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Questions and Answers of Corporate Finance

Product pricing the firm actually priced its product to be about 20 percent less than that of competitors, even though the Grandmother calendar was more detailed. In retrospect, was this a wise
Corporate Borrowing if the firm was so successful at selling, why wouldn’t a bank or some other lender step in and provide it with the cash it needed to continue?
Cash Flow which was the biggest culprit here: too many orders, too little cash, or too little production capacity?
Cash Flow what are some of the actions that a small company like The Grandmother Calendar Company can take if it finds itself in a situation in which growth in sales outstrips production capacity and
Pro Forma Statements consider the following simplified financial statements for the Parcells Corporation (assuming no income taxes): Parcells has predicted a sales increase of 10 percent. It has
Pro Forma Statements and EFN In the previous question assume Parcells pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare
Calculating EFN the most recent financial statements for Watchtower, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No
EFN the most recent financial statements for Last in Line, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,560 was paid, and the company
EFN The most recent financial statements tor 7 Seas, Inc., are shown here: Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains
Calculating Internal Growth the most recent financial statements for Benatar Co. are shown here: Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant
Calculating Sustainable Growth for the company in the previous problem, what is the sustainable growth rate?
Sales and Growth the most recent financial statements for Heng Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a
Calculating Retained Earnings from Pro Farina Income Consider the following income statement for the Heir Jordan Corporation: A 20 percent growth rate in sales is projected. Prepare a pro forma
Applying Percentage of Sales the balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information
EFN and Sales From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout
Internal Growth If the Soccer Shoppe has a 9 percent ROA and a 15 percent payout ratio, what is its internal growth rate?
Sustainable Growth If the Parodies Corp. has a 16 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?
Sustainable Growth Based on the following information calculates the sustainable growth rate for Kaleb’s Kickboxing:Profit margin = 8.9%Capital intensity ratio = .75Debt-equity ratio = .60Net
Sustainable Growth assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 1.90Profit margin= 7.6%Equity multiplier = 1.40Payout ratio = 40%
Full-Capacity Sales Seaweed Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $610,000. How fast can sales grow before any new fixed assets are needed?
Fixed Assets and Capacity Usage For the company in the previous problem, suppose fixed assets are $470,000 and Sales are projected to grow to $710,000. How much in new fixed assets are required to
Growth and Profit Margin Fixed Appliance Co. wishes to maintain a growth rate of 12 percent a year, a debt—equity ratio of .60, and a dividend payout ratio of 30 percent. The ratio of total assets
Growth and Debt—Equity Ratio A firm wishes to maintain a growth rate of 14 percent and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at .8, and profit margin
Growth and Assets A firm wishes to maintain an internal growth rate of 8 percent and a dividend payout ratio of 20 percent. The current profit margin is 7 percent, and the firm uses no external
Sustainable Growth Based on the following information calculates the sustainable growth rate for Hendrix Guitars, Inc.:Profit margin = 6.4%Total asset turnover = 1.70Total debt ratio = .40Payout
Sustainable Growth and Outside Financing You’ve collected the following information about Bad Company, Inc.:Sales = $170,000Net income = $16,000Dividends = $11,500Total debt = $120,000Total equity
Sustainable Growth Rate Country Comfort, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the company had total assets of $270,000. During the year the company sold
Internal Growth Rates Calculate the internal growth rate for the company in the previous problem. Now calculate the internal growth rate using ROA X b for both beginning of period and end of
Calculating EFN the most recent financial statements for Moose Tours, inc., follow. Sales for 2007 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the
Capacity Usage and Growth In the previous problem, suppose the firm was operating at only 80 percent capacity in 2006. What is EFN now?
Calculating EFN in Problem 25, suppose the firm wishes to keep its debt—equity ratio constant. What is EFN now?
EFN and Internal Growth Redo Problem 25 using sales growth rates of 15 and 25 percent in addition to 20 percent illustrate graphically the relationship between EFN and the growth rate, and use this
EFN and Sustainable Growth Redo Problem 27 using sales growth rates of 30 and 35 percent in addition to 20 percent, illustrate graphically the relationship between EFN and the growth rate, and use
Constraints on Growth Let Me Be, Inc., wishes to maintain a growth rate of 14 percent per year and a debt—equity ratio of .25 Profit margin is 5.9 percent, and the ratio of total assets to sales is
EFN Define the following:S = Previous year’s salesA = Total assetsD = Total debtE = Total equityg = Projected growth in salesPM = Profit marginb =Retention (plowback) ratioShow that EFN can be
Growth Rates based on the result in Problem 31, show that the internal and sustainable growth rates are as given in the chapter.S = Previous year’s salesA = Total assetsD = Total debtE = Total
Sustainable Growth Rate In the chapter, we discussed the two versions of the sustainable growth rate formula. Derive the formula ROE X b from the formula given in the chapter, where ROE is based on
Present Value the basic present value equation has four parts. What are they?
Compounding what is compounding? What is discounting?
Compounding and period as you increase the length of time involved, what happens to futures values? What happens to present values?
Compounding and interest Rates what happens to a future value if you increase the rates? What happens to a present value?
Ethical Considerations take a look back at example 5.7 is it deceptive advertising? Is it unethical to advertise a future value like this without a disclaimer? To answer the next five questions,
Time Value of Money why would TMCC be wiling to accept such a small amount today ($1,163) in exchange for a promise to repay about 9 times that amount ($10,000) in the future?
Call Provisions TMCC has the right to buy back the securities on the anniversary date at a price established when the securities were issued (this feature is a term of this particular deal). What
Time Value of Money would you be willing to pay $1.163 today in exchange for $10,000 in 30 years? What would be the key considerations in answering yes to no? Would your answer depend on who is
Investment Comparison suppose that when TMCC offered the security for $1,163 the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price?
Length of Investment the TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $1,163 original price? Why? If you
Calculating Future Values For each of the following, compute the future value:
Calculating Present Values For each of the following, compute the present value:
Calculating Interest Rates Solve for the unknown interest rate in each of thefollowing:
Calculating the Number of Periods Solve for the unknown number of years in each of the following:
Calculating Interest Rates Assume the total cost of a college education will be $280,000 when your child enters college in 18y. You presently have $50,000 to invest. What annual rate of interest must
Calculating the Number of Periods At 9 percent interest, how long does it take to double your money to quadruple it?
Calculating Interest Rates In 2005, the average vehicle selling price in the United States was $27,958. Seven years earlier, the average price was $21,608. What was the annual increase in vehicle
Calculating the Number of Periods you’re trying to save to buy a new $170,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 6.2 percent annual interest on its
Calculating Present Values Imprudential, Inc., has an unfunded pension liability of $700 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to
Calculating Present Values you have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday
Calculating Future Values Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth
Calculating Interest Rates and Future Values In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2006, the winner’s check was $1,170,000. What was the
Calculating Present Values the first comic book featuring Superman was sold in 1938. In 2005, the estimated price for this comic book in good condition was about $485,000. This represented a return
Calculating Rates of Return although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby’s sold the Edgar Degas bronze sculpture
Calculating Rates of Return Referring to the TMCC security we discussed at the very beginning of the chapter:a. Based on the $1,163 price, what rate was TMCC paying to borrow money?b. Suppose that,
Calculating Present Values Suppose you are still committed to owning a $170,000 Ferrari (see Problem). If you believe your mutual fund can achieve an 11 percent annual rate of return and you want to
Calculating Future Values you have just made your first $2,000 contribution to your individual retirement account. Assuming you earn a 12 percent rate of return and make no additional contributions,
Calculating Future Values you are scheduled to receive $25,000 in two years. When you receive it, you will invest it for six more years at 7.9 percent per year. How much will YOU have in eight years?
Calculating the Number of Periods you expect to receive $10,000 at graduation in two years. You plan on investing it at 11 percent until you have $100,000. How long will you wait from now?
Simple Interest versus Compound Interest First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually, if you
Annuity Factors There are four pieces to an annuity present value. What are they?
Annuity Period As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value?
Interest Rates what happens to the future value of an annuity if you increase the rate r? What happens to the present value?
Present Value what do you think about the Tn-State Megabucks lottery discussed in the chapter advertising $500.000 prize when the lump sum option is $250,000? Is it deceptive advertising?
Present Value If you were an athlete negotiating a contract, would you want a big signing bonus payable immedia.ely and smaller payments in the future, or vice versa? How about looking at it from the
Present Value Suppose two athletes sign 10-year contracts for $80 million. In one case, we’re told that the $80 million will be paid in 10 equal installments. In the other case, we’re told that
APR and EAR should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?
Time Value On subsidized Stafford loans a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a
Time Value Eligibility for a subsidized Stafford loan is based on current financial need. However, both subsidized and unsubsidized Stafford loans are repaid out of future income. Given this, do you
Time Value a viatical settlement is a lump sum of money given to a terminally ill individual in exchange for his life insurance policy. When the insured person dies, the purchaser receives the payout
Present Value and Multiple Cash Flows Sea born Co. has identified an investment project with the following cash flows, if the discount rate is 10 percent, what is the present value of these cash
Present Value and Multiple Cash Flows Investment X offers to pay you 57.000 per year for eight years, whereas Investment Y offers to pay you 59.000 per year for five years. Which of these cash flow
Future Value and Multiple Cash Flows Paradise, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash
Calculating Annuity Present Value An investment offers $4,600 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the
Calculating Annuity Cash Flows If you put up $28,000 today in exchange for a 8.25 percent, 15- year annuity, what will the annual cash flow be?
Calculating Annuity Values your company will generate $65,000 in annual revenue each year for the next eight years from a new information database, if the appropriate interest rate is 8.5 percent,
Calculating Annuity Values If you deposit $3,000 at the end of each of the next 20 years into an account paying 10.5 percent interest, how much money will you have in the account in 20 years how much
Calculating Annuity Values you want to have $80,000 in your savings account 10 years from now, and you’re prepared to make equal annual deposits into the account at the end of each year, if the
Calculating Annuity Values Dinero Bank offers you a $30,000, seven-year term loan at 8 percent annual interest. What will your annual loan payment be?
Calculating Perpetuity Values The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. If the required return on this
Calculating Perpetuity Values In the previous problem, suppose a sales associate told you the policy costs $280,000. At what interest rate would this be a fair deal?
Calculating EAR Find the EAR in each of the following cases:
Calculating APR Find the APR, or stated rate, in each of the following cases:
Calculating EAR First National Bank charges 13.1 percent compounded monthly on its business loans. First United Bank charges 13.4 percent compounded semiannually. As a potential borrower, which bank
Calculating APR Tarpley Credit Corp. wants to earn an effective annual return on its consumer loans of 14 percent per year. The bank uses daily compounding on its loans. What interest rate is the
Calculating Future Values What is the future value of $1,400 in 20 years assuming an interest rate of 9.6 percent compounded semiannually?
Calculating Future Values Corpstein Credit Bank is offering 8.4 percent compounded daily on its savings accounts. If you deposit $6,000 today, how much will you have in the account in 5 years in 10
Calculating Present Values An investment will pay you $45,000 in six years. If the appropriate discount rate is Ii percent compounded daily, what is the present value?
EAR versus APR Big Dom’s Pawn Shop charges an interest rate of 25 percent per month on loans to its customers like all lenders, Big Dom must report an APR to consumers. What rate should the shop
Calculating Loan Payments you want to buy a new sports coupe for $61,800 and the finance office at the dealership has quoted you a 7.4 percent APR loan for 60 months to buy the car. What will your
Calculating Number of Periods One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $300 per month. You will charge .9 percent per
Calculating EAR Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your door.” This means you get $3 today and repay $4 when you get your paycheck in one week (or else).
Valuing Perpetuities Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,200 monthly. The contract currently sells for $63,000. What is the monthly return on this investment

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