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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

What is the bid-ask spread?
Differentiate between closely held and publicly owned corporations.
Differentiate between primary and secondary markets.
What is an IPO?
What is a Dutch auction, and what company used this procedure for its IPO?
Would you expect a portfolio that consisted of the NYSE stocks to be more or less risky than a portfolio of NASDAQ stocks?
If we constructed a chart like Figure 2.2 for a typical S&P 500 stock, do you think it would show more or less volatility? Explain.Figure 2.2 FIGURE 2.2 Returns (%) 50.00 40.00 30.00 20.00 -
What does it mean for a market to be “efficient”?
Is the market for all stocks equally efficient? Explain.
Why is it good for the economy that markets be efficient?
Is it possible that the market for individual stocks could be highly efficient, but the market for whole companies could be less efficient? Explain.
What is arbitrage?
What is behavioral finance? What are the implications of behavioral finance for market efficiency?
Define each of the following terms:a. Spot markets; futures marketsb. Money markets; capital marketsc. Primary markets; secondary marketsd. Private markets; public marketse. Derivativesf. Investment
What is the annual report, and what two types of information does it provide?
What four financial statements are typically included in the annual report?
Why is the annual report of great interest to investors?
What is the balance sheet, and what information does it provide?
How is the order in which items are shown on the balance sheet determined?
Explain in words the difference between net working capital and net operating working capital.
Explain in words the difference between total debt and total liabilities.
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?
What is EBITDA?
Which is more like a snapshot of the firm’s operations—the balance sheet or the income statement? Explain your answer.
What is the statement of cash flows, and what are some questions it answers?
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?
Why do changes in retained earnings occur?
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 else.
Can investors be confident that if the financial statements of different companies are accurate and are prepared in accordance with GAAP, the data reported by one company will be comparable to the
Why might different companies account for similar transactions in different ways?
What is free cash flow (FCF)?
Why is FCF an important determinant of a firm’s value?
Define the terms market value added (MVA) and economic value added (EVA).
How does EVA differ from accounting net income?
Explain this statement: “Our tax rates are progressive”.
What’s the difference between individual marginal and average tax rates?
Refer to Allied’s balance sheets shown in Table 3.1 to answer the following questions:a. What was Allied’s net working capital on December 31, 2020?b. What was Allied’s net operating working
Refer to Allied’s balance sheets shown in Table 3.1. What was Allied’s total debt on December 31, 2020?Table 3.1 Allied Food Products: December 31 Balance Sheets (millions of dollars) Assets
A company has EBIT of $30 million, depreciation of $5 million, and a 25% tax rate. It needs to spend $10 million on new fixed assets and $15 million to increase its operating current assets. It
Refer to the box titled, “A Quick Glance at the Aggregate Balance Sheets of Households and Nonprofits, 2000–2019,” when answering parts a and b.a. What has happened to net worth levels since
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?
Byron Books Inc. recently reported $15 million of net income. Its EBIT was $20.8 million, and its tax rate was 25%. What was its interest expense? (Hint: Write out the headings for an income
Patterson Brothers recently reported an EBITDA of $7.5 million and net income of $2.625 million. It had $1.5 million of interest expense, and its corporate tax rate was 25%. What was its charge for
Barton Industries has operating income for the year of $3,500,000 and a 25% tax rate.Its total invested capital is $20,000,000 and its after-tax percentage cost of capital is 8%.What is the firm’s
For 2021, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost
Hampton Industries had $39,000 in cash at year-end 2020 and $11,000 in cash at year-end 2021. The firm invested in property, plant, and equipment totaling $210,000—the majority having a useful life
Arlington Corporation’s financial statements (dollars and shares are in millions) are provided here.a. What was net operating working capital for 2020 and 2021? Assume that all cash is excess cash;
Edmonds Industries is forecasting the following income statement:The CEO would like to see higher sales and a forecasted net income of $3,000,000. Assume that operating costs (excluding depreciation
The Davidson Corporation’s balance sheet and income statement are provided here.a. Construct the statement of stockholders’ equity for December 31, 2021. No common stock was issued during 2021.b.
Financial information for Powell Panther Corporation is shown here.a. What was net operating working capital for 2020 and 2021? Assume the firm has no excess cash.b. What was the 2021 free cash
Mary Jarvis is a single individual who is working on filing her tax return for the previous year. She has assembled the following relevant information:● She received $82,000 in salary.● She
Laiho Industries’s 2020 and 2021 balance sheets (in thousands of dollars) are shown.a. Sales for 2021 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were
Donna Jamison, a 2016 graduate of the University of Florida, with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D’Leon Inc., a small food
Dunkin’ Brands Group, Inc. operates under the Dunkin’ Donuts and Baskin-Robbins brands worldwide and has over 13,000 Dunkin’ Donuts and over 8,100 Baskin-Robbins restaurants.Using financial
What are the characteristics of a liquid asset? Give examples of some liquid assets.
What question are the two liquidity ratios designed to answer?
Which is the least liquid of the firm’s current assets?
A company has current liabilities of $500 million, and its current ratio is 2.0. What is the total of its current assets? ($1,000 million) If this firm’s quick ratio is 1.6, how much inventory does
Write the equations for four ratios that are used to measure how effectively a firm manages its assets.
If one firm is growing rapidly and another is not, how might this distort a comparison of their inventory turnover ratios?
If you wanted to evaluate a firm’s DSO, with what could you compare it?
How might the different ages of firms distort comparisons of their fixed assets turnover ratios?
A firm has annual sales of $100 million, $80 million of cost of goods, $20 million of inventory, and $30 million of accounts receivable. What is its inventory turnover ratio? (43) What is its DSO?
How does the use of financial leverage affect stockholders’ control position?
How does the U.S. tax structure influence a firm’s willingness to finance with debt?
How does the decision to use debt involve a risk-versus-return trade-off?
Explain the following statement: Analysts look at both balance sheet and income statement ratios when appraising a firm’s financial condition.
Name two ratios that are used to measure financial leverage and write their equations.
Identify six profitability ratios, and write their equations.
Why does the use of debt lower the profit margin and the ROA?
Using more debt lowers profits and thus the ROA. Why doesn’t debt have the same negative effect on the ROE?
A company has a 10% ROA. Assume that a company’s total assets equal total invested capital, and that the company has no debt, so its total invested capital equals total equity. What are the
Describe the three ratios discussed in this section and write their equations.
In what sense do these market value ratios reflect investors’ opinions about a stock’s risk and expected future growth?
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?
How is book value per share calculated? Explain how inflation and R&D programs might cause book values to deviate from market values.
Write the equation for the DuPont equation.
What is the equity multiplier, and why is it used?
How can management use the DuPont equation to analyze ways of improving the firm’s performance?
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion.The company’s total assets equal total invested capital, and its capital consists of half debt and
Baker Industries’s net income is $24,000, its interest expense is $5,000, and its tax rate is 25%. Its notes payable equals $27,000, long-term debt equals $75,000, and common equity equals
Broward Manufacturing recently reported the following information:Broward’s tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total
Thomson Trucking has $12 billion in assets, and its tax rate is 25%.Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5.25%. What is its times-interest-earned (TIE) ratio?
The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 7%. In addition, it has $600,000 of common equity on its balance sheet. It finances
Pacific Packaging’s ROE last year was only 5%, but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of
Lloyd Inc. has sales of $200,000, a net income of$15,000, and the following balance sheet:The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio
MPI Incorporated has $6 billion in assets, and its tax rate is 25%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is MPI’s times interest-earned (TIE) ratio?
Data for Barry Computer Co. and its industry averages follow. The firm’s debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, the number of
The Corrigan Corporation’s 2020 and 2021 financial statements follow, along with some industry average ratios. Corrigan is exempt from the interest deduction limitation because its average gross
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 increased plant capacity and
In Chapter 3, we looked at Dunkin’ Brands’ financial statements. In this chapter, we will use a financial Internet website, morningstar.com, to analyze HP Inc., a computer hardware company. Once
Do time lines deal only with years, or can other time periods be used?
Set up a time line to illustrate the following situation: You currently have $2,000 in a 3-year certificate of deposit (CD) that pays a guaranteed 4% annually.
Explain why this statement is true: A dollar in hand today is worth more than a dollar to be received next year.
What is compounding? What’s the difference between simple interest and compound interest? What would the future value of $100 be after 5 years at 10% compound interest? At 10% simple interest?
Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your
A company’s sales in 2021 were $100 million. If sales grow at 8%, what will they be 10 years later, in 2031?
How much would $1 growing at 5% per year be worth after 100 years? What would the FV be if the growth rate were 10%?

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