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Questions and Answers of
Corporate Finance
Given the following information, prepare a statement of cash flows. Increase in accounts receivable..... $ 25 Increase in inventories......... 30 Operating income......... 75 Interest expense
Interpret the following information regarding Westlake Corporation's cash flows.Sales..................$ 550,000Accumulated depreciation........ 190,000Cash ? Cost of goods sold........
Given the following information, prepare a statement of cash flows. Increase in accounts receivable........ $ 25 Increase in inventories............ 30 Operating income.............. 75 Interest
In July 2011, the finale to the Harry Potter movie series, Harry Potter and the Deathly Hallows€” Part 2, from Time Warner Inc.€™s Warner Bros. Pictures, earned an estimated $ 307 million in
Given the following information, compute the firm’s free cash flows and the financing cash flows. Dividends............. $ 25 Change in common stock...... $ 27 Change in inventories........ $
Interpret the following information regarding Bates Corporations free cash flows and financing cash flows.
In Problem 3- 12, you were asked to prepare a statement of cash flows for Abrahams Manufacturing Company. Use the information given in the problem to compute the firm’s free cash flows and the
In Problem 3- 14, you were asked to prepare a statement of cash flows for Pamplin Inc. Pamplins financial statements are provided again below. Using this information, compute the
Describe the “five- question approach” to using financial ratios.
Explain what determines a company’s return on equity.
What is Economic Value Added? Why is it used?
Discuss briefly the two perspectives that can be taken when performing a ratio analysis.
Where can we obtain industry norms?
What are the limitations of industry average ratios? Discuss briefly.
What is liquidity, and what is the rationale for its measurement?
Distinguish between a firm’s operating return on assets and operating profit margin.
Why is a firm’s operating return on assets a function of its operating profit margin and total asset turnover?
What is the difference between a firm’s gross profit margin, operating profit margin, and net profit margin?
What information do the price/ earnings ratio and the price/ book ratio give us about the firm and its investors?
Brashear Inc. currently has $ 2,145,000 in current assets and $ 858,000 in current liabilities. The company’s managers want to increase the firm’s inventory, which will be financed by a short-
The annual sales for Salco Inc. were $ 4.5 million last year. All sales are on credit. The firms end- of- year balance sheet was as follows:The firms income statement for the
Stegemoller Inc.’ s managers want to evaluate the firm’s prior- year performance in terms of its contribution to shareholder value. This past year, the firm earned an operating return on
Bremmer Industries has a price/ earnings ratio of 16.29X. a. If Bremmer’s earnings per share are $ 1.35, what is the price per share of Bremmer’s stock? b. Using the price per share you found
Ellie’s Electronics Incorporated has total assets of $ 63 million and total debt of $ 42 million. The company also has operating profits of $ 21 million with interest expenses of $ 6 million. a.
Callaway Concrete uses Economic Value Added as a financial performance measure. Callaway has $ 240 million in assets, and the firm has financed its assets with 37 percent equity and 63 percent debt
Last year, Davies Inc. had sales of $ 400,000 with a cost of goods sold of $ 112,000. The firm’s operating expenses were $ 130,000, and its increase in retained earnings was $ 58,000. There are
Greene Inc.’s balance sheet shows a stockholders’ equity book value (total common equity) of $ 750,500. The firm’s earnings per share were $ 3, resulting in a price/ earnings ratio of 12.25X.
The Mitchem Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. At present, the firm has current assets of $
The balance sheet and income statement for the J. P. Robard Mfg. Company are as follows:BALANCE SHEET. $ 000.Cash................ $ 500Accounts receivable...........
The R. M. Smithers Corporation earned an operating profit margin of 10 percent based on sales of $ 10 million and total assets of $ 5 million last year. a. What was Smithers’ total asset turnover
The financial statements and industry norms are shown below for Pamplin, Inc.:a. Compute the financial ratios for Pamplin to compare both for 2012 and 2013 against the industry norms.b. How liquid
After graduating from college in December 2011, Alyssa Randall started her career at the G& S Corporation, a small- to medium- sized warehouse distributor in Nashville, Tennessee. The company was
a. What is meant by the investor’s required rate of return? b. How do we measure the riskiness of an asset? c. How should the proposed measurement of risk be interpreted?
What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk (market or nondiversifiable risk)?
What is a beta? How is it used to calculate r, the investor’s required rate of return?
What is the security market line? What does it represent?
If we were to graph the returns of a stock against the returns of the S& P 500 Index, and the points did not follow a very ordered pattern, what could we say about that stock? If the stock’s
Over the past eight decades, we have had the opportunity to observe the rates of return and the variability of these returns for different types of securities. Summarize these observations.
What effect will diversifying your portfolio have on your returns?
Universal Corporation is planning to invest in a security that has several possible rates of return. Given the following probability distribution of returns, what is the expected rate of return on
a. From the price data here, compute the holding- period returns for Jazman and Solomon for periods 2 through 4.b. How would you interpret the meaning of a holding- period return?
a. Given the holding- period returns shown here, compute the average returns and the standard deviations for the Zemin Corporation and for the market.b. If Zemins beta is 1.54 and the
Suppose you purchased 16 shares of Disney stock for $ 24.22 per share on May 1, 2012. On September 1 of the same year, you sold 12 shares of the stock for $ 25.68. Calculate the holding- period
The following are the end-of- month prices for both the Standard & Poor€™s 500 Index and Nike€™s common stock.a. Using the data here, calculate the holding- period returns for each of the
Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk- free rate is 5 percent and the expected return for the market is 12 percent.
Below you have been provided the prices for Merck and the S& P 500 Index.a. Calculate the monthly holding- period returns for Merck and the S& P 500 Index. b. What are the average monthly
a. Determine the expected return and beta for the following portfolio:b. Given the foregoing information, draw the security market line and show where the securities and portfolio fit on the graph.
a. Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk- free rate is 2 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of
From the graph in the margin relating the holding- period returns for Aram Inc. to the S& P 500 Index, estimate the firm’s beta.
Given the holding- period returns shown here, calculate the average returns and the standard deviations for the Kaifu Corporation and for the market.
Levine Manufacturing Inc. is considering several investments. The rate on Treasury bills is currently 2.75 percent, and the expected return for the market is 12 percent. What should be the required
MFI Inc. has a beta of 0.86. If the expected market return is 11.5 percent and the risk- free rate is 3 percent, what is the appropriate required return of MFI (using the CAPM)?
The expected return for the general market is 12.8 percent, and the risk premium in the market is 9.3 percent. Tasaco, LBM, and Exxos have betas of 0.864, 0.693, and 0.575, respectively. What are
You own a portfolio consisting of the stocks below:The risk- free rate is 3 percent. Also, the expected return on the market portfolio is 11 percent. a. Calculate the expected return of your
Assume you have the following portfolio.What is the portfolios beta?
Carter Inc. is evaluating a security. Calculate the investment’s expected return and its standard deviation. PROBABILITY RETURN 0.15......... 6% 0.30......... 9% 0.40.........
Summerville Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk ( as measured by the standard deviation)
Given the following probabilities and returns for Mik’s Corporation, find the standard deviation. PROBABILITY RETURNS 0.40........... 7% 0.25........... 4% 0.15........... 18%
From the price data that follow, compute the holding- period returns for periods 2 through 4. PERIOD STOCK PRICE 1............ $ 10 2............ 13 3............ 11 4............ 15
Although not absolutely necessary, you are advised to use a computer spreadsheet to work the following problem.a. Use the price data from the table that follows for the Standard & Poor’s 500
Distinguish between debentures and mortgage bonds.
Define (a) Eurobonds, (b) Zero coupon bonds, and (c) Junk bonds.3
Describe the bondholder’s claim on the firm’s assets and income
What are the basic differences between book value, liquidation value, market value, and intrinsic value?
Explain the three factors that determine the intrinsic, or economic, value of an asset.
Trico bonds have an annual coupon rate of 8 percent and a par value of $ 1,000 and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the bond?
New Generation Public Utilities issued a bond with a $ 1,000 par value that pays $ 30 in annual interest. It matures in 20 years. Your required rate of return is 4 percent. a. Calculate the value of
The Logos Corporation is planning on issuing bonds that pay no interest but can be converted into $ 1,000 at maturity, 7 years from their purchase. To price these bonds competitively with other bonds
You are examining three bonds with a par value of $ 1,000 (you receive $ 1,000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount
Bank of America has bonds that pay a 6.5 percent coupon interest rate and mature in 5 years. If an investor has a 4.3 percent required rate of return, what should she be willing to pay for the bond?
Xerox issued bonds that pay $ 67.50 in interest each year and will mature in 5 years. You are thinking about purchasing the bonds. You have decided that you would need to receive a 5 percent return
Sharp Co. bonds are selling in the market for $ 1,045. These 15- year bonds pay 7 percent interest annually on a $ 1,000 par value. If they are purchased at the market price, what is the expected
You own a bond that has a par value of $ 1,000 and matures in 5 years. It pays a 5 percent annual coupon rate. The bond currently sells for $ 1,100. What is the bond’s expected rate of return?
Time Warner has bonds that are selling for $ 1,371. The coupon interest rate on the bonds is 9.15 percent and they mature in 21 years. What is the yield to maturity on the bonds? What is the current
SunnCo.’ s bonds, maturing in 7 years, pay 4 percent interest on a $ 1,000 face value. However, interest is paid semiannually. If your required rate of return is 5 percent, what is the value of the
Citigroup issued bonds that pay a 5.5 percent coupon interest rate. The bonds mature in 5 years. They are selling for $ 1,076. What would be your expected rate of return (yield to maturity) if you
Zenith Co.’ s bonds mature in 12 years and pay 7 percent interest annually. If you purchase the bonds for $ 1,150, what is your expected rate of return?
Assume the market price of a 5- year bond for Margaret Inc. is $ 900, and it has a par value of $ 1,000. The bond has an annual interest rate of 6 percent that is paid semi-annually. What is the
Assume you have a bond with a semiannual interest payment of $ 35, a par value of $ 1,000, and a current market of $ 780. What is the current yield of the bond?
An 8- year bond for Katy Corporation has a market price of $ 700 and a par value of $ 1,000. If the bond has an annual interest rate of 6 percent, but pays interest semiannually, what is the
Assume you own a bond with a market value of $ 820 that matures in 7 years. The par value of the bond is $ 1,000. Interest payments of $ 30 are paid semiannually. What is your expected rate of
You own a 10- year bond that pays 6 percent interest annually. The par value of the bond is $ 1,000 and the market price of the bond is $ 900. What is the yield to maturity of the bond?
You purchased a bond for $ 1,100. The bond has a coupon rate of 8 percent, which is paid semiannually. It matures in 7 years and has a par value of $ 1,000. What is your expected rate of return?
You own a 20- year, $ 1,000 par value bond paying 7 percent interest annually. The market price of the bond is $ 875, and your required rate of return is 10 percent. a. Compute the bond’s expected
Calculate the value of a bond that will mature in 14 years and has a $ 1,000 face value. The annual coupon interest rate is 5 percent, and the investor’s required rate of return is 7 percent.
At the beginning of the year, you bought a $ 1,000 par value corporate bond with a 6 percent annual coupon rate and a 10- year maturity date. When you bought the bond, it had an expected yield to
Shelly Inc. bonds have a 6 percent coupon rate. The interest is paid semiannually, and the bonds mature in 8 years. Their par value is $ 1,000. If your required rate of return is 4 percent, what is
Crawford Inc. has two bond issues outstanding, both paying the same annual interest of $ 55, called Series A and Series b. Series A has a maturity of 12 years, whereas Series B has a maturity of 1
ExxonMobil 20- year bonds pay 6 percent interest annually on a $ 1,000 par value. If bonds sell at $ 945, what is the bonds’ expected rate of return?
National Steel 15- year, $ 1,000 par value bonds pay 5.5 percent interest annually. The market price of the bonds is $ 1,085, and your required rate of return is 7 percent. a. Compute the bond’s
Here are data on $ 1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley at the end of 2012. Assume you are thinking about buying these bonds as of January 2013. Answer the
Why is preferred stock referred to as a hybrid security? It is often said to combine the worst features of common stock and bonds. What is meant by this statement?
Because preferred stock dividends in arrears must be paid before common stock dividends, should they be considered a liability and appear on the right- hand side of the balance sheet?
Why would a preferred stockholder want the stock to have a cumulative dividend feature and protective provisions?
Why is preferred stock frequently convertible? Why is it callable?
Compare valuing preferred stock and common stock.
The common stockholders receive two types of return from their investment. What are they?
Dalton Inc. has an 11.5 percent return on equity and retains 55 percent of its earnings for reinvestment purposes. It recently paid a dividend of $ 3.25 and the stock is currently selling for $ 40.
Bates Inc. pays a dividend of $ 1 and is currently selling for $ 32.50. If investors require a 12 percent return on their investment from buying Bates stock, what growth rate would Bates Inc. have to
You intend to purchase Marigo common stock at $ 50 per share, hold it 1 year, and then sell it after a dividend of $ 6 is paid. How much will the stock price have to appreciate for you to satisfy
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