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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Explain why maximizing the value of the firm’s stock is the appropriate goal for management.
Describe the typical organization of the financial function in a large corporation.
Identify common forms of business organization in the United States and their respective strengths and weaknesses.
Identify the key financial decisions facing the financial manager of any business.
Vanderheiden Hog Products Corp. provided the following financial information for its most recent quarter.Net income: $189,425 Depreciation and amortization: $63,114 Increase in receivables: $62,154
Menomonie Casino Company earned $23,458,933 before interest and taxes last year and had interest expenses of $1,645,123. If the firm is taxed at 25% on taxable income up to $15,000,000 and 28% on
Columbia Construction Company earned $451,888 during the year. After paying out $225,794 in dividends, the balance went into retained earnings. If the firm’s total retained earnings were $846,972
The Centennial Chemical Corporation just announced income after taxes of $2,768,028.25 on revenues of $13,144,680. The company’s costs (excluding depreciation and amortization) amounted to 61
Tax: Mount Hebron Electrical Company’s financial statements indicated that the company had earnings before interest and taxes of$718,323. The interest rate on its $850,000 debt was 8.95 percent.
Cash flows: Refer to the information given in Problem 3.21.What is the cash flow from operating activity for Nimitz Rental?
Retained earnings: Eau Claire Paper Mill, Inc., had, at the beginning of the current fiscal year, retained earnings of $323,325. During the year, the company produced net income after taxes of
Income Statement/CFOA: For its most recent fiscal year, Carmichael Hobby Shop recorded EBITDA of $512,725.20, EBIT of$362,450.20, zero interest expense, and cash flow to investors from operating
Income statement: Fraser Corporation has announced that its net income for the year was $1,353,412. The company had EBITDA of$4,967,855, and its depreciation and amortization expense was equal to
Income statement: Sosa Corporation recently reported an EBITDA of $31.3 million and net income of $9.7 million. The company had $6.8 million in interest expense, and its average corporate tax rate
Income statement: Nimitz Rental Company provided the following information to its auditors. For the latest fiscal year, the company had revenues of $878,412, general and administrative expenses of
Market value: Reservoir Bottling Company reported the following information at the end of the year. Total current assets are worth $237,513 at book value and $219,344 at market value. In addition,
Working capital: Mukhopadhya Network Associates has a current ratio of 1.60, where the current ratio is defined as follows:Current ratio = Current assets/Current liabilities. The firm’s current
Balance sheet: Tim Dye, the CFO of Blackwell Automotive, Inc., is putting together this year’s financial statements. He has gathered the following balance sheet information: The firm had a cash
Tax: Manz Property Management Company just announced earnings before taxes of $1,478,936. Calculate its taxes using a flat tax rate of 30 percent.
Tax: What is the relevant tax rate to use when making financial decisions? Explain why.
Tax: Define average tax rate and marginal tax rate.
Cash flows: Del Bridge Construction had long-term assets before depreciation of $990,560 on December 31, 2019, and $1,211,105 on December 31, 2020. How much cash flow was invested in longterm assets
Cash flows: Hillman Corporation reported current assets of$3,495,055 on December 31, 2020, and $3,103,839 on December 31, 2019. Current liabilities for the firm were $2,867,225 and $2,760,124 at the
Cash flows: Given the data for Oakland Mills Company in Problem 3.7, compute the cash flows to investors from operating activity.
Cash flows: Identify and describe the noncash expenses that a firm may incur.
Cash flows: Caustic Chemicals management identified the following cash flows as significant in its year-end meeting with analysts: During the year, Caustic repaid existing debt of $312,080 and raised
Cash flows: Last year, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed-assets acquisitions of $109,455, and had marketable securities of $14,215
Cash flows: Describe the organization of the statement of cash flows.
Income statement: The Oakland Mills Company has just disclosed the following financial information in its annual report:sales of $1.45 million, cost of goods sold of $812,500, depreciation expenses
is all at book value. Suppose marking to market reveals that the market value of the firm’s inventory is 20 percent below its book value, its receivables are 25 percent below their book value, and
Working capital: The financial information for Laurel Electronics referred to in Problem
Working capital: Laurel Electronics reported the following information at its annual meeting: The company had cash and marketable securities worth $1,235,455, accounts payable worth $4,159,357,
Market-value accounting: How does the use of market-value accounting help managers?
Inventory accounting: Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement.
Inventory accounting: What is the difference between FIFO and LIFO accounting?
Balance sheet: Elkridge Sporting Goods, Inc., has cash and marketable securities of $25,135, accounts receivable of $43,758, inventory of $167,112, net fixed assets of $325,422, and other assets of
Net present value: Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the
Net present value: Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450, would have a
Net present value: Cranjet Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table.
Net present value: Emporia Mills management is evaluating two alternative heating systems. Costs and projected energy savings are given in the following table. The firm uses 11.5 percent to discount
Discounted payback: Timeline Manufacturing Co. management is evaluating two projects. The company uses a payback criterion of three years or less. Project A has a cost of $912,855, and Project B’s
Payback: Regent Corp. management is evaluating three competing types of equipment. Costs and cash flow projections for all three are given in the following table. Which would be the best choice based
Benchmark analysis: Trademark Corp.’s financial manager collected the following information to compare its performance against that of its peers.a. Explain how Trademark is performing relative to
Discounted Payback: Nugent Communication Corp. is considering an investment in new technologies. The company’s management expects significant benefits in the first three years after installation
Internal rate of return: Management of Great Flights, Inc., an aviation firm, is considering purchasing three aircraft for a total cost of $161 million. The company would lease the aircraft to an
Replace an existing asset: Bell Mountain Vineyards is considering updating its current manual accounting system with a highend electronic system. While the new accounting system would save the
Internal rate of return: Ancala Corporation management is considering investments in two new golf apparel lines for next season: golf hats and belts. Due to a funding constraint, these lines are
Profitability index: Suppose that you could invest in the following projects but have only $30,000 to invest. How would you make your decision and in which projects would you invest? Project Cost NPV
Management of Intrepid, Inc., is considering investing in three independent projects. The costs and the cash flows are given in the following table. The appropriate cost of capital is 14.5
Biotech Partners LLC has been farming a new strain of radioactive-material-eating bacteria that the electrical utility industry can use to help dispose of its nuclear waste. Two opposing factors
The following are the financial statements for Nederland Consumer Products Company for the fiscal year.Calculate all the ratios listed below for Nederland and compare the firm’s ratios with the
You and a coworker are analyzing two proposed capital investments with the following cash flows:The cost of capital for both projects is 10 percent.a. Calculate the profitability index (PI) for each
The CFO of Edgeworth Inc., a cardboard box maker, is deciding between one of two new cardboard cutting machines: the Super Cutter and the Duper Cutter. The cash flows for the two cutters are as
Modern Appliances Corporation has reported its financial results for the latest fiscal year.Using the information from the financial statements, complete a comprehensive ratio analysis for Modern
Joe Burrow, the number 1 draft pick of the NFL Cincinnati Bengals in 2020, and his agent are evaluating three contract options.Each option offers a signing bonus and a series of payments over the
You are the project manager for Eagle Golf Corporation. You are considering manufacturing a new golf wedge with a unique groove design. You have put together the estimates in the following table
Net present value: Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying
Interest rates: When are the nominal and real interest rates equal?
Interest rates: Your parents gave you $1,000 a year before your graduation date so that you can take a trip when you graduate.You wisely decide to invest the money in a bank CD that pays 6.75 percent
Interest rates: Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 7 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be
Interest rates: What is the Fisher equation, and how is it used?
Interest rates: How does the nominal rate of interest vary over time?
Interest rates: What is the real rate of interest, and how is it determined?
Financial instruments: What are the two risk-hedging instruments discussed in this chapter?
Financial markets: What are the major differences between public and private markets?
Market efficiency: If the market is strong-form efficient, then trading on tips you hear from Jim Cramer (the host of Mad Money on CNBC) will generate no excess returns (i.e., returns in excess of
Market efficiency: In Problem 2.20, if the market is efficient, would it have been possible for Zippy’s stock price to go down in the day that the firm announced the strong fourth quarter results?
Market efficiency: Zippy Computers announced strong fourth quarter results. Sales and earnings were both above analysts’ expectations.You notice in the newspaper that Zippy’s stock price went up
Market efficiency: Describe the informational differences that distinguish the three forms of market efficiency.
Capital markets: How do capital market instruments differ from money market instruments?
Money markets: What are the main types of securities in the money markets?
Money markets: What is the primary role of money markets?Explain how the money markets work.
Financial markets: What is the main difference between money markets and capital markets?
Financial institutions: Which financial institution is usually the most important to businesses?
Financial institutions: How do financial institutions act as intermediaries to provide services to small businesses?
Financial institutions: What are some of the ways in which a financial institution or intermediary can raise money?
Investment banking: Cranjet Inc. is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. If the investment banker sells the entire issue to investors for
Investment banking: What does it mean to “underwrite” a new security issue? What compensation does an investment banker get from underwriting a security issue?
Primary markets: Identify whether the following transactions are primary market or secondary market transactions.a. Jim Hendry bought 300 shares of IBM through his brokerage account.b. Peggy Jones
Primary markets: What is a primary market? What does IPO stand for?
Financial markets: Trader Inc. is a $300 million company, as measured by asset value, and Horst Corp. is a $35 million company.Both are privately held corporations. Explain which firm is more likely
Financial markets: Why are direct financial markets also called wholesale markets?
Financial markets: Suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What does this imply for the
Financial markets: List the two ways in which a transfer of funds takes place in an economy. What is the main difference between these two?
Financial system: What is the difference between saverlenders and borrower-spenders, and who are the major representatives of each group?
Financial system: What does a competitive financial system imply about interest rates?
Financial system: What is the role of the financial system, and what are the two major components of the financial system?
If businesses are not investing when they have unfunded capital projects whose rate of return exceeds the cost of capital, what does it imply about the real rate of interest?
Why is the expected rate of inflation ( Δ P e ) used in finding the nominal rate of interest in Equation 2.1 rather than the actual rate of inflation ( Δ P a ), which can be easily measured?
The CFO of a certain company always wears his green suit on a day when the firm is about to release positive information about his company. You believe that you can profit from this information by
What effect does an increase in demand for business goods and services have on the real interest rate? What other factors can affect the real interest rate?
Business ethics: What ethical conflict does insider trading present?
Information asymmetry: Describe what an information asymmetry is in a business transaction. Explain how the inequity associated with an information asymmetry might be, at least partially, solved
Agency conflicts: What are some ways to resolve a conflict of interest?
Business ethics: How can a lack of business ethics negatively affect the performance of an economy? Give an example.
Agency conflicts: What are some of the regulations that pertain to boards of directors that were put in place to reduce agency conflicts?
Firm’s goal: What can happen if a firm is poorly managed and its stock price falls substantially below its potential price if the firm was better managed?
Agency conflicts: What is an agency relationship, and what is an agency conflict? How can agency conflicts be reduced in a corporation?
Firm’s goal: What are the major factors that affect a firm’s stock price?
Firm’s goal: What is the appropriate goal of financial managers?How do managers’ decisions affect how successful the firm is in achieving this goal?

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