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financial management

Questions and Answers of Financial Management

12. The Wintergreens are planning ahead for their son’s education. He’s eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts
11. How much will $650 per year be worth in eight years at interest rates ofa. 12%?b. 8%?c. 6%?
10. Ralph Renner just borrowed $30,000 to pay for a new sports car. He took out a 60-month loan and his car payments are $761.80 per month. What is the effective annual interest rate (EAR) on
9. Charlie owes Joe $8,000 on a note that is due in five years with accumulated interest at 6%. Joe has an investment opportunity now that he thinks will earn 18%. There’s a chance, however, that
8. Paladin Enterprises manufactures printing presses for small-town newspapers that are often short of cash. To accommodate these customers, Paladin offers the following payment terms.1/3 on delivery
7. John Cleaver’s grandfather died recently and left him a trunk that had been locked in his attic for years. At the bottom of the trunk John found a packet of 50 World War I “liberty bonds”
6. Branson Inc. has sold product to the Brandywine Company, a major customer, for$20,000. As a courtesy to Brandywine, Branson has agreed to take a note due in two years for half of the amount due.a.
5. Sally Guthrie is looking for an investment vehicle that will double her money in five years.a. What interest rate, to the nearest whole percentage, does she have to receive?b. At that rate, how
4. How long does it take for the following to happen?a. $856 grows into $1,122 at 7%b. $450 grows into $725.50 at 12% compounded monthlyc. $5,000 grows into $6,724.44 at 10% compounded quarterly
3. What interest rates are implied by the following lending arrangements?a. You borrow $500 and repay $555 in one year.b. You lend $1,850 and are repaid $2,078.66 in two years.c. You lend $750 and
2. What will a deposit of $4,500 left in the bank be worth under the following conditions?a. Left for nine years at 7% interestb. Left for six years at 10% compounded semiannuallyc. Left for five
1. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate isa. 9%?b. 12% compounded
1. A business can be valued by capitalizing its earnings stream (see Example 6.15, page 254). How might you use the same idea to value securities, especially the stock of large publicly held
14. When an annuity begins several time periods into the future, how do we calculate its present value today? Describe the procedure in a few words.
13. Discuss the idea of capitalizing a stream of earnings in perpetuity. Where is this idea useful? Is there a financial asset that makes use of this idea?
12. Discuss mortgage loans in terms of the time value of money and loan amortization.What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting
11. What information are we likely to be interested in that’s contained in a loan amortization schedule?
10. Describe the underlying meaning of compounding and compounding periods.How does it relate to time value? Include the idea of an effective annual rate(EAR). What is the annual percentage rate
9. The amount formulas share a closer relationship than the annuity formulas.Explain and interpret this statement.
8. Discuss the idea of a sinking fund. How is it related to time value?
7. What’s an opportunity cost interest rate?
6. Deferred payment terms are equivalent to a cash discount. Discuss and explain this idea.
5. Write a brief verbal description of the logic behind the development of the time value formulas for annuities.
4. Calculate the present value of one dollar 30 years in the future at 10% interest.What does the result tell you about very long-term contracts?
3. In a retail store a discount is a price reduction. What’s a discount in finance? Are the two ideas related?
2. Why are time value concepts crucial in determining what a bond or a share of stock should be worth?
1. Why are time value concepts important in ordinary business dealings, especially those involving contracts?
1. The concept of interest is grounded in money. Without money there could be no interest. Is this statement true or false? Explain and discuss.
17. Go to http://www.nyse.com for a tour of the New York Stock Exchange.a. Go to About the NYSE. Click on Education and then Educational Materials. Look at A Guide to the NYSE Marketplace; Chapter 1,
16. The real risk free rate is 2.5%. The maturity risk premium is .1% for 1-year maturities, growing by .2% per year up to a maximum of 1.0%. The interest rate on 4-year treasuries (federal
15. Assume that interest rates on federal government bonds are as follows:1-year 6.5%2-year 6.3%3-year 6.0%4-year 5.8%5-year 5.5%10-year 5.2%15-year 5.0%20-year 5.0%Do the theories of the shape of
14. Atkins Company has just issued a series of bonds with 5- through 10-year maturities.The company’s default risk is .5% on 5-year bonds, and grows by .2% for each year that’s added to the
13. The interest rate outlook for Montrose Inc., a large, financially sound company, is reflected in the following information.• The pure rate of interest is 4%.• Inflation is expected to
12. Inflation is expected to be 5% next year and a steady 7% each year thereafter.Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government
11. Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 14%. The maturity risk premium is zero for one-year debt
10. Charles Jackson, the founder and president of the Jackson Company, is concerned about his firm’s image in the financial community. The concern arose when he went to the bank for a one-year loan
9. The Habender Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. Habender estimates its default risk premium at about 1.5% and its maturity
8. Mountain Sports Inc. borrowed money for two years last week at 12%. The pure rate is 2%, and Mountain’s financial condition warrants a default risk premium of 3% and a liquidity risk premium of
7. Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’s financial condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There is
6. Keena is saving money so she can start a two year graduate school program two years from now. She doesn’t want to take any chances going grad school, so she’s planning to invest her savings in
5. Calculate the rate Nu-Mode in the last problem should expect to pay on a two-year loan. Assume a 4% default risk premium and liquidity and maturity risk premiums of 3/4% due to the longer term.
4. Nu-Mode Fashions Inc. manufactures quality women’s wear and needs to borrow money to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The
3. Economists have forecast the following yearly inflation rates over the next 10 years:Calculate the inflation components of interest rates on new bonds issued today with terms varying from one (1)
2. Read Business Analysis Case 3. Henderson Industries Inc.’s stock is currently selling at $22.40 per share. Sharon Jacobs, the CEO, has options to buy 250,000 shares at$25.50 per share that
1. Refer to the General Motors stock quotation on page 179.a. Demonstrate that GM’s dividend yield shown as YLD % is correct using other information in the listing.b. Estimate earnings per share
5. Your Aunt Sally has a large portfolio of corporate bonds of different maturities.She has asked your advice on whether to buy more or get rid of some. You anticipate an increase in interest rates
4. Does the so-called risk-free rate actually have some risk? (This is a tough question that isn’t discussed in the chapter. Think about what makes up the risk-free rate and what among those pieces
3. Sharon Jacobs is CEO of Henderson Industries Inc., a public company. Henderson makes heavy construction equipment like bulldozers and cranes which it sells to small construction companies. These
2. Brokers and mutual funds do the same thing: invest your money for you. Is that statement true or false? Explain. What kind of financial institution is a mutual fund? What is its distinguishing
1. Harry, a friend of yours, is taking a course in economics, and has become confused by some of the terminology because of the way people commonly use the samewords.The economics professor says
23. What is a yield curve? Briefly outline three theories that purport to explain its shape. How does the yield curve influence the behavior of lenders?
22. Explain the ideas of a risk-free rate and the real rate of interest. Is either of them approximated by anything that exists in the real world?
21. Do all loans have default, liquidity, and maturity risk more or less equally? Are some types of loans relatively free of some risks? Is the debt of a particular organization free of certain
20. Explain the nature of the potential lending losses associated with each of the following: default risk, liquidity risk, and maturity risk.
19. Why is inflation important to lenders? How do they take it into consideration?
18. Briefly explain the idea of representing an interest rate as a collection of components.What is represented by the base rate? What is the risk premium for?Explain the idea of risk in lending.
17. Discuss the similarities and differences between supply and demand for a good(product or service) and supply and demand in a money (debt) market.
16. Interest is said to drive the stock market. But interest is paid on bonds and loans, while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock
15. Why did securities analysts issue biased reports in the 1990s? In what direction were the reports biased?
14. Describe the primary conflict of interest that caused the public accounting industry to fail in its duty to protect the investing public’s interests in the 1990s.
13. Why does stock-based compensation create a moral hazard for executives?
12. Corporate executives sometimes abuse their positions by overpaying themselves at the expense of stockholders. When that happens are the executives’ gains dollarfor-dollar losses to stockholders
11. Define term and maturity. Is there a difference?
10. Explain the following terms: privately held company, publicly traded company, listed company, Nasdaq market, IPO, prospectus, and red herring.
9. Describe insider trading. Why is it illegal?
8. Your friend Charlie is excited about a newly issued stock. You’ve looked at the company’s prospectus and feel it’s a very risky venture. You told Charlie your opinion, and he said he
7. Describe the process that occurs when an investor places an order with a broker to buy or sell stocks.Market segmentation theory: Loan terms define independent segments of the dept market, which
6. Your friend Sally just returned from a trip to New York where she was very impressed by a visit to the stock market. Is it correct to say that she visited the stock market? What exactly did Sally
5. What’s the difference between a direct and an indirect transfer of money between investors and firms?
4. Define the following terms: primary market, secondary market, capital market, and money market.
3. What is the primary purpose of financial markets?
2. What do we mean when we say businesses spend two kinds of money? Where does each kind come from? How is each used?
1. Describe the sectors into which economists divide an industrialized economy and outline the financial flows between them.
17. The Business Owner’s Toolkit at http://www.toolkit.cch.com/tools/tools.asp offers a series of comprehensive training modules that will help you learn how to market, manage, promote, and grow
16. Blue & Noble is a small law firm that does all of its business through billings(no cash sales). Historically, the firm has collected 40% of its revenue in the month of billing, 50% during the
15. Lapps Inc. makes a gift product that sells best during the holiday season. Retailers stock up in the fall so Lapps’s sales are largest in October and November and drop dramatically in December.
14. The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year.The following facts are available.FACTS • Payables
13. The Owl Corporation is planning for 20X2. The firm expects to have the following financial result in 20X1 ($000).Management has made the following planning assumptions:Income Statement •
12. Broxholme Industries has sales of $40 million, equity totaling $27.5 million, and an ROS of 12%. The sustainable growth rate has been calculated at 10.9%. What dividend payout ratio was assumed
11. The Bubar Building Co. has the following current financial results ($000).On the average, other building companies pay about one-quarter of their earnings in dividends, earn about six cents on
10. Lytle Trucking projects a $3.2 million EBIT next year. The firm’s marginal tax rate is 40%, and it currently has $8 million in long-term debt with an average coupon rate of 8%. Management is
9. The Dalmation Corporation expects the following summarized financial results this year ($000).Use the EFR relation to estimate Dalmation’s external funding requirements under the following
8. Fleming, Inc. had a dividend payout ratio of 25% this year, which resulted in a payout of $80,000 in dividends. Return on sales (ROS) was 8% this year and is expected to increase to 9% next year.
7. Assume we’re at the end of “this year” planning “next year’s” financial statements.Calculate the following using indirect planning assumptions as indicated.a. Sales are forecast to be
6. The Eagle Feather Fabric Company expects to complete the current year with the following financial results ($000).Forecast next year using a modified percentage of sales method assuming no
5. The Winthrop Company is constructing a five-year plan. The firm’s ACP is currently 90 days, while its inventory turnover ratio is 3 based on COGS. The company has forecast aggressive revenue
4. Larime Corp. is forecasting 20X2 near the end of 20X1. The estimated year-end financial statements and a worksheet for the forecast follow.Management expects the following next year.• An 8%
3. The Libris Publishing Company had revenues of $200 million this year and expects a 50% growth to $300 million next year. Costs and expenses other than interest are forecast at $250 million. The
2. Lap Dogs Inc. is planning for next year and has the following summarized results so far ($000):The Firm pays interest of 12% on all borrowing and is subject to an overall tax rate of 38%. It paid
1. The Cambridge Cartage Company has partially completed its forecast of next year’s financial statements as follows.The firm pays interest at 10% on all borrowings and pays a combined state and
3. You’ve just been hired as CFO of the Gatsby Corp., a new company in the hightech computer business. Shortly after your arrival you were amazed to find that the firm does virtually no planning.
2. You’re the CFO of the Ramkin Company, which makes and sells electronic equipment.The firm was originally an independent business, but was acquired by the larger BigTech Inc. 10 years ago and is
2. What will preparing a business plan do for Ed?i. Before he gets started.ii. After he gets started.iii. What will he learn by doing the financial plan?b. What kind of thinking is the bank looking
1. What will it show the bank?i. List some specific concerns the bank might have that a plan would answer outside of the financial section.ii. List several concerns that the financial plan might
1. Ed Perez has always wanted to run his own restaurant. He worked part time in the food service business during high school and college and has worked for a large restaurant chain since graduating
11. You are developing next year’s financial plan for Ajax Inc., a medium sized manufacturing company that’s currently operating at 80% of factory’s capacity. The firm is launching a sales
10. You’re a new member of the planning staff within the finance department at Bertram Enterprises, a large manufacturer of household goods. The firm does an annual operating plan and a long-range
9. Financial planning is no longer a problem in business because of the advent of personal computers. Armed with a PC and the appropriate software, anyone can do a plan for even the largest and most
8. Contrast planning cash requirements, especially borrowing, using the statement of cash flows derived from forecast financial statement with a cash budget. Which is likely to be more useful in
7. Comment on the value of the formula (EFR) approach to estimating funding requirements. Could it create more problems than it solves?

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