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Questions and Answers of
Corporate Finance
Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?
Under standard accounting rules, it is possible for a company's liabilities to exceed its assets. When this occurs, the owners' equity is negative. Can this happen with market values? Why or why not?
If Roten, Inc,. Has an equity multiplier of 1.35, total aset turn over of 2.15, and a profit margin of 5.8 percent, what is its ROE?
Guthrie Corp. has current liabilities of $270,000, a quick ratio of 1.1, inventory turnover of 4.2, and a current ratio of 2.3. What is the cost of goods sold for the company?
Thomsen Company has a debt-equity ratio of, 90. Return on assets is 10.1 percent, and total equity is $645,000. What is the equity multiplier? Return on equity? Net income?
The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes):Assets and costs are porportional to sales. Debt and equity are not. No dividends are paid. Next
What are some actions a small company like The Grandmother Calendar Company can take (Besides Expansion of Capacity) if it finds itself in a situation in which growth in sales outstrips production?
So-called "same-store sales" are a very important measure for companies as diverse as McDonald's and Sears. As the name suggests, examining same-store sales means comparing revenues from the same
In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the
Consider the ratio EBITD/Assets. What does this ratio tell us? Way might it be more useful than ROA in comparing two companies?
A 15 year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 13 percent compounded monthly for the first saven years, and 9 percent compounded
A 5 year annuity of ten $4,500 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 12 percent compounded monthly, what is the
On September 1, 2007, Susan Chao bought a motorcycle for $25,000. She paid $1,000 down and financed the balance with a five year loan at a stated annual interest rate of 8.4 percent, compounded
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 9 percent interest per week.a. What APR must the store report to its
What is the equation for the present value of a growing perpetuity with a payment of C one period from today if the payments grow by C each period?
An investment project costs $10,000 and has annual cash flows of $2,600 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10
Give several examples of (a) Investment decisions and (b) Financing decisions?
Why is a bank loan a financial asset?
What are the key differences between a corporation and a sole proprietorship? What is the difference between a public and a private corporation?
Explain why each of the following may not be appropriate corporate goals: a. Increase market share. b. Minimize costs. c. Under-price any competitors. d. Expand profits?
What is the key advantage of separating ownership and management in large corporations?
The following report appeared in the Financial Times (October 28, 1999, p. 1): "Coca- Cola is testing a vending machine that automatically raises the price of the world's favorite soft drink when the
The objective of value maximization makes sense when stockholders have access to modern financial markets and institutions. Briefly explain why?
Is it possible for an individual to save and invest in a corporation without lending money to it or purchasing additional shares? Explain
What is meant by the separation of ownership and control for public corporations? What potential problems does this separation create?
What are the key advantages of a defined-contribution pension plan as a vehicle for retirement savings?
What are the largest institutional investors in bonds? In shares?
The year-end 2010 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $1,100,000 and retained earnings at $3,400,000. The next year, retained earnings were listed at
Here are the 2010 and 2011 (incomplete) balance sheets for Nobel Oil Corp?a. What was owners' equity at the end of 2010 and 2011?b. If Nobel paid dividends of $100 in 2011, and made no stock issues,
The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during
The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during
The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during
A married couple earned $95,000 in 2011. How much did they pay in taxes? What were their marginal and average tax brackets?
a. In early 2010, the market values of the shares of many banks (e.g., Bank of America or Citigroup) were less than book value per share. How would you interpret this pattern? b. At the same time,
Reconsider the data in Practice Problem 13 which imply that you have $100,000 of total pretax income to allocate between your salary and your firm's profits. What allocation will minimize the total
What impact will the following actions have on the firm's cash balance? a. The firm sells some goods from inventory. b. The firm sells some machinery to a bank and leases it back for a period of 20
Here are simplified financial statements of Phone Corporation from a recent year:
Here are simplified financial statements of Phone Corporation from a recent year:
a. What would be Home Depot's economic value added if its cost of capital were 8%?b. Would this have any impact on its accounting profits?c. Which do you think is a better measure of the firm's
In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio: a. Debt-equity ratio: a shipping company or a computer software
Company X does not raise any new finance during the year, but it generates a lot of earnings during the year, which are immediately reinvested. If you were calculating X's return on capital, would it
If you take out an $8,000 car loan that calls for 48 monthly payments of $240 each, what is the APR of the loan? What is the effective annual interest rate on the loan? What if the payments are made
Your landscaping company can lease a truck for $8,000 a year (paid at year end) for 6 years.It can instead buy the truck for $40,000. The truck will be valueless after 6 years. The interest rate your
Banks sometimes quote interest rates in the form of "add-on interest." In this case, if a 1-year loan is quoted with a 20% interest rate and you borrow $1,000, then you pay back $1,200. But you make
a. It is 2012, you've just graduated college, and you are contemplating your lifetime budget. You think your general living expenses will average around $50,000 a year. For the next 8 years, you will
Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and
A bond has 8 years until maturity, a coupon rate of 8%, and sells for $1,100.a. If this bond has a yield to maturity of 8% 1 year from now, what will its price be?b. What will be the rate of return
Fill in the table below for the following zero-coupon bonds. The face value of each bond is $1,000.
Suppose that you buy a 1-year maturity bond for $1,000 that will pay you back $1,000 plus a coupon payment of $70 at the end of the year and the inflation rate isa.2%?b.4%?c.6%?d.8%?Now suppose the
In Figure 6.7, we saw a plot of the yield curve on stripped Treasury bonds and pointed out that bonds bonds of different maturities may sell at different yields to maturity. In principle, when we are
A 6-year Circular File bond pays interest of $80 annually and sells for $950.If Circular File wants to issue a new 6-year bond at face value, what coupon rate must the bond offer?
If a bond with face value of $1,000 and a coupon rate of 8% is selling at a price of $970, is the bond's yield to maturity more or less than 8%?
Now suppose that the bond in the previous problem is a TIPS (inflation-indexed) bond with a coupon rate of 4%. What will the cash flow provided by the bond be for each of the four inflation rates?
Amazon.com has never paid a dividend, but in August 2010 the market value of its stock was $57 billion. Does this invalidate the dividend discount model?
Terence Breezeway, the CEO of Prairie Home Stores, wondered what retirement would be like. It was almost 20 years to the day since his uncle Jacob Breezeway, Prairie Home's founder, had asked him to
a. Calculate the net present value of the following project for discount rates of 0, 50, and 100%:b. What is the IRR of the project?Discount rate-1..................0.00%Discount
Refer to two projects with the following cash flowsSuppose that you can choose only one of these projects. Which would you choose?The discount rate is 11%.Discount rate..........11.00%
Econo-Cool air conditioners cost $300 to purchase, result in electricity bills of $150 per year, and last for 5 years. Luxury Air models cost $500, result in electricity bills of $100 per year, and
Considering your answers to Quiz Questions 2, 3, and 7, is there any reason to believe that the project with the lower payback period is the better project?
Flowton Products enjoys a steady demand for stainless steel infiltrators used in a number of chemical processes. Revenues from the infiltrator division are $50 million a year and production costs are
A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm's tax rate is 35%. Calculate cash flow for the year by
Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000, and the fixed costs of maintaining the lawn mower factory are
Talia's Tutus bought a new sewing machine for $40,000 that will be depreciated using the MACRS depreciation schedule for a 5-year recovery period.a. Find the depreciation charge each year.b. If the
Your firm purchased machinery with a 7-year MACRS life for $10 million. The project, however, will end after 5 years. If the equipment can be sold for $4.5 million at the completion of the project,
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and
Canyon Tours showed the following components of working capital last year:a. What was the change in net working capital during the year?b. If sales were $36,000 and costs were $24,000, what was cash
Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 35%, what is the
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $115 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for
Suppose MidAmerican Energy is contemplating construction of a gas-fired power plant. The plant is likely to last 25 years and to have no salvage value. Depreciation allowances for tax purposes on the
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be
Conference Services Inc. has leased a large office building for $4 million per year. The building is larger than the company needs; two of the building's eight stories are almost empty. A manager
Suppose that Blooper's customers paid their bills with an average 3-month delay (instead of 2 months) and that Blooper's inventories were 20% rather than 15% of next year's expenses.a. Would project
The efficiency gains resulting from a just-in-time inventory management system will allow a firm to reduce its level of inventories permanently by $250,000. What is the most the firm should be
A corporation donates a valuable painting from its private collection to an art museum. Which of the following are incremental cash flows associated with the donation? a. The price the firm paid for
Jack Tar, CFO of Sheetbend & Halyard, Inc., opened the company confidential envelope. It contained a draft of a competitive bid for a contract to supply duffel canvas to the U.S. Navy. The cover memo
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year and variable costs are $60 per unit If the project requires an initial
Hit or Miss Sports is introducing a new product this year. If its see-at night soccer balls are a hit, the firm expects to be able to sell 50,000 units a year at a price of $60 each. If the new
Hit or Miss Sports is introducing a new product this year. If its see-at night soccer balls are a hit, the firm expects to be able to sell 50,000 units a year at a price of $60 each. If the new
In a slow year, Deutsche Burgers will produce 2 million hamburgers at a total cost of $3.5 million. In a good year, it can produce 4 million hamburgers at a total cost of $4.5 million.a. What is the
A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million. The firm's tax rate is 35%. The project will last for 10 years. The discount
How does the capital budget help mitigate the following potential problems? a. Over-optimism by project sponsors. b. Inconsistent forecasts of macroeconomic variables. c. Capital budgeting organized
Turn back to the previous problem. a. Would the accounting break-even point in the first year of operation increase or decrease if the machinery were depreciated over a 5-year period? b. Would the
Reconsider the best- and worst-case scenarios in the previous problem. Do the best- and worst-case outcomes when each variable is treated independently seem to be reasonable scenarios in terms of the
Maxine Peru, the CEO of Peru Resources, hardly noticed the plate of savory quenelles de brochet and the glass of Corton Charlemagne '94 on the table before her. She was absorbed by the engineering
The accompanying table shows annual stock prices on the Costaguanan Stock Exchange or 2005-2010. Construct two stock market indexes, one using weights as in the Dow Jones ndustrial Average, the other
In 1990, the Dow Jones Industrial Average was at a level of about 2,600. In 2010, it was about 10,000. Would you expect the Dow in 2010 to be more or less likely to move up or down by more than 40
Draw the security market line when the Treasury bill rate is 4% and the market risk premium is 7%. What are the project costs of capital for new ventures with betas of .75 and 1.75? Which of the
A share of stock with a beta of .75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4%, and the market risk premium is 7%. Suppose investors
The common stock of Buildwell Conservation & Construction, Inc., has a beta of .90. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI's capital structure is 30%
Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value per share is $20. The stock sells for a price of $30 per share, and the cost of equity
Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share.There are 1 million common
Following is the book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares
With a tax rate of 35%, Big Oil had a WAAC of 10.5%. Suppose Big Oil is excused from paying taxes. How would its WACC change? Now suppose Big Oil makes a large stock issue and uses the proceeds to
With a tax rate of 35%, Big Oil had a WAAC of 10.5%. Suppose Big Oil is excused from paying taxes.TABLE 13.3Suppose Big Oil starts from the financing mix in Table 13.3, and then borrows an additional
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,050. The firm's tax bracket is 35%. Micro Spinoffs also
A financial analyst at Dawn Chemical notes that the firm's total interest payments this year were $10 million while total debt outstanding was $80 million, and he concludes that the cost of debt
Bernice Mountaindog was glad to be back at Sea Shore Salt. Employees were treated well. When she had asked a year ago for a leave of absence to complete her degree in finance, top management promptly
The authorized share capital of the Alfred Cake Company is 100,000 shares. The equity is currently shown in the company's books as follows:Common stock ($1 par
Why might a bond agreement limit the amount of assets that the firm can lease?
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