 50 percent of its bills
Would each of the following changes increase or decrease the break-even sales growth rate?a. An increase in the amount of inventory heldc. A decrease in the amount of inventory heldd. A decrease in
a. What can you conclude if a firm’s planned sales growth exceeds its break-even sales growth rate?b. What can you conclude if a firm’s planned sales growth is less than its break-even sales
Discuss measures businesses can implement to improve working capital management.
Explain the difference between the operating cycle (OC) and the cash conversion cycle (CCC).
Great Northern Manufacturing presently has net working capital of $100,000 and sales of $150,000. It is considering entering into a new project that would increase next year’s sales by $7,500. The
Manitoba Services is considering undertaking a new order that would cause its average days of revenues in payables (ADRP) to decrease from 58 days to 45 days, while its average collection period
MB Corporation has a receivables turnover of 10, an inventory turnover of 15, and a payables turnover of 5. Calculate its cash conversion cycle. What does a negative cash conversion cycle tell you
Why is the efficient utilization of net working capital important?
Explain the difference between the receivables turnover ratio and the average collection period (ACP).
Explain the difference between the quick ratio and the current ratio.
Calculate the cash conversion cycle (CCC) for the company examined in questions 2 to 4.
Determine the operating cycle and cash conversion cycle for a company with inventory turnover of 6.25 times per year, receivables turnover of 10 times per year, and an average days of revenues in
1. Which of the following is not near-cash?a. T-billsb. Commercial paperc. Bankers’ acceptancesd. Long-term debt2. Which of the following descriptions about near-cash is false?a. Low returnsb.
State the principle of the optimal cash balance.
A company receives an average of $100,000 in cheques per day from its customers. It takes the company an average of five days to receive and deposit these cheques. The company is considering a
What are three major sources of float? What are some common methods that address float?
Explain the function of a factor in working capital management.
ABC Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $50.
Suppose that ABC Inc. switches to 3/10 net 30 from net 30. It is estimated that 80 percent of customers will take advantage of the discount, while the remaining 20 percent will pay on day 30. The
East Shore Inc. has an ACP of 60 days and daily credit sales of $75,000. A factor offers a 60-day accounts receivable loan equal to 90 percent of accounts receivable. The quoted interest rate is 10
ABC Inc. grants credit terms of net 25. It is considering a new policy that involves more stringent credit terms: net 20. As a result, the price of its product will stay the same at $45. The expected
Describe the four inventory management approaches.
Explain how commercial paper differs from bankers’ acceptances.
Montreal Brewers is going to issue $50 million of 90-day commercial paper for net proceeds of $49 million. Montreal Brewers must maintain a $50 million credit line, on which it must pay a standby fee
Habitant Maple Syrup Sweets Company just issued $10 million of 180-day commercial paper for net proceeds of $9.9 million. What is the commercial paper’s quoted yield?
a. Calculate the effective annual cost of forgoing the discount from credit terms of 2/15 net 40. The selling price is $600.b. Another supplier offers $620 on credit terms of net 60. If you could
What are special purpose vehicles (SPVs)? What is the main advantage of SPVs? List a few forms of credit enhancement that are critical to SPVs.
Suppose Sio Inc. has 60 days of accounts receivable (AR) of $900,000 on its books. A factor offers a 60-day AR loan equal to 90 percent of AR. The quoted interest rate is 8 percent, and there is a
What is the effective annual cost if a firm issues $2.5 million face value of 90-day commercial paper for net proceeds of $2,450,000? The firm pays a standby fee of 0.05 percent on the face value.
Calculate the effective annual cost of issuing 270-day BAs at a quoted rate of 6 percent with a face value of $10 million. The bank charges a 0.4 percent stamping fee.
There are two suppliers of one input for a factory. Supplier A offers a selling price of $500 with terms of 1/10 net 30, while Supplier B offers $520 with 2/10 net 60. Which supplier offers the lower
A firm engaged a one-year, monthly pay, $100,000 line of credit at 6 percent plus a 0.25 percent commitment fee on the unused portion of the line. The firm used 80 percent of the line for the first
Calculate the effective annual cost of a one-year $2-million operating line of credit. The firm borrowed $1.2 million for the first five months of the year and reduced the loan amount to $500,000 for
What is the effective annual cost if a firm issues $10 million of 180-day BAs at a quoted rate of 6.5 percent, and the bank charges it a 0.5 percent stamping fee? Compare the effective annual cost of
State four main motives firms have to hold cash.
What is the purpose of credit analysis and how is it accomplished?
What are some of the advantages of carrying inventories?
What are some of the disadvantages of carrying inventories?
Reread the chapter-opening vignette. 1. In your view, have the Steeles really planned for the future? Discuss your answer. 2. Realizing the information is limited indicate which of the family’s
Discuss the choice of financial and nonfinancial goals and the part each may play in personal financial planning.
Compare future consumption to current consumption. Is one necessarily better than the other? Discuss.
Some people argue that consumer debt should be abolished. Explain from a consumption-through-time perspective why this argument makes little economic sense.
Explain the steps involved in financial planning, and list the eight major planning areas.
Explain marginal analysis and opportunity cost, and then indicate why they are important concepts in financial decision making.
How would you measure the cost of spending a night at home watching television?
Martin has been asked by Jan to deliver a package on his way home for Christmas break. The trip would take him a total of 200 miles out of his way. Jan has offered to pay $40 for the service. a. What
Give a simple definition of savings. Explain reasons why people save.
What is the history of inflation over the past 25 years? If you were making financial plans for the next 25 years, what inflation rate do you feel is most relevant to those plans? Explain your answer.
What has been the history of the overall economy over the past 25 years? Explain if you think recessions no longer plague our economic growth.
Some people believe that the stock market is a safe place to put their money. Do you agree, particularly if the money might be needed on short notice?
Is our current income tax law neutral in terms of financial planning; that is, can you make such plans without considering tax impacts? Discuss.
What are the phases of the life cycle, and how are they related to financial planning?
Bryan has saved $3,000. His friend Chris advises him to put it in a savings account because Bryan has very little cash reserves. Bryan wants to speculate in the stock market by trading biotech
1. Without knowing more about the Haggertys, would you say they might benefit from financial planning? Cite specific examples. 2. What do you think of Jan’s idea of investing in growth stocks? What
1. How should Vicki look at the opportunity costs of her M.B.A. degree? Explain. 2. Suppose that when Vicki registers at the university, she learns that she can pay a flat tuition of $3,000 a
Indicate whether each of the following statements is consistent with an organic or mechanistic view of government: a. “If you want to believe in a national purpose that is greater than our
Explain how you would expect a libertarian, a social democrat, and someone with an organic conception of the state to react to the following laws: a. A law prohibiting receiving compensation for
In 2011, Denmark introduced a tax on foods with more than 2.3 percent saturated fats. The goal was to reduce obesity. Is such a tax consistent with a mechanistic view of government?
In each of the following circumstances, decide whether the impact of government on the economy increases or decreases and why. In each case, how does your answer compare to that given by standard
During 2011, the inflation rate in the United Kingdom was about 3.6 percent. During that year, the national debt of the United Kingdom was about £ 940 billion. Discuss the implications of these
Consider two policies: 1) The government re-quires everyone to buy a standard health insurance policy that costs $ 5,000; 2) the government taxes everyone $ 5,000, but cuts taxes by $ 5,000 for
From 1981 to 1985, the US federal government increased defense spending from $ 157.5 billion to $ 252.7 billion per year, while over the same period Gross Domestic Product rose from $ 3.127 trillion
The following table shows the composition of US federal expenditures in 1997, 2001, 2007, and 2011.From 1997 to 2001, GDP went from $ 8.3324 trillion to $ 10.2862 trillion, the GDP price deflator
The following table shows the composition of US federal tax revenues in 1997, 2001, 2007, and 2011.a. Using the information provided in question 8, for the years 1997 to 2001 and 2007 to 2011,
In 2012, presidential candidate Mitt Romney proposed extending the cut in marginal income tax rates passed during the Bush administration. Explain why theory alone cannot predict how labor supply
A study by the New York City government of a program to prevent homelessness found that over 90 percent of families who signed up to receive job training, counseling services, and emergency money did
A researcher conducts a cross- sectional analysis of workers and finds a positive correlation between time spent on a computer at work and wages. The researcher concludes that computer use increases
In the 1970s, researchers at the RAND Corporation conducted a famous social experiment to investigate the relationship between health insurance coverage and health care utilization. In this
In New York State, an individual’s unemployment benefits depend on her previous earnings— the higher the earnings, the higher the benefits, up until a maximum benefit level is reached. In 1989,
Suppose that five states reduce income taxes in a given year. You are interested in estimating whether the tax cut has increased saving, and you find that the saving rate for residents of these five
Former New York governor, Eliot Spitzer, ob-served that when one examines the data from the United States over time, there is “ no correlation between higher marginal tax rates and slowing economic
A perennial debate is whether federal budget deficits lead to higher interest rates. The follow-ing table gives some historical data on deficits and interest rates. For each year, the deficit is the
In which of the following markets do you expect efficient outcomes? Why?a. Hurricane insurance for beach housesb. Medical carec. Stock marketd. MP3 playerse. Loans for students who wish to attend
In his commencement address at Wesleyan Uni-versity in 2008, then- Senator Barack Obama told the students that “our individual salvation depends on collective salvation.” Is this view consistent
Certain market transactions, such as selling one’s kidneys, seem morally repugnant to many people. At a conference discussion on what makes certain transactions morally repugnant, a professor of
Recently, the California insurance commissioner proposed a regulation that would reduce the ability of insurers to use geographic location in determining automobile insurance rates. The change would
Comedian Jay Leno once took his show to Michigan and gave away free tickets so that out- of-work individuals could attend. He later objected when he discovered that someone tried to sell his free
Imagine a simple economy with only two people: Augustus and Livia.a. Let the social welfare function beW = UL + UAwhere U L and U A are the utilities of Livia and Augustus, respectively. Graph the
In recent years, a number of states have instituted taxes on patrons of nude and topless dance bars. Such taxes are known as “sin taxes,” because they target behavior that is believed to be
In each case listed below, can you rationalize the government policy on the basis of welfare economics? a. In Los Angeles, the police respond to 127,000 burglar alarm calls per year. There is no
Your airplane crashes in the Pacific Ocean. You land on a desert island with one other passenger. A box containing 100 little bags of peanuts also washes up on the island. The peanuts are the only
[This problem is for readers who know some calculus.] Suppose that there are only two people in society, Mark and Judy, who must split a fixed amount of income of $ 300. Mark’s utility function is
Suppose that Tang and Wilson must split a fixed 400 pounds of food between them. Tang’s utility function is UT = sqrt (F1) and Wilson’s utility function is UW = ½ sqrt (F2 ), where F1 and F2 are
Consider an economy with two people, Victoria and Albert, and two commodities, tea and crumpets. Currently, Victoria and Albert would both be willing to substitute two cups of tea for one crumpet.
Suppose that Hannah’s utility function is U H = 3 T + 4 C and that Jose’s utility function is U J = 4 T + 3 C , where T is pounds of tea per year and C is pounds of coffee per year. Suppose there
Which of the following do you consider pure public goods? Private goods? Why? a. Wilderness areas b. Satellite television c. Medical school education d. Public television programs e. Automated
Indicate whether each of the following statements is true, false, or uncertain, and justify your answer. a. Efficient provision of a public good requires that each member of society place the same
Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and
Although Mexico has vast reserves of oil, in recent years its production of oil has been falling. In order to reverse this decline, former President Felipe Calderon attempted to privatize the state-
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