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Questions and Answers of Finance

What is the firm’s goal with regard to cash collections? Describe each of the following types of collection systems: a. Field-banking system b. Mail-based collection system c. Electronic system
What is a lockbox system? How does it typically work? Briefly describe the economics involved in performing a cost-benefit analysis of such a system.
Briefly describe each of the following funds transfer mechanisms: • Automated clearinghouse (ACH) debit transfer • Wire transfer Why are wire transfers typically used only for high-dollar
What is the goal with regard to managing accounts payable as it relates to the cash conversion cycle? Briefly describe the process involved in managing the accounts payable function.
How can a firm in need of short-term financing decide whether or not to take a cash discount offered by its supplier? How would this decision change in the event the firm has no alternative source of
Briefly describe each of the following disbursement products/methods: • Zero-balance accounts (ZBAs) • Controlled disbursement • Positive pay How does a ZBA relate to the firm’s target cash
Briefly describe each of the following developments in accounts payable and disbursements. a. Integrated accounts payable b. Purchasing/procurement cards c. Imaging services d. Fraud prevention in
Briefly describe each of the three basic motives for a firm holding cash and short-term investments. For each of the motives indicate the general form in which the funds are typically held.
What is the firm’s goal in short-term investing? How does it use money market mutual funds? Describe some of the popular money market financial instruments in each of the following groups:a. U.S.
How is interest paid on a discount investment? What is the money market yield (MMY)? How can the MMY be converted into a bond equivalent yield (BEY)?
How are the rates on short-term borrowing typically set? What role does either the prime rate or LIBOR play in this process? What is the effective borrowing rate (EBR)? How does the EBR differ from
Nickolas Industries has daily cash receipts of $350,000. A recent analysis of the firm’s collections indicated that customers’ payments are in the mail an average of 2 days. Once received, the
NorthAm Trucking is a long-haul trucking company serving customers all across the continental United States and parts of Canada and Mexico. At present, all billing activities — from preparation to
Qtime Products believes that use of a lockbox system can shorten its accounts receivable collection period by four days. The firm’s annual sales, all on credit, are $65 million, billed on a
Firm A has annual revenues of $1.6 billion and can reduce its float by four days using a lockbox system. Due to A’s significant risk, A has a high cost of capital of 22%. Firm B has annual
Quick Burger Inc., a national chain of hamburger restaurants, has accumulated a $27,000 balance in one of its regional collection accounts. It wishes to make an efficient, cost-effective transfer of
Firm OPL has average daily cash inflows (Monday through Saturday) of $15,890, $13,267, $20,654, $24,956, $37,923, and $42,516, respectively. A wire transfer deposits money into a concentration
Assume a firm receives the following credit terms from six suppliers and a 365-day year.Supplier 1: 2/10 net 50Supplier 2: 1/10 net 30Supplier 3: 2/10 net 150Supplier 4: 3/10 net 60Supplier 5: 1/10
Access Enterprises is vetting four possible suppliers of an important raw material used in its production process, all offering different credit terms. The products offered by each supplier are
Union Company is examining its operating cash management. One of the options the firm is considering is a zero-balance account (ZBA). The firm’s bank is offering a ZBA with monthly charges of
Suppose Treasury bills (face value of $10,000) with maturities of 30 days, 90 days, and 180 days sell at the respective annualized discounts of 4.25%, 4.35%, and 4.92%. What are the respective money
Sager Inc. just purchased a 91-day, $1 million T-bill that was selling at a discount of 3.25%. a. Calculate the dollar discount and purchase price on this T-bill. b. Find the money market yield (MMY)
Matthews Manufacturing is negotiating a one-year credit line with its bank, Worldwide Bank. The amount of the credit line is $6.5 million with an interest rate set at 1.5% above the prime rate. A
Firm MGST is reviewing its 1-year line of credit, currently with an interest rate of 9.15%. The credit line is for $1 million, but the firm intends to use only half of it throughout the year. The
1. Should Foah’s Designs implement the lockbox system?2. Suppose Foah’s Designs plans to transfer money on a weekly basis (every Tuesday) from California State Bank to Yakima State Bank. Which
Who are the major players in foreign currency markets, and what are their motivations for trading?
Explain how triangular arbitrage ensures that currency values are essentially the same in different markets around the world at any given moment.
Explain how the law of one price establishes a relationship between changes in currency values and inflation rates.
Why does purchasing power parity appear to hold in the long run but not in the short run?
If the euro trades at a forward premium against the yen, explain why interest rates in Japan would have to be higher than they are in Europe.
Suppose that the U.S. Federal Reserve suddenly decides to raise interest rates. Trace out the potential impact that this action might have on (1) interest rates abroad, (2) the spot value of the
Suppose that the dollar trades at a forward discount relative to the yen. A U.S. firm must pay a Japanese supplier ¥10 million in three months. A manager in the U.S. firm reasons that because the
One month ago, the Mexican peso (Ps)–U.S. dollar exchange rate was Ps9.0395/$ ($0.1106/Ps). This month, the exchange rate is Ps9.4805/$ ($0.1055/Ps). State which currency appreciated and which
Using the data presented in Figure 18.1, calculate the spot exchange rate on Wednesday between Canadian dollars and British pounds (in pounds per Canadian dollar).
Recently a financial newspaper reported the following spot and forward rates for the Japanese yen (¥) Spot: .......... $0.007556/¥ (¥132.34/$) 1-month: ....... $0.007568/¥ (¥132.14/$) 3-month:
Using the data presented in Figure, specify whether the U.S. dollar trades at a forward premium or discount relative to the Canadian dollar, the Japanese yen, and the Swiss franc. Use the three-month
Using the data presented in Figure 18.1, determine the forward premium or discount on the Canadian dollar relative to the British pound, the Japanese yen, and the Swiss franc. Use the six-month
You are quoted the following series of exchange rates for the U.S. dollar ($), the Canadian dollar (C$), and the British pound (£): $0.6000/C$ ........ C$1.6667/$ $1.2500/£
The current spot exchange rate is ¥109.43/$. A particular commodity sells for $5,000 in the United States and ¥600,000 in Japan. a. Does the law of one price hold? If not, explain how to profit
If the expected rate of inflation in the United States is 1%, the one-year risk-free interest rate is 2%, and the one-year risk-free rate in Britain is 4%, what is the expected inflation rate in
Go to www.economist.com. Under Economics, Markets & Data, find the link for the “Big Mac index.” After exploring this part of the site, explain why the Big Mac index might foreshadow changes in
Assume that the annual interest rate on a six-month U.S. Treasury bill is 5%, and use the data presented in Figure to answer the following:a. Calculate the annual interest rate on six-month bills in
Assume that the following information is known about the current spot exchange rate between the U.S. dollar and the British pound (£), inflation rates in Britain and the United States, and the real
Classic City Exporters (CCE) recently sold a large shipment of sporting equipment to a Swiss company—the goods will be sold in Zurich. The sale was denominated in Swiss francs (SF) and was worth
A British firm will receive $1 million from a U.S. customer in three months. The firm is considering two strategies to eliminate its foreign exchange exposure. The first strategy is to pledge the $1
A German company manufactures a specialized piece of manufacturing equipment and leases it to a U.K. enterprise. The lease calls for five end-of-year payments of £1 million. The German firm spent
1. First, you decide to review basic exchange rate terminology. a. Describe fixed and floating exchange rate systems. What are some problems with these systems? b. Describe a managed floating rate
List and describe the key financial differences between entrepreneurial growth companies and large publicly traded firms.
How does the financing of entrepreneurial growth companies differ from that of most firms in mature industries? Under what circumstances can EGCs obtain debt financing from banks or other financial
What is an angel capitalist? How do the financing techniques used by angels differ from those employed by professional venture capitalists?
Distinguish between the four basic types of venture capital funds. Which type has emerged as the dominant organizational form? Why?
What are some of the common characteristics of those entrepreneurial growth companies that are able to attract venture capital investment? In which industries and states is the majority of venture
What is meant by early-stage and later-stage venture capital investment? What proportions of venture capital have been allocated between the two in recent years? Which stage requires a higher
What are the responsibilities and typical payoff for a general partner in a venture capital limited partnership?
Define staged financing. Why is this an efficient risk-minimizing mechanism for venture capitalists?
List and briefly describe some of the more popular covenants included in venture capital investment contracts. What is their general purpose?
What is the most popular form of financing (or security type) required by venture capitalists in return for their investment? Why is this form of financing optimal for both the entrepreneur and the
List the major differences between venture capital financing in the United States and Western Europe. What major changes have been occurring recently in the European venture capital industry?
Why is a vibrant IPO market considered vital to the success of a nation’s venture capital industry? What impact did the near collapse of Germany’s Neuer Markt have on the European venture capital
Describe the recent levels of venture capital activity in Canada, Israel, China, India and India. What is the outlook for each of them?
An entrepreneur seeks $4 million from a venture capitalist. They agree that the entrepreneur’s venture is currently worth $12 million and that, when the company goes public in an IPO three years
An entrepreneur seeks $10 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur’s venture is currently worth $25 million and that the company is likely to be ready
The venture capital fund Techno Fund II made a $4 million investment in Optical Fibers Corporation five years ago and, in return, received 1 million shares representing 20% of Optical Fibers’
High-Tech Fund III made a $3 million investment in Internet Printing Company (IPC) six years ago and received 2 million shares of series A convertible preferred stock. Each of these shares is
Suppose that five out of ten investments made by a VC fund are a total loss, meaning that the return on each of them is −100%. Of the ten investments, three break even, earning a 0 percent return.
Through your financial services firm, Vestin Capital, Incorporated, you have raised a pool of money from clients. You intend to invest it in new business opportunities. To prepare for this endeavor,
Indicate the components of the balance sheet and income statement that will change as a consequence of the following transactions:
Find the missing values for the following three firms. Show your computations.
Below are incomplete balance sheets of ABC Corporation (figures in millions).a. Compute the missing amounts, and show the balance sheet at year-end 1, 2, 3, and 4. Show your computations.b. What
Below are incomplete balance sheets of XYZ Corporation (figures in millions).a. Compute the missing amounts, and show the balance sheet at year-end 1, 2, 3, and 4. Show your computations.b. What
Below are incomplete balance sheets of OPQ Corporation (figures in millions).a. Compute the missing amounts, and show the balance sheet at year-ends 1, 2, 3, and 4. Show your computationsb. Comment
Below is some income statement information on company DEF. Prepare an income statement for each of the three years. Show your computations.
Below is some income statement information on company ABD. Prepare an income statement for each of the three years. Show your computations.
From the following data, reconstruct the balance sheet at the end of the year.
Based on the information provided below, prepare the following financial state ments for VideoStores:a. An income statement for the calendar year 2010b. A balance sheet on December 31, 2009c. A
Ambex Inc. expects sales to increase to $36 million next year, from $27 million this year. Its current assets are $9 million, accounts payable is $2.7 million, fixed assets are $9 million, long-term
Indicate the effects of the following transactions on net long-term financing (NLF),working capital requirement (WCR), net short-term financing (NSF), and net profit. Use + to indicate an increase,
Prepare the managerial balance sheet of Lowe’s from the following company consolidated balance sheet: In millions Fiscal year-end 2008AssetsCurrent assetsCash and cash equivalents.............. $
Use the following information to complete the balance sheet below.a. Collection period: forty daysb. Inventory turnover: six times salesc. Working capital requirement/sales: 20 percentd.
Indicate the effect of the following transactions on the working capital requirement: a. More customers pay with cash instead of credit b. More of raw material is paid for with cash c. More discounts
Indicate which of the following four statements are right or wrong:a. Because working capital requirement (WCR) = net long-term financing (NLF) + net short-term financing (NSF), I can reduce my
The income statement and end-of-year balance sheet of Altar Inc., a distribution company, are as follows:Income StatementNet
Below are selected accounting data of four U.S. firms:a. For each one of the firms, compute the following: working capital requirement (WCR), WCR-to-revenue ratio, collection period in days (using
Which of the following three companies has a matching, a conservative, and an aggressive financing strategy? Explain why.
Below are financial statements for Sentec Inc., a distributor of electrical fixtures, for 2008, 2009, and 2010.a. Compute Sentec Inc.’s working capital requirement (WCR) on December 31, 2008, 2009,
Mars Electronics is a distributor for the Global Electric Company (GEC), a large manufacturer of electrical and electronics products for consumer and institutional markets. Below are the semiannual
Indicate the effect of the following transactions on working capital requirement (WCR), net operating cash flow (CFOPE), cash flow from investing activities (CFINV), cash flow from financing
a. How would you explain that a firm can generate a profit, when at the same time its cash flow from operations is negative?b. How would you explain that a firm showing a net loss can have a positive
Do you agree with the statement that depreciation expenses are one of the firm's most important sources of cash?
Based on the following financial statements and information given below, compute the following for the year 2010:a. The cash inflow from operationsb. The cash outflow from operationsc. The net
Following are the income statement for 2010 and the balance sheets at year-ends 2009 and 2010 for Allied Enterprises Inc.a. Prepare the managerial balance sheets for Allied Enterprises at year-ends
From the following Lowe’s cash-flow statement, build the firm’s cash-flow statement according to the direct method. The interest payments in 2008 were equal to $280 million. (in millions) 2008a.
What are the major differences between the cash-flow statement (direct method) and the statement of cash flows (indirect method according to Standards No. 95 of the Financial Accounting Standards
Build a cash-flow statement for Allied Enterprises Inc. that measures the firm's cash flow from its operating activities in 2010 based on the cash flows the firm was legally obliged to meet that year
Following are financial statements for Sentec Inc., a distributor of electrical fixtures, for 2008, 2009, and 2010.a. Prepare Sentec Inc.’s managerial balance sheets on December 31, 2008, 2009, and
Mars Electronics is a distributor for the Global Electric Company (GEC), a large manufacturer of electrical and electronics products for consumer and institutional markets. Below are the semiannual
Indicate the effects of the following transactions on operating margin, invested capital turnover, and debt ratio. Use + to indicate an increase, €“ to indicate a decrease, and 0 to
From the balance sheets and income statements of OS Distributors in Exhibits 5.1, 5.2, and 5.3, compute the firm’s return on invested capital before tax (ROICBT), re- turn on capital employed
Return on equity (ROE) can be estimated using financial statements (book value) or financial market data (market value). The book value of ROE over an accounting period is earnings after tax divided
a. If a firm has a return on equity (ROE) of 15 percent, a financial multiplier of 2, and does not pay any tax, what is its return on invested capital before tax?b. If a firm has an ROE of 15

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