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Questions and Answers of
Corporate Finance
In the chapter introduction we learned that AT& T (T) borrowed $ 3 billion by issuing bonds in the public bond market. Although this may sound like a lot of money, AT& T owed almost $ 65 billion in
Why might firms whose sales levels change drastically over time choose to use debt only sparingly in their capital structures?
What does the term independence hypothesis mean as it applies to capital structure theory?
Many CFOs believe that the firm’s composite cost of capital is saucer- shaped or U- shaped. What does this mean?
Explain how industry norms might be used by the financial manager in the design of the company’s financing mix.
Distinguish between business risk and financial risk. What gives rise to, or causes, each type of risk?
Define the term financial leverage. Does the firm use financial leverage if preferred stock is present in its capital structure?
A manager in your firm decides to employ a break- even analysis. Of what shortcomings should this manager be aware?
A break- even analysis assumes linear revenue and cost functions. In reality, these linear functions deviate over large output and sales levels. Why?
Define the following terms: a. Financial structure b. Capital structure c. Optimal capital structure d. Debt capacity
What is the primary weakness of using EBIT- EPS analysis as a financing decision tool?
Which of the following sources of new earnings volatility represents the effect of business versus financial risk (discuss the rationale for your decisions): a. Amos Gooding Real Estate Company
Some financial data for three corporations are displayed here.a. Which firm appears to be excessively leveraged? b. Which firm appears to be employing financial leverage to the most appropriate
You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent years operations, which ended yesterday.Your supervisor in the
Parks Castings Inc. will manufacture and sell 200,000 units next year. Fixed costs will total $ 300,000, and variable costs will be 60 percent of sales. a. The firm wants to achieve a level of
Footwear Inc. manufactures a complete line of men’s and women’s dress shoes for independent merchants. The average selling price of its finished product is $ 85 per pair. The variable cost for
Rocky Mount Metals Company manufactures an assortment of wood-burning stoves. The average selling price for the various units is $ 500. The associated variable cost is $ 350 per unit. Fixed costs for
Match each of the following definitions to the appropriate terms: 4 TERMS
Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure (explain)? a. When firm owners borrow money they have an incentive to
Two inventive entrepreneurs have interested a group of venture capitalists in backing a new business project. The proposed plan would consist of a series of international retail outlets to distribute
A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. Two financing plans have been
Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado’s Rocky Mountains. Your firm manufactures
Camping USA Inc. has been operating for only 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top- of- the- line camping tent. You are starting an internship as
Why would a firm repurchase its own stock?
Explain the trade- off between retaining internally generated funds and paying cash dividends.
a. What is the residual dividend theory? b. Why is this theory operational only in the long term?
What legal restrictions may limit the amount of dividends to be paid?
In the introduction to the chapter we learned that Apple Computer (AAPL) recently rein-stated the payment of cash dividends, which had been suspended since the 1990s. What are some reasons that might
How can ownership control constrain the growth of a firm?
Explain what a dividend’s declaration date, date of record, and ex- dividend date are.
Carson Electronics earned $ 2.4 million in net income last year and for the first time ever paid its common stockholders a cash dividend of $ 0.02 per share. The firm has 10 million shareholders.
Parker Prints is in negotiation with two of its largest customers to increase the firm’s sales dramatically. The increase will require that Parker expand its production facilities at a cost of $ 30
In the spring of 2014 the CFO of Placebo Pharmaceuticals, Inc. took a proposal to the firm’s board of directors to distribute a noncash dividend to the firm’s shareholders in the form of new
Marston Mfg. recently declared a 4- for- 1 stock split for its common shares. Before the split the firm’s share price had risen to $ 600 per share and the firm’s CFO felt that this high stock
The Dunn Corporation is planning to pay dividends of $ 500,000. There are 250,000 shares outstanding, and earnings per share are $5. The stock should sell for $ 50 after the ex- dividend date. If,
CareMore, Inc. provides in- home medical assistance to the elderly and earned net income of $ 5 million that it plans to use to repurchase shares of the firm’s common stock, which is currently
Your firm needs to raise $ 10 million to finance its capital expenditures for the coming year. The firm earned $ 4 million last year and will pay out half this amount in dividends. If the firm’s
Explain in your own words the notion of a perfect capital market.
The question as to whether dividend policy has an effect on share prices raises a question as to whether dividends paid out to stockholders are any more “ certain” than the expected future
FarmCo, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains after funding 60 percent of its planned capital expenditures. The firm tries to maintain a 40
Describe the types of limitations firms can face from legal restrictions on dividend payments.
The board of directors of Kensington Enterprises has decided to pay cash dividends totaling $ 5 million in the first quarter of the year. This payment represents the initiation of a cash dividend for
The Patterson- Hale Trucking Company (PHT) needs to expand its fleet by 50 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing
Assume that you write a column for a very widely followed financial blog titled, “Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week
United Parcel Service (UPS) provides package delivery services throughout the United States and the world. Discuss the impact of seasonal variations in the delivery business for forecasting the
Discuss the shortcomings of the percent of sales method of financial forecasting.
What would be the probable effect on a firm’s cash position of the following events? a. Rapidly rising sales b. A delay in the payment of payables c. A more liberal credit policy on sales (to the
A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand?
Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has been in business for only 1 year, but its CFO predicts that the firms operating expenses,
In November of each year the CFO of Barker Electronics begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Barker is a small
The Caraway Seed Company has grown rapidly over the last decade and is trying to forecast the firms inventory requirements for the next 5 years. Historical sales and inventories for the
Findlay Instruments produces a complete line of medical instruments used by plastic surgeons and has experienced rapid growth over the past 5 years. In an effort to make more accurate predictions of
The Sharpe Corporations projected sales for the first 8 months of 2014 follow:Of Sharpes sales, 10 percent is for cash, another 60 percent is collected in the month following
Lewis Printing has projected its sales for the first 8 months of 2014 as follows:Lewis collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the
On March 31, 2013, Mikes Bike Shop had outstanding accounts receivable of $ 17,500. Mikes sales are roughly evenly split between credit and cash sales, with the credit sales
Sambonoza Enterprises projects its sales next year to be $ 4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs
Tulley Appliances Inc. projects next year’s sales to be $ 20 million. Current sales are $ 15 million, based on current assets of $ 5 million and fixed assets of $ 5 million. The firm’s net profit
Use the following industry- average ratios to construct a pro forma balance sheet for Phoebes Cat Foods Inc.
Which of the following accounts would most likely vary directly with the level of a firm€™s sales? Discuss each briefly.
The balance sheet of the Boyd Trucking Company (BTC) follows:BTC had sales for the year ended December 31, 2013, of $ 25 million. The firm follows a policy of paying all net earnings out to its
The most recent balance sheet for the Armadillo Dog Biscuit Co. Inc. is shown in the following table. The company is about to embark on an advertising campaign, which is expected to raise sales from
Fishing Charter Inc. estimates that it invests $ 0.30 in assets for each dollar of new sales. However, $ 0.05 in profits are produced by each dollar of additional sales, of which $ 0.01 can be
Phillips Petroleum is an integrated oil and gas company with headquarters in Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production
Dell Computer Corporation (DELL) has long been recognized for its innovative approach to managing its working capital. Describe how Dell pioneered the management of net working capital to free up
There are three major sources of unsecured short- term credit other than accrued wages and taxes. List and discuss the distinguishing characteristics of each.
What is meant by the following trade credit terms: 2/ 10, net 30? 4/ 20, net 60? 3/ 15, net 45?
Define the following: a. Line of credit b. Commercial paper c. Compensating balance d. Prime rate
Define and contrast the terms working capital and net working capital.
Discuss the risk– return relationship involved in the firm’s asset- investment decisions as that relationship pertains to its working- capital management.
What advantages and disadvantages are generally associated with the use of short- term debt? Discuss.
Explain what is meant by the statement “The use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of illiquidity.”
Define the hedging principle. How can this principle be used in the management of working capital?
Define the following terms: a. Permanent asset investments b. Temporary asset investments c. Permanent sources of financing d. Temporary sources of financing e. Spontaneous sources of financing
How can the formula “interest = principle * rate * time” be used to estimate the cost of short- term credit?
How can we accommodate the effects of compounding in our calculation of the effective cost of short- term credit?
The Carton Packing Company (CPC) is located in rapidly growing Austin, Texas. To meet its need for funds to finance its growing assets the firm has reinvested earnings and borrowed using short- term
Compute the cost of the trade credit terms in problem 15- 3 using the compounding formula, or effective annual rate.
On July 1, 2013, the Southwest Forging Corporation arranged for a line of credit with the First National Bank of Dallas. The terms of the agreement call for a $ 100,000 maximum loan with interest
Tri- State Enterprises plans to issue commercial paper for the first time in the firm’s 35- year history. The firm plans to issue $500,000 in 180- day maturity notes. The paper will carry a 10 1/ 2
Johnson Enterprises Inc. is involved in the manufacture and sale of electronic components used in small AM/ FM radios. The firm needs $ 300,000 to fi-nance an anticipated expansion in receivables due
MDM Inc. is considering factoring its receivables. The firm has credit sales of $ 400,000 per month and has an average receivables balance of $ 800,000 with 60- day credit terms. The factor has
A factor has agreed to lend the JVC Corporation working capital on the following terms: JVC’s receivables average $ 100,000 per month and have a 90- day average collection period. The factor will
Identify each of the following sources of short- term credit in terms of whether they are secured (include some type of collateral) or are unsecured:•Line of credit •Pledging of accounts
A popular theory for managing risk to the firm that arises out of its management of working capital (that is, current assets and current liabilities) involves following some-thing called the
Sims Electric Corp. has been striving for the last 5 years to improve its management of working capital. Historical data for the firm€™s sales, accounts receivable, inventories, and accounts
Paymaster Enterprises has arranged to finance its seasonal working- capital needs with a short- term bank loan. The loan will carry a rate of 12 percent per an-num with interest paid in advance
The R. Morin Construction Company needs to borrow $ 100,000 to help finance the cost of a new $ 150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for
The Sean- Janeow Import Co. needs $ 500,000 for the 3- month period ending September 30, 2013. The firm has explored two possible sources of credit. a. S- J has arranged with its bank for a $
On February 3, 2012, the Burlington Western Company plans a commercial paper issue of $ 20 million. The firm has never used commercial paper before but has been assured by the firm placing the issue
Calculate the effective cost of the following trade credit terms when payment is made on the net due date: a. 2/ 10, net 30 b. 3/ 15, net 30 c. 3/ 15, net 45 d. 2/ 15, net 60
What different types of businesses operate in the international environment? Why are the techniques and strategies available to these firms different?
What is meant by arbitrage profits?
What are the markets and mechanics involved in generating simple arbitrage profits?
How do purchasing- power parity, interest rate parity, and the Fisher effect explain the relationships among the current spot rate, the future spot rate, and the forward rate?
What is meant by (a) Exchange risk and (b) Political risk?
In the New York exchange market, the forward rate for the Indian currency, the rupee, is not quoted. If you were exposed to exchange risk in rupees, how could you hedge your position?
What risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic investment?
Are the inputs more complicated to a direct foreign investment than those to the domestic investment problem? If so, why?
Suppose 90- day investments in Europe have a 5 percent annualized return and a 1.25 percent quarterly (90- day) return. In the United States, 90- day investments of similar risk have a 7 percent
A McDonald’s Big Mac costs 2.44 yuan in China, but costs $ 4.20 in the United States. Assuming that purchasing- power parity (PPP) holds, how many Chinese yuan are required to purchase 1 U. S.
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