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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

Calculating Ratios. Here are simplified financial statements of Phone Corporation from a recent year:Calculate the following financial ratios:a. Long-term debt ratiob. Total debt ratioc. Times
Interval Measure. Suppose that Phone Corp. shut down operations. For how many days could it pay its bills?
Gross Investment. What was Phone Corp.’s gross investment in plant and other equipment?
Market Value Ratios. If the market value of Phone Corp. stock was $17.2 billion at the end of the year, what was the market-to-book ratio? If there were 205 million shares outstanding, what were
Common-Size Balance Sheet. Prepare a common-size balance sheet for Phone Corp. using its balance sheet from problem 1.
Du Pont Analysis. Use the data for Phone Corp. to confirm that ROA = asset turnover ×profit margin.
Du Pont Analysis. Use the data for Phone Corp. from problem 1 toa. calculate the ROE for Phone Corp.b. demonstrate that ROE = leverage ratio × asset turnover ratio × profit margin × debt burden.
Asset Turnover. In each case, choose the firm that you expect to have a higher asset turnover ratio.a. Economics Consulting Group or Pepsib. Catalog Shopping Network or Neiman Marcusc. Electric
Defining Ratios. There are no universally accepted definitions of financial ratios, but some of the following ratios make no sense at all. Substitute the correct definitions. c. Profit margin d.
Current Liabilities. Suppose that at year-end Pepsi had unused lines of credit which would have allowed it to borrow a further $300 million. Suppose also that it used this line of credit to borrow
Current Ratio. How would the following actions affect a firm’s current ratio?a. Inventory is sold at cost.b. The firm takes out a bank loan to pay its accounts due.c. A customer pays its accounts
Liquidity Ratios. A firm uses $1 million in cash to purchase inventories. What will happen to its current ratio? Its quick ratio?
Receivables. Chik’s Chickens has average accounts receivable of $6,333. Sales for the year were $9,800. What is its average collection period?
Inventory. Salad Daze maintains an inventory of produce worth $400. Its total bill for produce over the course of the year was $73,000. How old on average is the lettuce it serves its customers?
Inventory Turnover. If a firm’s inventory level of $10,000 represents 30 days’ sales, what is the annual cost of goods sold? What is the inventory turnover ratio?
Leverage Ratios. Lever Age pays an 8 percent coupon on outstanding debt with face value$10 million. The firm’s EBIT was $1 million.a. What is times interest earned?b. If depreciation is $200,000,
Du Pont Analysis. Keller Cosmetics maintains a profit margin of 5 percent and asset turnover ratio of 3.a. What is its ROA?b. If its debt-equity ratio is 1.0, its interest payments and taxes are each
Du Pont Analysis. Torrid Romance Publishers has total receivables of $3,000, which represents 20 days’ sales. Average total assets are $75,000. The firm’s profit margin is 5 percent.Find the
Leverage. A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $1 million.Current assets are $200,000 and the current ratio is 2.0. The only current liabilities are notes
Leverage Ratios. A firm has a debt-to-equity ratio of .5 and a market-to-book ratio of 2.0.What is the ratio of the book value of debt to the market value of equity?
Times Interest Earned. In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with
Du Pont Analysis. CFA Corp. has a debt-equity ratio that is lower than the industry average, but its cash coverage ratio is also lower than the industry average. What might explain this seeming
Leverage. Suppose that a firm has both floating rate and fixed rate debt outstanding. What effect will a decline in market interest rates have on the firm’s times interest earned ratio?On the
Interpreting Ratios. In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio:a. Debt-equity ratio: a shipping company or a
Using Financial Ratios. For each category of financial ratios discussed in this material, give some examples of who would be likely to examine these ratios and why.
Financial Statements. As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad. Can you use the following information to
Rights. Consolidated Jewels needs to raise $2 million to pay for its Diamonds in the Rough campaign. It will raise the funds by offering 200,000 rights, each of which entitles the owner to buy one
Bond Risk. A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 8.5 percent. A-rated bonds sell at yields of 8.8 percent.If a 10-year
Bond Yields. A 30-year Treasury bond is issued with par value of $1,000, paying interest of$80 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s:a.
Bond Yields. A bond with par value $1,000 has a current yield of 7.5 percent and a coupon rate of 8 percent. What is the bond’s price?
Coupon Rate. General Matter’s outstanding bond issue has a coupon rate of 10 percent and a current yield of 9.6 percent, and it sells at a yield to maturity of 9.25 percent. The firm wishes to
Consol Bonds. Perpetual Life Corp. has issued consol bonds with coupon payments of $80.(Consols pay interest forever, and never mature. They are perpetuities.) If the required rate of return on these
Bond Pricing. Large Industries bonds sell for $1,065.15. The bond life is 9 years, and the yield to maturity is 7 percent. What must be the coupon rate on the bonds?
A house painting business had revenues of \($16,000\) and expenses of \($9,000.\) There were no depreciation expenses. However, the business reported the following changes in various components of
A firm’s balance sheets for year-end 2000 and 2001 contain the following data. What happened to investment in net working capital during 2001? All items are in millions of dollars. Dec. 31, 2000
Revenues generated by a new fad product are forecast as follows:Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues
A machine costs \($8,000\) and is expected to produce profit before depreciation of \($2,500\) in each of Years 1 and 2 and \($3,500\) in each of Years 3 and 4.Assuming that the machine is
A 30-year Treasury bond is issued with par value of $1,000, paying interest of$80 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s:a. coupon rateb.
A bond with par value $1,000 has a current yield of 7.5 percent and a coupon rate of 8 percent. What is the bond’s price?
General Matter’s outstanding bond issue has a coupon rate of 10 percent and a current yield of 9.6 percent, and it sells at a yield to maturity of 9.25 percent. The firm wishes to issue additional
A 30-year maturity bond with face value $1,000 makes annual coupon payments and has a coupon rate of 8 percent. What is the bond’s yield to maturity if the bond is selling
Perpetual Life Corp. has issued consol bonds with coupon payments of $80.(Consols pay interest forever, and never mature. They are perpetuities.) If the required rate of return on these bonds at the
Large Industries bonds sell for $1,065.15. The bond life is 9 years, and the yield to maturity is 7 percent. What must be the coupon rate on the bonds?
You buy an 8 percent coupon, 10-year maturity bond for \($980.\) A year later, the bond price is \($1,050\).a. What is the new yield to maturity on the bond?b. What is your rate of return over the
You buy an 8 percent coupon, 10-year maturity bond when its yield to maturity is 9 percent. A year later, the yield to maturity is 10 percent. What is your rate of return over the year?
A bond that pays coupons annually is issued with a coupon rate of 4 percent, maturity of 30 years, and a yield to maturity of 8 percent. What rate of return will be earned by an investor who
A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 8.5 percent. A-rated bonds sell at yields of 8.8 percent.If a 10-year bond with a
Microbiotics currently sells all of its frozen dinners cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is \($50\) and the
Locust Software sells computer training packages to its business customers at a price of \($101.\) The cost of production (in present value terms) is \($95\)Locust sells its packages on terms of net
Look back at Example 3.Cast Iron’s costs have increased from $1,000 to$1,050. Assuming there is no possibility of repeat orders, and that the probability of successful collection from the customer
A company has the following cash balances:Company’s ledger balance = \($600,000\) Bank’s ledger balance = \($625,000\) Available balance = \($550,000\)a. Calculate the payment float and
Sherman’s Sherbet currently takes about 6 days to collect and deposit checks from customers. A lock-box system could reduce this time to 4 days. Collections average$10,000 daily. The interest rate
Knob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of \($182.5\) million annually. First National, Knob’s principal bank,
Here is a forecast of sales by National Bromide for the first 4 months of 2001 (figures in thousands of dollars):On average, 50 percent of credit sales are paid for in the current month, 30 percent
The accompanying tables show Dynamic Mattress’s year-end 1998 balance sheet and its income statement for 1999. Use these tables (and Table 2.3) to work out a statement of sources and uses of cash
Explain why accounting revenue generally will differ from a firm’s cash inflows.
A married couple earned $95,000 in 1999. How much did they pay in taxes? What were their marginal and average tax brackets?
The year-end 1999 balance sheet of Brandex Inc. lists common stock and other paid-in capital at \($1,100,000\) and retained earnings at $3,400,000.The next year, retained earnings were listed at
Here are the 1999 and 2000 (incomplete) balance sheets for Nobel Oil Corp.a. What was owners’ equity at the end of 1999 and 2000?b. If Nobel paid dividends of $100 in 2000, what must have been net
Construct a balance sheet for Fincorp for 1999 and 2000. What is shareholders’equity?
Construct an income statement for Fincorp for 1999 and 2000. What were retained earnings for 2000? How does that compare with the increase in shareholders’equity between the two years?
Examine the values for depreciation in 2000 and net fixed assets in 1999 and 2000. What was Fincorp’s gross investment in plant and equipment during 2000?
Construct a statement of cash flows for Fincorp for 2000.
Now suppose that the market value (in thousands of dollars) of Fincorp’s fixed assets in 2000 is \($6,000,\) and that the value of its long-term debt is only \($2,400.\) In addition, the consensus
Here are simplified financial statements of Phone Corporation from a recent year:Calculate the following financial ratios:a. Long-term debt ratiob. Total debt ratioc. Times interest earnedd. Cash
Suppose that Phone Corp. shut down operations. For how many days could it pay its bills?
What was Phone Corp.’s gross investment in plant and other equipment?
If the market value of Phone Corp. stock was $17.2 billion at the end of the year, what was the market-to-book ratio? If there were 205 million shares outstanding, what were earnings per share? The
Prepare a common-size balance sheet for Phone Corp. using its balance sheet from problem 1.Data from in Problem 1Here are simplified financial statements of Phone Corporation from a recent
As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad. Can you use the following information to work out the missing
What are the dangers and disadvantages of using a financial model? Discuss.
Here are the abbreviated financial statements for Planners Peanuts:If sales increase by 20 percent in 2001, and the company uses a strict percentage of sales planning model (meaning that all items on
If the dividend payout ratio in problem 9 is fixed at 50 percent, calculate the required total external financing for growth rates in 2001 of 15 percent, 20 percent, and 25 percent.Data from in
What is the maximum possible growth rate for Planners Peanuts(see problem 9) if the payout ratio remains at 50 percent anda. no external debt or equity is to be issuedb. the firm maintains a fixed
Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.a. Find Eagle’s required external funds if it maintains a dividend payout
How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1⁄3? Use the revised model to generate a new financial plan for 2000 assuming that debt is the
Executive Fruit’s financial manager believes that sales in 2000 could rise by as much as 20 percent or by as little as 5 percent.a. Recalculate the first-stage pro forma financial statements (Table
The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets
Plank’s Plants had net income of \($2,000\) on sales of \($40,000\) last year.The firm paid a dividend of \($500.\) Total assets were \($100,000,\) of which \($40,000\) was financed by debt.a. What
Go Go Industries is growing at 30 percent per year. It is all-equity financed and has total assets of $1 million. Its return on equity is 20 percent. Its plowback ratio is 40 percent.a. What is the
A firm’s profit margin is 10 percent and its asset turnover ratio is .5.It has no debt, has net income of \($10\) per share, and pays dividends of \($4\) per share. What is the sustainable growth
A firm has an asset turnover ratio of 2.0. Its plowback ratio is 50 percent, and it is all-equity financed. What must its profit margin be if it wishes to finance 8 percent growth using only
The 2000 financial statements for Growth Industries are presented below. Sales and costs in 2001 are projected to be 20 percent higher than in 2000.Both current assets and accounts payable are
Compute the present value of a $100 cash flow for the following combinations of discount rates and times:a. r = 10 percent. t = 10 yearsb. r = 10 percent. t = 20 yearsc. r = 5 percent. t = 10 yearsd.
Compute the future value of a $100 cash flow for the same combinations of rates and times as in problem 1.Data from in problem 1Compute the present value of a $100 cash flow for the following
You will require $700 in 5 years. If you earn 6 percent interest on your funds, how much will you need to invest today in order to reach your savings goal?
What is the present value of the following cash-flow stream if the interest rate is 5 percent? Year Cash Flow 1 $200 23 2 $400 $300
Investments in the stock market have increased at an average compound rate of about 10 percent since 1926.a. If you invested $1,000 in the stock market in 1926, how much would that investment be
If you take out an $8,000 car loan that calls for 48 monthly payments of$225 each, what is the APR of the loan? What is the effective annual interest rate on the loan?
Reconsider the car loan in the previous question. What if the payments are made in four annual year-end installments? What annual payment would have the same present value as the monthly payment you
Suppose that you will receive annual payments of $10,000 for a period of 10 years. The first payment will be made 4 years from now. If the interest rate is 6 percent, what is the present value of
You take out a 30-year $100,000 mortgage loan with an APR of 8 percent and monthly payments. In 12 years you decide to sell your house and pay off the mortgage.What is the principal balance on the
Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.a. If the interest rate is 10 percent, show that the annual payment is $315.47.b.
If a bank pays 10 percent interest with continuous compounding, what is the effective annual rate?
How much will $100 grow to if invested at a continuously compounded interest rate of 10 percent for 6 years? What if it is invested for 10 years at 6 percent?
You believe you will need to have saved $500,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5 percent per year, how much must you save each year to meet
You may own shares of IBM, but you still can’t enter corporate headquarters whenever you feel like it. In what sense then are you an owner of the firm?
Which of the following statements more accurately describes the treasurer than the controller?a. Likely to be the only financial executive in small firmsb. Monitors capital expenditures to make sure
What is meant by over-the-counter trading? Is this trading mechanism used for stocks, bonds, or both?
Mega Nutrition has offered \($275\) million cash for all of the common stock in Andro Steroid Corporation. Based on recent market information, Andro Steroid is worth \($210\) million as an

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