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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Goal of Financial Management Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why isn ’ t the goal to maximize the future share
Accounting and Cash Flows Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?
Accounting Statement of Cash Flows Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?
Cash Flows How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?
Book Values versus Market Values Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this
Cash Flow from Assets Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?
Operating Cash Flow Why is it not necessarily bad for the operating cash flow to be negative for a particular period?
Net Working Capital and Capital Spending Could a company’s change in net working capital be negative in a given year? ( Hint: Yes.) Explain how this might come about. What about net capital
Cash Flow to Stockholders and Creditors Could a company’s cash flow to stockholders be negative in a given year? ( Hint: Yes.) Explain how this might come about. What about cash flow to creditors?
Firm Values Referring back to the Bank of America example at the beginning of the chapter, note that we suggested that Bank of America’s stockholders probably didn’t suffer as a result of the
Cash flow is generated by the firm and paid to creditors and shareholders. It can be classified as:a. Cash flow from operations.b. Cash flow from changes in fixed assets.c. Cash flow from changes in
Calculations of cash flow are not difficult, but they require care and particular attention to detail in properly accounting for noncash expenses such as depreciation and deferred taxes. It is
Building a Balance Sheet Bishop, Inc., has current assets of $5,700, net fixed assets of $27,000, current liabilities of $4,400, and long-term debt of $12,900. What is the value of the
Building a Balance Sheet The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago:Long-term debt $ 65,000,000 Preferred stock
Cash Flow to Creditors The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed longterm debt of $1.52 million. The 2012 income
Cash Flow to Stockholders The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2012
Calculating Cash Flows Given the information for Anna’s Tennis Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2012 was $945,000 and that
Cash Flows Ritter Corporation’s accountants prepared the following financial statements for year-end 2012:a. Explain the change in cash during 2012.b. Determine the change in net working capital in
Financial Cash Flows The Stancil Corporation provided the following current information:Proceeds from long-term borrowing $17,000 Proceeds from the sale of common stock 4,000 Purchases of fixed
Building an Income Statement During the year, the Senbet Discount Tire Company had gross sales of $1.06 million. The firm’s cost of goods sold and selling expenses were $525,000 and $215,000,
Calculating Total Cash Flows Schwert Corp. shows the following information on its 2012 income statement: sales 5 $185,000; costs 5 $98,000; other expenses 5$6,700; depreciation expense 5 $16,500;
Using Income Statements Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales 5 $41,000; costs 5 $26,400; addition to retained earnings 5 $4,900;
Residual Claims Huang, Inc., is obligated to pay its creditors $10,900 very soon.a. What is the market value of the shareholders’ equity if assets have a market value of $12,400?b. What if assets
Marginal versus Average Tax Rates (Refer to Table 2.3.) Corporation Growth has $86,000 in taxable income, and Corporation Income has $8,600,000 in taxable income.a. What is the tax bill for each
Net Income and OCF During 2012, Raines Umbrella Corp. had sales of $630,000.Cost of goods sold, administrative and selling expenses, and depreciation expenses were $470,000, $95,000, and $140,000,
Accounting Values versus Cash Flows In Problem 18, suppose Raines Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was
Calculating Cash Flows Cusic Industries had the following operating results for 2012: sales 5 $19,900; cost of goods sold 5 $14,200; depreciation expense 5$2,700; interest expense 5 $670; dividends
Calculating Cash Flows Consider the following abbreviated financial statements for Weston Enterprises:WESTON ENTERPRISES 2011 and 2012 Partial Balance Sheets Assets Liabilities and Owners’ Equity
Financial Statements Draw up an income statement and balance sheet for this company for 2011 and 2012.
Calculating Cash Flow For 2012, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
Cash Flows You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $98 million in current
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function.However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer.The small initial investment to start the company was made by Nick and his friends. Over the years, this same group
Nick has also provided the following information: During the year the company raised $175,000 in new long-term debt and retired $151,000 in long-term debt. The company also sold $12,000 in new stock
The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow
In the previous two questions, how would it affect your thinking to know that insiders still owned 56 percent of the company’s Class A stock and all of the company’s Class B stock?
In the previous question, how would it affect your thinking to know that the company was incorporated in 2004,had only $118 million in revenues in 2014, with net income of only $2.1 million?
The Shake Shack IPO was underpriced by about 119 percent. Should Shake Shack be upset at JP Morgan and Morgan Stanley over the underpricing?
Why is underpricing not a great concern with bond offerings? Use the following information to answer the next three questions. In January 2015, hamburger joint Shake Shack went public. Assisted by
Rob wishes to buy a European put option on BioLabs, Inc., a nondividend- paying common stock, with a strike price of $75 and six months until expiration. The company’s common stock is currently
Refer to the observed capital structures given in Table 15.3 of the text. What do you notice about the types of industries with respect to their average debt–equity ratios? Are certain types of
In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? If a firm issues equity to repurchase some of its debt, the
You have been at your job with East Coast Yachts for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Sarah Brown, the Bledsoe
You want to calculate the WACC for auto parts retailer AutoZone (AZO). Complete the following steps to construct a spreadsheet that can be updated.a. Using an input for the ticker symbol, create
Based on the following information, calculate the expected return and standard deviation for the two stocks. RATE OF RETURN IF STATE OCCURS PROBABILITY OF STATE OF ECONOMY STATE OF ECONOMY STOCK A
A stock has had returns of −16.43 percent, 15.81 percent, 26.34 percent, 5.98 percent, and 18.43 percent over the past five years, respectively. What was the holding period return for the stock?
Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2015? Why do you think they were so high during this period? What
Dahlia Simmons, CFO of Ulrich Enterprises, is analyzing a new project to sell solar-powered batteries for cell phones. Dahlia has estimated the following probability distributions for the variables
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if
After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, and must decide whether to make the investment necessary to produce and market it.
In practice, the use of the dividend discount model is refined from the method we presented in the textbook. Many analysts will estimate the dividend for the next five years and then estimate a
Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2016. What is
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this:
Find the EAR in each of the following cases: APR NUMBER OF TIMES COMPOUNDED EAR 9.8% Quarterly 12.4 Monthly 7.6 Daily 8.4 Infinite
Solve for the unknown number of years in each of the following: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE $ 625 6% $ 1,284 810 9 4,341 18,400 7 234,162 21,500 10 215,000
Solve for the unknown interest rate in each of the following: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE $ 217 3 293 432 10 1,053 41,000 16 162,181 54,382 19 483,500
For each of the following, compute the present value: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE 7% $ 15,451 13 51,557 16 14 886,073 24 11 550,164
Compute the future value of $3,550 compounded annually for:a. 10 years at 6 percent.b. 10 years at 8 percent.c. 20 years at 6 percent.d. Why is the interest earned in part (c) not twice the amount
Using Excel to find the marginal tax rate can be accomplished with the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for
What impact did the announcement have on BlueSky’s suppliers?Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the
Heidi Pedersen, the treasurer for Wood Products, Inc., has been asked by Justin Wood, the president, to prepare a memo detailing the company’s ending cash balance for the next three months. Below,
For this Master It! assignment, refer to the Goodweek Tires, Inc., case at the end of this chapter. For your convenience, we have entered the relevant values such as the price and variable costs in
What were the highest and lowest historical interest rates for commercial paper? Go to www.stlouisfed.org, find the “FRED® data” link, then the “Interest Rates” link. What were the highest
Chevron sells commercial paper to interested institutional investors. Go to the Chevron Web site at www.chevron.com to find information on Chevron’s commercial paper. What is the credit rating for
Find the two most recent balance sheets for 3M at the “Investor Relations” link on the Web site www.mmm.com. For each account in the balance sheet, show the change during the most recent year and
Using the information you gathered in the previous problem, calculate the operating cycle for each company. What are the similarities or differences? Is this what you would expect from companies in
Go to www.reuters.com. You will need to find the most recent annual income statement and the two most recent balance sheets for McKesson (MCK) and Newmont Mining (NEM). MCK is involved in
What was the largest IPO? Go to www.hoovers.com and find out. In what country was the company located? What was the largest IPO in the United States?
Go to www.hoovers.com and find the most recent secondary stock offering. At what price was the stock offered for sale to the public? How does this offer price compare to the market price of the stock
Go to www.hoovers.com and find the most recent IPO. Now go to the SEC Web site at www.sec.gov and look up the company’s filings with the SEC. What is the name of the filing the company made to sell
How many times has Procter & Gamble stock split? Go to P&G’s Web page at www.pg.com and find the history of the company’s stock splits. When did Procter & Gamble stock first split?
Go to www.earnings.com and find the stock splits. How many stock splits are listed? How many are reverse splits? What is the largest split and the largest reverse split in terms of shares? Pick a
Go to www.earnings.com and find the list of dividends. How many companies went “ex” today? What is the largest declared dividend? For the stocks going “ex” today, what is the longest time
Dividend reinvestment plans (DRIPs) permit shareholders to automatically reinvest cash dividends in the company. To find out more about DRIPs, go to www.fool.com and answer the following questions
Go to finance.yahoo.com and find the stock screener. Use the Java stock screener to answer the following questions. How many companies have debt-toequity ratios greater than 2? Greater than 5?
Go to www.nasdbondinfo.com and look up the outstanding bonds for Nike. Record the most recent price and YTM of each bond issue. Now go to www.sec.gov and find the most recent 10Q or 10K report filed
Go to finance.yahoo.com and look up the information for Allegheny Technologies (ATI), a metal manufacturing company in the S&P 500. You want to estimate the cost of equity for the company.
Go to the St. Louis Federal Reserve Web site at www.stlouisfed.org and find the ?FRED?? link and the ?Interest Rates? link. You will find a list of links for different historical interest rates.
Using the online calculator from the previous problem, find the IRR for a project with cash flows of −$500, $1,200, and −$400. What is going on here?Data From Web 1You have a project that has an
The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stlouisfed.org. Find your way to the “FRED” data, then “Interest Rates.” You will find
You can find current bond prices at www.finra.org. You want to find the bond prices and yields for bonds issued by Georgia Pacific. Enter the ticker symbol “GP” to do a search. What is the
The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stlouisfed.org. Find the link for “FRED®” (Federal Reserve Economic Data). You will find a
Finding the time necessary until you pay off a loan is simple if you make equal payments each month. However, when paying off credit cards many individuals only make the minimum monthly payment,
Taxes can greatly affect the future value of your investment. The Financial Calculators Web site at www.fincalc.com has a financial calculator that adjusts your return for taxes. Go to this page and
Use the Return Rate calculator at www.moneychimp.com to solve the following problem. You still want to buy the Lamborghini Murcielago, but you have $60,000 to invest and want to buy the car in 15
Go to www.moneychimp.com and find the “Compound Interest” calculator. You want to buy a Lamborghini Murciélago. Assume the price of the car is $330,000 and you have $35,000. If you can earn an
Go to www.dinkytown.net and find the “Cool Million” calculator. You want to be a millionaire. You can earn 11.5 percent per year. Using your current age, at what age will you become a millionaire
Go to www.dinkytown.net and find the “Savings Calculator” calculator. If you currently have $10,000 and invest this money at 9 percent, how much will you have in 30 years? Assume you will not
Start with the partial model in the file Ch16 P18 Build a Model.xlsx on the textbook?s Web site. Rusty Spears, CEO of Rusty?s Renovations, a custom building and repair company, is preparing
Web site, which contains Henley Corporation?s most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the questions
Web site, which contains the 2019 financial statements of Zieber Corporation. Forecast Zieber’s 2020 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2)
Website. Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to
The stock of Gao Computing sells for $50, and last year’s dividend was $3.13. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 10%
The following data apply to Jacobus and Associates (millions of dollars):Cash ................................... $ 400Fixed assets ................... $ 4,300Sales ..............................
Argent Corporation has $60 million in current liabilities, $150 million in total liabilities, and $210 million in total common equity; Argent has no preferred stock. Argent’s total debt is $120
Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbook?s Web site. a. Using the financial statements shown here for Lan & Chen Technologies, calculate net operating
Begin with the partial model in the file Ch02 P20 Build a Model.xlsx on the textbook?s Web site. a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets.
Last year Cole Furnaces had $4 million in operating income (EBIT). The company had a net depreciation expense of $1 million and an interest expense of $1 million; its combined federal and state

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