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business
fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Firm’s goal: What are some of the drawbacks to setting profit maximization as the main goal of a company?
Finance function: All public companies must hire a certified public accounting firm to perform an independent audit of their financial statements. What exactly does the term audit mean?
Finance function: What is the primary responsibility of the board of directors in a corporation?
Organizational form: What is the form of business organization taken by most large companies and why?
Organizational form: What is double taxation?
Organizational form: Explain what is meant by stockholders’limited liability.
Organizational form: Who are the owners of a corporation, and how is their ownership represented?
Organizational form: What is a partnership, and what is the biggest disadvantage of this form of business organization? How can this disadvantage be avoided?
Organizational form: What are the advantages and disadvantages of a sole proprietorship?
Organizational form: What are the common forms of business organization discussed in this chapter?
Management role: What are some of the working capital decisions that a financial manager faces?
Management role: What is a firm’s capital structure, and why is it important?
Cash flows: What is the appropriate decision rule for a firm considering undertaking a capital project? Give a real-life example.
Management role: What three major decisions are of most concern to financial managers?
Cash flows: Explain the difference between profitable and unprofitable firms.
Management role: What is net working capital?
Capital: What are the two basic sources of funds for all businesses?
Give an example of a conflict of interest in a business setting, other than the one involving the real estate agent discussed in the chapter text.
What is the Sarbanes-Oxley Act, and what is its focus? Why does it focus in these areas?
Identify the sources of agency costs. What are some ways these costs can be controlled in a company?
What are some of the major external and internal factors that affect a firm’s stock price? What is the difference between the two general types of factors?
Suppose that several accountants want to start an accounting business. What organizational form would they most likely choose, and why?
The TBI Company has days’ sales in inventory of 50. Therefore, the TBI Company’s inventory turnover is closest to:a. 4.8 times.b. 7.3 times.c. 8.4 times.d. 9.6 times.
Nutmeg Houseware Inc. has an operating profit margin of 10.3 percent on revenues of $24,547,125 and total assets of $8,652,352.a. Calculate the company’s total asset turnover ratio and its
Nugent, Inc., has a gross profit margin of 31.7 percent on net sales of $9,865,214 and total assets of $7,125,852. The company has a current ratio of 2.7 times, accounts receivable of $1,715,363,
The Northern Clothing Company has total assets of $87,631,181, ROA of 11.67 percent, ROE of 21.19 percent, and a net profit margin of 11.59 percent. What are the company’s net income and net
DuPont equation: Grossman Enterprises has an equity multiplier of 2.6 times, total assets of $2,312,000, an ROE of 14.8 percent, and a total asset turnover ratio of 2.8 times. Calculate the firm’s
DuPont equation: Carter, Inc., a manufacturer of electrical supplies, has an ROE of 23.1 percent, a profit margin of 4.9 percent, and a total asset turnover ratio of 2.6 times. Its peer group also
Market-value ratios: Use the information for Cisco Systems in Problem 4.24. In addition, the company’s EBITDA was $6.834 billion and its share price was $22.36. Compute the firm’s price-earnings
Market-value ratios: Cisco Systems had net income of $4.401 billion and, at year end, 6.735 billion shares outstanding. Calculate the earnings per share for the company.
Profitability ratios: Xtreme Sports Innovations has disclosed the following information:EBIT = $25,664,300 Net income = $13,054,000 Net sales = $83,125,336 Total debt = $20,885,753 Total assets =
Profitability ratios: Walmart, Inc., has net income of$9,054,000 on net sales of $256,329,812. The company has total assets of $104,912,112 and stockholders’ equity of $43,623,445. Use the extended
Profitability ratios: Procter & Gamble reported the following information for its fiscal year end: On net sales of $51.407 billion, the company earned net income after taxes of $6.481 billion. It had
Profitability ratios: Cisco Systems has total assets of $35.594 billion, total debt of $9.678 billion, and net sales of $22.045 billion. Its net profit margin for the year is 20 percent, while the
Leverage ratios: Conseco, Inc., has a debt ratio of 0.56. What are the company’s debt-to-equity ratio and equity multiplier?
Coverage ratios: Nimitz Rental Company had depreciation expenses of $108,905, interest expenses of $78,112, and an EBIT of$1,254,338 for the last fiscal year. What are the times-interest-earned and
Efficiency ratio: If Norwood Corp.’s management wants to reduce the DSO from that calculated in Problem 4.16 to an industry average of 56.3 days and its net sales are expected to decline by about
Efficiency ratio: Norwood Corp. currently has accounts receivable of $1,223,675 on net sales of $6,216,900. What are its accounts receivable turnover and days’ sales outstanding (DSO)?
Efficiency ratio: Lambda Corporation has current liabilities of$450,000, a quick ratio of 1.8, inventory turnover of 5.0, and a current ratio of 3.5. What is the cost of goods sold for Lambda
Liquidity ratios: Laurel Electronics has a quick ratio of 1.15, current liabilities of $5,311,020, and inventories of $7,121,599. What is the firm’s current ratio?
Market-value ratios: Chisel Corporation has 3 million shares outstanding at a price per share of $3.25. If the debt-to-equity ratio is 1.7 and total book value of debt equals $12,400,000, what is the
Benchmark analysis: List the ways a company’s financial manager can benchmark the company’s own performance.
DuPont equation: Lemmon Enterprises has a total asset turnover of 2.1 and a net profit margin of 7.5%. If its equity multiplier is 1.90, what is the ROE for Lemmon Enterprises?
DuPont equation: The Rangoon Timber Company has the following ratios:Net sales/Total assets = 2.23 ROA = 9.69% ROE = 16.4%What are Rangoon’s profit margin and debt ratios?
Leverage ratios: Norton Company has a debt-to-equity ratio of 1.65, ROA of 11.3 percent, and total equity of $1,322,796. What are the company’s equity multiplier, debt ratio, and ROE?
Leverage ratios: Breckenridge Ski Company has total assets of$422,235,811 and a debt ratio of 29.5 percent. Calculate the company’s debt-to-equity ratio and equity multiplier.
Efficiency ratio: Sorenson Inc. has sales of $3,112,489, a gross profit margin of 23.1 percent, and inventory of $833,145. What are the company’s inventory turnover ratio and days’ sales in
Efficiency ratio: Bummel and Strand Corp. has a gross profit margin of 33.7 percent, sales of $47,112,365, and inventory of$14,595,435. What is its inventory turnover ratio?
Efficiency ratio: If Newton Manufacturers has an accounts receivable turnover of 4.8 times and net sales of $7,812,379, what are its receivables?
Liquidity ratios: Flying Penguins Corp. has total current assets of $11,845,175, current liabilities of $5,311,020, and a quick ratio of 0.89. How much inventory does it have?
Liquidity ratios: Explain why the quick ratio or acid-test ratio is a better measure of a firm’s liquidity than the current ratio.
Explain how large U.S. money center banks make and price Eurocredit loans to their customers, and compute the cost of a Eurocredit bank loan.
Discuss the importance of the Euromarkets to large U.S. multinational firms, and calculate the cost of borrowing in the Eurobond market.
Identify the major factors that distinguish international from domestic capital budgeting, explain how the capital budgeting process can be adjusted to account for these factors, and compute the NPV
Differentiate among the spot rate, the forward rate, and the cross rate in the foreign exchange markets, perform foreign exchange and cross rate calculations, and hedge an asset purchase where
Discuss how the basic principles of finance apply to international financial transactions.
Explain how options can be used to manage a firm’s exposure to risk.
Describe how the agency costs of debt and equity are related to options.
Identify some of the real options that occur in business, and explain why traditional NPV analysis does not accurately incorporate their values.
List and describe the variables that affect the value of an option. Calculate the value of a call option and of a put option.
Define a call option and a put option, and describe the payoff function for each of these options.
Explain what factors determine a firm’s sustainable growth rate, discuss why it is of interest to management, and compute the sustainable growth rate for a firm.
Describe the conditions under which fixed assets vary directly with sales, and discuss the impact of so-called lumpy assets on this relation.
Discuss how the relation between projected sales and the income statement and balance sheet accounts can be determined, and analyze a strategic investment decision using a percent of sales model.
Discuss how management uses financial planning models in the planning process, and explain the importance of sales forecasts in the construction of financial planning models.
Explain what a financial plan is and why financial planning is important.
Explain how valuations can differ between public and private companies and between young and mature companies, and discuss the importance of control and key person considerations in valuation.
Explain the three general approaches to valuation, and value a business using common business valuation approaches.
Describe the key components of a business plan, and explain what a business plan is used for.
Explain why the choice of organizational form is important, and describe two financial considerations that are especially important in starting a business.
Two theories of capital structure: Use the information in the following table to make a suggestion concerning the proportion of debt that the firm should utilize in its capital structure. No 25% 50%
Multiples analysis: You are an analyst at a private equity firm that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the
Going-concern value: Aggie Motors is a chain of used car dealerships that has publicly traded stock. Using the adjusted book value approach, you have estimated the value of Aggie Motors to be
Aging schedule: A partial aging of accounts receivable for Lincoln Cleaning Services is given in the accompanying table. What percent of receivables is in the 45-day range? Determine the firm’s
Morgan Sports Equipment Company just reported the following financial information.a. Calculate the firm’s days’ sales outstanding.b. What is the firm’s days’ sales in inventory?c. What is the
Days’ sales outstanding: Sliver Computing, Inc., reported the following balance sheet information for the last fiscal year. Sliver Computing also reported cost of goods sold of $291,240 for the
Cash conversion cycle: Blackwell Automotive, Inc., reported the following financial information for the last fiscal year.Calculate the firm’s cash conversion cycle and operating cycle. Blackwell
Operating cycle: Devlin Construction, Inc., reported the following balance sheet information for the last fiscal year. Devlin also reported net sales of $980,770 and days’ sales in inventory of
Toyota is interested in borrowing $5 million for 90 days. Bank of America has quoted a rate that is 1.85 percent under the prime rate of 3.55 percent. Daiwa Bank is offering Toyota a rate that is
Caterpillar, Inc., management is trying to decide between selling a new bond issue in the United States or the Eurodollar bond market. In either market, the bonds will be denominated in dollars and
Barrington Fertilizers, Inc., exports its specialized lawn care products to Canada. It made a sale worth C$1,150,000, with the payment due in 90 days. Barrington’s banker gave it a forward quote
Eurocredit loan: A Swiss sporting goods company borrows in yen in the Eurocredit market at a rate of 4.35 percent from Bank of America using a three-month rollover loan. Bank of America assigns a
Hedging: Tricolor Industries has purchased equipment from a Brazilian firm for a total cost of 272,500 Brazilian reals. The firm has to pay in 30 days. Citibank has given the firm a 30-day forward
Cross rate: Flint Corp. recently purchased auto parts worth 17.5 million Mexican pesos (MP) on credit. Management needs to find out the U.S. dollar cost of the purchase. It has access to two quotes
Cross rate: Alcor Pharma just received revenues of $3,165,300 in Australian dollars (A$). Management has the following exchange rates: A$1.7110/£ and $1.3675/£. What is the U.S. dollar value of the
Bid-ask spread: Banco Santiago wants to make a bid-ask spread of 0.65 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP18.3092/$, what does the bid rate
Bid-ask spread: The foreign exchange department of Bank of America has a bid quote on Canadian dollars (C$) of C$1.2350/$. If the bank typically tries to make a bid-ask spread of 0.5 percent on these
Forward premium: The spot rate on the Australian dollar(A$) is A$1.1667/$. The Australian dollar is quoted at a 30-day forward premium of 4.90 percent against the U.S. dollar. What is the 30-day
Forward premium: The foreign exchange department at Tokyo’s Daiwa Bank quotes the spot rate on the euro at €0.007269/¥.The 90-day forward rate is quoted at a premium of 5.42 percent on the euro.
Forward premium: Bank of America quotes the 180-day forward rate on the Swiss franc at $1.0407/SF. The spot rate is quoted at$1.0268/SF. What is the annualized forward premium or discount on the
Forward premium: The spot rate on the London market is£0.7531/$, while the 90-day forward rate is £0.7602/$. What is the annualized forward premium or discount on the British pound?
International debt: What are Yankee bonds?
Foreign exchange rate risk: How is transaction exposure different from operating exposure?
Country risk: Ford Motor Company maintains production facilities in many different countries, including Brazil, Taiwan, and the United States. Given the data in Exhibit 21.6, which production plant
Cross rate: Bremer Corporation observes that the Swiss franc(SF) is being quoted at €0.9282/SF, while the Swedish krona (SK) is quoted at €0.0991/SK. What is the SK/SF cross rate?
Cross rate: Barclays Bank of London has offered the following exchange rate quotes: ¥134.64/£ and Korean won 13.8374/¥. What is the cross rate between the Korean won and the British pound?
Cross rate: Given the following quotes, calculate the €/£ cross rate.Bank of America $ 1.3862/£JPMorgan Chase $1.2148/€
Bid-ask spread: A foreign exchange dealer is willing to buy the Danish krone (DKr) at $0.1556/DKr and will sell it at a rate of$0.1563/DKr. What is the bid-ask spread on the Danish krone?
Bid-ask spread: A local community bank has requested foreign exchange quotes for the Swiss franc from Citibank. Citibank quotes a bid rate of $1.0934/SF and an ask rate of $1.0997/SF. What is the
Bid-ask spread: Nova Scotia Bank offers quotes on the Canadian dollar as shown below. What is the bid-ask spread based on these quotes?Bid Ask C$1.3081/$ C$1.3087/$

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