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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Halley Enterprises’ bonds currently sell for $975. They have a 7-year maturity, an annual coupon of $90, and a par value of $1,000. What is their yield to maturity?AppendixLO1
The Henderson Company’s bonds currently sell for $1,275. They pay a $120 annual coupon, have a 20-year maturity, and a par value of $1,000, but they can be called in 5 years at $1,120. What are
Last year a firm issued 20-year, 8% annual coupon bonds at a par value of$1,000.a. Suppose that one year later the going market interest rate drops to 6%. What is the new price of the bonds assuming
Describe how the annual payment bond valuation formula is changed to evaluate semiannual coupon bonds and write the revised formula.AppendixLO1
Hartwell Corporation’s bonds have a 20-year maturity, an 8% semiannual coupon, and a face value of $1,000. The going nominal annual interest rate(rd) is 7%. What is the bond’s price?AppendixLO1
Differentiate between price risk and reinvestment risk.AppendixLO1
What type of security can be used to minimize both price risk and reinvestment risk for an investor with a fixed investment horizon? Does this security protect the real payoff? Explain.AppendixLO1
Name the major rating agencies and list some factors that affect bond ratings.AppendixLO1
Why are bond ratings important to firms and investors?AppendixLO1
Do bond ratings adjust immediately to changes in credit quality? Explain.AppendixLO1
Differentiate between Chapter 7 liquidations and Chapter 11 reorganizations. In general, when should each be used?AppendixLO1
How is accrued interest calculated?AppendixLO1
What is meant by the terms clean price and dirty price?AppendixLO1
KEY TERMS Define each of the following terms:a. Bond; treasury bond; corporate bond; municipal bond; foreign bondb. Par value; maturity date; original maturityc. Coupon payment; coupon interest
BOND VALUATION The Pennington Corporation issued a new series of bonds on January 1, 1990. The bonds were sold at par ($1,000); had a 12% coupon; and mature in 30 years, on December 31, 2019. Coupon
SINKING FUND The Vancouver Development Company (VDC) is planning to sell a$100 million, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life
A sinking fund can be set up in one of two ways:• The corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated
Can the following equation be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago.AppendixLO1 N Annual interest
The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond
If interest rates rise after a bond issue, what will happen to the bond’s price and YTM? Does the time to maturity affect the extent to which interest rate changes affect the bond’s price?(Again,
Discuss the following statement: A bond’s yield to maturity is the bond’s promised rate of return, which equals its expected rate of return.AppendixLO1
Assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Which of the two investments would
Indicate whether each of the following actions will increase or decrease a bond’s yield to maturity:a. The bond’s price increases.b. The bond is downgraded by the rating agencies.c. A change in
Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding call?AppendixLO1
Are securities that provide for a sinking fund more or less risky from the bondholder’s perspective than those without this type of provision? Explain.AppendixLO1
What’s the difference between a call for sinking fund purposes and a refunding call?AppendixLO1
Why are convertibles and bonds with warrants typically offered with lower coupons than similarly rated straight bonds?AppendixLO1
Explain whether the following statement is true or false: Only weak companies issue debentures.AppendixLO1
Would the yield spread on a corporate bond over a Treasury bond with the same maturity tend to become wider or narrower if the economy appeared to be heading toward a recession? Would the change in
A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC.Under what conditions would the YTM provide a better estimate, and when would the YTC be better?AppendixLO1
BOND VALUATION Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%.
YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985.a. What is its yield to maturity (YTM)?b. Assume that the yield to
BOND VALUATION Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8 5% YTM. What is the bond’s price?AppendixLO1
YIELD TO MATURITY A firm’s bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,100. What
BOND VALUATION An investor has two bonds in his portfolio that have a face value of$1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.a. What will the
BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9 6%.Bond C pays a 10% annual
INTEREST RATE SENSITIVITY An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased
YIELD TO CALL Six years ago the Singleton Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today
YIELD TO MATURITY Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.a. What is the yield to maturity at a
CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Hooper Printing Inc.has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago
BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for
YIELD TO CALL It is now January 1, 2014, and you are considering the purchase of an outstanding bond that was issued on January 1, 2012. It has a 9 5% annual coupon and had a 30-year original
PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8 21%. What are the bond’s price and YTM?(Hint: Refer to Footnote 7 for
EXPECTED INTEREST RATE Lloyd Corporation’s 14% coupon rate, semiannual payment,$1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050.They sell at a price of
BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; if you buy it, you plan to hold it for 5 years.
BOND VALUATION You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an “effective” annual interest rate(not a nominal
BOND RETURNS Last year Joan purchased a $1,000 face value corporate bond with an 11%annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9
YIELD TO MATURITY AND YIELD TO CALL Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current
BOND VALUATION Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:• Bond A has a 7%
BOND VALUATION Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the company’s pension fund management division. A major new client, the California
What is the balance sheet, and what information does it provide?AppendixLO1
How is the order in which items are shown on the balance sheet determined?AppendixLO1
Explain in words the difference between net working capital and net operating working capital.AppendixLO1
Explain in words the difference between total debt and total liabilities.AppendixLO1
What items on Allied’s December 31 balance sheet would probably be different from its June 30 values? Would these differences be as large if Allied were a grocery chain rather than a food
Why is earnings per share called “the bottom line”? What is EBIT, or operating income?AppendixLO1
What is EBITDA?AppendixLO1
Which is more like a snapshot of the firm’s operations—the balance sheet or the income statement? Explain your answer.AppendixLO1
What is the statement of cash flows, and what are some questions it answers?AppendixLO1
Identify and briefly explain the four sections shown in the statement of cash flows.AppendixLO1
If during the year a company has high cash flows from its operations, does this mean that cash on its balance sheet will be higher at the end of the year than it was at the beginning of the year?
What information does the statement of stockholders’ equity provide?AppendixLO1
Why do changes in retained earnings occur?AppendixLO1
Explain why the following statement is true: The retained earnings account reported on the balance sheet does not represent cash and is not “available”for dividend payments or anything
Can investors be confident that if the financial statements of different companies are accurate and are prepared in accordance with GAAP, that the data reported by one company will be comparable to
Why might different companies account for similar transactions in different ways?AppendixLO1
What is free cash flow (FCF)?AppendixLO1
Why is FCF an important determinant of a firm’s value?AppendixLO1
Define the terms Market Value Added (MVA) and Economic Value Added (EVA).AppendixLO1
How does EVA differ from accounting net income?AppendixLO1
Explain this statement: Our tax rates are progressive.AppendixLO1
What’s the difference between marginal and average tax rates?AppendixLO1
What’s the AMT, and what is its purpose?AppendixLO1
What’s a muni bond, and how are these bonds taxed?AppendixLO1
What are long-term capital gains? Are they taxed like other income? Explain.AppendixLO1
How does our tax system influence the use of debt financing by corporations?AppendixLO1
What is the logic behind allowing tax loss carry-backs/carry-forwards?AppendixLO1
Differentiate between S and C corporations.AppendixLO1
Define each of the following terms:a. Annual report; balance sheet; income statement; statement of cash flows; statement of stockholders’ equityb. Stockholders’ equity; retained earnings; working
Last year Rattner Robotics had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 40%. At year-end, it
What four financial statements are contained in most annual reports?AppendixLO1
Who are some of the basic users of financial statements, and how do they use them?AppendixLO1
If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing?
Explain the following statement: While the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements?Explain your
Refer to the box titled, “The Balance Sheet of an ‘Average’ American Household” when answering Parts a and b.a. Based on this evidence, has the financial position of the average household
What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?AppendixLO1
Would it be possible for a company to report negative free cash flow and still be highly valued by investors; that is, could a negative free cash flow ever be viewed optimistically by investors?
How are management’s actions incorporated in EVA and MVA? How are EVA and MVA interconnected?AppendixLO1
Explain the following statement: Our tax rates are progressive.AppendixLO1
What does double taxation of corporate income mean? Could income ever be subject to triple taxation? Explain your answer.AppendixLO1
How does the deductibility of interest and dividends by the paying corporation affect the choice of financing (that is, the use of debt versus equity)?AppendixLO1
BALANCE SHEET The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2 5 million and net plant and equipment equals $2
INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an
INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7 5 million and net income of $1 8 million. It had $2 0 million of interest expense, and its corporate tax rate was 40%. What was its
STATEMENT OF STOCKHOLDERS’ EQUITY In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings
MVA Henderson Industries has $500 million of common equity on its balance sheet; its stock price is $60 per share; and its Market Value Added (MVA) is $130 million. How many common shares are
MVA Over the years, McLaughlin Corporation’s stockholders have provided $35,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm’s
EVA Britton Industries has operating income for the year of $3,000,000 and a 40% tax rate.Its total invested capital is $20,000,000 and its after-tax percentage cost of capital is 8%.What is the
BALANCE SHEET Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Explain and state the assumptions that underlie your answer.a. It issues

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