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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

What is the annual report, and what two types of information are given in it?AppendixLO1
What four types of financial statements are typically included in the annual report?AppendixLO1
Why is the annual report of great interest to investors?AppendixLO1
Are the quantitative and verbal sections of the annual report equally important?Explain.AppendixLO1
What is the balance sheet, and what information does it provide?AppendixLO1
How is the order of the information shown on the balance sheet determined?AppendixLO1
Why might a company's December 31 balance sheet differ from its June 30 balance sheet?AppendixLO1
What is an income statement, and what information does it provide?AppendixLO1
Why is earnings per share called "the bottom line"?AppendixLO1
Differentiate between amortization and depreciation.AppendixLO1
What is EBITDA?AppendixLO1
Regarding the time period reported, how does the income statement differ from the balance sheet?AppendixLO1
What is the statement of retained earnings, and what information does it provide?AppendixLO1
Why do changes in retained earnings occur?AppendixLO1
Explain why the following statement is true: "Retained earnings as reported on the balance sheet do not represent cash and are not 'available' for the payment of dividends or anything
Differentiate between net cash flow and accounting profit.AppendixLO1
In accounting, the emphasis is on net income. What is emphasized in finance, and why is that item emphasized?AppendixLO1
Assuming that depreciation and amortization are a firm's only noncash costs, how is the firm's net cash flow calculated?AppendixLO1
Does the fact that a company generates high cash flow necessarily mean that the amount of cash reported on its balance sheet will also be high? Briefly explain.AppendixLO1
Identify four factors that affect the company's cash position as reported on the balance sheet.AppendixLO1
What is the statement of cash flows, and what types of questions does it answer?AppendixLO1
Identify and briefly explain the three different categories of activities shown in the statement of cash flows.AppendixLO1
What is net operating working capital?AppendixLO1
What is total operating capital?AppendixLO1
What is NOPAT? Why might it be a better performance measure than net income?AppendixLO1
What is free cash flow? Why is free cash flow the most important determinant of a firm's value?AppendixLO1
Briefly explain why we need to compare managers' ability to generate operating income with the operating assets under their control to judge their performance.AppendixLO1
Define the terms "Market Value Added (MVA)" and "Economic Value Added (EVA).AppendixLO1
How does EVA differ from accounting profit?AppendixLO1
Explain the statement, "Our tax rates are progressive."AppendixLO1
What is a "muni" bond, and how are these bonds taxed?AppendixLO1
What are Long-term capital gains, and how are they taxed relative to dividend income?AppendixLO1
How does our tax system influence the use of debt financing by corporations?AppendixLO1
How does our tax system influence the use of a corporation's dividend policy, that is, the percentage of a corporation's income it pays out as dividends?AppendixLO1
What four financial statements are contained in most annual reports?AppendixLO1
It a "typical" firm reports S20 million of retained earnings on its balance sheet, could its directors declare a S20 million cash dividend without any qualms whatsoever?AppendixLO1
Explain the following statement: "While the balance sheet can be thought of as a snapshot of the firm's financial position at a point in time, the income statement reports on operations over ti
Differentiate between accounting income and net cash flow. Why might these two numbers differ?AppendixLO1
Differentiate between operating cash flow and net cash flow. \Miv might these two numbers differ?AppendixLO1
What do the numbers on financial statements actually represent?AppendixLO1
Who are some of the basic users of financial statements, and how do they use them?AppendixLO1
What is operating capital, and why is it important?AppendixLO1
Explain the difference between XOPAT and net income. Which is a better measure of the performance of a company's operations?AppendixLO1
What is free cash flow? Why is it the most important measure of cash flow?AppendixLO1
What does double taxation of corporate income mean?AppendixLO1
Explain how the federal income tax structure affects the choice of financing (use of debt versus equitv) of U.S. business firms.AppendixLO1
How might it be possible for a company to generate positive net accounting income yet have a negative EVA?AppendixLO1
Little Books Inc. recently reported net income of $3 million. Its operating income (EBIT) was$6 million, and the company pays a 40 percent tax rate. What was the company's interest expense for the
Kendall Corners Inc. recently reported net income of $3.1 million. The company's depreciation expense was $500,000. What is the company's approximate net cash flow? Assume the firm has no
In its most recent financial statements, Newhouse Inc. reported $50 million of net income and$810 million of retained earnings. The previous year, its balance sheet showed $780 million of retained
Pearson Brothers recently reported an EBITDA of $7.5 million and $1.8 million of net income.The company has $2.0 million of interest expense and the corporate tax rate is 40 percent.What was the
The Klaven Corporation has operating income (EBIT) of $750,000. The company's depreciation expense is $200,000. Klaven is 100 percent equity financed, and it faces a 40 percent tax rate. Assume that
Bailey Corporation recently reported the following income statement (dollars are in thousands):$ales Operating costs excluding depreciation and amortization EBITDA Depreciation and amortization EBIT
Henderson Industries has $500 million of common equity on its balance sheet. The company's MVA current stock price is $60 per share, and its Market Value Added (MVA) is $130 million. How many shares
The Ronayne Corporation has on its balance sheet $5 million in net operating working capi-EVA tal and S3 7 million in net fixed assets. The company's weighted average cost of capital is 8.5 percent.
Statement of retained earnings In its recent income statement ComputerWorld Inc. reported paying out $22. 5 million in total dividends to shareholders during the most recent year, and in its year-end
Statement of cash flows Williams Cycling Company had S55,000 in cash on the balance sheet at the end of 2001. At vear-end 2002, the company had S25,000 in cash. We know cash flow from long-term
Hermann Industries is forecasting the following income statement for the upcoming year:Income statement Sales Operating costs (excluding depreciation and amortization)EBITDA Depreciation and
The Smythe-Davidson Corporation just issued its annual report. The current year's balance Financial statements sheet and income statement as they appeared in the annual report are given below. Answer
Last vear Martin Motors reported the following income statement:Income statement Sales S2,000,000 Cost of goods sold 1,200,000 EBITDA S 800,000 Depreciation and amortization 500,000 Operating income
You have just obtained financial information for the past 2 years for Powell Panther Corpora-Free cash flow tion. Answer the following questions.Powell Panther Corporation: Income Statements for Year
Laiho Industries" 2001 and 2002 balance sheets (in thousands of dollars) are shown below:Financial statements, EVA, and MVA 2002 2001 Cash S102.850 S 89,725 Accounts receivable 103,365 85.527
What would happen to the SML graph in Figure 8.8 if expected inflation increased or decreased?Figure 8.8 268 269 270 271 272 273 274 275 A Required Rate of Return TH-13.0% SML: r, RF+RPM * b D E F H
What is a multinational corporation?
Why do companies “go global”?
Discuss the following statement: The United States is not immune to the influence of foreign corporations over U.S. economic and political policies.
Identify and briefly discuss five major factors that complicate financial management in multinational firms.
What is the international monetary system?
What is the difference between spot and forward exchange rates?
What is the basic difference between floating and fixed exchange rates?
Differentiate between devaluation/revaluation of a currency and depreciation/appreciation of a currency.
What are the two broad categories of the various currency regimes? What are the subgroups of those two broad categories?
Explain the difference between direct and indirect quotations.
What is a cross rate?
Assume that today 1 Canadian dollar is worth 0.75 U.S. dollar. How many Canadian dollars would you receive for 1 U.S. dollar?
Assume that 1 U.S. dollar can be exchanged for 105 Japanese yen or for 0.80 euro.What is the euro/yen exchange rate?
Explain what it means for a forward currency to sell at a discount and at a premium.
Suppose a U.S. firm must pay 200 million Swiss francs to a Swiss firm in 90 days.Briefly explain how the firm would use forward exchange rates to “lock in” the price of the payable due in 90 days.
Using data in Table 18.3, if a U.S. firm entered into a 90-day forward contract, how many dollars would be required to honor the 200 million Swiss franc obligation when it is due?Table 18.3 British
What is interest rate parity?
Assume that interest rate parity holds. When a currency trades at a forward premium, what does that imply about domestic rates relative to foreign interest rates? When a currency trades at a forward
Assume that 90-day U.S. securities have a 3.5% annualized interest rate, whereas 90-day Canadian securities have a 4% annualized interest rate. In the spot market, 1 U.S. dollar can be exchanged for
On the basis of your answer to the previous question, is the Canadian dollar selling at a premium or discount on the forward rate?Previous questionAssume that 90-day U.S. securities have a 3.5%
A television set sells for 3,000 U.S. dollars. In the spot market, $1 = 106 Japanese yen. If purchasing power parity holds, what should be the price (in yen) of the same television set in Japan?
Price differences in “similar” products in different countries often exist. What can explain those differences?
What effects do relative inflation rates have on relative interest rates?
What happens over time to the currencies of countries with higher inflation rates than U.S. inflation rates? To the currencies of countries with lower inflation rates?
Why might a multinational corporation decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country such as Switzerland, where interest rates are low?
What are the three major types of international credit markets?
What is LIBOR?
What is country risk?
What is exchange rate risk?
On what two factors does the return on a foreign investment depend?
What are the relevant cash flows for an international investment—the cash flows produced by the subsidiary in the country in which it operates or the cash flows in dollars that it sends to its
List some key differences in capital budgeting as applied to foreign versus domestic operations.
Why might the cost of capital for a foreign project differ from that of an equivalent domestic project? Could it be lower? Explain.
What adjustments might be made to the domestic cost of capital for a foreign investment due to exchange rate risk, political risk, and country risk?
Do international differences in financial leverage exist? Explain.
Define each of the following terms:a. Multinational, or global, corporationb. Vertically integrated investmentc. International monetary systemd. Exchange ratee. Freely floating regime; managed-float
Suppose the exchange rate between the U.S. dollar and the EMU euro is €0.85 = $1.00 and the exchange rate between the U.S. dollar and the Canadian dollar is $1.00 = C$1.34. What is the cross rate

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