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Questions and Answers of Corporate Finance

If one euro buys 1.32 U. S. dollars, how many euros can you purchase for 3 U. S. dollars?
Suppose 1 year ago, Miller Company had inventory in Britain valued at 1.5 million Swiss francs. The exchange rate for dollars to Swiss francs was 1 franc = 1.15 dollars. Today, the exchange rate is
This morning, you noticed the following information in your financial newspaper: 1 British po3und = 103.25 yen (JPY) 1 U. S. dollar = 81.23 yen 1 U. S. dollar = 0.77 euros Given this information, how
For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much
Explain how options can be used to protect a short position.
What is the difference between writing a covered and a naked call option?
In general, if the price of the underlying stock is going up, what will happen to the price of a put option? Briefly explain.
What is meant by the exercise or strike price on an option?
What factors influence a speculative premium on an option?
Why would a high-beta stock often have a greater speculative premium than a low-beta stock?
Comment on the statement, “The novice may attempt to write the options with the highest total premium or speculative premium, while the buyer may think the smallest investment provides the greatest
Comment on how leverage works in purchasing a call option.
A stock has an exercise (strike) price of $40. a. If the stock price goes to $41.50, is the exchange likely to add a new strike price? b. If the stock price goes to $42.75 is the exchange likely to
In problem 10, what would be the overall gain or loss if the stock ended up ata. $41b. $25c. $57d. $70[Disregard the stock being called away in parts a, c, and d. Assume you will repurchase the
Assume a 40 July put option is purchased for 6.50 on a stock selling at $35 per share. If the stock ends up on expiration at 38.75, what will be the value of the put option?
Look at the option quotes in Table 14–2 on page 368. a. What is the closing price of the common stock of SINGLE Systems? b. What is the highest strike price listed? c. What is the price of a
Assume a stock is selling for $66.75 with options available at 60, 65, and 70 strike prices. The 65 call option price is at $4.50.a. What is the intrinsic value of the 65 call?b. Is the 65 call in
Assume a stock is selling for $48.50 with options available at 40, 50, and 60 strike prices. The 50 call option price is at 2.75. a. What is the intrinsic value of the 50 call? b. Is the 50 call in
In the case of Deli USA in Table 14–6 on page 373: a. What is the intrinsic value of the November 20 call option on October 19? b. What is the total premium (option price) for the option on that
In the case of American Travel in Table 14–6 on page 373:a. What is the intrinsic value of the November 32.50 call option on November 2?b. How much is the speculative premium on that date?c. By
Assume on May 1 you are considering a stock with three different expiration dates for the 60 call options. The percentage of the speculative premium for each date is as follows:May.......
Assume an investor writes a call option for 100 shares at a strike price of 30 for a premium of 5.75. This is a naked option. a. What would the gain or loss be if the stock closed at 26? b. What
What is a risk-adjusted return?
What does a high R2 (correlation) between a fund’s excess returns and the market’s excess returns indicate about the fund manager’s ability to effectively diversify?
What is the Sharpe approach to measuring portfolio risk? If a portfolio has a higher Sharpe measure than the market in general under the Sharpe approach, what is the implication?
How does the Treynor approach differ from the Sharpe approach? Which of the two measures assumes unsystematic risk will be diversified away?
Explain alpha as a measure of performance.
A firm that evaluates portfolios uses the Sharpe approach to measuring performance. How would it rank the following three portfolios? (Round to three places to the right of the decimal point.)
Assume a second firm that evaluates portfolios uses the Treynor approach to measuring performance. The firm is also evaluating the three portfolios in problem 1. The portfolio betas are as follows:a.
Assume the Jensen approach to portfolio valuation is being used.a. Draw a market line similar to that in Figure 22–4 on page 573. That is, show 0 excess returns at a 0 portfolio beta and 3 percent
A portfolio manager has the following asset allocation and returns on his portfolio. Fill in the values in Column (3). Use Table 22€“2 on page 579 as a guideline on how to proceed.The benchmark
a. Fill the blanks in the table below for a quarterly comparison of sectors with the S&P 500 Index (see the box on page 581).b. Did the portfolio manger under- or over perform the S&P 500?c.
Define accounting. How does accounting differ from bookkeeping?
What is point-in-time measurement? How does it differ from period-of-time measurement?
Write the fundamental accounting equation. Why is it significant?
What information is included in the heading of each of the four financial statements?
Define current assets and current liabilities. Why are current assets and current liabilities separated from noncurrent assets and long-term liabilities on the balance sheet?
Name the two main components of stockholders’ equity. Describe the main sources of change in each component.
How does the multiple-step income statement differ from the single-step income statement?
Explain the items reported on a retained earnings statement.
Name and describe the three categories of the statement of cash flows.
Why is there a demand for accounting information? Name five groups that create demand for accounting information about businesses, and describe how each group uses accounting information.
How is the retained earnings statement related to the balance sheet? How is the income statement related to the retained earnings statement?
Describe the items (other than the financial statements) found in the annual report.
Give an example of unethical behavior by a public accountant and describe its consequences.
What is an accounting entity?
Name and describe three different forms of business organization.
Name and describe the three main types of business activities.
Define the terms assets, liabilities, and stockholders’ equity. How are the three terms related?
Define the terms revenue and expense. How are these terms related?
Name and briefly describe the purpose of the four financial statements.
What types of questions are answered by the financial statements?
Multiple Choice questions 1. Which of the following statements is false concerning forms of business organization? a. A corporation has tax advantages over the other forms of business
Listed below are three independent scenarios.Required:Use the fundamental accounting equation to find the missing amounts.
At the beginning of the year, Morgan Company had total assets of $440,000 and total liabilities of $285,000. Required: Use the fundamental accounting equation to answer the following independent
Listed below are elements of the financial statements. a. Liabilities b. Net change in cash c. Assets d. Revenue e. Cash flow from operating activities f. Expenses g. Stockholders’ equity h.
Listed below are items that may appear on a balance sheet.Item 1. Accounts payable2. Machinery 3. Inventory4. Common stock 5. Notes payable (due in 5 years) 6. Cash 7. Copyright8. Net income less
An analysis of the transactions of Cavernous Homes Inc. yields the following totals at December 31, 2011: cash, $3,200; accounts receivable, $4,500; notes payable, $5,000; supplies, $8,100; common
An analysis of the transactions of Canary Cola Inc. for the year 2011 yields the following information: revenue, $78,000; supplies expense, $33,200; rent expense, $20,500; and dividends,
Parker Company has a balance of $25,000 in retained earnings on January 1, 2011. During 2011, Parker reported revenues of $74,000 and expenses of $57,000. Parker also paid a dividend of
Decision-makers use accounting information in a wide variety of decisions including the following: 1. Deciding whether or not to lend money to a business 2. Deciding whether or not an individual has
Listed below are definitions, examples, or descriptions related to business entities. 1. Owned by one person 2. Can make and sell goods (manufacturing) 3. Owned by more than one person 4. Can sell
Listed below are various activities that companies engage in during a period. a. The purchase of equipment b. The payment of a dividend c. The purchase of supplies d. The sale of equipment e. The
Bill and Steve recently formed a company that manufactures and sells high-end kitchen appliances. The following is a list of activities that occurred during the year. a. Bill and Steve each
A list of accounting concepts and related definitions is presented below. Concept 1. Revenue 2. Expense 3. Net income (loss) 4. Dividend 5. Asset 6. Liability 7. Stockholders’ equity Definition a.
Financial information for three independent cases is given below.Required: Compute the missing numbers in each case.
The following accounts exist in the ledger of Higgins Company: accounts payable, accounts receivable, accumulated depreciation, bonds payable, building, common stock, cash, equipment, income taxes
Dunn Sporting Goods sells athletic clothing and footwear to retail customers. Dunn’s accountant indicates that the firm’s operating cycle averages six months. At December 31, 2011, Dunn has the
Hanson Construction has an operating cycle of nine months. On December 31, 2011, Hanson has the following assets and liabilities: a. A note receivable in the amount of $1,200 to be collected in six
Swanson Products was organized as a new business on January 1, 2011. On that date, Swanson acquired equipment at a cost of $425,000, which is depreciated at a rate of $40,000 per year.
On January 1, 2011, Mulcahy Manufacturing Inc., a newly formed corporation, issued 1,000 shares of common stock in exchange for $135,600 cash. No other shares were issued during 2011, and no shares
College Spirit sells sportswear with logos of major universities. At the end of 2011, the following balance sheet account balances were available.Required: 1. Prepare a classified balance sheet for
Jerrison Company operates a wholesale hardware business. The following balance sheet accounts and balances are available for Jerrison at December 31, 2011.Required: 1. Prepare a classified balance
The following accounts exist in the ledger of Butler Company: salaries expense, advertising expense, cost of goods sold, depreciation expense, interest expense, income taxes expense, sales revenue,
ERS Inc. maintains and repairs office equipment. ERS had an average of 10,000 shares of common stock outstanding for the year. The following income statement account balances are available for ERS
The following information is available for Bergin Pastry Shop.Gross margin ..................$34,700Income from operations ............. 9,200Income taxes expense (15% of income before taxes) ...
The following information is available for Wright Auto Supply at December 31, 2011.Required: 1. Prepare a single-step income statement for the year ended December 31, 2011. 2. Prepare a multiple-step
At the end of 2010, Sherwood Company had retained earnings of $18,240. During 2011, Sherwood had revenues of $837,400 and expenses of $792,100, and paid cash dividends in the amount of
Walters Inc. began operations on January 1, 2011. The following information relates to Walters€™ cash flows during 2011.Required:1. Calculate the cash provided/used for each cash flow category.2.
Zachary Corporation’s December 31, 2010 balance sheet included the following amounts: Cash ..................... $17,400 Retained earnings ................ 103,600 Revenues
The following information for Kellman Inc. is available at the end of 2011.Required: Calculate the amount of dividends reported on the retained earnings statement for 2011.
During 2011, Moore Corporation paid $14,500 of dividends. Moore€™s assets, liabilities, and common stock at the end of 2010 and 2011 were:Required:Using the information provided, compute
DeSalle Company’s annual report includes the following items: financial statements, notes to the financial statements, management’s discussion and analysis, and a report of independent
Ethical behavior is essential to the conduct of business activity. Consider each of the following business behaviors: a. A manager prepares financial statements that grossly overstate the
Multiple Choice questions Use the following information for Multiple-Choice Exercises 1-1 and 1-2: At December 31, Marker reported the following items: cash, $8,200; inventory, $3,700; accounts
At the beginning of 2011, Huffer Corporation had total assets of $226,800, total liabilities of $84,200, common stock of $80,000, and retained earnings of $62,600. During 2011, Huffer had net income
Information for Beethoven Music Company is given below.Required:Use the relationships in the balance sheet, income statement, and retained earnings statement to determine the missing values.
Powers Wrecking Service demolishes old buildings and other structures and sells the salvaged materials. During 2011, Powers had $425,000 of revenue from demolition services and $137,000 of revenue
Each column presents financial information taken from one of four different companies, with one or more items of data missing.Required:Use your understanding of the relationships among financial
The following information for Rogers Enterprises is available at December 31, 2011, and includes all of Rogers€™ financial statement amounts except retained earnings:Required:Prepare a
Dittman Expositions has the following data available:Required:Prepare statements of retained earnings for 2011 and 2012.
The table below presents the statements of retained earnings for Bass Corporation for three successive years. Certain numbers are missing.Required: Use your understanding of the relationship between
The following information relates to Ashton Appliances for 2011.Required: 1. Prepare a single-step income statement for 2011, a retained earnings statement for 2011, and a properly classified balance
Data from the financial statements of four different companies are presented in separate columns in the table below. Each column has one or more data items missing.Required:Use your understanding of
Carson Corporation reported the following amounts for assets and liabilities at the beginning and end of a recent year.Required: Calculate Carson€™s net income or net loss for the year in
At the beginning of 2011, KJ Corporation had total assets of $553,700, total liabilities of $261,800, common stock of $139,000, and retained earnings of $152,900. During 2011, KJ had net income of
Information for TTL Inc. is given below.Required: Use the relationships in the balance sheet, income statement, and retained earnings statement to determine the missing values.
Parker Renovation Inc. renovates historical buildings for commercial use. During 2011, Parker had $763,400 of revenue from renovation services and $5,475 of interest income from miscellaneous
Each column presents financial information taken from one of four different companies, with one or more items of data missing.Required:Use your understanding of the relationships among financial
Ross Airport Auto Service provides parking and minor repair service at the local airport while customers are away on business or pleasure trips. The following account balances (except for retained

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