Questions and Answers of Contemporary Financial Management

Go-for-Broke Company is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance sheet was as follows:Assume that the liquidation is a voluntary petition,
Looking back at Tables 23.5 and 23.6, assume that Diversified Industries acquires High-Tech Products in a stock-for-stock transaction and no immediate synergistic benefits are expected. How long will
The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model
Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of bonds at a coupon interest rate of 12 percent. Each bond came with 30 detachable
Suppose your firm has decided to build a 10-story office building and, just as Sears leased the Sears Tower in Chicago, your firm has decided to contract a professional lessor to build the building
Swenson Electric Company sells on terms of “net 30.” Given the following information on its receivables, construct an aging of accounts schedule as of September 1, showing the percentage of
Tokyo Electric Company (TEC) sells most of its products in the United States through 50 large distributors and retail chains (for example, Sears, Kmart). Currently, TEC’s customers mail their
Wisconsin Paper Company is considering establishing a zero-balance system for itspayroll account. The firm pays its employees every 2 weeks on Friday (that is, 26pay periods per year). Currently, the
Great Lakes Oil Company currently processes all its credit card payments at its domestic headquarters in Chicago. The firm is considering establishing a lock box arrangement with a Los Angeles bank
Prepare a pro forma income statement for 2016. Assume that sales increase to $87 million as a result of the plant expansion. Also assume that the cost of sales and selling and administrative expense
University Technologies, Inc. (UTI) has a current capital structure consisting of 10 million shares of common stock, $200 million of first-mortgage bonds with a coupon interest rate of 13 percent,
The Oakland Shirt Company has computed its indifference level of EBIT to be $500,000 between an equity financing option and a debt financing option. Interest expense under the debt option is $200,000
Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two
Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operatingincome (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost ofthis debt will be 12 percent
Access the Thomson consensus earnings forecast report for Mylan Laboratories using data available at www.yahoo.com. From the Yahoo main screen, select “Finance.” On the next screen enter the
Rolodex Inc. is in the process of determining its capital budget for the next fiscal year. The firm’s current capital structure, which it considers to be optimal, is contained in the following
The Ewing Distribution Company is planning a $100 million expansion of its chainof discount service stations to several neighboring states. This expansion will befinanced, in part, with debt issued
Use the sensitivity-analysis calculator maintained by SME to perform a cash flow sensitivity-analysis of a firm or project (http://www.smetoolkit.org/smetoolkit/en/
The Seminole Production Company is analyzing the investment in a new line ofbusiness machines. The initial outlay required is $35 million. The net cash flowsexpected from the investment are as
You have just been named the chief financial officer of Fabco, a large metal fabricator located in Chama, New Mexico. The company has long been a user of the net present value method for evaluating
Locus Quintatus, Inc., a highly profitable maker of customized chariots, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of $900,000. Freight and
Prepare a cash budget for Elmwood Manufacturing Company for the first three months of 2017 based on the following information:The company has found that approximately 40 percent of sales are
It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such
Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earnings after taxes during the next year to equal$400,000. During the past several years,
Prepare a cash budget for Elmwood Manufacturing Company for the first three months of 2011 based on the following information: P715 Month December 2010 January 2011 February 2011 March 2011 April
Prepare a cash budget for Atlas Products, Inc., for the first quarter of 2010, based on the following information.The budgeting section of the corporate finance department of Atlas Products has
The balance sheet and income statement of Eastland Products, Inc., are as follows:Using these data, determine the following:a. Earnings per shareb. Price-to-earnings ratio •c. Book value per
Keystone Resources has a net profit margin of 8 percent and earnings after taxes of$2 million. Its current balance sheet is as follows: k-63 Current assets Fixed assets Total assets $6,000,000
Given the following data for Profiteers, Inc., and the corresponding industry averages, perform a trend analysis of the return on investment and the return on stockholders’ equity. Plot the data
Using the following data for Jackson Products Company, answer Parts a through g: k-63 Jackson Products Company's Balance Sheet December 31, 2010 Cash Accounts receivable Inventory Total current
Pacific Fixtures lists the following accounts as part of its balance sheet.Compute the return on stockholders’ equity if the company has sales of $20 million and the following net profit margin:
The following financial data for the Freemont Corporation are to be used in answering self-test problems 1–6. Balance Sheet ($000) Assets Liabilities & Stockholders' Equity Cash $1,500 Accounts
Clynne Resources expects earnings this year to be $2 per share. Clynne plans to pay a dividend of $0.70 for the year. During the year, Clynne expects to borrow $10 million in addition to its already
On Friday, August 6, the board of directors of Cisco Industries declares a $0.22 quarterly dividend payable on September 15 to stockholders of record on Tuesday, August 24.When is the ex-dividend
Concave Systems presently has earnings before interest and taxes of $3 million. Its interest expenses are $500,000 a year, and it pays $600,000 in annual dividends to its shareholders. Concave has
Striker’s Match Company reports the following financial data:Net earnings $3,000,000 Shares outstanding 1,000,000 Earnings per share $3 Market price per share (ex-dividend) $40 Expected dividend
The Sweet Times Candy Company has the following equity accounts on its balance sheet:Common stock ($1 par, 500,000 shares) $ 500,000 Contributed capital in excess of par 2,000,000 Retained earnings
The Emco Steel Company has experienced a slow (3 percent per year) but steady increase in earnings per share. The firm has consistently paid out an average of 75 percent of each year’s earnings as
Phoenix Tool Company and Denver Tool Company have had a very similar record of earnings performance over the past 8 years. Both firms are in the same industry and, in fact, compete directly with each
Lenberg Lens Company believes in the dividends-as-a-residual philosophy of dividend policy. This year’s earnings are expected to total $10 million. A very conservative company, Lenberg is financed
Champoux Hair Factory, Inc., has earnings before interest and taxes of $200,000.Annual interest amounts to $80,000, and annual depreciation is $80,000. Taxes are computed at a 40 percent rate.
The Mori Egg Noodle Company has the following equity accounts on its balance sheet:a. What is the maximum amount of dividends that may be paid by the Mori Company if the capital impairment provisions
Tulia Dairy pays a $2.50 cash dividend and earns $5 per share. The cash dividend has recently been increased to $2.65 per share, and a 3 percent stock dividend has been declared. What is the
Wolverine Corporation plans to pay a $3 dividend per share on each of its 300,000 shares next year. Wolverine anticipates earnings of $6.25 per share over the year. If the company has a capital
Winkie Baking has just announced a 100 percent stock dividend. The annual cash dividend per share was $2.40 before the stock dividend. Winkie intends to pay $1.40 per share on each of the new shares.
Drew Financial Associates currently pays a quarterly dividend of 50 cents per share. This quarter's dividend will be paid to stockholders of record on Friday, February 11, 2011. Drew has 200,000
Jacobs Corporation earned $2 million after tax. The firm has 1.6 million shares of common stock outstanding.a. Compute the earnings per share of Jacobs.b. If Jacobs' dividend policy calls for a 40
Sanchez Supermarkets, Inc. (50,000 common shares outstanding) currently has annual earnings before interest and taxes of $1,000,000. Its interest expenses are$200,000 a year, and it pays $100,000 in
The board of directors of Complex Computers has decided to declare a 20 percent stock dividend. The company’s common stockholders’ equity is as follows:Pre–Stock Dividend Common Stockholders’
What issues of business ethics may be involved in the establishment of a firm’s dividend payment amounts? P-698
You are the holder of common stock in the G. Lewis Apartment Renovation Company. Historically, the firm has paid generous cash dividends. The firm has recently announced that it would replace its
What effect do share repurchases (undertaken as part of the firm’s dividend decision) have on the value of the firm? P-698
What are the tax limitations on the practice of share repurchases as a regular dividend policy? P-698
Why do many firms choose to issue stock dividends? What is the value of a stock dividend to a shareholder? P-698
What is a dividend reinvestment plan? Explain the advantages of a dividend reinvestment plan to the firm and to shareholders. P-698
Some people have suggested that it is irrational for a firm to pay dividends and sell new stock in the same year because the cost of newly issued equity is greater than the cost of retained earnings.
Under what circumstances would it make sense for a firm to borrow money to make its dividend payments? P-698
Why do many managers prefer a stable dollar dividend policy to a policy of paying out a constant percentage of each year’s earnings as dividends? P-698
How can the passive residual view of dividend policy be reconciled with the tendency of most firms to maintain a constant or steadily growing dividend payment record? P-698
What role do most practitioners think dividend policy plays in determining share values? P-698
In the theoretical world of Miller and Modigliani, what role does dividend policy play in the determination of share values? P-698
Explain what is meant by the signaling effects of dividend policy. P-698
Explain what is meant by the informational content of dividend policy. P-698
Explain what is meant by the clientele effect. P-698
What is the likely impact of a highly inflationary economy on a firm’s ability to pay dividends? Would you expect this impact to be greater or smaller for a rapidly expanding firm? Why? P-698
What other “external” factors limit a firm’s ability to pay cash dividends? P-698
What aspects of U.S. tax laws tend to (a) encourage and (b) discourage large dividend payments by corporations? Explain how. P-698
What legal constraints limit the amount of cash dividends that may be paid by a firm? P-698
In addition to regular cash dividends, Huntington Bank paid stock dividends (i.e., additional shares of common stock) in 20 of the 25 years between 1976 and 2000? P-698
During 1992, General Motors paid out approximately $990 million ($1.40 per share)in common stock dividends (a decrease in stockholders’ equity). During the same period, the company sold $2.145
In September 2007, Texas Instruments announced a 25 percent increase in its quarterly dividends per share to $0.10 and also announced a $ 5.0 billion stock buyback program. Texas Instruments is known
During 2000, Sun Microsystems had record earnings of $0.51 per share. The company has never paid a dividend. Sun’s stock price was near its all-time high. By mid-2007, Sun was trading at less than
In 2007, Leggett & Platt, a furniture manufacturer, experienced a significant drop in earnings per share to $0.28 from $1.57 in the preceding year. Despite the decline in earnings per share, the firm
Stock repurchases and their impact on the firm? P-698
Stock dividends and stock splits and why they are declared? P-698
Types of dividend policies observed by firms and how dividends are paid? P-698
The impact of dividend policy on firm value? P-698
The determinants of dividend policy in practice? P-698
Other important topics includea. How dividends are paidb. Stock dividendsc. Stock splitsd. Share repurchase as a dividend decision? P-698
Alternative dividend policies includea. Passive residual approachb. Stable dollar dividend approachc. Constant payout ratio approachd. Policy of paying a small, regular dividend plus year-end extras?
Factors influencing the firm’s choice of a dividend policy are examined, includinga. Legal constraintsb. Restrictive covenantsc. Tax considerationsd. Liquidity considerationse. Borrowing capacity
Dividend policy determines the ultimate distribution of the firm’s earnings between retention(that is, reinvestment) and cash dividend payments to shareholders. P-698
The theory of interest rate parity states that the percentage differential between the spot and the forward rate for a currency is equal to the approximate difference in interest rates in the two
The theory of relative purchasing power parity states that in comparison to a period when exchange rates between two countries are in equilibrium, changes in differential rates of inflation between
The forward rate is often considered to be an unbiased estimator of the future spot currency rate.L012
The Fisher effect states that nominal interest rates are approximately equal to the sum of the real interest rate and the expected inflation rate.L012
The international Fisher effect theory states that differences in interest rates between two countries should be offset by equal but opposite changes in the future spot rate.L012
Three important categories of foreign exchange risk are (1) transaction exposure, (2) economic exposure, and (3) translation exposure.L012
A hedge is an offsetting transaction designed to reduce or avoid risk. Forward and futures exchange hedges and money market hedges are used to reduce transaction exposure. Financing with debt
Convert $1.2 million into CHF2 million at today’s spot rate of $0.60/CHF. L012
Buy a 90-day CD at a Swiss bank yielding 4 percent every 90 days. L012
Simultaneously sell CHF2.08 million forward (original CHF2 million plus CHF 80,000 in interest) at $0.60 to net you $1,248,000. L012
This compares favorably with the $1,224,000 ($1.2 million plus interest at 2 percent)you could have received from investing in a U.S. CD.L012
The theory of interest rate parity states that the percentage differential between the spot and the forward rates for a currency quoted in terms of another currency is equal to the approximate
The theory of relative purchasing power parity states that in comparison to a period when exchange rates between two countries are in equilibrium, changes in differential rates of inflation between
The forward rate is often taken as an unbiased estimator of the future spot currency rate. L012
The nominal rate of interest is approximately equal to the sum of the real rate of interest and the expected inflation rate. This relationship is known as the Fisher effect. L012
The international Fisher effect theory states that differences in interest rates between two countries will be offset by equal but opposite changes in the future spot rate.L012
Forecasts of future spot exchange rates can be derived from forward rates, if available, or from observed interest rates between two countries in conjunction with the international Fisher effect
What is the theory of interest rate parity?L012

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