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Questions and Answers of
Corporate Finance
Southwest Airlines has substantial cash reserves and an investment-grade bond rating. How would the trade-off theory predict that managers of Southwest would raise capital and choose the company's
What control implications do a firm's capital structure decisions have?
You would like to own a common stock that has a record date of Friday, September 6, 2013. What is the last date that you can purchase the stock and still receive the dividend?
You believe that the average investor is subject to a 20 percent tax rate on dividend payments. If a firm is going to pay a $0.30 dividend, by what amount would you expect the stock price to drop on
The Veil Acts Company just announced that instead of a regular dividend this quarter, it will be repurchasing shares using the same amount of cash that would have been paid in the suspended dividend.
The Bernie Rubbel Company has just declared a three-for-one stock split. If you own 12,000 shares before the split, how many shares do you own after the split? What if it were a one-for-three reverse
Two publicly traded companies in the same industry are similar in all respects except one. Where Publicks has issued debt in the public markets (bonds), Privicks has never borrowed from any public
The price of a share of stock is $15.00 on Tuesday, November 11, 2014. The record date for a $0.50 dividend is Friday, November 14, 2014. If there are no taxes on dividends, what would you expect the
A company's management announces a $1.00 per share dividend payment. Assuming all investors are subject to a 15 percent tax rate on dividends, how much should the company's share price drop on the
Shares of Convoy West, Inc. are trading for $55.45 on the day before the ex-dividend date. If the quarterly dividend is $0.16 per share and there are no taxes, how will the share price change on the
Why does an ongoing stock repurchase program offer management greater flexibility in distributing value to stockholders than a regular cash dividend?
Why would management of a company undertake a reverse stock split?
Your sister wants to open a store that sells antique-style jewelry and accessories. She has $15,000 of savings to invest, but opening the store will require an initial investment of $20,000. Net cash
You have the following information for a company you are valuing and for a comparable company: Comparable company: Company you are valuing: Stock price =
How do the cash flows that are discounted when the WACC approach (FCFF approach) is used to value a business differ from those that are discounted when the free cash flow to equity (FCFE) approach
You are valuing a company using the WACC approach and have estimated that the free cash flows from the firm (FCFF) in the next five years will be $36.7, $42.6, $45.1, $46.3, and $46.6 million,
You want to estimate the value of a local advertising firm. The earnings of the firm are expected to be $2 million next year. Based on expected earnings next year, the average price-to-earnings ratio
At the end of 2014 the value of the S&P 500 Index divided by the estimated 2014 earnings for S&P 500 firms (the S&P 500 P/E multiple) was 18.66. Assume that the long term Treasury bond yield was 3.72
It is April 4, 2015, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat, the Italian auto mobile manufacturer that owns
You plan to start a business to produce and sell custom kitchen cabinets. The targeted price for each order of cabinets is $10,000. You estimate that you will receive orders for cabinets for eight
Sessler Corporation is a private company that had EBIT of $186 million and depreciation and amortization of $22 million in the most recent fiscal year. At the end of that year, a similar, public firm
Winters Inc. management estimates that the company will generate after-tax free cash flows from the firm (FCFF) of $12.5 million, $16.8 million and $19.7 million, respectively, over the next three
Do private companies have audited financial statements prepared in accordance with GAAP?
The Starlight, Inc. financial statements for the fiscal year ended June 30, 2013, are presented below. The firm's sales are projected to grow at a rate of 20 percent next year, and all financial
Use the financial information for Starlight from Problem 16.1. Assume now that equity accounts do not vary directly with sales but change when retained earning change or new equity is issued. The
Use the financial statements from Problem 16.1 and the information from Problem 16.2 to calculate the company's retention(plowback) ratio, external funds needed (EFN), internal growth rate (IGR)
The financial statements for the year ended June 30, 2014, are given below for Morgan Construction Company. The firm's sales are projected to grow at a rate of 25 percent next year, and all
Mars Company had net sales of $18 million in the year that just ended. Next year, the company's management expects a 15 percent increase in sales. If cost of goods sold is 60 percent of sales and
Lavaca Inc. management expects net sales to be $855,000, total costs to be $647,000, and to pay taxes at an average rate of 32 percent this year. If the Lavaca pays out 38 percent of its earnings as
Spurlock Inc. had net income of $266,778 in its most recent fiscal year and total assets of $1,833,400 at the end of the year. The company's total debt ratio (total debt to total assets) is 35
Using the information in Sample Test Problem 19.3, what is Spurlock's capital intensity ratio if the company has net sales of $3,557,100? What does this ratio tell us?
Edgefield Excavation Company has total ssets of $4,976,456, sales of $1,225,700, nd net income of $587,000. The company's management expects sales to grow by 9 percent next year. ll costs (including
Of the two parties to an option contract, the buyer and the seller, who has a right and who has an obligation?
The stock of Augusta Light and Power is currently selling at $12 per share. Over the next year the company is undertaking a new electricity production project. If the project is successful, the
ADCAP International is a U.S.-based company which sells its products primarily in overseas markets. The company's stock is currently trading at $50 per share. Depending on the outcome of U.S. trade
Your company is considering opening a new factory in Europe to serve the growing demand for your product there. What real options might you want to consider in your capital budgeting analysis of the
Your firm, which uses oil as an input to its production processes, hedges its exposure to changes in the price of oil by buying call options on oil at today's price. If the price of oil goes down by
You own a call option on Pepsico stock with a strike price of $60 per share that expires in 60 days. The current market price of Pepsico stock is $63.50 per share. What are the limits on the value
Assume that the current market price of Montrose Industrials stock is $28 per share and will either rise to $38 per share or fall to $21 per share in one month. The risk-free rate for one month is 1
Why is it hard to account for real options in an NPV analysis?
Fuel costs are a significant fraction of total costs in the airline industry. How might airline managers use options to manage fuel costs? What is the downside of doing this?
What is globalization? Discuss.
Digital, Inc., an electronic games manufacturer, is planning to purchase flash memory from one of two sources. Kyoto, Inc., quotes a price of ¥6,800 per gigabyte. The current exchange rate is
Columbia Corp. has just made a sale to a British customer. The sale was for a total value of £135,000 and is to be paid 60 days from now. Columbia is concerned that the British pound will depreciate
What are six factors that cause international transactions to differ from domestic transactions?
A bank in India has offered a spot rate quote on Indian rupees (Rs) of Rs62.2905/$. The Indian rupee is quoted at a 30-day forward premium of 5.22 percent against the dollar. What is the 30-day
Technocorp has purchased industrial parts from a German company for a total cost of €1,225,000. The firm has 30 days to pay. A bank has given Technocorp a 30-day forward quote of $1.355/€. Assume
Tass Co., Ltd, a Japanese electrical parts producer, is considering building a plant in the U.S. The cost of this plant will be $20 million and the current spot exchange rate between the yen and the
Capital markets often are grouped into two categories: those in developed countries and those in emerging market countries. Give your own definitions of developed and emerging market countries. Which
Appendix 1-1 shows that over time, national governments in many countries sold shares in state-owned financial institutions to nongovernmental entities. Discuss how these privatizations might affect
Some have advocated that a single widely spoken language be designated as the formal international accounting language. Write a two-paragraph statement in favor of choosing English as the designated
Referring to Exhibit 1-7, which geographic region is experiencing the most activity in foreign listings: the Americas, Asia-Pacific, or Europe-Africa-Middle East? Do you expect this pattern to
The World Wide Web provides low-cost access to a vast amount of information about financial reporting requirements and practices worldwide. Required: Refer to Appendix 1-2, which provides Web site
Referring to the seven factors in Question 1, rank them from most to least important as far as accounting development is concerned, then justify both the top and bottom items in your ranking.
What is the difference between a judgmental and an empirical classification of accounting?
Code law countries typically have portions of their financial accounting and reporting requirements anchored in the law itself and other portions derived from professional standards or
The world's stock exchanges differ in terms of the number of domestic versus foreign listed firms. Required: Go to the World Federation of Stock Exchanges Web page (www. world-exchanges.org)
Several companies from the five countries discussed in this chapter are listed on the New York Stock Exchange (NYSE). Required: Go to the NYSE Web site (www.nyse.com). Identify the companies listed
What is the difference between principles-based and rules-based accounting standards? What evidence indicates that U.S. GAAP is rules-based?
Mexican companies that list their shares on the New York Stock Exchange are required by the U.S. Securities and Exchange Commission to reconcile net income and stockholders' equity from Mexican to
The world's stock exchanges differ in terms of the number of domestic- versus foreign listed firms. Required: Go to the World Federation of Stock Exchanges Web page (www. world-exchanges.org)
Several companies from Mexico, Japan, China, and India are listed on the New York Stock Exchange (NYSE). Required: Go to the NYSE Web site (www.nyse.com). Identify the companies listed on the NYSE
Briefly explain the difference between accounting measurement and accounting disclosure. Which of the two reporting processes do you think promises substantial innovative advances during the next 10
The forecast disclosures appearing in the 2005 annual report of Schering AG may be found at www.schering.de/html/en/50_media/download/_files/2005/fin_rep/annual/05GB_en.pdf (pp. 80-81). Required:
Exhibit 5-1 presents the business-segment and geographic-segment information of Lafarge, a French company that uses International Financial Reporting Standards (IFRS) in its consolidated financial
Exhibit 5-5 presents the reconciliation disclosures made by the Swiss company Novartis.As discussed in the chapter, the U.S. SEC requires foreign listed firms to present reconciliation information
Exhibit 5-5 presents the limited restatement from Novartis Group's 2005 annual financial statement, reconciling net income and shareholders' equity from International Financial Reporting Standards
Revisit Alcan's income statement on the first page of this chapter together with the accompanying notes, and answer the following questions.a. Which currency effects described in the three
Refer to Exhibit 6-1 and using the information provided, can you determine the cross spot rate (i.e., a rate computed from two other exchange rates) between the euro and the British pound?
The Offshore Investment Fund (OIF) was incorporated in Fairfield, Connecticut, for the sole purpose of allowing U.S. shareholders to invest in Spanish securities. The fund is listed on the New York
What is a general price-level index, and of what use is it for financial statement readers?
Professional accountancy bodies the world over generally agree that inflation may become so great that conventional financial statements lose much of their significance and price-level adjusted
Briefly describe how adjustments for changing prices differ between the United States and the U.K.
General price-level index information for the country of Majikstan is as follows: 12/31/X7 30,000 Average 32,900 12/31/X8 36,000 Required: Using this information and the information in Exercise
From a financial statement user's viewpoint, what is the most important source of accounting difference: measurement or disclosure? For which area is it most important to achieve international
Do you believe that international accounting harmonization/convergence will end investor concerns about cross-national differences in accounting practices?
The IASB published 13 revised standards in December 2003. A summary is available at www.iasplus.com/iasplus/improve0401.pdf. Required: Prepare a list of the major differences between these revised
Refer to Exercise 8. Required: How would each difference affect the balance sheet and income statement? How would each difference affect the following financial ratios used by analysts? a.
What are the information needs of four user groups that rely on foreign financial statements for their financial decisions? Are the four main steps in financial statement analysis equally important
Choi and Levich found that investors cope with accounting principles differences in two fundamentally different ways. What are these coping mechanisms and which of the two do you favor?
The quick (or acid test) ratio is frequently used to assess the short-term debt-paying ability of a business enterprise. As a rule of thumb, U.S. commercial lenders often consider a ratio of at least
Exhibit 9-21 presents cross-country differences in auditor liability by country and audit firm. Required: Does the incidence of liability cases vary more by country or by auditor? In what countries
Exhibit 9-20 provides a recent summary of the Volvo Group's net income and shareholders' equity determined in accordance with Swedish GAAP and U.S. GAAP.Required:a. Compute the return on
Why is it better to record sales transacted in a high-inflation country and denominated in foreign currency at the expected spot rate on the date the transaction is settled, instead of the average or
Do a WOTS-UP analysis for your school or firm relative to its major competitor. Based on your analysis, suggest several countermeasures your dean or CEO might consider to maintain or improve your
Assume the following:¢ Inflation and Turkish lira (YTL) devaluation is 30 percent per month, or 1.2 percent per workday.¢ Foreign exchange rates at selected intervals for the
Exhibit 10-4, "Framework for Systems Design," provides a way of thinking about the financial control process in a multinational setting. Assume that a parent company domiciled in your country is
General Electric Company's worldwide performance- evaluation system is based on a policy of decentralization. The policy reflects its conviction that managers will become more responsible and their
Describe what ERM (Enterprise Risk Management) entails.
Explain the difference between a multicurrency translation exposure report and a multicurrency transactions exposure report.
What is a financial derivative, and what are some of the accounting issues associated with it?
What is the effective dollar cost of the Swiss chocolate purchase in Exercise 7? Show your calculations.
Based on Worberg Bank's exposure to exchange risk identified in Exercise 3, corporate management decides to shield reported earnings from FX losses by actively managing its exposure in Israeli
You are working for a consulting firm that provides risk-management products for clients. Your task is to provide your company's sales force with information on prospective clients. Assume that
What role do tax credits play in international taxation? What considerations might cause tax credits to not achieve their intended results?
Briefly describe the major advantages and disadvantages of the a. Classical, b. Split-rate, and c. Imputation
You are an investment analyst domiciled in Country Z doing a cross-country comparison of the financial performance of two manufacturing companies in the pharmaceuticals industry. Both companies, X
Using the facts in Exercise 1, assume that Companies X and Y have identical dividend payout ratios of 50 percent. Country Z, your country of domicile, has an income tax rate of 35 percent. Country Z
Access the FASB website: www.fasb.org. Locate information about projects that the FASB and IASB are working on related to international convergence. Write a short essay outlining the topics that the
The 2013 Intel Form 10-K can be found at the following Web site: www.pearsonhighered.com/fraser. T he company's annual report which includes the letters from the CEO and the chairman can be found at
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