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business
fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Why shouldn’t the managers simply release any inside information to the market to allow the share price to rise and so make it possible to issue shares at a fair price?
Some businesses may take up a less cautious financing position than that shown in Figure 6.9and others may take up a more cautious one. How would the diagram differ under each of these options?
What factors might a business take into account when deciding between preference shares and loan capital as a means of raising new finance?
Would you expect the returns from loan capital to be higher or lower than those from preference shares?
Would you expect the returns from preference shares to be higher or lower than those from ordinary shares?
Discuss the factors to be taken into account when choosing an appropriate source of finance.
Discuss the advantages and disadvantages of each source of finance.
Identify the main sources of external and internal finance available to a business and explain their main features.
Eco-Energy Appliances Ltd started operations on 1 January and has produced the following forecasts for annual sales revenue:Year to 31 December Year 1 Year 2 Year 3 Year 4 Forecast sales revenue (£)
Newtake Records Ltd owns a small chain of shops selling rare jazz and classical recordings to serious collectors. At the beginning of June, the business had an overdraft of£35,000 and the bank has
The financial statements of Danube Engineering plc for the year that has just ended are as follows:Income statement for the year ending 31 March Year 5£m Sales revenue 500 Cost of sales ( 350 )Gross
Changes Ltd owns five shops selling fashion goods. In the past the business maintained a healthy cash balance. However, this has fallen in recent months and at the end of September Year 10 the
Davis Travel Ltd specialises in the provision of weekend winter breaks but also organises weekend summer breaks. You are given the following information:Statement of financial position as at 30
Forecast information for Saturn plc for next year is as follows:£m Projected profit before taxation (after interest) 165 Depreciation charged in arriving at operating profit 41 Interest expense 21
Choice Designs Ltd operates a small group of wholesale/retail carpet stores in the north of England. The statement of financial position of the business as at 31 May Year 8 is as follows:Statement of
Why would it normally be easier for an established business than for a new business to prepare projected financial statements?
Why might calculating working capital as a fixed percentage of sales be a reasonable simplifying assumption?
Fill in the outline projected statement of financial position for Designer Dresses Ltd as at 30 June using the information contained in Example 2.1and in the answers to Activities 2.3and
Fill in the outline projected income statement for Designer Dresses Ltd for the six months to 30 June, using the information contained in Example 2.1above.
.
Fill in the outline cash flow statement for Designer Dresses Ltd for the six months to 30 June using the information contained in Example
What if sales price could be increased by 20 per cent?
What if sales price is reduced by 15 per cent?
What if sales volume is 10 per cent lower than expected?
What if sales volume is 5 per cent higher than expected?
Describe the ways in which projected financial statements may take account of risk and uncertainty.
Discuss the strengths and weaknesses of each of the main methods of preparing projected financial statements.
Prepare projected financial statements for a business and interpret their significance for decision-making purposes.
Explain how business plans are developed and the role that projected financial statements play in this process.
In what situation should a firm pay a stock dividend?AppendixLO1
In what situation should a firm split its stock?AppendixLO1
Suppose you have 100 common shares of Tillman Industries. The EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share. Now Tillman announces a two-for-one split. Immediately after the
Explain how repurchases can (1) help stockholders limit taxes and (2) help firms change their capital structures.AppendixLO1
What is treasury stock?AppendixLO1
KEY TERMS Define each of the following terms:a. Target payout ratio; optimal dividend policyb. Dividend irrelevance theory; bird-in-the-hand fallacyc. Information content (signaling) hypothesis;
ALTERNATIVE DIVIDEND POLICIES Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When CMC’s
Discuss the pros and cons of having the directors formally announce a firm’s future dividend policy.AppendixLO1
The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cash dividends during the
Would it ever be rational for a firmto borrowmoney in order to pay cash dividends? Explain.AppendixLO1
Modigliani and Miller (MM) on the one hand and Gordon and Lintner (GL) on the other hand have expressed strong views regarding the effect of dividend policy on a firm’s cost of capital and value.a.
How would each of the following changes tend to affect aggregate (that is, the average for all corporations) payout ratios, other things held constant? Explain your answers.a. An increase in the
Executive salaries have been shown to be more closely correlated to the size of the firm than to its profitability. If a firm’s board of directors is controlled by management rather than outside
What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a two-for-one split?Assume that either
Most firms like to have their stock selling at a high P E ratio, and they also like to have extensive public ownership (many different shareholders). Explain how stock dividends or stock splits may
What is meant by catering theory, and how might it impact a firm’s dividend policy?AppendixLO1
RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be
STOCK SPLIT Gamma Medical’s stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity,
STOCK REPURCHASES Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding. The company’s stock currently trades at $32 a share.Beta is considering a
STOCK SPLIT After a 5-for-l stock split, Strasburg Company paid a dividend of $0 75 per new share, which represents a 9% increase over last year’s pre-split dividend. What was last year’s
EXTERNAL EQUITY FINANCING Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production
RESIDUAL DIVIDEND MODEL Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR)and cost of capital for
DIVIDENDS Bowles Sporting Inc. is prepared to report the following 2014 income statement(shown in thousands of dollars).Sales $15,200 Operating costs including depreciation 11,900 EBIT $ 3,300
ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0 75 out of annual earnings per share of $2 25. Currently, Rubenstein Bros.’ stock is
ALTERNATIVE DIVIDEND POLICIES In 2013, Keenan Company paid dividends totaling$3,600,000 on net income of $10.8 million. Note that 2013 was a normal year and that for the past 10 years, earnings have
DIVIDEND POLICY Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the
What are the key elements of a corporation’s strategic plan?AppendixLO1
How is the financial plan related to the other parts of a firm’s overall strategic plan?AppendixLO1
How can the financial plan be used to help management provide guidance to security analysts?AppendixLO1
Why is an accurate sales forecast critical for financial planning?AppendixLO1
If the key ratios are expected to remain constant, the AFN equation can be used to forecast the need for external funds. Write out the equation and explain its logic.How would an increase in each of
Is it possible for the AFN to be negative? If so, what would this indicate?If excess capacity exists, how would that affect the calculated AFN?AppendixLO1
What advantages does the forecasted financial statement method have over the AFN equation for forecasting financial requirements?AppendixLO1
Why should a marketing or management major be interested in financial forecasting?AppendixLO1
Would financial forecasting be relevant for nonfinance majors when they graduate and enter the workforce? Explain.AppendixLO1
Examine the following statement: Using regression to predict items such as inventories is better than basing such predictions on last year’s Inventory/Sales ratio because regression helps smooth
KEY TERMS Define each of the following terms:a. Mission statement; corporate scope; statement of corporate objectives; corporate strategiesb. Operating plan; financial planc. Spontaneously generated
SUSTAINABLE GROWTH RATE Weatherford Industries Inc. has the following ratios:A0 S0 1 6; L0 S0 0 4; profit margin 0 10; and payout ratio 0 45, or 45%. Sales last year were $100 million. Assuming that
ADDITIONAL FUNDS NEEDED Suppose Weatherford’s financial consultants report (1) that the inventory turnover ratio is Sales Inventory 3 times versus an industry average of 4 times and (2) that
What are the key factors on which external financing depends, as indicated in the AFN equation?AppendixLO1
Assume that an average firm in the office supply business has a 6% profit margin, a 40%total liabilities/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it
Would you agree that computerized corporate planning models were a fad during the 1990s but that because of a need for flexibility in corporate planning, they are no longer used by most firms?
Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark ( ) next to those items that typically increase spontaneously.Accounts payable
Suppose a firm makes the following policy changes. If the change means that external nonspontaneous financial requirements (AFN) will increase, indicate this with a ;indicate a decrease with a ; and
AFN EQUATION Carter Corporation’s sales are expected to increase from $5 million in 2014 to $6 million in 2015, or by 20%. Its assets totaled $3 million at the end of 2014. Carter is at full
AFN EQUATION Refer to Problem 16-1. What additional funds would be needed if the company’s year-end 2014 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN
AFN EQUATION Refer to Problem 16-1 and assume that the company had $3 million in assets at the end of 2014. However, now assume that the company pays no dividends.Under these assumptions, what
PRO FORMA INCOME STATEMENT Austin Grocers recently reported the following 2014 income statement (in millions of dollars):Sales $700 Operating costs including depreciation 500 EBIT $200 Interest 40
EXCESS CAPACITY Walter Industries has $5 billion in sales and $1 7 billion in fixed assets.Currently, the company’s fixed assets are operating at 90% of capacity.a. What level of sales could Walter
REGRESSION AND INVENTORIES Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’s CFO uses a simple linear regression to forecast the
PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):Sales $3,000 Operating costs excluding depreciation 2,450 EBITDA $
LONG-TERM FINANCING NEEDED At year-end 2014, total assets for Ambrose Inc. were$1 2 million and accounts payable were $375,000. Sales, which in 2014 were $2 5 million, are expected to increase by 25%
SALES INCREASE Pierce Furnishings generated $2 million in sales during 2014, and its year-end total assets were $1 5 million. Also, at year-end 2014, current liabilities were$500,000, consisting of
REGRESSION AND RECEIVABLES Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards’ CFO uses a simple linear regression to forecast the
REGRESSION AND INVENTORIES Charlie’s Cycles Inc. has $110 million in sales. The company expects that its sales will increase 5% this year. Charlie’s CFO uses a simple linear regression to
EXCESS CAPACITY Edney Manufacturing Company has $2 billion in sales and $0 6 billion in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity.a. What level of sales
ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.’s 2014 financial statements are shown here.Morrissey Technologies Inc.: Balance Sheet as of December 31, 2014 Cash $ 180,000 Accounts payable $
EXCESS CAPACITY Krogh Lumber’s 2014 financial statements are shown here.Krogh Lumber: Balance Sheet as of December 31, 2014 (Thousands of Dollars)Cash $ 1,800 Accounts payable $ 7,200 Receivables
FORECASTING FINANCIAL STATEMENTS Use a spreadsheet model to forecast the financial statements in Problems 16-13 and 16-14.AppendixLO1
FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial
NWC’s high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As
What two characteristics can lead to conflicts between the NPV and the IRR when evaluating mutually exclusive projects?AppendixlLO1
What information does the payback convey that is absent from the other capital budgeting decision methods?AppendixlLO1
BREAKEVEN AND OPERATING LEVERAGEa. Given the following graphs, calculate the total fixed costs, variable costs per unit, and sales price for Firm A. Firm B’s fixed costs are $120,000, its variable
OPTIMAL CAPITAL STRUCTURE Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were
What are the characteristics of a liquid asset? Give examples of some liquid assets.AppendixLO1
What question are the two liquidity ratios designed to answer?AppendixLO1
Which is the least liquid of the firm’s current assets?AppendixLO1
A company has current liabilities of $500million, and its current ratio is 2 0. What is the total of its current assets? ($1,000 million) If this firm’s quick ratio is 1 6, how much inventory does
Write the equations for four ratios that are used to measure how effectively a firm manages its assets.AppendixLO1
If one firm is growing rapidly and another is not, how might this distort a comparison of their inventory turnover ratios?AppendixLO1

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