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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

21. Long-term planning models (S30.4) The financial statements of Eagle Sport Supply are shown in Table 30.17. For simplicity, “Costs” include interest. Assume that Eagle’s assets are
20. Long-term planning models (S30.4) Abbreviated financial statements for Archimedes Levers are shown in Table 30.16. If sales increase by 10% in 2022 and all other items, including debt, increase
19. Long-term planning models (S30.4) Table 30.15 summarizes the 2022 income statement and end-year balance sheet of Drake’s Bowling Alleys. Drake’s financial manager forecasts a 10% increase in
18. Long-term planning models (S30.4)a. Use the Dynamic Mattress model in Table 30.8 and the spreadsheets to produce pro forma income statements, balance sheets, and statements of cash flows for
17. Long-term planning models (S30.4) Construct a new model for Dynamic Mattress based on your answer to Problem 16. Does your model generate a feasible financial plan for 2022?(Hint: If it
16. Long-term planning models (S30.4) The balancing item in the Dynamic long-term planning model is borrowing. What is meant by balancing item? How would the model change if dividends were made the
15. Long-term financial plans (S30.4) Corporate financial plans are often used as a basis for judging subsequent performance. What do you think can be learned from such comparisons?What problems are
14. Long-term financial plans (S30.4) True or false?a. Financial planning should attempt to minimize risk.b. The primary aim of financial planning is to obtain better forecasts of future cash flows
13. Short-term financial plans (S30.3) Dynamic Mattress decides to lease its new mattressstuffing machines rather than buy them. As a result, capital expenditure in the first quarter is reduced by
12. Short-term financial plans (S30.3) Work out a short-term financing plan for Dynamic Mattress Company, assuming the limit on the line of credit is raised from $100 to $120 million.Otherwise, keep
11. Short-term financial plans (S30.2–S30.3) Each of the following events affects one or more tables in Sections 30-2 and 30-3. Show the effects of each event by adjusting the tables listed in
10. Cash budget (S30.2) Which items in Table 30.5 would be affected by the following events?a. Interest rates rise.b. Suppliers demand interest for late payment.c. Dynamic receives an unexpected bill
9. Cash budget (S30.2)a. Paymore places orders for goods equal to 75% of its sales forecast for the next quarter.What will orders be in each quarter of the coming year if the sales in the current
8. Cash budget (S30.2) Table 30.13 lists data from the budget of Ritewell Publishers. Half the company’s sales are for cash immediately; the other half are paid for with a one-month delay.The
b. Suppose that from the start of the year the company stretches payables by paying 40%after one month and 20% after two months. (The remainder continue to be paid cash on delivery.) Recalculate
7. Forecasts of payables (S30.2) Dynamic Futon forecasts the following purchases from suppliers:Jan. Feb. Mar. Apr. May Jun.Value of goods ($ millions) 32 28 25 22 20 20 880 Part Ten Financial
6. Collections on receivables (S30.2) If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid in the current quarter? In the following quarter? What if the delay is
5. Collections on receivables (S30.2) Here is a forecast of sales by National Bromide for the first four months of 2022 (figures in $ thousands):Sales $1,500 Operating costs 1,405$95 Depreciation
4. Sources and uses of cash and working capital (S30.2) Listed below are six transactions that Dynamic Mattress might make. Indicate how each transaction would affect (1) cash and(2) working
3. Sources and uses of cash (S30.2) What will be the effect of each of the following transactions on cash, net working capital, and the current ratio? Assume that the current ratio is above 1.0.a.
2. Sources and uses of cash (S30.2) Table 30.11 shows Dynamic Mattress’s year-end 2019 balance sheet, and Table 30.12 shows its income statement for 2020. Work out the statement of cash flows for
1. Sources and uses of cash (S30.2) State whether each of the following events is a source or a use of cash, or neither.a. An automobile manufacturer increases production in response to a forecasted
27. Measuring leverage (S29.4) Take another look at Geomorph Trading’s balance sheet in Problem 9 and consider the following additional information:Current Assets Current Liabilities Other
26. Return on capital (S29.2) Sometimes analysts use the average of capital at the start and end of the year to calculate return on capital. Provide some examples to illustrate when this does and
25. Calculating EVA (S29.2) We noted that when calculating EVA, you should calculate income as the sum of the after-tax interest payment and net income. Why do you need to deduct the tax shield?
24. Interpreting financial ratios (S29.6) Look up some firms that have been in trouble. Plot the changes over the preceding years in the principal financial ratios. Are there any patterns?CHALLENGE
23. Interpreting financial ratios (S29.6) Suppose that you wish to use financial ratios to estimate the risk of a company’s stock. Which of those that we have described in this chapter are likely
22. Interpreting financial ratios (S29.6) How would rapid inflation affect the accuracy and relevance of a manufacturing company’s balance sheet and income statement? Does your answer depend on how
21. Interpreting financial ratios (S29.6) Here are some data for five companies in the same industry:Company Code A B C D E EBIT 10 30 100 −3 80 Interest expense 5 15 50 2 1 You have been asked to
20. Interpreting financial ratios (S29.6) This question reviews some of the difficulties encountered in interpreting accounting numbers.a. Give four examples of important assets, liabilities, or
19. Financial ratios (S29.2–S29.5) As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad (Table 29.9). Can you use the
18. Financial ratios (S29.2–S29.5) Sara Togas sells all its output to Federal Stores. The following table shows selected 2020 financial data, in millions, for the two firms:Sales Interest Payment
17. Financial ratios (S29.2–S29.5) True or false?a. A company’s debt–equity ratio is always less than 1.b. The quick ratio is always less than the current ratio.c. The return on equity is
16. Financial ratios (S29.2–S29.5) There are no universally accepted definitions of financial ratios, but five of the following ratios are clearly incorrect. Substitute the correct definitions.a.
15. Financial ratios (S29.2–S29.5) Look again at Table 29.8, which gives abbreviated balance sheets and income statements for Walmart. Assume Walmart had a 21% corporate tax rate in 2019. Calculate
14. Measuring liquidity (S29.5) How would the following actions affect a firm’s current ratio?a. Inventory is sold.b. The firm takes out a bank loan to pay its suppliers.c. The firm arranges a line
13. Measuring liquidity (S29.5) Airlux Antarctica has current assets of $300 million, current liabilities of $200 million, and a cash ratio of 0.05. How much cash and marketable securities does it
12. Measuring leverage and liquidity (S29.4–S29.5) Look again at the balance sheet for Geomorph in Problem 9. Suppose that at year-end, Geomorph had $30 in cash and marketable securities.
11. Measuring leverage (S29.4) Suppose that a firm has both fixed-rate and floating-rate debt outstanding. What effect will a decline in interest rates have on the firm’s times-interestearned
10. Measuring leverage (S29.4) Discuss alternative measures of financial leverage. Should the market value of equity be used or the book value? Is it better to use the market value of debt or the
8. Measuring leverage (S29.4) A firm has a long-term debt–equity ratio of 0.4. Shareholders’equity is $1 million. Current assets are $200,000, and total assets are $1.5 million. If the current
7. Measuring efficiency (S29.3) Magic Flutes has total receivables of $3,000, which represent 20 days’ sales. Total assets are $75,000. The firm’s operating profit margin is 5%. Find the firm’s
6. Measuring efficiency (S29.3) Microcharge’s customers take on average 60 days to pay their bills. What is its receivables turnover?
5. Measuring efficiency (S29.3)a. If a firm’s assets of $10,000 represent 200 days’ sales, what is its annual sales?b. What is its asset turnover ratio?
4. Performance measures (S29.2) Describe some alternative measures of a firm’s overall performance.What are their advantages and disadvantages? In each case, discuss what benchmarks you might use
3. Performance measures (S29.2) Table 29.8 gives abbreviated balance sheets and income statements for Walmart. At the end of fiscal 2019, Walmart had 2,832 million shares outstanding with a share
2. Performance measures (S29.2) Keller Cosmetics maintains an operating profit margin of 8% and a sales-to-assets ratio of 3. It has assets of $500,000 and equity of $300,000. Assume that interest
1. Financial Statements (S29.1) Construct a balance sheet for Galactic Enterprises given the following data:Cash balances $25,000 Inventories $30,000 Net plant and equipment $140,000 Accounts
2. Given that exposure, what would be the most effective and inexpensive approach to hedging?
1. What would Exacta’s true exposure be from its new U.S. operations, and how would it change from the company’s current exposure?
2.a. How many Swiss francs can you buy for $1?b. How many Japanese yen can you buy?c. What rate do you think a Swiss bank would quote (CHF/JPY) for buying or selling Japanese yen? Explain what would
With a little ingenuity you can find recent data for the following question on the Bank of England website (www.bankofengland,co.uk).1.a. How many U.S. dollars are worth one British pound?b. How many
22. Currency hedging (S28.3) Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States, assembles them, and then sells the finished product in
b. What are the dollar cash flows from the project if the company hedges against exchange rate changes? What is the NPV of these flows?c. Suppose that the company expects the euro to depreciate by 5%
21. Investment decisions (S28.4) It is the year 2023 and Pork Barrels Inc. is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows:C0
20. Investment decisions (S28.4) Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash
19. Currency hedging (S28.3) “Last year we had a substantial income in sterling, which we hedged by selling sterling forward. In the event sterling appreciated. So our decision to sell forward cost
18. Currency hedging (S28.3) A Ford dealer in the United States may be exposed to a devaluation of the yen if this leads to a cut in the price of Japanese cars. Suppose that the dealer estimates that
17. Currency hedging (S28.3) Suppose you are the treasurer of Lufthansa, the German international airline. How is company value likely to be affected by exchange rate changes? What policies would you
16. Currency hedging (S28.3) A firm in the United States is due to receive payment of €1 million in eight years’ time. It would like to protect itself against a decline in the value of the euro,
15. Currency hedging (S28.3) A U.S. company has committed to pay 10 million kronor to a Swedish company in one year. What is the cost (in present value) of covering this liability by buying kronor
14. Currency hedging (S28.3) An importer in the United States is due to take delivery of clothing from Mexico in six months. The price is fixed in Mexican pesos. Which of the following transactions
c. Do you think that she has made an exchange rate profit or loss? Explain.⟩ TABLE 28.5 Interest rates and exchange rates.aNumber of units of foreign currency that can be exchanged for $1.Interest
b. What is her total return in pesos? In dollars?
13. Currency risk (S28.3) In July 2020, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later, she sells the
12. Currency risk (S28.3) You have bid for a possible export order that would provide a cash inflow of €1 million in six months. The spot exchange rate is EUR/USD = 1.3549 and the six-month forward
11. Currency risk (S28.3) Companies may be affected by changes in the nominal exchange rate or in the real exchange rate. Explain how this can occur. Which changes are easiest to hedge against?
10. Currency risk (S28.3) Suppose that in 2025, one- and two-year interest rates are 5.2% in the United States and 1.0% in Japan. The spot exchange rate is USD/JPY = 120.22. Suppose that one year
9. Interest rates and exchange rates (S28.2) Penny Farthing, the treasurer of International Bicycles Inc., has noticed that the interest rate in Japan is below the rates in most other
8. Purchasing power parity (S28.2) In September 2021, the exchange rate for the Narnian leo was USD/LEO = 2,419. Inflation in the year to September 2022 was about 30% in Narnia and 2% in the United
7. Interest rate parity (S28.2) Table 28.5 shows the annual interest rate (annually compounded)and exchange rates against the dollar for different currencies. Are there any arbitrage opportunities?If
6. Interest rate parity (S28.2) Look at Table 28.1. If the three-month interest rate on dollars is 0.2%, what do you think is the three-month interest rate on the Brazilian real? Explain what would
5. Interest rate parity (S28.2) The following table shows interest rates and exchange rates for the U.S. dollar and the Lilliputian nano. The spot exchange rate is USD/NAN = 15. Complete the missing
4. Interest rate parity (S28.2) Look again at Table 28.1. Which countries would you expect to have a lower one-year interest rate than the United States?
3. Some basic relationships (S28.2) Define each of the following theories in a sentence or simple equation:a. Interest rate parity.b. Expectations theory of forward rates.c. Purchasing power
2. Exchange rates (S28.1) Table 28.1 shows the three-month forward rate on the South African rand.a. Is the rand at a forward discount or premium on the dollar?b. What is the annual percentage
1. Exchange rates (S28.1) Look at Table 28.1.a. How many Turkish lira do you get for your dollar?b. What is the three-month forward rate for the lira?c. Is the lira at a forward discount or premium
b. Suppose that gold prices rise by 2% in the United States and by 5% in the United Kingdom. What must be the exchange rate at the end of the year?
Suppose that gold currently costs $1,000 an ounce in New York and £600 in London.a. What must be the pound dollar (GBP/USD) exchange rate?
1. Give examples of the investment and financing decisions that financial managers make.
2. Distinguish between real and financial assets.
3. Cite some of the advantages and disadvantages of organiz- ing a business as a corporation.
4. Describe the responsibilities of the CFO, treasurer, and controller.
5. Explain why maximizing market value is the logical financial goal of the corporation.
6. Explain why value maximization is usually consistent with ethi- cal behavior.
7. Explain how corporations mitigate conflicts and encourage cooperative behavior.
1. Financial Decisions. Give several examples of (a) investment decisions and (b) financing decisions. (LOI)
2. Corporations. What are the key differences between a corporation and a sole proprietorship? What is the difference between a public and a private corporation? (LO3)
3. Corporations. What is the key advantage of separating ownership and management in large corporations? (LO3)
4. Limited Liability. What is limited liability, and who benefits from it? (LO3) 5. Corporations. What do we mean when we say that corporate income is subject to double taxation? (LO3) 6. Real versus
8. Value Maximization. Give an example of an action that might increase short-run profits but at the same time reduce stock price and the market value of the firm. (LOS)
9. Agency Costs. What are agency costs? List some ways by which agency costs are mitigated. (L07)
10. Agency Problems. Many firms have devised defenses that make it much more costly or dif- ficult for other firms to take them over. How might such takeover defenses affect the firm's agency
12. Financial Assets. Why is a bank loan a financial asset? (LO2)
13. Real Assets. Explain how investment in an R&D program creates a real asset. (LO2)
14. Financial Managers. Explain the differences between the CFO's responsibilities and the trea- surer's and controller's responsibilities. (LO4)
15. Limited Liability. Is limited liability always an advantage for a corporation and its sharehold- ers? Hint: Could limited liability reduce a corporation's access to financing? (LO3)
16. Goals of the Firm. You may have heard big business criticized for focusing on short-term performance at the expense of long-term results. Explain why a firm that strives to maximize stock price
17. Goals of the Firm. We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with that goal? (LOS)a. The firm adds a cost-of-living
18. Goals of the Firm. Explain why each of the following may not be appropriate corporate goals: (L05)a. Increase market share.b. Minimize costs.c. Underprice any competitors.d. Expand profits.

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