Questions and Answers of Foundations Financial Management

Excess capacity Krogh Lumber’s 2005 financial statements are shown here.a. Assume that the company was operating at full capacity in 2005 with regard to all items except fixed assets; fixed assets
Morrissey Technologies Inc.’s 2005 financial statements are shown here.Morrissey Technologies Inc.: Balance Sheet as of December 31, 2005.a. Suppose that in 2006 sales increase by 10 percent over
Pierce Furnishings generated $2.0 million in sales during 2005, and its year-end total assets were $1.5 million. Also, at year-end 2005, current liabilities were $500,000, consisting of $200,000 of
At year-end 2005, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2005 were $2.5 million, are expected to increase by 25 percent in 2006. Total
At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):Looking ahead to the following year, the company’s CFO has assembled the following
Refer to Problem 17-1 and assume that the company had $3 million in assets at the end of 2005. However, now assume that the company pays no dividends. Under these assumptions, what would be the
Refer to Problem 17-1. What would the additional funds needed be if the company’s year-end 2005 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different
Carter Corporation’s sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so
Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2006 and 2007:May
What are two techniques that are used to help monitor accounts receivable? How would an easy versus a tight credit policy affect the results of these two monitoring techniques?
In 2005 the Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2005 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 10
Why do public utilities generally use different capital structures than drug companies?
If Congress increased the personal tax rate on dividends and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital
You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class,
Operating cash flows rather than accounting profits are listed in Table 12-1. Why do we focus on cash flows as opposed to net income in capital budgeting?Table 12-1: A Н 15 Part 1. Input Data 16 17
The following table gives Foust Company’s earnings per share for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/06) selling for $65 per share, and the expected
Cost of common equity The Bouchard Company’s EPS was $6.50 in 2005, up from $4.42 in 2000. The company pays out 40 percent of its earnings as dividends, and its common stock sells for $36. a.
Trivoli Industries plans to issue a $100 par perpetual preferred stock with an 11 percent dividend. It is currently selling for $97.00, but flotation costs will be 5 percent of the market price, so
Assume that the risk-free rate increases. What impact would this have on the cost of debt? What impact would it have on the cost of equity?
Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Merrill Finch Inc., a large financial services corporation. Your first assignment is
Evaluating risk and return Bartman Industries’ and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2000–2005. The Winslow 5000 data
Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the period 2001 through 2005.b. Assume that someone held a portfolio consisting of
Look back at Table 7-4, and examine the Albertson’s and Ford Motor Co. bonds that mature in 2031.a. If these companies were to sell new $1,000 par value long-term bonds, approximately what coupon
It is now January 1, 2006, and you are considering the purchase of an outstanding bond that was issued on January 1, 2004. It has a 9.5 percent annual coupon and had a 30-year original maturity. (It
A company’s 5-year bonds are yielding 7.75 percent per year. Treasury bonds with the same maturity are yielding 5.2 percent per year, and the real risk-free rate (r*) is 2.3 percent. The average
The real risk-free rate is 3 percent. Inflation is expected to be 3 percent this year, 4 percent next year, and then 3.5 percent thereafter. The maturity risk premium is estimated to be 0.05 x (t-
Explain whether the following statements are true or false.a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high
Part I of this case, presented in Chapter 3, discussed the situation that D’Leon Inc., a regional snack-foods producer, was in after an expansion program. D’Leon had increased plant capacity and
Data for Barry Computer Co. and its industry averages follow.a. Calculate the indicated ratios for Barry.b. Construct the extended Du Pont equation for both Barry and the industry.c. Outline
Financial ratio analysis is conducted by four groups of analysts: short-term lenders, long-term lenders, stockholders, and managers. What is the primary emphasis of each group, and how would that
Donna Jamison, a 2000 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairman of the board of D’Leon Inc., a small food
Laiho Industries’ 2004 and 2005 balance sheets (in thousands of dollars) are shown below:a. Sales for 2005 were $455,150,000, and EBITDA was 15 percent of sales. Furthermore, depreciation was 11
The Menendez Corporation expects to have sales of $12 million in 2006. Costs other than depreciation and amortization are expected to be 75 percent of sales, and depreciation and amortization
Financial information for Powell Panther Corporation is shown here: Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)a. What was the 2005 NOPAT?b.
W.C. Cycling had $55,000 in cash at year-end 2004 and $25,000 in cash at year-end 2005. Cash flow from long-term investing activities totaled – $250,000, and cash flow from financing activities
Differentiate between accounting profit and net cash flow. Why do those two numbers differ?
Looking at the income statement, what are the company’s most recent sales and net income? Over the past several years, what has been the sales growth rate? What has been the growth rate in net
Looking at the statement of cash flows, what factors can explain the change in the company’s cash position over the last couple of years?Exploring Starbucks’ Financial StatementsOver the past
Does Starbucks have a lot of long-term debt? What are the chief ways in which Starbucks has financed assets?Exploring Starbucks’ Financial StatementsOver the past decade, Starbucks coffee shops
Looking at the most recent year available, what is the amount of total assets on Starbucks’ balance sheet? What percentage is fixed assets, such as plant and equipment, and what percentage is
Shalit Corporation’s 2005 sales were $12 million. Its 2000 sales were $6 million.a. At what rate have sales been growing?b. Suppose someone made this statement: “Sales doubled in 5 years. This
To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even if some of the cash
Are all corporate projects equally risky, and if not, how do a firm’s investment decisions affect the riskiness of its stock?
Are the stocks of different companies equally risky? If not, what are some factors that would cause a company’s stock to be viewed as being relatively risky?
List the advantages and disadvantages of the three different types of business organizations.
What are the returns on the following investments? Selling Price of Investment Distributions Received S Percent Return Original Cost or Invested $ Investment $525.00 $500.00 $0.00 CD $34.00 Stock
The Always-Stocked Party Store wants to stay true to its name, especially since the “Out-to-Get-You” Party store is opening up very close by. One of their main sellers, the Mega-Keg, costs $2 to
What are the two parameters for selecting investments in the finance world? How do investors try to get the most out of their investment with regard to these two parameters?
Find the cash flow to owners for 2017 by parts and total, with the parts being dividends paid and increase in borrowing.Use the data from the following financial statements: Partial Income Statement
Find the cash flow to creditors for 2017 by parts and total, with the parts being interest income paid and increases in borrowing.Use the data from the following financial statements: Partial
Find the cash flow from assets for 2017 and break it down into its three parts: operating cash flow, capital spending, and change in net working capital.Use the data from the following financial
What are the net fixed assets for the years 2016 and 2017?Use the data from the following financial statements: Partial Income Statement Year Ending 2017 Sales Revenue S350,000 COGS $140,000 Fixed
Complete the statement of retained earnings for 2017 and determine the dividends paid last year.Use the data from the following financial statements: Partial Income Statement Year Ending 2017 Sales
Complete the balance sheet. Find accumulated depreciation for 2017 first.Use the data from the following financial statements: Partial Income Statement Year Ending 2017 Sales Revenue S350,000 COGS
What is the difference between net income and operating cash flow?
Upstate Bank is offering long-term certificates of deposit with a face value of $100,000 (future value). Bank customers can buy these CDs today for $67,000 and will receive the $100,000 in fifteen
What is an iterative process?
Which of the following statements is true? Give all correct answers.a. Effective annual rate > annual percentage rateb. Effective annual rate = annual percentage ratec. Effective annual rate <
When you increase the number of payments per period, why does the total cash payment times the number of payments in the period not equal the original single payment for the period? (In other words,
Given the following information, estimate the nominal rate with the approximate nominal interest rate equation and the true nominal interest rate equation for each set of real and inflation rates.
Does a zero-coupon bond pay interest?
How does the potential for default of a bond affect the yield of the bond?
How is operational efficiency different from informational efficiency?
What are the returns on the following investments? Selling Price of Original Cost or Invested $ Distributions Received $ Percent Investment Investment Return $500.00 CD S540.00 $0.00 $2.00 $23.00
How do we define risk?
How do we define risk?
Is it better to calculate the net present value of a foreign project in the foreign currency or in the domestic currency?
Use a financial publication to find the going interest rates for the list of marketable securities in Table 7-3. Which security would you choose for a short-term investment? Why?Table 7-3
Corporate debt has expanded significantly since the 1980s. What has been the effect on interest coverage?
The investment dealer of Saskatchewan Cloud Inc. uses a dividend valuation model to appraise the shares of Lambert Aerospace Company. Dividends (D1)) at the end of the current year will be $1.20. The
What are the first three priority items under liquidation in bankruptcy after the claims of secured creditors are settled?
Referring back to the previous problem, part b, what percent of the total bond value does the repayment of principal represent?Previous Problemb. 15 percent
Monarch King Size Beds Ltd. is evaluating a new promotional campaign that could increase sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of
On a Saturday afternoon in May 2015, Robert Boyle and his wife Janet were sitting on the porch of their house on Saltspring Island, British Columbia, watching the fog roll in. The couple frequently
Midas and Company is the managing investment dealer for a major new underwriting.The price of the stock to the managing investment dealer is $15 per share. Other syndicate members may buy at $15.25.
In what way is an investment dealer a risk taker?
Walton and Company is the managing investment dealer for a major new underwriting. The price of the stock to the investment dealer is $18 per share. Other syndicate members may buy at $18.25. The
The Maple Ridge Slugger Bat Company needs to raise $30 million. The investment dealer Walker and Jenkins will handle the transaction.a. If stock is utilized, 1,800,000 shares will be sold to the
Solar Energy Corp. has $5 million in earnings with 2 million shares outstanding. Investment bankers think the stock can justify a P/E ratio of 18. If the underwriting spread is 5 percent, what should
Tiger Golf Supplies has $15 million in earnings with 4 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 22. If there is an underwriting spread of 2.8
Explain how the price-earnings ratio is related to the pricing of a new security issue and the dilution effect.
Assume Safeguard Detective Company is thinking about three different size offerings for the issuance of additional shares.What is the percentage underwriting spread for each size offering? What
Comment on the market performance of companies going public, both immediately after the offering has been made and some time later. Relate this to research that has been done in this area.
Power Temporaries Inc. has earnings of $4,500,000 with 1,800,000 shares outstanding before a public distribution. Four hundred thousand shares will be included in the sale, of which 250,000 are new
Discuss key changes going on in the investment dealer brokerage community. Also, who are some of the new participants in the industry?
The Hamilton Company currently has 4 million shares of stock outstanding and will report earnings of $6 million in the current year. The company is considering the issuance of 1 million additional
In the previous problem, if the 1 million additional shares can be issued only at $23 per share and the company can earn 6.0 percent on the proceeds, should the new issue be undertaken based on
What are some reasons a corporation may prefer to remain privately held?
The Carma S. Diego Travellers Corp. has 10 million shares of stock outstanding at a current market price of $10. It is considering a new share offering that will net it $9 a share on 1 million
Macho Tool Company is going public at $50 net per share to the company. There also are founding shareholders that are selling part of their shares at the same price. Prior to the offering, the firm
Winston Sporting Goods is considering a public offering of common shares. Its investment dealer has informed the company that the retail price will be $18 per share for 600,000 shares. The company
What effect does a leveraged buyout have on the future strategic choices open to the company's management?
DUR Semiconductors will issue stock at a retail (public) price of $18. The company will receive $16.55 per share.a. What is the spread on the issue in percentage terms?b. If DUR Semiconductors
Comment on whether you believe leveraged buyouts are good for an economy.
Becker Brothers is the managing underwriter for a 1 million share issue by Jay's Hamburger Heaven. Becker Brothers is "handling" 10 percent of the issue. Its price is $25, and the price to the public
Ashley Homebuilding is about to go public. The investment firm of Blake, Webber and Company is attempting to price the issue. The home building industry generally trades at a 20 percent discount
The investment firm of A. Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.44.
The Landry Corporation needs to raise $1 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 11 percent, and $30,000 in out-of-pocket costs will be
Midland Corporation has a net income of $15 million and 6 million shares outstanding. Its common stock is currently selling for $40 per share. Midland plans to sell common stock to set up a major
The Presley Corporation is about to go public. It currently has aftertax earnings of $7,500,000 and 2,500,000 shares are owned by the present shareholders (the Presley family). The new public issue

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