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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

If you wanted to evaluate a firm’s DSO, with what could you compare it?AppendixLO1
How might different ages distort comparisons of different firms’ fixed assets turnover ratios?AppendixLO1
A firmhas annual sales of $100million, $20million of inventory, and $30million of accounts receivable. What is its inventory turnover ratio? (5×) What is its DSO?AppendixLO1
How does the U.S. tax structure influence a firm’s willingness to finance with debt?AppendixLO1
How does the decision to use debt involve a risk-versus-return trade-off?AppendixLO1
Name two ratios that are used to measure financial leverage and write their equations.AppendixLO1
Identify six profitability ratios and write their equations.AppendixLO1
Why does the use of debt lower the profit margin and the ROA?AppendixLO1
Using more debt lowers profits and thus the ROA. Why doesn’t debt have the same negative effect on the ROE?AppendixLO1
A company has a 10% ROA. Assume that a company’s total assets equals total invested capital, and that the company has no debt, so its total invested capital equals total equity. What is the
Describe two ratios that relate a firm’s stock price to its earnings and book value per share and write their equations.AppendixLO1
In what sense do these market value ratios reflect investors’ opinions about a stock’s risk and expected future growth?AppendixLO1
What does the price/earnings (P/E) ratio show? If one firm’s P/E ratio is lower than that of another firm, what factors might explain the difference?AppendixLO1
How is book value per share calculated? Explain how inflation and R&D programs might cause book values to deviate from market values.AppendixLO1
Write the equation for the DuPont equation.AppendixLO1
What is the equity multiplier, and why is it used?AppendixLO1
How can management use the DuPont equation to analyze ways of improving the firm’s performance?AppendixLO1
If a firm takes steps that increase its expected future ROE, does this necessarily mean that the stock price will also increase? Explain.AppendixLO1
Why might railroads have such low total assets turnovers and food wholesalers and grocery stores such high turnovers?AppendixLO1
If competition causes all companies to have similar ROEs in the long run, would companies with high turnovers tend to have high or low profit margins? Explain your answer.AppendixLO1
Why are comparative ratio analyses useful?AppendixLO1
List several potential difficulties with ratio analysis.AppendixLO1
What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance?AppendixLO1
KEY TERMS Define each of the following terms:a. Liquid assetb. Liquidity ratios: current ratio; quick (acid test) ratioc. Asset management ratios: inventory turnover ratio; days sales outstanding
TOTAL DEBT TO TOTAL CAPITAL Last year K. Billingsworth & Co. had earnings per share of $4 and dividends per share of $2. Total retained earnings increased by$12 million during the year, while book
RATIO ANALYSIS The following data apply to A.L. Kaiser & Company (millions of dollars):Cash and equivalents $ 100.00 Fixed assets 283.50 Sales 1,000.00 Net income 50.00 Current liabilities 105.50
Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect
Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?AppendixLO1
Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed
Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between the turnover ratios, profit margins, and DuPont equations for a grocery chain
How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance
Give some examples that illustrate how (a) seasonal factors and (b) different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?AppendixLO1
Suppose you were comparing a discount merchandiser with a high-end merchandiser.Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you
Refer to an online finance source such as Yahoo! Finance or Google Finance to look up the P/E ratios for Verizon Communications and Walmart. Which company has the higher P/E ratio? What factors could
Differentiate between ROE and ROIC.AppendixLO1
Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (–) to indicate a decrease, and(0) to
DAYS SALES OUTSTANDING Baker Brothers has a DSO of 40 days, and its annual sales are$7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.AppendixLO1
DEBT TO CAPITAL RATIO Bartley Barstools has amarket/book ratio equal to AppendixLO1
Its stock price is $14 per share and it has 5 million shares outstanding. The firm’s total capital is $125 million and it finances with only debt and common equity. What is its debt-to-capital
DuPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?AppendixLO1
MARKET/BOOK RATIO Jaster Jets has $10 billion in total assets. Its balance sheet shows$1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity.It has 800
PRICE/EARNINGS RATIO A company has an EPS of $2.00, a book value per share of $20, and a market/book ratio of 1.2×. What is its P/E ratio?4-6 DuPONT AND ROE A firm has a profit margin of 2% and an
ROE AND ROIC Hilyard Industries’ net income is $25,000, its interest expense is $5,000, and its tax rate is 40%. Its notes payable equals $25,000, long-term debt equals $75,000, and common equity
DuPONT AND NET INCOME Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. Common equity on the firm’s balance sheet is 50% of its total assets. What is
BEP, ROE, AND ROIC Duval Manufacturing recently reported the following information:Net income $ 600,000 ROA 8%Interest expense $ 225,000 Accounts payable and accruals $1,000,000 Duval’s tax rate is
M/B AND SHARE PRICE You are given the following information: Stockholders’ equity as reported on the firm’s balance sheet = $3.75 billion, price/earnings ratio = 3.5, common shares outstanding =
RATIO CALCULATIONS Assume the following relationships for the Brauer Corp.:Sales/Total assets 1.5×Return on assets (ROA) 3.0%Return on equity (ROE) 5.0%Calculate Brauer’s profit margin and
RATIO CALCULATIONS Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its
TIE AND ROIC RATIOS The H.R. Pickett Corp. has $500,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 10%. In addition, it has $700,000 of common stock on its balance
RETURN ON EQUITY Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 60%, which will result in annual
RETURN ON EQUITY Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income
CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct?(Hint: Work Problem 4-16 before answering 4-17 and consider the solution setup for 4-16 as you think about 4-17.)a. If a
CURRENT RATIO The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and
DSO AND ACCOUNTS RECEIVABLE Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of
P/E AND STOCK PRICE Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and
BALANCE SHEET ANALYSIS Complete the balance sheet and sales information using the following financial data:Total assets turnover: 1.5×Days sales outstanding: 36.5 daysa Inventory turnover ratio:
RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow.a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline
DUPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but
RATIO ANALYSIS The Corrigan Corporation’s 2013 and 2014 financial statements follow, along with some industry average ratios.a. Assess Corrigan’s liquidity position and determine how it compares
FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had
What is the most important step in a capital budgeting analysis?AppendixLO1
What departments are involved in estimating a project's cash flows?AppendixLO1
What is the financial staff's role in the forecasting process for capital projects?AppendixLO1
Why should companies use project cash flow rather than accounting income when finding the NPV of a project?AppendixLO1
How do shipping and installation costs affect the costs of fixed assets and the depreciable basis?AppendixLO1
What is the most common noncash charge that must be added back when finding project cash flows?AppendixLO1
What is net operating working capital, and how does it affect projects' costs in capital budgeting?AppendixLO1
How does the company get back the dollars it invests in net operating working capital?AppendixLO1
Give an example of a "good" externality, that is, one that makes a project look better.AppendixLO1
What three types of cash flows must be considered when evaluating a proposed project?AppendixLO1
Define the following terms: new expansion project and replacement project.AppendixLO1
Why are (1) market and (2) corporate risk both important?AppendixLO1
List two reasons why, in practice, a project's stand-alone risk is important.AppendixLO1
Differentiate between sensitivity and scenario analyses. What advantage does scenario analysis have over sensitivity analysis?AppendixLO1
What is Monte Carlo simulation?AppendixLO1
In theory, should a firm be concerned with stand-alone and corporate risk? Should the firm be concerned with these risks in practice?AppendixLO1
If a project's stand-alone, corporate, and market risk are highly correlated, would this make the task of measuring risk easier or harder? Explain.AppendixLO1
How are risk-adjusted discount rates used to incorporate project risk into the capital budgeting decision process?AppendixLO1
What is a decision tree, and how is it used in capital budgeting?AppendixLO1
Briefly illustrate an investment timing option.AppendixLO1
Identify some examples of projects with embedded options.AppendixLO1
Explain why the following statement is true: "In general, the more uncertainty there is about future market conditions, the more attractive it may be to wait."AppendixLO1
Operating cash flows rather than accounting profits are listed in Table 11-1. What is the basis for this emphasis on cash flows as opposed to net income?AppendixLO1
Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included.AppendixLO1
Explain how net operating working capital is recovered at the end of a project's life, and why it is included in a capital budgeting analysis.AppendixLO1
Define (a) simulation analysis, (b) scenario analysis, and (c) sensitivity analysis. If AT&T were considering two investments, one calling for the expenditure of $200 million to develop a satellite
What factors should a company consider when it decides whether to invest in a project today or to wait until more information becomes available?AppendixLO1
In general, do timing options make it more or less likely that a project will be accepted today?AppendixLO1
If a company has an option to abandon a project, would this tend to make the company more or less likely to accept the project today?AppendixLO1
Distinguish between physical asset and financial asset markets.AppendixLO1
What is the difference between spot and futures markets?AppendixLO1
Distinguish between money and capital markets.AppendixLO1
What is the difference between primary and secondary markets?AppendixLO1
Why are financial markets essential for a healthy economy?AppendixLO1
What is a derivative, and how is its value related to that of an "underlying asset"?AppendixLO1
Identify three different ways capital is transferred between savers and borrowers.AppendixLO1
Distinguish between investment banking houses and financial intermediaries.AppendixLO1
List the major types of intermediaries and briefly describe the primary function of each.AppendixLO1
What is the price paid to borrow money called?AppendixLO1
What are the two items whose sum is the "price" of equity capital?AppendixLO1

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