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business
financial management

Questions and Answers of Financial Management

6. Do the definitions of current assets and current liabilities suggest a quick way of looking at the firm’s ability to meet its financial obligations (pay its bills) over the near term? (Hint:
5. What are the common misstatements of balance sheet figures, and why do they present a problem?
4. What is meant by liquidity in financial statements?
3. Why is EBIT an important line item in the income statement? What does EBIT show us?
2. Discuss the purpose of an accounting system and financial statements in terms of the way the system represents the business.
1. Why does a financial professional working outside accounting need a knowledge of accounting principles and methods?
7. State the opposing view. What argument will someone who doesn’t feel there’s a problem make?The question is whether ethics should keep investors who do morally condemn the industry from buying
6. State any alternatives the injured group has. How difficult are they to use?The question is whether ethics should keep investors who do morally condemn the industry from buying tobacco stocks in
5. Identify the nature and source of the power of the benefited group. Do they have the ability to manipulate and preserve their power? How did the power come about? Did they do something to create
4. Identify the injured party or group and describe the injury or cost.The question is whether ethics should keep investors who do morally condemn the industry from buying tobacco stocks in pursuit
3. Identify the benefited party or group and describe the benefit.The question is whether ethics should keep investors who do morally condemn the industry from buying tobacco stocks in pursuit of
2. Separate legal and ethical issues. Something may not be OK just because it’s legal.The question is whether ethics should keep investors who do morally condemn the industry from buying tobacco
1. Clearly identify the unethical practice. Is it all or part of what the firm is doing? In the tobacco illustration, is it wrong to make cigarettes at all or just to advertise to children?The
4. You’re a new financial analyst for the brokerage firm of Lodge and Howe. A client has expressed an interest in the following companies:General Motors (GM), Harley-Davidson (HOG), Starbucks
3. Visit the Business Job Finder at http://www.careers-in-business.com to explore a career in finance. Prepare a one-page report profiling one of the positions listed. Include education and skills
2. Jill Meier is the sole owner of Meier Corp., which provides her only source of income. Jill has always paid herself entirely by drawing dividends from her corporation.A friend suggested that as
1. Sussman Industries purchased a drilling machine for $50,000 and paid cash.Sussman expects to use the machine for ten years after which it will have no value. It will be depreciated straight-line
2. The company president is reviewing the performance and budget of the marketing department with the vice president of marketing. Should that be a one-on-one meeting, or should the CFO be present?
1. Diversified companies are made up of divisions, each of which is a separate business.Large companies have divisions spread over the entire country. In such companies, most treasury functions are
11. Compare and contrast the terms “stockholder” and “stakeholder.”
10. Is the agency problem an ethical issue or an economic issue?
9. What conflict(s) of interest can you imagine arising between members of the community in which a company operates and some other stakeholders? (Hint:Think about pollution.)
8. Is limited liability a meaningful concept? Why or why not? And if so, for whom?
7. What are the significant financial advantages and disadvantages of the sole proprietorship/partnership form in comparison with the corporate form?
6. How does the activity of investors in financial markets affect the decisions of executives within the firm?
5. Discuss the relationship between finance and economics.
4. Discuss the differences, similarities, and ties between finance and accounting.
3. Companies are generally financed with a mix of debt and equity. How does the riskiness of the company as perceived by the financial market change as the mix shifts from all equity to mostly debt?
2. What is the primary factor that determines the price of securities? Can you think of another factor that might significantly affect how investors value the first factor? (Think hard: this second
1. Separate the following list of assets into real assets and financial assets. What are the distinguishing characteristics of each type of asset?Delivery Truck Corporate Stock Factory Building Land
+In what ways do you transfer, save, borrow and/or invest your money?
+1–7 Why is maximising a firm’s accounting profits not an appropriate goal for the firm?
+1–6 What goal do the owners of a for-profit business generally strive for?
+1–5 Who really owns a corporation, and how does that impact on the goal of the firm?
+were to consider starting up a lawn-care business for the summer, what type of business organisation might you use?
+1–4 List the three main forms of business organisation and describe their advantages and disadvantages. If you
+1–3 In very basic terms, describe how profits and cash flow are different.
+1–2 According to Principle 2, how should investors decide where to invest their money?
+Explain the three types of business decision that a financial manager faces.
+that higher risks require higher rewards or returns. Give two examples of the risk–return relationship.
+A fundamental guiding principle of investing is
+How do the duties of a corporate Treasurer differ from those of a Financial Controller?
+What are the duties of a Chief Financial Officer?
+Explain why large and growing firms tend to choose the corporate form of organisation.
+What are the primary differences between a sole proprietorship, a partnership and a corporation?
+If you are working either part-time or full-time, can you identify the type of business structure your employer has adopted?
+What are the three basic types of issue that arise in business that are addressed by the study of business finance?
+How can the firm best manage its cash flows as they arise in its day-to-day operations?
+How should the firm raise money to fund these investments?
+What long-term investments should the firm undertake?
+In the past 12 months, can you think of any financial decisions you have had to make?
Table 3.3 shows the December 31, 2009 pro-forma balance sheet and income statements for R&E Supplies, Inc. The pro-forma balance sheet shows that R&E Supplies will need external funding from the bank
Pro forma financial statements, by definition, are predictions of a company's financial statements at a future point in time. So why is it important to analyze the historical performance of the
Suppose you constructed a pro forma balance sheet for a company and the estimate for external financing required was negative. How would you interpret this result?AppendixLO1
Harlin Fencing Company's sales, half of which are for cash, over the past three months were: August $70,000 September $120,000 October $80,000a. Estimate Harlin's cash receipts in October if the
Suppose you constructed a pro forma balance sheet and a cash budget for a company for the same time period and the external financing re- quired from the pro forma forecast exceeded the cash deficit
Table 3.5 presents a computer spreadsheet for estimating R&E Sup- plies' external financing required for 2009. The text mentions that with modifications to the equations for equity and net sales, the
Using a computer spreadsheet, the information presented below, and the modified equations determined in question 6 above, extend the fore- cast for R&E Supplies contained in Table 3.5 through 2010.
This and the following two problems demonstrate that pro forma forecasts, cash budgets and cash flow forecasts all yield the same esti- mated need for external financing-provided you don't make any
Continuing problem 8, Pepperton's annual income statement and balance sheet for December 31, 2008 appear below. Additional in- formation about the company's accounting methods and the trea- surer's
Based on your answer to question 9, construct a first-quarter 2009 cash flow forecast for Pepperton.AppendixLO1
Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. Below is a quarterly pro forma forecast indicating ex- ternal financing needs for 2009. Assumptions are in
Continuing with Toys-4-Kids introduced in the preceding problem, the company's production manager has argued for years that it is inef- ficient to produce on a seasonal basis. She believes the
You will need to use the Standard & Poor's Market Insight Web site (www.mhhe.com/edumarketinsight) for this problem. Market Insight presents a spreadsheet entitled "Forecasted Values." (Excel
This problem asks you to construct a simple simulation model. If you do not own simulation software, you can download to your computer a free, full-strength version of Crystal Ball for a one-week
This problem asks you to prepare one- and five-year financial fore- casts for Aquatic Supplies Company. An Excel spreadsheet containing the company's 2008 financial statements and management's
The financial statements and additional information for Noble Equipment Corp. appear at www.mhhe.com/higgins9e. (Select Student Edition Choose a Chapter > Excel Spreadsheets.) The company's fiscal
Table 5.1 indicates that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States. Why do we observe this pattern?AppendixLO1
Suppose the realized rate of return on government bonds exceeded the return on common stocks one year. How would you interpret this result?AppendixLO1
What is more important to investors: the number of a company's shares they own, the price of the company's stock, or the percentage of the company's equity they own? Why?AppendixLO1
If the stock market in the United States is efficient, how do you ex- plain the fact that some people make very high returns? Would it be more difficult to reconcile very high returns with efficient
A company wants to raise $500 million in a new stock issue. Its in- vestment banker indicates that the sale of new stock will require 8 per- cent underpricing and a 7 percent spread. (Hint: the
The return an investor carns on a bond over a period of time is known as the holding period return, defined as interest income plus or minus the change in the bond's price, all divided by the
Companies can generally borrow money from banks or sell bonds to individual investors. Why might some firms choose one method of raising money over the other?AppendixLO1
The common shares of Fortune Brands, Inc. (FO), owner of many brands including Knob Creek bourbons, Wild Horse wines, Titleist golf products, and Swingline staplers, are trading today on the New York
Some refer to common stock as an option on a company's assets. Do you see any logic to this statement? What is the logic, if any?AppendixLO1
Use the Standard and Poor's Market Insight Web site, www.mhhe .com/edumarketinsight, for this problem. Assume that as of December 31, 2006, Fortune Brands, Inc. wants to raise $800 million in a new
You see an article in the newspaper that details the performance of mu- tual funds over the last five years. You see that, out of 5,600 actively managed mutual funds in the study, 104 outperformed
Explain why increasing financial leverage increases the risk borne by shareholders.AppendixLO1
What is operating leverage? How, if at all, is it similar to financial leverage? If a firm has high operating leverage, would you expect it to have high or low financial leverage? Explain your
Headquartered in Germany, SAP Ag is a leader in the enterprise ap- plication software business. Toyota Motor Corporation is the world's largest car manufacturer. Which company do you think would bear
Explain how a company can incur costs of financial distress without ever going bankrupt. What is the nature of these costs?AppendixLO1
One recommendation in the chapter is that companies with promis- ing investment opportunities should strive to maintain a conservative capital structure. Yet many promising small businesses are
Why might it make sense for a mature, slow-growth company to have a high debt ratio?AppendixLO1
The chapter discusses potential conflicts of interest between share- holders and bondholders. Some argue that bondholders can protect themselves against stockholder expropriation by writing bond
You can access Playtex Products Inc.'s SEC filings, including 10-Ks (annual reports) at www.secinfo.com. Enter PYX, Playtex's ticker sym- bol in the search box. Select "Annual Reports Form 10-K."
Explain how each of the following changes will affect Scotts Miracle- Gro's range of earnings chart, Figure 6.2. Which changes would make the leveraged recap more attractive, which less attractive?a.
FARO Technologies, whose products include portable 3D measure- ment equipment, has 400 million shares outstanding trading at $5 a share. The company announces its intention to raise $200 million by
This is a more difficult but informative problem. James Brodrick & Sons, Inc., is growing rapidly and, if at all possible, would like to fi- nance its growth without selling new equity. Selected
The equity of Enterprise Holdings Inc. has a market value of $3 mil- lion. It currently has 300,000 shares outstanding, and a book value of equity of $1,095,000. An unexpected cash windfall has
As the financial vice president for Aether Media, you have the follow- ing information: Expected net income after tax next year before new financing Sinking-fund payments due next year on existing
This problem asks you to evaluate a major increase in financial leverage on the part of Avon Products Inc. The company's financial statements for 2001-2003 and specific questions are available for
Problem 15, partf. in Chapter 3 asks you to construct a five-year financial projection for Aquatic Supplies beginning in 2009. Based on your forecast, or the suggested answer in C3 Problem 15.xls,
Use the Standard and Poor's Market Insight Web site, www.mhhe .com/edumarketinsight, for this problem.a. For fiscal year 2006, compare several coverage and leverage ratios of The Boeing Company with
Answer the following questions assuming the interest rate is 8 percent.a. What is the present value of $1,000 to be received in four years?b. What is the present value of $1,000 in eight years? Why
An investment of $1,300 today returns $61,000 in 50 years. What is the internal rate of return on this investment? m. A company is planning to set aside money to repay $150 million in bonds that will
An individual wants to borrow $120,000 from a bank and repay it in six equal annual end-of-year payments, including interest. If the bank wants to earn a 7 percent rate of return on the loan, what
Your mother is buying a house for $400,000 and intends to pay $100,000 down, and borrow the remaining $300,000 (including all closing costs). She is evaluating two loan options: borrow $300,000 at 8
If National Health Care Corp. reported earnings per share of $5.82 in 1997 and $21.26 in 2008, at what annual rate did earnings per share grow over this period?AppendixLO1
A developer offers lots for sale at $60,000, $10,000 to be paid down and $10,000 to be paid at the end of cach of the next five years with "no interest to be charged." In discussing a possible

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