Questions and Answers of Contemporary Financial Management

Financial markets are the vehicles through which financial assets are bought and sold. They include money or capital markets and primary or secondary markets. Money markets deal in securities with
Capital markets are considered to be efficient if security prices instantaneously and fully reflect, in an unbiased way, all economically relevant information about a security’s prospective returns
A Eurocurrency is a currency deposited in a bank located outside the country of origin. The Eurocurrency market is an important alternative to domestic sources of financing for multinational firms.
The exchange rate is the rate at which one currency can be converted into another. The spot rate is the rate of exchange for currencies being bought and sold for immediate delivery today. The forward
Investment returns are normally measured using the holding period return concept. V=96
Describe and discuss the saving-investment cycle. V=96
What roles do financial middlemen and financial intermediaries play in the operation of the U.S. financial system? How do the two differ? V=96
How do money and capital markets differ? V=96
Describe the various types of financial intermediaries, including the sources of their funds and the types of investments they make. V=96
What factors need to be considered when determining the optimal form of organization for a business enterprise? V=96
How do primary and secondary financial markets differ? V=96
What is the primary distinction between the trading process on the New York Stock Exchange and the over-the-counter markets? V=96
Describe the concept of market efficiency. In what sense is this concept an important part of the shareholder wealth maximization objective? V=96
If a capital market is not efficient, what is the impact on a firm seeking to raise capital in that market? Why? V=96
Define the following terms:a. Multinational corporationb. Spot exchange ratec. Forward exchange rated. Direct quote versus indirect quotee. Optionf. LIBOR g. Euro ST1. Three months ago, you purchased
An investor bought 100 shares of Venus Corporation common stock 1 year ago for $40 per share. She just sold the shares for $44 each, and during the year, she received four quarterly dividend checks
An investor bought 10 Ellis Industries, Inc., long-term bonds 1 year ago, when they were first issued by the company. In addition, he bought 200 shares of the company’s common stock at the same
Suppose a Midwest Telephone and Telegraph (MTT) Company bond, maturing in 1 year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000
a. National Telephone and Telegraph (NTT) Company common stock currently sells for $60 per share. NTT is expected to pay a $4 dividend during the coming year, and the price of the stock is expected
Japanese Motors exports cars and trucks to the U.S. market. On February 20, 2004, its most popular model was selling (wholesale) to U.S. dealers for $20,000. What price must Japanese Motors charge
Valley Stores, a U.S. department store chain, annually negotiates a contract with Alpine Watch Company, located in Switzerland, to purchase a large shipment of watches. On February 20, 2004, Valley
Determine the percentage change in the value of the following currencies relative to the U.S. dollar between February 20, 2004 and March 9, 2010. (Refer to Table 2.1.) V=96a. Rupeeb. Poundc. Yend.
What is an S corporation? V=96
What do you think is the reason for the 70 percent corporate-dividend exclusion?ST1. During the past year, Alcore Enterprises, Inc., had sales of $3 million, cost of goods sold of $1.8 million,
Using the tax rates shown in Table 2A.1, determine the expected annual tax liability of Kaiser Enterprises (a new firm formed in 2010), if the firm anticipates the follow- ing stream of taxable
1. Once on The New York Times website, go to the Business section. Then click “Dealbook” and select “Mergers and Acquisitions.” What new mergers have been announced? Select one and provide
a. Several reasons have been proposed to justify mergers. Among the more prominent are (1) tax considerations, (2) risk reduction, (3) control, (4) purchase of assets at below-replacement cost,
Use the spreadsheet model to rework problem 21-6, and then answer the following question:a. Suppose GCC has 120,000 shares outstanding. What is the maximum per-share price Trans World should offer
On the basis of your answers to problems 21-1 and 21-2, if Hastings were to acquire Visscher, what would be the range of possible prices it could bid for each share of Visscher common stock? Hastings
1. Look up Allergan PLC’s (AGN) cumulative convertible Series A preferred stock. You will find this information on Yahoo! Finance (AGN-PA) or on Morningstar.com (AGNPRA).a. What is the
1. Recreate Table 19.1 for the following currencies: Australian dollar, British pound, Canadian dollar, Chinese yuan, EMU euro, Japanese yen, and Swiss franc. Be sure to show both the direct
Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.16. If the krone appreciated 4% tomorrow against the dollar, how many krones would a dollar buy tomorrow?
1. Go to the options screen for Netflix. Select one call option that doesn’t expire for 3 months. a. What is NFLX’s current stock price? b. What is the strike price of this call
a. Rework problem 18-4 using the spreadsheet model.b. Construct data tables for the intrinsic value and Black–Scholes exercise value for this option and graph the relationship. Include possible
Misuraca Enterprise’s current stock price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50.These options will expire at
Rachel is considering an investment in Yonan Communications, whose stock currently sells for $65. A put option on Yonan’s stock, with an exercise price of $60, has amarket value of $2.90.
The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018 to help finance a new research and development laboratory. Assume that interest rate futures maturing in March 2018 are
1. What is the mean forecast for Abercrombie’s earnings per share over the next fiscal year?2. Based on analysts’ forecasts, what is the expected long-term (5-year) growth rate in earnings?3.
a. Assume (1) that NWC was operating at full capacity in 2018 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities
Refer to problem 17-1 and assume that the company had $3 million in assets at the end of 2018. However, now assume that the company pays no dividends.Under these assumptions, what additional funds
Refer to problem 17-1. What additional funds would be needed if the company’s year-end 2018 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from
Assume that an average firm in the office supply business has a 6% profit margin, a 40%total liabilities/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it
Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain’s 2018 sales (all on credit) were
Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a
Zane Corporation has an inventory conversion period of 64 days,an average collection period of 28 days, and a payable deferral period of 41 days.a. What is the length of the cash conversion cycle?b.
1. What has happened to Apple’s dividend per share, dividend yield, and dividend payout over the past 4 years? Provide an explanation for what took place.2. Compare this information with other
Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to
In 2017, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2017 was a normal year and that for the past 10 years, earnings have grown at a constant rate of
Brooks Sporting Inc. is prepared to report the following 2018 income statement (shown in thousands of dollars).Sales
Walsh Company is considering three independent projects, each of which requires a $4 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are
Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 45% with a $20
After a 5-for-l stock split, Tyler Company paid a dividend of $1.15 per new share, which represents a 7% increase over last year’s pre-split dividend. What was last year’s dividend per share?
Gamma Industries has net income of $3,800,000, and it has 1,490,000 shares of common stock outstanding. The company’s stock currently trades at $67 a share. Gamma is considering a plan in which it
Emergency Medical’s stock trades at $145 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will
Altamonte Telecommunications has a target capital structure that consists of 45% debt and 55% equity. The company anticipates that its capital budget for the upcoming year will be $1,000,000. If
1. To get an overall picture of each company’s capital structure, it is helpful to look at a the Key Ratios screen and then select the Financial Health tab. Common size balance sheet data are
The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2019. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds
Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever’s debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market
Tartan Industries currently has total capital equal to $4 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as
Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm
The Warren Watch Company sells watches for $26, fixed costs are $155,000, and variable costs are $13 per watch.a. What is the firm’s gain or loss at sales of 9,000 watches? At 15,000 watches?b.
Hartman Motors has $18 million in assets, which were financed with $6 million of debt and $12 million in equity. Hartman’s beta is currently 1.3, and its tax rate is 35%. Use the Hamada
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has
A company’s fixed operating costs are $430,000, its variable costs are $2.95 per unit, and the product’s sales price is $4.50. What is the company’s break-even point; that is, at what unit
Why do public utilities generally use different capital structures than biotechnology companies?
a. In recent months, Keller?s group has focused on real option analysis.1. What is real option analysis?2. What are some examples of projects with real options?b. Considering real options, one of
Use a spreadsheet model to evaluate the project analyzed in problem 13-7.Reference problem 13-7
Boisjoly Enterprises is considering buying a vacant lot that sells for $1.4 million. If the property is purchased, the company’s plan is to spend another $6 million today (t 5 0) to build a hotel
The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $9 million today. Engler estimates that once
Hampton Manufacturing estimates that its WACC is 12.5%.The company is considering the following 7 investment projects: a. Assume that each of these projects is independent and that each is just as
The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash flows, including depreciation, of $6,250 per year.
All American Telephones Inc. is considering the production of a new cell phone. The project will require an investment of $13 million. If the phone is well received, the project will produce cash
Singh Development Co. is deciding whether to proceed with Project X. The cost would be $11 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual
You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $85,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the
Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the
A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: Projects X and Y are equally risky and may be repeated indefinitely. If the firm?s WACC
The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs $8.9 million but
Rini Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $95 million, and will produce after-tax cash flows of $35 million per year. Plane B has a life
Overton Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine 171-3, which has a cost of $171,000, a 3-year expected
Crockett Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has
St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $46,000 per year. The new
The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of
You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis,
Faleye Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $21,000, which will generate cash flows of $6,000 at the end of each
The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine
Karsted Air Services is now in the final year of a project. The equipment originally cost $29 million, of which 75% has been depreciated. Karsted can sell the used equipment today for $8 million, and
Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:Sales
Tannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional $2 million investment in net operating working
Suppose a firm is considering two mutually exclusive projects. One project has a life of 6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives. Might
Operating cash flows rather than?accounting income are listed in Table 12.1. Why do we focus on cash flows as opposed to net income in capital budgeting? 3 4 Investment Outlays at Time = 0 CAPEX =
a. What is capital budgeting? Are there any similarities between a firm?s capital budgeting decisions and an individual?s investment decisions?b. What is the difference between independent and
Project A costs $1,000, and its cash flows are the same in Years 1 through 10. Its IRR is 16%, and its WACC is 8%. What is the project’s MIRR?
A project has annual cash flows of $5,000 for the next 10 years and then $9,000 each year for the following 10 years. The IRR of this 20-year project is 8.52%. If the firm’s WACC is 8%, what is the
A company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:a. What is each project?s NPV?b. What is each project?s IRR?c.
A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:The projects are equally risky, and their WACC is 11%. What is the MIRR of the project that maximizes
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:The company?s WACC is 8.5%. What is the IRR of the better project? (Hint: The better project may or may
Project S costs $17,000, and its expected cash flows would be $5,000 per year for 5 years. Mutually exclusive Project L costs $30,000, and its expected cash flows would be $8,750 per year for 5

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