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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

15-23A. (Operating leverage) The management of Detroit Heat Treating did not purchase the new piece ofequipment (see problem lS-22A). Using the existing cost structure, calculate the degree of
15·22A. (Fixed costs) Detroit Heat Treating projects that next year its fixed costs will total$120,000. Its only product sells for $12 per unit, ofwhich $7 is a variable cost. The management of
IS-2lA. (Break-even point and operating leverage) The Portland Recreation Company manufaclUres a full line of lawn furniture. The average selling price of a finished unit is $25. The associated
IS·20A. (Operating leverage) Rocky Mount Metals Company manufactures an assortment of woodbuming stoves. The average selling price for the various units is $500. The associated variable cost is $350
IS·19A. (Break-even point and profit margin) A recent business graduate of Midwestern State University is planning to open a new wholesaling operation. His target operating profit margin~28 percent.
IS-18A. (Break-even point and selling price) Parks Castings, Inc., will manufacture and sell 200,000 units next year. Fixed costs will total $300,000, and variable costs will be 60 percent of
IS-17A. (Break-even point and selling price) Gerry's Tool and Die Company will produce 200,000 units next year. All of this production will be sold as finished goods. Fixed costs will total S300,000.
IS·16A. (Fixed costs and the break-even point) Albert's Cooling Equipment hopes to earn $80,000 next year after taxes. Sales will be $2 million. The firm's single plant is located on the edge of
IS-lSA. (Fixed costs and the break-even point) Dot's Quik-Stop Party Store expects to earn$4{I,OOOnextyear after taxes. Sales will be $400,000. The store is located near the fraternity-row dilO'ict
15-13A. (Break-even point and operating leverage) Allison Radios manufactures a complete line 01'radio and communication equipment for law enforcement agencies. The average selling price of its
IS-lOA. (Break-even point and profit margin) Mary Clark, a recent graduate of Clarion South University, is planning to open a new wholesaling operation. Her target operating profit margin is 26
IS-9A. (Fixed costs and the break-even point) A & B Beverages expects to earn $50,000 next year after taxes. Sales will be $375:000. The store is located near the shopping district surrounding
IS-7A. (Break-even point and operating leverage) Zeylog Corporation manufactures a line of computer memory expansion boards used in microcomputers. The average selling price of its finished product
lS-6A. (Break-even point and operating leverage) Footwear, Inc., manufactures a complete line of men's and women's dress shoes for independent merchants. The average selling price of its finished
15-3A. (Operating leverage) In light of a sales agreement that Napa Valley Wmery (see descriptial Problem I5-2A) just signed with a national chain of health food restaurants, NVWs CFOJ Cheng is
15-2A. (Break-even point) Napa Valley Winery (NVW) is a boutique winery that produ high-quality, nonalcoholic red Wine from organically grown cabemet sauvignon grapes. It each bottle for $30. NVWs
ST-3. (Fixed costs and the break-even point) Bonaventure Manufacturing expects to earn $210,000 next year after taxes. Sales will be $4 million. The finn's single plant is located on the outskirts of
15-7. Ifa finn has a degree of combined leverage of three times, what does a negative sales flucıtuation of 15 percent portend for the earnings available to the finn's common stock investors?ı
15-6. What is meant by total risk exposure? How maya finn move to reduce its total risk exposure?ı
15-5. A manager in your finn decides to employ break-even analysis. Of what shortcomingsıshould this manager be aware?ı
15-4. What is the difference between the (ordinary) break-even point and the cash break-evenıpoint? Which will be the greater?ı
15-3. Define the tenn operating leverage. What type of effect occurs when the finn uses operating leverage?ı
15-2. Define the term financial leverage. Does the firm use financial leverage if preferred stock isıpresent in the capital strucmre?ı
15-1. Distinguish between business risk and financial risk. What gives rise to, or causes, eachıtype of risk?ı
ST-2.Gross profits Operating expenses Depreciation Taxable income$1,000,000 500,000 350,000$ 150,000 EARNINGS x MARGINAL TAX RATE TAXES$50,000$75,000-$50,000$100,000-$75,000$150,000-$100,000 xx xx
ST-I.INCOME STATEMENT Sales $ 13,000 Cost of goods sold 6.000 Gross profits $ 7,000 Depreciation expense 600 General and administrative expenses ----.!RQQ Operating expenses $ 1,600 Operating income
2-4B. (Corporate income tax) Rose, Inc. had sales of $7 million during the past year. The cost of goods sold amounted to $4 million. Operating expenses totaled $2.6 million and interest expense was
2-3B. (Corporate income tax) Cook, Inc., sells minicomputers. During the past year, the company's sales were $3.5 million. The cost of its merchandise sold came to $2 million, and cash operating
2-2B. (Review offinancial statements) Prepare a balance sheet and income statement as of December 31, 2003, for the Sabine Mfg. Co. from the following list of items. Ignore income taxes and interest
2-1B. (Review offinancial statements) Prepare a balance sheet and income statement as of December 31, 2003, for the Warner Company from the following list of items.Depreciation $ 66,000 Cash 225,000
2-4A. (Corporate income tax) Potts, Inc. had sales of $6 million during the past year. The cost of goods sold amounted to $3 million. Operating expenses totaled $2.6 million and interest expense was
2-3A. (Corporate inawze tax) Delaney, Inc. sells minicomputers. During the past year, the company's sales were $4 million. The cost of its merchandise sold came to $2 million, cash operating expenses
ST-3. (Measuring cash flows) Given the following information for Neff Industries, compute the firm's free cash flows for the year 2003, first from an asset perspective and then from a financing
ST-2. (Corporate income tax) Sales for Davies, Inc. during the past year amounted to $4 million.The finn supplies statistical infonnation to engineering companies. Gross profits totaled $1 million,
ST-l. (Review offinancial statements) Prepare a balance sheet and income statement for the Wood Corporation, given the following information:Accumulated depreciation $38,000 Long-term debt
2-8. Why do a firm's free cash flows from an asset perspective have to equal its free cash flows from a financing perspective?
2-7. Why is the examination of only the balance sheet and income statement not adequate in evaluating a firm?
2-6. Discuss the reasons why one firm could have positive cash flows and be headed for financial trouble, while another firm with negative cash flows could actually be in a good financial position.
2-5. What is net working capital? How is it different from gross working capital? What is the difference between interest-bearing debt and noninterest-bearing debt?
2-4. Why is it that the common equity section in the balance sheet changes from year to year regardless of whether new shares are bought or sold?
2-3. What is the difference between dividends and interest expense?
2-2. What are the differences among gross profits, operating profits, and net income?
2-1. A company's financial statements consist of the balance sheet, income statement, and statement of cash flows. .a. Describe the nature of the balance sheet and the income statement.b. Why have we
Much of what we deal with in financial management centers around the evaluation of projects-when they should be accepted and when they should be terminated. As new infor- mation surfaces regarding
7.ˇ Define (a) sole proprietorship, (b) partnership, and (c) corporation.
6.ˇ What do ethics and ethical behavior have to do with finance?
5. What is the cause of the agency problem and how do we try to solve it?
4.ˇ What is an efficient market and what are the implications of efficient markets for us?
3.ˇ Why are we interested in cash flows rather than accounting profits in determining the valueıof an asset?ı
2.ˇ What does the risk-return trade-off mean?
1.ˇ What are the differences between the goals of profit maximization and maximization ofıshareholder wealth? Which goal do you think is more appropriate?ı
1-7. Using the following criterl~; specify the legal form of business that is favored: (a) organizaıtional requirements and costs, (b) liability of the owners, (c) continuity of business, (d)
1-6. Identify the primary characteristics of each fonn of legal organization.ı
1-5. Define (a) sole proprietorship, (b) partnership, and (c) corporation.ı
1-3. Finns often involve themselves in projects that do not result direccly in profits; for example,ıIBM and Mobil Oil frequently support public television broadcasts. Do these projects
, 1-2. Compare and contrast the goals of profit maximization and maximization of shareholder wealth.ı
1-1. What are some of the problems involved in the use of profit maximization as the goal of the finn? How does the goal of maximization of shareholder wealth deal with those problems?
What market consequences may arise from a failure to ensure that directors do not benefit from inside information?
How might the managers of a business increase short-term profits at the expense of long-term profits?
Can you think of any way in which(a) a lender, and(b) a supplier could avoid the risk of loss, even though the business with which they are dealing is in financial difficulties and may even fail?
Describe the agency problem and explain how it may be managed.
Explain how risk, ethical considerations and the needs of other stakeholders influence the pursuit of shareholder wealth maximisation.
Identify and discuss possible objectives for a business and explain the advantages of the shareholder wealth maximisation objective.
Discuss the role of the finance function within a business.
ST-1. You are considering a project that will require an initial outlay of $54,200. This project has an expected life of five years and will generate after-tax cash flows to the company as a whole of
ST-1. G. Norohna and Co. is considering two mutually exclusive projects. The expected values for each project's cash flows are as follows:The company has decided to evaluate these projects using the
II-IA. (Risk-adjusted NPV) The Rokie Corporation is considering two mutually exclusive projects.Both require an initial outlay of $1 0,000 and will operate for five years. The probability
ST-2. (Weighted average cost ofcapital) The capital structure for the Carion Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 5.5
ST-2. Zaap.coin, Inc. is a privately held B2B startup that offers inventory management services to clients. Chent firms are generally small- to medium-sized manufacturing firms that 'cannot afford
1I-2A. (Risk-adjusted NPV) The Goblu Corporation is evaluating two mutually exclusive projects, both of which require an initial outlay of $100,000. Each project has an expected life of five years.
ST-3. The management of Zaap.com (from ST-2) wishes to estimate EVA for each of the next four years of the firm's operations. An evaluation of the firm's invested capital reveals the follow- ing
ST-l. The Easterwood Corporation, a film in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. This project involves the
11-3A. (Certainty equivalents) The V Coles Corp. is considering two mutually exclusive projects.The expected values for each project's cash flows are as follows:Management has decided to evaluate
ST-2. The J. Serrano Corporation is considering signing a one-year contract with one of two computer-based marketing firms. Although one is more expensive, it offers a more extensive program and thus
11-4A. (Certainty equivalents) Neustal, Inc., has decided to use the certainty equivalent method in determining whether or not a new investment should be made. The expected cash flows associated with
13-2A. (Free cash flow model valuation) The Berginan Corporation sold its shares to the general public in 2003. The firm's estimated free cash flows for the next four years are as follows:Bergmau
9-6A. (Net pnsent value, profitability index, and internal rate ofretum calculationi) You are considering two independent projects, project A and project B. The initial cash outlay associated with
11-5A. (Risk-adjusted discount rates and risk classes) The G. Wolfe Corporation is examining two capital-budgeting projects with five-year lives. The first, project A, is a replacement project; the
13-3A. (Calculating economic value added) The management of the Bergman Corporation (from problem 13-2A) wishes to estimate EVA for each of the next three years of the firm's operations. An
9-7A. (Payback period calculations) You are considering three independent projects, project A, project B, and project C. The required rate of return is 1°percent on each. Given the following free
11-6A. (Certainty equivalents) Nacho Nachtmann Company uses the certainty equivalent approach when it evaluates risky investments. The company presently has two mutually exclusive investment
1O-3A. (Calculating free cash flows) Racin' Scooters is introducing a new product and has an expected change in EBIT of$475,000. Racin' Scooters has a 34 percent marginal tax rate. This project will
11-7A. (Probability trees) The M. Solt Corporation is evaluating an investillent proposal with an expected life of two years. This project will require an initial outlay of$1,200,OOO. The resultant
9-9A. (Internal rate of return calculations) Given the following free cash flows, determine the internal rate of return for the three independent projects A, B, and C. PROJECT A PROJECT B PROJECT C
1O-4A. (Calculating free cash flows) Visible Fences is introducing a new product and has an expected change in EBIT of $900,000. Visible Fences has a 34 percent marginal tax rate. This project will
ST-2. (Residual dividend them")') Britton Corporation is considering four investment opportunities.The required investment outlays and expected rates of return for these investments are shown below.
Jason Jeffries was still a bit stunned as he pressed the lever on the water cooler just outside his boss's office. Just minutes before, Jason had left the office of Sarah Burchette, a partner at
ST-3. (Stock split) The debt and equity section of the Robson Corporation balance sheet follows.The current market price of the common shares is $20. Reconstruct the financial statement assuming
17-1A. (Dividend policies) The earnings for Harmony Pianos, Inc., have been predicted for the next five years and are listed in the following table. There are I million shares outstanding, Determine
13-2B. (Free cash-flow model valuation) The Hackberg Corporation sold its shares to the general public in 2003. The firm's estimated free cash flows for the next four years are as follows:Hackberg
13-3B. (Calculating economic value added) The management of the Hackberg Corporation (from problem 13-2B) wishes to estimate EVA for each of the next four years of the firm's operations. An
ST-2. (Assessing level-age lise) Some financial data and the appropriate industry norm for three rompanies are shown in the following table:a. Which firm appears to be employing financial leverage to
1O-12A. (Comprehensive problem) Traid Wl11ds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project.This
The capital structure for Nealon, Inc., follows:Nealon. Inc., Balance SheetFlotation costs are(a) 15 percent of market value for a new bond issue,(b) $1.21 per share for common stock, and(c) $2.01
17-7A. (Long-term residual dividend policy) Stetson Manufacturing, Inc., has projected its investment opportunities over a five-year planning horizon. The cost of each year's invesnnent and the
1O-13A. (Comprehensive problem) The Shome Corporation, a firn1 in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project.This
8. Caledonia Products is using the certainty equivalent approach to evaluate two mutually exclusive investment proposals with an expected life of four years. The expected net cash flows are as
IO-14A. (Size disp017ty ranking problem) The D. Dorner Fanns Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is better and
9. Caledonia is considering an additional investment project with an expected life of two years and would like some insights on the level of risk this project has using the probability tree method.
17-9A. (Dividend policies) The earnings for Crystal Cargo, Inc., have been predicted for the next five years and follow. There are I million shares outstanding. Determine the yearly dividend per

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