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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

8-3. Why would a preferred stockholder want the stock to have a cumulative dividend feature and other protective provisions?
8-2. Because preferred stock dividends in arrears must be paid before common stock dividends, should they be considered a liability and appear on the right side of the balance sheet?
8-1. Why is preferred stock referred to as a hybrid security? It is often said to combine the worst features of common stock and bonds. What is meant by this statement?
In an uncertain world, capital budgeting attempts to determine what the future of a new product will bring and how then to act on that forecast. We never know for certain what the future will bring,
II-8B. (Probability trees) Mac's Buffaloes, Inc., is considering expanding its operations into computer-based basketball games. Mac's Buffaloes feels that there is a three-year life associated with
7. What does time dependence of cash flows mean? Why might cash flows be time dependent?Give some examples.
6. What is sensitivity analysis and what is its purpose?
5. Explain how simulation works. What is the value of using a simulation approach?
4. Why might we use the probability tree technique for evaluating capital-budgeting projects?
3. What are the similarities and differences between the risk-adjusted discount rate and certainty equivalent methods for incorporating risk into the capital-budgeting decision?
2. According to the CAPM, which measurement of a project's risk is relevant? What complications does reality introduce into the CAPM view of risk and what does that mean for our view of the relevant
1. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project's risk?
You've decided to use the pure play method for estimating a project's beta. Let's assume that your new product is in the pharmaceutical industry. That means the first thing you'll have to do is
11-8A. (Probability trees) Sega, Inc. is considering expanding its operations into computer-based lacrosse games. Sega feels that there is a three-year life associated with this project, and it will
11-6. What does time dependence of cash flows mean? Why might cash flows be time dependent?Give some examples.
11-5. Explain how simulation works. What is the value in using a simulation approach?
11-4. What is the value of using the probability tree method for evaluating capital-budgeting projects?
11-3. What are the similarities and differences between the risk-adjusted discount rate and the certainty equivalent methods for incorporating risk into the capital-budgeting decision?
11-2. The use of the risk-adjusted discount rate assumes that risk increases over time. Justify this assumption.
17-12B. (Stock split) You own 25 percent of the Star Corporation, which recently sold for $90 before a planned two-for-one stock split announcement. Before the split tllere are 90,000 shares of
17-11B. (Re)'idual dividend theory) Maness, Inc., finances new acquisitions with 3S percent in equity and the rest in debt. The firm needs $1.5 million for a new acquisition. If retained earnings
17-lOB. (Flotation costs and issue size) D. B. Fool, Inc., needs to raise $16 million. Assuming that the market price of the firm's stock is $100 and flotation costs are 12 percent of the market
17-9B. (Repurchase of stock) The B. Phillips Corporation is planning to pay dividends of 5550,000. There are 275,000 shares outstanding, with an earnings per share of $6. The stock should sell for
11-1. In Chapter 9, we examined the p,ayback period capital-budgeting decision criterion.Often this capital-budgeting criterion is used as a risk-screening device. Explain the rationale behind its
17-7B. (Stock split) You own 8 percent of the Standlee Corporation's common stock, which most recendy sold for $98 before a planned two-for-one stock split announcement. Before the split mere are
17-5B. (Dividends in peifect markets) The management of Montford, Inc., is considering two dividend policies for the years 1997 and 1998, one and two years away. In 1999, the management~planning to
17-4B. (Stock dividentf) DCA has 2.5 million shares of common stock outstanding. Net income~$600,000, and the PIE ratio for the stock is 10. Management is planning an 18 percent stockdividend.What
17-3B. (Residual dividend theory) Steven Miller finances new investments by 35 percent debt and 65 percent equity. The finn needs $650,000 for financing new investments. If retained earnings
17-2B. (F/ctation co~ts and isme size) If flotation costs for a common stock issue are 14 percen~how large must the issue be so that the firm will net $6,100,000? If the stock sells for $76 per
17-IB. (Flotation costs and issue size) Your firm needs to raise $12 million. Assuming that flotation costs are expected to be $17 per share and that the market price of the stock is $115, how many
The following article appeared in the July 2, 1995, issue of the Dallas Morning News, Scott Burns, the author, argues the case for the importance of dividends.Let us now praise the lowly
17-2WW Stock repurchase plans, as discussed in this chapter, have become a rather common financial policy activity within corporate America. IBM is one well-known firm that has had a long history of
17-1WW. As was mentioned in this chapter, the "Jobs and Growth Tax Relief Reconciliation Act of 2003" included important changes in the tax code that relate to corporate dividend policy and the
17-13A. (Stock split) You own 20 percent of Rainy Corp., which recently sold for $86 before a planned two-for-one stock split announcement. Before the split there are 80,000 shares of common stock
17-12A. (Residual dividend theory) Martinez, Inc., finances new acquisitions with 70 percent debt and the rest in equity. The firm needs $1.2 million for a new acquisition. If retained earnings
17-11A. (Flotation costs and issue size) D. Butler, Inc., needs to raise $14 million. Assuming that the market price of the firm's stock is $95 and flotation costs are 10 percent of the market price,
17-10A. (Repurchase ofstock) The Dunn Corporation is planning to pay dividends of $500,000.There are 250,000 shares outstanding, with an earnings per share of$5. The stock should sen for$50 after the
17-8A. (Stock split) You own 5 percent of the Trexco Corporation's common stock, which recently sold for $98 prior to a planned two-for-one stock split announcement. Before the split there are 25,000
17-6A. (Dividends in peifeet markets) The management of Harris, Inc., is considering two dividend policies for the years 1996 and 1997, one and two years away. In 1998, the management is planning to
17-5A. (Stock dividend) RCB has 2 million shares of common stock outstanding. Net income ~$550,000, and the PIE ratio for the stock is 10. Management is planning a 20 percent stockdivi dend. What
17-4A. (Residual dividend theory) Terra Cotta finances new investments by 40 percent debt and 60 percent equity. The firm needs $640,000 for financing new investments. If retained earnings available
17-3A. (Flotation costs and issue size) If flotation costs for a common stock issue are 18 percen~how large must the issue be so that the firm will net $5,800,000? If the stock sells for $85 per
17-2A. (Flotation costs and issue size) Your firm needs to raise $10 million. Assuming that flotation costs are expected to be $15 per share and that the market price of the stock is $120, how many
ST-1. (Dividend growth rate) Schutz, Inc., maintains a constant dividend payout ratio of 35 percent.Earnings per share last year were $8.20 and are expected to grow indefinitely at a rate of 12
17-13. "Why would a firm repurchase its own stock?
17-12. "What are the advantages of a stock split or dividend over a cash dividend?
17-11. Explain declaration date, date of record, and ex-dividend date.
17-10.a. "Why is a stable dollar dividend policy popular from the viewpoint of the corporation?b. Is it also popular with investors? "Why?
17-9. How can ownership conu'ol constrain the gwwth of a firm?
17-8. How does a firm's liquidity position affect the payment of dividends?
17-7. "What legal restrictions may limit the amount of dividends to be paid?
17-6. "Why might investors prefer capital gains to the same amount of dividend income?
17-5.a. "What is the residual dividend tbem)'?b. "Why is this theory operational only in the long term?
17-4. "What is the impact of flotation costs on the financing decision?
17-3.a. "What are the assumptions of a perfect market?b. "What effect does dividend policy have on the share price in a perfect market?
17-2. Explain the trade-off between retaining internally generated funds and paying cash dividends.
17-1. "What is meant by the term dividend payout ratio?
16-14B. (Capital structure theory) Fernando Hotels has an all-cammon-equity capital structure.Some financial data for the company are as follows:Shares of common stock outstanding = 575,000 Common
16-10B. (Analysis ofrecessionary cash flows) Seville Cranes, Inc., is undertaking a thorough cash flow analysis. It has been proposed by management that the firm expand by raising $6 million in the
16-9B. (EBIT-EPS analysis) The professors in problem 16-8B contacted a financial consultant to provide them with some additional information. They felt that in a few years, the stock of the firm
16-8B. (EBIT-EPS analysis) A group of college professors has decided to form a small manufacturing corporation. The company will produce a full line of contemporary furniture. Two financing plans
16-7B. (EBIT-EPS analysis) Four recent business school graduates have interested a group of venture capitalists in backing a small business enterprise. The proposed operation would consist of a
16-6B. (Analysis of recessionary cash flows) The management of CincilUlati Collectibles (CC) is considering an increase in its use offinancial leverage. The proposal on the table is to sell $11
16-5B. (ERIT-EPS analysis) Two recent graduates of the computer science program at Ohio Tech are forming a company to write, market, and distribute software for various personal computers.Initially,
16-4B. (ERIT-EPS analysis) Three recent liberal arts graduates have interested a group of venmre capitalists in backing a new business enterprise. The proposed operation would consist ofa series of
16-3B. (EBlT-EPS analysis) Three recent graduates of the computer science program at Midstate University are forming a company to write and distribute software for various personal
16-2B. (EBIT-EPS analysis with sinkingfund) Due to her concern over the effect of the "worst that could happen" if she finances the expansion only with debt (she believes cash collections on sales
Aconcern of the venture capitalists, of course, is whether FCI would be able to survive its first year in business if for some reason~such as an economic recession or just an overly optimistic sales
5. At an EBIT level of $1,300,000, what is the price/earnings ratio they would have to obtain under HLP for the EPS ofHLP to provide the same stock price as that projected for LLP in part 4 above?
4. If the analysis of FCI's long-term prospects also shows that at a long-term EBIT of$1,300,000 a price/earnings ratio of 18 likely would apply under LLP, and a ratio of 14 would apply under HLP,
3. If an analysis of FCI's long-term prospects indicates that long-term EBIT will be $1,300,000 annually, which financing alternative will generate the higher EPS?
2. Prepare an analytical income statement that demonstrates that EPS will be the same regardless of the alternative selected. Use the EBIT level computed in part 1 above. .
1. Find the EBIT indifference level associated with the two financing alternatives, and prepare an EBIT-EPS analysis graph.
16-2WW. The Federal Reserve Bank of St. Louis maintains an outstanding Web site at www.stls.frb/org.ltis a fertile source for financial and economic time series data. Go to the St.Louis Fed site and
16-1W\¥. This exercise focuses on capital structure management and its direct relationship to corporate capital costs. We will work with actual relationships from the Coca-Cola Company(ticker symbol
16-18A. (Capital structure theory) South Bend Auto Parts has an all-common-equity capital structure. Some financial data for the company are as follows:Shares of common stock outstanding = 600,000
16-17A. (Capital structure theory) Boston Textiles has an all-common-equity capital structure.Pertinent financial characteristics for the company are shown below:Shares of common stock outstanding =
16-14A. (Analysis ofrecessirmary cash flows) Cavalier Agriculture Supplies is Wldertaking a thorough cash flow analysis. It has been proposed by management that the firm expand by raising $5 million
16-13A. (EBIT-EPS analysis) The professors discussed in problem 16-12A contacted a financial consultant to provide them with some additional information. They felt that in a few years, the stock of
16-12A. (EBIT-EPS analysis) A group of college professors has decided to form a small manufacturing corporation. The company will produce a full line of contemporary furniture. Two financing plans
16-11A. (EBIT-EPS analysis) Four recent business school graduates have interested a group of venture capitalists in backing a small business enterprise. The proposed operation would consist of
16-lOA. (Analysis ofrecessionary cash flows) The management of Idaho Produce is considering an increase in its use of financial leverage. The proposal on the table is to sell $10 million of bonds
16-9A. (EBlT-EPS analysis) Two recent graduates of the computer science program at Ohio Tech are forming a company to write, market, and distribute software for various personal corn·puters.
16-8A. (EBlT-EPS analysis) Three recent liberal arts graduates have interested a group of venture capitalists in backing a new business enterprise. The proposed operation would consist ofa series of
16-7A. (EBlT-EPS analysis) Three recent graduates of the computer science program at Southern Tennessee Tech are forming a company to write and distribute software for various personal computers.
16-6A. (EBIT-EPS analysis) Four recent liberal arts graduates have interested a group ofventure capitalists in backing a new business enterprise. The proposed operation would consist of a series of
16-5A. (Capital structure theory) Deep End Pools & Supplies has an all-common-equity capital structure. Some financial data for the company are as follows:Shares of common stock outstanding = 900,000
16-4A. (EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture.Two
16-3A. (EBIT-EPS analysis with sinking fund) Due to his concern over the effect of the "wom that could happen" if he finances the equipment acquisition only with debt (he believes cash col·lections
16-2A. (Analysis of recessionary cash flows) Ontherise, Inc. is considering expanding its bagel bakery business with the acquisition ofnew equipment to be financed entirely with debt. The company
16-1A. (Analysis ofrecessionary cash flows) The management of Transpacific Inc. is considering an increase in its use of financial leverage to develop several investment projects. The proposal is to
ST-3. (EBlT-EPS analysis) Four engineers from Martin-Bowing Company are leaving that firm in order to form their own corporation. The new firm will produce and disnibute computer software on a
ST-1. (Analysis o/recessional)' cash flows) The management of Story Enterprises is considering an increase in its use of financial leverage. The proposal on the table is to sell $6 million of bonds
16-17. In almost every instance, what funds source do managers use first in the financing of their capital budgets?
16-16. Why should the financial manager be familiar with the business cycle?
16-15. Briefly describe the trend in corporate use of financial leverage during the 1980s.
16-14. What is meant by the free cash flow theory 0/capital structure?
16-13. Define the term free cash flow.
16-12. Explain how industry norms might be used by the financial manager in the design of the rompany's financing mix.
16-11. What is UEPS?

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