Questions and Answers of Foundations Of Financial Management 17th

The cost of capital is based on the valuation techniques from the previous chapter and is applied to bonds, preferred stock, and common stock.
The cost of capital is normally the discount rate to use in analyzing an investment.
The cost of capital represents the weighted average cost of the source of financing to the firm.
Compounding or discounting may take place on a less than annual basis such as semiannually or monthly.
Not only can future value and present value be computed, but other factors such as yield (rate of return)can be determined as well.
The present value is based on the current value of funds to be received.
The future value is based on the number of periods over which the funds are to be compounded at a given interest rate.
Money has a time value associated with it and therefore a dollar received today is worth more than a dollar received in the future.
Stock valuation is based on determining the present value of the future benefits of equity ownership.
Preferred stock valuation is based on the dividend paid.
Bond valuation is based on the process of determining the present value of interest payments plus the present value of the principal payment at maturity.
The required rate of return in valuing an asset is based on the risk involved.
The valuation of a financial asset is based on the present value of future cash flows.
Commercial paper represents a short-term, unsecured promissory note issued by the firm.
Hedging may be used to offset the risk of interest rates rising.
By using accounts receivable and inventory as collateral for a loan, the firm may be able to borrow larger amounts.
Bank loans are usually short term in nature and should be paid off from funds from the normal operations of the firm.
Trade credit from suppliers is normally the most available form of short-term financing.
An overriding concept is that the less liquid an asset is, the higher the required return.
Inventory management requires determining the level of inventory necessary to enhance sales and profitability.
Accounts receivable management requires credit policy decisions aimed at maximizing profitability.
The management of marketable securities involves selecting between various short-term investments.
Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances.
Expected value analysis may sometimes be employed in working capital management.LOI Current asset management is an extension of concepts discussed in the previous chapter and involves the management
Risk, as well as profitability, determines the financing plan for current assets.
Long-term financing is usually more expensive than short-term financing based on the theory of the term structure of interest rates.
The financing of an asset should be tied to how long the asset is likely to be on the balance sheet.
Management must distinguish between those current assets that are easily converted to cash and those that are more permanent.
Working capital management involves financing and controlling the current assets of the firm.
By increasing leverage, the firm increases its profit potential, but also its risk of failure.
Combined leverage takes into account both the use of fixed assets and debt.
Financial leverage shows how much debt the firm employs in its capital structure.
Operating leverage indicates the extent fixed assets (plant and equipment) are utilized by the firm.
Break-even analysis allows the firm to determine the magnitude of operations necessary to avoid loss.
Leverage represents the use of fixed cost items to magnify the firm's results.
The process of forecasting forces the firm to consider seasonal and other effects on cash flow.
The various methods of forecasting enable the firm to determine the amount of new funds required in advance.
The percent-of-sales method may also be used for forecasting on a less precise basis.
The three financial statements for forecasting are the pro forma income statement, the cash budget, and the pro forma balance sheet.
Financial forecasting is essential to the strategic growth of the firm.
Reported income must be further evaluated to identify sources of distortion.
Trend analysis shows company performance over time.
The Du Pont system of analysis identifies the true sources of return on assets and return to stockholders.
Ratios can be used to measure profitability, asset utilization, liquidity, and debt utilization.
Ratio analysis provides a meaningful comparison of a company to its industry.
The primary goal of financial managers is to maximize the wealth of the shareholders.LOS Financial managers attempt to achieve wealth maximization through daily activities such as credit and
The relationship of risk to return is a central focus of finance.
A firm can have many different forms of organization.
The field of finance integrates concepts from economics, accounting, and a number of other areas.
Depreciation provides a tax reduction benefit that increases cash flow.
The statement of cash flows indicates the change in the cash position of the firm.
The balance sheet shows assets and the financing of those assets with debt and equity.
The price-earnings ratio indicates the relative valuation of earnings.
The income statement measures profitability.
It was another disappointing year for Bruce Honiball, the manager of retail services at the Gibb River Bank. Sure, the retail side of Gibb River was making money, but it didn't grow at all in 2019.
Large blockholders can either encourage or discourage value maximization. Explain.
True/false?a. A blockchain is a form of cryptocurrency.b. Equity crowdfunding can be used to raise cash for start-up ventures by selling stock over the internet.c. An initial coin offering is used to
A law firm (not Dewey, Cheatem, and Howe) is expanding rapidly and must move to new office space. Business is good, and the firm is encouraged to purchase an entire building for $10 million.The
Suppose financial managers can use inside information to time equity issues when stock price is unrealistically high. How would capital structure evolve? Explain briefly.
A study of capital structure in several developed countries found that debt ratios were positively related to firm size and the proportion of tangible versus intangible assets and negatively related
1. Texas Instruments was referred to in the chapter as being an innovator in the calculator industry. But that is only one of its products. Let’s see how this large company is doing today. Go to
What factors would influence a U.S. business firm to go overseas?
Telstar Communications is going to purchase an asset for $380,000 that will produce $180,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated
1. PepsiCo, near the top of Table 2-5 in the chapter, is a company that provides comprehensive financial statements. Go tofinance.yahoo.com. In the box “Quote Lookup,” type in its ticker symbol
1. Barnes & Noble is a company in transition in terms of financial performance. Go to www.barnesandnoble.com.2. Scroll to the bottom of the page and click on “Investor Relations.” What is the
1. At the start of the chapter, we talked about how risky and volatile airlines’ operations are. Let us examine this further. Go tofinance.yahoo.com. Enter “UAL” for United Continental Holdings
1. Target was mentioned in the chapter as a company that has a high degree of seasonality (and associated working capital issues). Let us use the Internet to examine the seasonality. Go to
1. One of the items discussed in this chapter was the impact of the Internet on working capital management. Ariba and Perfect Commerce are two companies at the forefront of the B2B trend. Go to the
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of $2
1. This chapter explores the various sources of financing working capital needs. It also mentions General Electric Capital as a competitor to the banking community. This exercise examines General
You will receive $6,800 three years from now. The discount rate is 10 percent.a. What is the value of your investment two years from now? Multiply $6,800 × (1/1.10) or divide by 1.10 (one year’s
What is a deferred annuity?
1. When the price of oil fell in 2014 and 2015, ExxonMobil’s stock price dropped in expectation that earnings would also eventually fall. The P/E ratio was below 10 for some time. Go to
1. We will examine the debt ratios for two airlines. First go to finance.yahoo.com. In the “Quote Lookup” box, enter “LUV” for Southwest Airlines. Select South-west Airlines. Click on
1. 3M (Minnesota Mining & Manufacturing Co.) was listed in Table 17-1 as one of the companies having a large percentage of institutional ownership. Institutional ownership represents stock held
1. Earlier in the chapter we mentioned Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe (BNSF). Let’s take a closer look at Berkshire’s acquisition activity. Go to
1. In this web exercise we use the Chicago Board Options Exchange website to cover options. While we will stay with basic coverage of the material, this website is capable of taking you into much
Betsy Ross owns 927 shares in the Hanson Fabrics Company. There are 15 directors to be elected, and 33,500 shares are outstanding. The firm has adopted cumulative voting.a. How many total votes can
The Goldsmith Charitable Foundation, which is tax-exempt, issued debt last year at 9 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 25 percent higher;
Calculate the after-tax cost of debt under each of the following conditions: a. b. C. Yield 8.0% 9.0 8.0 Corporate Tax Rate 26% 35 0
Charming Paper Company sells to the 12 accounts listed here:Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account
If Dome offers a 3 percent discount for payment in 18 days, what will the new average receivables balance be? Use the credit sales of $180,000 for your calculation of receivables.
International Data Systems’ information on revenue and costs is relevant only up to a sales volume of 105,000 units. After 105,000 units, the market becomes saturated and the price per unit falls
U.S. Steel has the following income statement data:a. Compute DOL based on the following formula (see page 131 for an example):b. Confirm that your answer to part a is correct by recomputing DOL
The following information is from Harrelson Inc.’s financial statements. Sales (all credit) were $28.50 million for last year. Sales to total assets. Total debt to total assets. Current
The Griggs Corporation has credit sales of $1,200,000. Given these ratios, fill in the following balance sheet. Total assets turnover Cash to total assets. Accounts receivable turnover Inventory
Omni Technology Holding Company has the following three affiliates:a. Which affiliate has the highest return on sales?b. Which affiliate has the lowest return on assets?c. Which affiliate has the
Assume the following data for Cable Corporation and Multi-Media Inc. a. Compute the return on stockholders’ equity for both firms using ratio 3a. Which firm has the higher return?b. Compute
Jerry Rice and Grain Stores have $4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has $123,000 in current liabilities
Front Beam Lighting Company has the following ratios compared to its industry for last year:Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared
a. Compute the profit margin for 20X1.b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume
Classify the following balance sheet items as current or noncurrent:Retained earnings........................................................................................Bonds payableAccounts
Lemon Auto Wholesalers had sales of $1,000,000 last year, and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense
Given the following information, prepare an income statement for the Dental Drilling Company. Selling and administrative expense Depreciation expense Sales Interest
What are four types of out-of-court settlements? Briefly describe each.
1. Ralph Larsen, former chairman and CEO of Johnson & Johnson, was quoted in this chapter concerning the use of the Internet. Johnson & Johnson has been one of America’s premier companies
Sosa Diet Supplements had earnings after taxes of $800,000 in 20X1 with 200,000 shares of stock outstanding. On January 1,20X2, the firm issued 50,000 new shares. Because of the proceeds from these
Swank Clothiers had sales of $383,000 and cost of goods sold of $260,000. What is the gross profit margin (ratio of gross profit to sales)? If the average firm in the clothing industry had a gross
Compute the percentage change between the last two years for the following (numbers are in millions of dollars):a. Sales to customersb. Net earningsc. Earnings per share
A firm has a net income before interest and taxes of $193,000 and an interest expense of $28,100.a. What is the times-interest-earned ratio?b. If the firm’s lease payments are $48,500, what is the

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