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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

STATEMENT OF STOCKHOLDERS’ EQUITY Computer World Inc. paid out $22 5 million in total common dividends and reported $278 9 million of retained earnings at year-end. The prior year’s retained
EVA For 2014, Everyday Electronics reported $22 5 million of sales and $18 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax
STATEMENT OF CASH FLOWS W.C. Cycling had $55,000 in cash at year-end 2013 and$25,000 in cash at year-end 2014. The firm invested in property, plant, and equipment totaling $250,000. Cash flow from
STATEMENT OF CASH FLOWS You have just been hired as a financial analyst for Basel Industries. Unfortunately, company headquarters (where all of the firm’s records are kept)has been destroyed by
FREE CASH FLOW Bailey Corporation’s financial statements (dollars and shares are in millions) are provided here.Balance Sheets as of December 31 2014 2013 Assets Cash and equivalents $ 14,000 $
INCOME STATEMENT Hermann Industries is forecasting the following income statement:Sales $8,000,000 Operating costs excluding depreciation & amortization 4,400,000 EBITDA $3,600,000 Depreciation and
FINANCIAL STATEMENTS The Davidson Corporation’s balance sheet and income statement are provided here.Davidson Corporation: Balance Sheet as of December 31, 2014(Millions of Dollars)Assets
FREE CASH FLOW Financial information for Powell Panther Corporation is shown here.Powell Panther Corporation: Income Statements for Year Ending December 31(Millions of Dollars)2014 2013 Sales
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES Laiho Industries’ 2013 and 2014 balance sheets (in thousands of dollars) are shown.2014 2013 Cash $102,850 $ 89,725 Accounts receivable 103,365 85,527
Why are capital budgeting decisions so important?AppendixLO1
Why is the sales forecast a key element in a capital budgeting decision?AppendixLO1
What are some ways firms get ideas for capital projects?AppendixLO1
Identify the major project classification categories, and explain how they are used.AppendixLO1
List the six steps in the capital budgeting process, and compare them with the steps in security valuation.AppendixLO1
What four capital budgeting ranking methods were discussed in this section?AppendixLO1
Describe each method, and give the rationale for its use.AppendixLO1
What two methods always lead to the same accept/reject decision for independent projects?AppendixLO1
What two pieces of information does the payback period convey that are not conveyed by the other methods?AppendixLO1
Describe how NPV profiles are constructed.AppendixLO1
What is the crossover rate, and how does it affect the choice between mutually exclusive projects?AppendixLO1
What two basic conditions can lead to conflicts between the NPV and IRR methods?AppendixLO1
Why is the "reinvestment rate" considered to be the underlying cause of conflicts between the NPV and IRR methods?AppendixLO1
If a conflict exists, should the capital budgeting decision be made on the basis of the NPV or the IRR ranking? Why?AppendixLO1
Explain the difference between normal and nonnormal cash flows.AppendixLO1
What is the "multiple IRR problem," and what condition is necessary for it to occur?AppendixLO1
Describe how the modified IRR (MIRR) is calculated.AppendixLO1
What is the primary difference between the MIRR and the regular IRR?AppendixLO1
What advantages does the MIRR have over the regular IRR for making capital budgeting decisions?AppendixLO1
What condition can cause the MIRR and NPV methods to produce conflicting rankings?AppendixLO1
Describe the advantages and disadvantages of the five capital budgeting methods discussed in this chapter.AppendixLO1
Should capital budgeting decisions be made solely on the basis of a project's NPV?AppendixLO1
What is done in the post-audit?AppendixLO1
Identify several purposes of the post-audit.AppendixLO1
What are some factors that can cause complications in the post-audit?AppendixLO1
Give some examples of other decisions that can be analyzed with the capital budgeting techniques developed in this chapter.AppendixLO1
How is a project classification scheme (for example, replacement, expansion into new markets, and so forth) used in the capital budgeting process?AppendixLO1
Explain why the NPV of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of
Explain why, if two mumally exclusive projects are being compared, the short-term project might have the higher ranking under the NPV criterion if the cost of capital is high, but the long-term
In what sense is a reinvestment rate assumption embodied in the N'PY, IRR. and MIRR methods?What is the assumed reinvestment rate of each method?AppendixLO1
"If a firm has no mutually exclusive projects, only independent ones, and it also has both a constant cost of capital and projects with normal cash flows in the sense that each project has one or
Are there conditions under which a firm might be better off if it were to choose a machine with a rapid payback rather than one with a larger XPV?AppendixLO1
A firm has Si 00 million available for capital expenditures. It is considering investing in one of two projects; each has a cost of S100 million. Project A has an IRR of 20 percent and an XPV of S9
What does it mean for projects to be mutually- exclusive? How- should managers rank mutuallyexclusive projects?AppendixLO1
Project X is very risky- and has an XPV of S3 million. Project Y is very- safe and has an XPV of S2.5 million. Assume that the two projects are mutually exclusive and that each of the net present
Define each of the following terms:Key termsa. Capital budget; capital budgeting; strategic business planb. Regular pavback period; discounted payback periodc. Independent projects: mutually
You are a financial analyst for Damon Electronics Company. The director of capital budgeting Project analysis has asked you to analyze two proposed capital investments. Projects X and Y. Each project
What is a bond?AppendixLO1
What are the four main types of bonds?AppendixLO1
Why are U.S. Treasury bonds not riskless?AppendixLO1
To what types of risk are investors of foreign bonds exposed?AppendixLO1
Define floating rate bonds and zero coupon bonds.AppendixLO1
What problem was solved by the introduction of long-term floating rate debt, and how is the rate on such bonds determined?AppendixLO1
Why is a call provision advantageous to a bond issuer? When will the issuer initiate a refunding call? Why?AppendixLO1
What are the two ways a sinking fund can be handled? Which method will be chosen by the firm if interest rates have risen? If interest rates have fallen?AppendixLO1
Are securities that provide for a sinking fund regarded as being riskier than those without this type of provision? Explain.AppendixLO1
What is the difference between a call for sinking fund purposes and a refunding call?AppendixLO1
Define convertible bonds, bonds with warrants, putable bonds, income bonds, and indexed bonds.AppendixLO1
Why do bonds with warrants and convertible bonds have lower coupons than similarly rated bonds that do not have these features?AppendixLO1 VB = Mz 1 INT + M (1+ka)(1 + k).
What is meant by the terms "new issue" and "seasoned issue"?AppendixLO1
Last year a firm issued 20-year, 8 percent annual coupon bonds that sold at a par value of $1,000. (1) Suppose that one year after issue the going interest rate for these bonds was 6 percent. What is
Why do the prices of fixed-rate bonds fall if expectations for inflation rise?AppendixLO1
What is a "discount bond"? A "premium bond"?AppendixLO1
Describe the difference between the yield to maturity and the yield to call.AppendixLO1
How does a bond's current yield differ from its total return?AppendixLO1
Could the current yield exceed the total return?AppendixLO1
Halley Enterprises' bonds currently sell for $975. The bonds have a seven-year maturity, pay an annual coupon of $90, and have a par value of $1,000. What is their yield to maturity? What is their
Henderson Company bonds currently sell for $1,275. These bonds can be called in five years at a call price of $1,120 and pay an annual coupon of $120. What is their yield to call?AppendixLO1
Describe how the annual bond valuation formula is changed to evaluate semiannual coupon bonds. Then, write out the revised formula.AppendixLO1
Hartwell Corporation bonds have a 20-year maturity, an 8 percent semiannual coupon, and a face value of $1,000. If the going interest rate is currently 7 percent, what is the current price of these
Differentiate between interest rate risk and reinvestment rate risk.To which type of risk are holders of long-term bonds more exposed? Short-term bondholders?AppendixLO1
Identify one way to minimize both interest rate and reinvestment rate risk for an investor with a fixed investment horizon.AppendixLO1
Differentiate between mortgage bonds and debentures.AppendixLO1
Name the major rating agencies, and list some factors that affect bond ratings.Why are bond ratings important both to firms and to investors?AppendixLO1
Differentiate between a Chapter 7 Liquidation and a Chapter 11 reorganization.When would each be used?AppendixLO1
List the priority of claims for the distribution of a liquidated firm's assets.AppendixLO1
Why do most bond trades occur in the over-the-counter market?AppendixLO1
If a bond issue is to be sold at par, how will its coupon rate be determined?AppendixLO1
Is it true that the following equation can be used to find the value of an N-year bond that pays interest once a year?AppendixLO1 Annual VB = interest (1+ka) Par value + (1+ka)
"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
The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rates in the economy rise after a bond has been issued, what
If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.AppendixLO1
A sinking fund can be set up in one of two ways:(1) The corporation makes annual payments to the trustee, who invests the proceeds in securities(frequently government bonds) and uses the accumulated
Indicate whether each of the following actions will increase or decrease a bond's yield to maturity:a. A bond's price increases.b. The company's bonds are downgraded by the rating agencies.c. A
What are the characteristics of a liquid asset? Give some examples.AppendixLO1
Identify the key ratio that is used to analyze a firm's liquidity position, and write out its equation.AppendixLO1
Why is the current ratio the most commonly used measure of short-term solvency?AppendixLO1
Identify four ratios that are used to measure how effectively a firm is managing its assets, and write out their equations.AppendixLO1
How might rapid growth distort the inventory turnover ratio?AppendixLO1
When evaluating a firm's DSO, with what should it be compared?AppendixLO1
What potential problem might arise when comparing different firms' fixed assets turnover ratios?AppendixLO1
Identify three important implications of the extent to which a firm uses financial leverage.AppendixLO1
How does the use of financial leverage affect stockholders' control position?AppendixLO1
In what way do taxes influence a firm's willingness to finance with debt?AppendixLO1
In what way does the decision to use debt involve a risk-versus-return trade-off?AppendixLO1
Explain the following statement: "Analysts look at both balance sheet and income statement ratios when appraising a firm's financial condition."AppendixLO1
Name three ratios that are used to measure the extent to which a firm uses financial leverage, and write out their equations.AppendixLO1
Identify and write out the equations for four ratios that show the combined effects of liquidity, asset management, and debt management on profitability.AppendixLO1
Why is the basic earning power ratio useful?AppendixLO1
Why does the use of debt lower the ROA?AppendixLO1
What does ROE measure? Since interest expense lowers profits, does using debt lower ROE?AppendixLO1

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