Questions and Answers of Contemporary Financial Management

Market equilibrium occurs when the price of an asset is such that the expected rate of return is equal to the required rate of return. PO85
Bond refunding involves the replacement of a called bond issue with a lower interest cost issue. PO85
Define the following terms associated with long-term debt: PO85a. Indentureb. Trusteec. Call featured. Sinking funde. Conversion featuref. Coupon rate
Describe the basic features of each of the following types of bonds: PO85a. Mortgage bondsb. Debenturesc. Subordinated debenturesd. Equipment trust certificatese. Collateral trust bondsf. Income bonds
Suppose a company simultaneously sold two long-term debt issues at par:9⅛ percent senior debentures and 9⅜ percent subordinated debentures. What risk–return trade-off would be faced by an
What is the relationship between par value, market value, and book value for the following? PO85a. Long-term debtb. Preferred stock
Define the following terms associated with preferred stock: PO85a. Cumulative featureb. Participationc. Call feature
What variables must be known (or estimated) in applying the capitalization of cash flow method of valuation to a physical or financial asset? PO85
Define the following:a. The market value of an assetb. Market equilibrium PO85
What is the primary difference between the book value and the market value of an asset? PO85
Describe the relationship between the coupon rate and the required rate of return that will result in a bond selling ata. A discountb. Par value PO85c. A premium
How does the yield to maturity on a bond differ from the coupon yield or current yield? PO85
Under what conditions will a bond’s current yield be equal to its yield to maturity? PO85
In what ways is preferred stock similar to long-term debt? In what ways is it similar to common stock? PO85
Explain why bondholders often prefer a sinking fund provision in a bond issue. PO85
Explain what is meant by interest rate risk. PO85
Explain how a bond can be classified as a fixed-income security when the yield to maturity can fluctuate significantly over time, depending on the market price of the bond. PO85
Describe the basic features of each of the following types of bonds:a. Floating rate bondsb. Original issue deep discount bondsc. Zero coupon bondsd. Extendable notes (put bonds) PO85
Explain what is meant by reinvestment rate risk. PO85
Compare the debt outstanding for AMR (parent of American Airlines) and Southwest Airlines. Use the S&P Bond Guide from your library to determine the bond rating of each of these firms. What reasons
What is the current value of a $1,000 par value perpetual bond to an investor who requires a 10 percent annual rate of return? The perpetual bond pays interest at the rate of 8 percent per year. PO85
Cellular International zero coupon bonds (par value $1,000) mature on April 21, 2017. Calculate the yield to maturity if an investor purchased one of these bonds on April 21, 2011, at a price of
Philips Industries has bonds outstanding ($1,000 par value) that mature 10 years from today and have a coupon interest rate of 9⅜ percent. Calculate the maximum price an investor should be willing
What is the value of a share of DuPont Series A $3.50 cumulative, perpetual preferred stock to an investor who requires a 6 percent annual rate of return on this security? This preferred stock was
Use the data in Figure 6.1 to answer the following:a. What is the coupon rate and year of maturity for the Thomson Reuters bonds?b. If you purchased one Kraft Foods bond, what price would you have to
A U.S. government bond was quoted as:Rate Maturity Mo/Yr Bid Asked Chg* Ask Yld 12 Aug 13 110.12 110.13 +6 4.50*Chg is in 32nds of a percent.a. How much would you have to pay for one of these $1,000
Recently the high and low market prices of Canadian Pacific Limited's debentures (see problem 1) were $790 and $475, respectively. Determine the yield-to-maturity of one of these debentures if it was
Creative Financing, Inc., is planning to offer a $1,000 par value 15-year maturity bond with a coupon interest rate that changes every 5 years. The coupon rate for the first 5 years is 10 percent,
Adams Food Service has issued 7% percent bonds that mature on July 15, 2042. The bonds are callable at $1,037.08 on July 15, 2017. Assume that interest is paid and compounded annually. Determine the
BCC has issued 8% percent debentures that will mature on July 15, 2030. Assume that interest is paid and compounded annually. If an investor purchased a $1,000 denomination bond for $1,025 on July
Consider the Leverage Unlimited, Inc., zero coupon bonds of 2016. The bonds were issued in 1998 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the bonds are purchased
If you purchase a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest /10 of 1 percent)? PO85
In 2000, BCC issued 8% percent debentures that will mature on December 1, 2040.a. If an investor purchased one of these bonds ($1,000 denomination) on December 1, 2010, for $1,050, determine the
Determine the value of a share of DuPont Series A $3.50 cumulative preferred stock to an investor who requires the following rates of return:a. 9 percentb. 10 percentc. 12 percent PO85
Consider again the BCC 8% percent debentures that mature on July 15, 2030 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2016, at $1,016.55.
BCC has bonds that trade frequently, pay a 7.75 percent coupon rate, and mature in 2015. The bonds mature on March 1 in the maturity year. Suppose an investor bought this bond on March 1, 2010, and
Calcu- late the yield to maturity assuming the investor bought the bond at the following price, as quoted in the financial press:a. 100b. 90c. 105
Zabberer Corporation bonds pay a coupon rate of interest of 12 percent annually and have a maturity value of $1,000. The bonds are scheduled to mature at the end of 14 years. The company has the
World Tobacco has issued preferred stock ($10 par value) that pays an annual divi- dend of $0.84. The preferred stock matures in 5 years. At that time, holders of the stock will receive, at their
Refer to the bonds appearing in Figure 6.1.a. What is the coupon rate and year of maturity for the Medtronic and Morgan Stanley bonds?b. How much would you have had to pay to buy one Anheuser Busch
The "asked" discount on a 6-month Treasury bill was recently quoted as 3.02 per- cent. Approximately how much would you have to pay to buy one of these Treasury bills ($10,000 maturity value)? PO85
How much would you have to pay for a U.S. government bond ($1,000 maturity value) scheduled to mature in November 2015 and quoted at 147:27 "asked"? The coupon rate on the bond is 9% percent. PO85
Zip Boys has outstanding zero coupon bonds maturing in 2016.a. How would you compute the yield-to-maturity on bonds like these?b. How do bondholders get a return when they buy these bonds? PO85
Zip Boys has outstanding zero coupon bonds maturing in 2016.a. How would you compute the yield-to-maturity on bonds like these?b. How do bondholders get a return when they buy these bonds? PO85
Hexcel has a 7 percent coupon rate bond issue outstanding that matures in 2015. The Wall Street Journal reports a bond price of $582.50. These bonds are convert- ible into common stock. Why do you
Disney Enterprises issued 7.55% senior debentures (bonds) on July 15, 1993, with a 100-year maturity (i.e., due on July 15, 2093). Suppose an investor purchased one of these bonds on July 15, 2003
Do a Google search for “Preparing a Cash Flow Forecast.” Choose a site that provides cash flow forecasting tools and templates. Prepare a 1-page memo to your instructor summarizing what you found
Appalachian Registers, Inc. (ARI) has current sales of $50 million. Sales are expected to grow to $75 million next year. ARI currently has accounts receivable of $10 million, inventories of $15
Berea Resources is planning a $75 million capital expenditure program for the coming year. Next year, Berea expects to report to the IRS earnings of $40 million after interest and taxes. The company
In the Industrial Supply Company example (Table 4.4) it was assumed that the company’s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase
The Podrasky Corporation is considering a $200 million expansion (capital expenditure) program next year. The company wants to know approximately how much additional financing (if any) will be
Consider the Industrial Supply Company example (Table 4.4) again. Assume that the company plans to maintain its dividend payments at the same level in 2011 as in 2010. Also assume that all of the
Prepare a statement of cash flows (using the indirect method) for the Midland Manufacturing Corporation for the year ending December 2010, based on the following comparative balance sheets. P715
Refer to the Summit Furniture Company example (Table 4.2). Recalculate the cash and cash equivalents at the end of 2010 assuming that (1) the company had 2010 capital expenditures of $22,000; (2) it
Use the percentage of sales forecasting method to compute the additional financing needed by Lambrechts Specialty Shops, Inc. (LSS), if sales are expected to increase from a current level of $20
Piedmont Products Inc. (PPI) has current sales of $60 million. Sales are expected to grow to $80 million next year. PPI currently has accounts receivable of $9 million, inventories of $15 million,
Jenkins Properties had gross fixed assets of $1,000 at the end of 2010. By the end of 2011, these had grown to $1,100. Accumulated depreciation at the end of 2010 was $500, and it was $575 at the end
Explain the difference between deterministic and probabilistic financial planning models. P715
Illustrate how the statement of cash flows can be used as a financial planning technique. P715
What is a cash budget? What are the usual steps involved in preparing a cash budget? P715
What is the percentage of sales forecasting method? What are some of the limitations financial analysts should be aware of in applying this method? P715
What are pro forma financial statements? P715
What are deferred taxes, and how do they come into being? P715
Financial forecasting involves the projection and estimation of a firm’s future cash needs. The percentage of sales method, cash budgeting, the pro forma statement of cash flows, and computerized
The statement of cash flows is a major financial statement showing the effects of a firm’s operating, investing, and financing activities on its cash balance. P715
After-tax cash flow is equal to earnings after taxes plus noncash charges. Depreciation and deferred taxes are examples of noncash charges. P715
The cash flow concept is a fundamental concept in finance. Financial managers focus on raising cash to invest in assets that will, in turn, generate future cash flows for the firm and its owners. P715
The operational plan consists of a marketing plan, production plan, human resource plan, and a financial plan. The marketing plan lays out the marketing resources needed to meet the operational
Developing a cash budget? P715
Forecasting the funds needed using the percentage of sales method and pro forma?financial statements? P715
Interpreting the statement of cash flows? P715
The importance of financial planning? P715
A cash budget is the projection of a firm’s cash receipts and disbursements over a future time period and is useful in determining the amount of short-term funds the firm will need to borrow. P715
The percentage of sales forecasting method is used in estimating the amount of additional financing that a firm will need for a given increase in sales, based on certain assumptions about the
The statement of cash flows shows the effects of a firm’s operating, investing, and financing activities on its cash balance. P715
After-tax cash flow is equal to earnings after tax plus noncash charges. P715
Cash flows are the ultimate source of financial value. Therefore, cash flow analysis and forecasting are important parts of a firm’s financial plans. P715
Financial forecasting involves the estimation of the firm’s future needs for funds. Pro forma financial statements, i.e., balance sheets, income statements, and cash budgets, are an integral part
Firms need to conduct two types of planning: strategic planning, and a subset, operational planning.a. Strategic planning is long range in nature and deals with the overall direction of the firm.b.
How would you characterize the performance of Hewlett-Packard over the past 5 years? k-63
What has been the trend in “return on total equity” over the past 5 years? k-63
What has been the trend in “asset turnover” over the past 5 years?25 What has been the trend in “accounts receivable days” over the past 5 years? k-63
What has been the trend in debt usage by the company over the past 5 years? k-63
Use the Research and Education portion of Yahoo’s finance site, finance.yahoo.com, to access the data needed to perform a comparative financial analysis of American Airlines and Southwest Airlines.
Armbrust Corporation is the maker of fine fitness equipment. Armbrust’s bank has been pressuring the firm to improve its liquidity. Which of the following actions proposed by the CFO do you believe
The Southwick Company has the following balance sheet ($000):Evaluate the impact of each of the following (independent) financial decisions on Southwick’s current, quick, and debt-to-equity
Fill in the balance sheet for the Jamestown Company based on the following data(assume a 365-day year):Sales = $3,650,000 Total asset turnover = 4×Current ratio = 3:1 Quick ratio = 2:1 Current
Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 10 percent debt outstanding.Its after-tax net income is $12
Hoffman Paper Company, a profitable distributor of stationery and office supplies, has an agreement with its banks that allows Hoffman to borrow money on a shortterm basis to finance its inventories
The stock of Jenkins Corporation, a major steel producer, is currently selling for $50 per share. The book value per share is $125. In contrast, the price per share of Dataquest’s stock is $40,
Palmer Chocolates, a maker of chocolates that specializes in Easter candy, had the following inventories over the past year:Palmer had sales of $290 million over the past year. Cost of sales
If a company sells additional common stock and uses the proceeds to increase its inventory level and to increase its cash balances, what is the near-term (immediate)impact ( increase, decrease, no
Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of$600,000. Its current balance sheet follows: k-63
The Jamesway Printing Corporation has current assets of $3.0 million. Of this total,$1.0 million is inventory, $0.5 million is cash, $1.0 million is accounts receivable, and the balance is marketable
The Sooner Equipment Company has total assets of $100 million. Of this total,$40 million was financed with common equity and $60 million with debt (both long- and short-term). Its average accounts
Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $1 million after taxes on the venture during the first year.
Using the data in the following table for a number of firms in the same industry, do the following:•a. Compute the total asset turnover, the net profit margin, the equity multiplier, and the return
Williams Oil Company had a return on stockholders’ equity of 18 percent during 2010. Its total asset turnover was 1.0 times, and its equity multiplier was 2.0 times.Calculate the company’s net
Clovis Industries had sales in 2010 of $40 million, 20 percent of which were cash. If Clovis normally carries 45 days of credit sales in accounts receivable, what are its average accounts receivable
Vanity Press, Inc., has annual credit sales of $1.6 million and a gross profit margin of 35 percent.•a. If the firm wishes to maintain an average collection period of 50 days, what level of

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