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business
intermediate financial management

Questions and Answers of Intermediate Financial Management

11-1 Compare and contrast market-skimming and market penetration pricing strategies and discuss the conditions under which each is appropriate. For each strategy, give an example of a recently
Objective 5 Overview the social and legal issues that affect pricing decisions. pg93 Public policy and pricing (pp. 328–330)
Objective 4 Discuss the key issues related to initiating and responding to price changes.Price changes (pp. 325–328) pg93
Objective 2 Explain how companies find a set of prices that maximises the profits from the total product mix.Product mix pricing strategies (pp. 315–317) pg93•Objective 3 Discuss how companies
Objective 1 Describe the major strategies for pricing new products. pg93 New product pricing strategies (pp. 314–315)
4. Is Cath Kidston’s pricing strategy sustainable? Explain.
3. Could Cath Kidston have been successful as a designfocused product marketer had it employed a low-price strategy? Explain. pg93
2. Has Cath Kidston executed value-based pricing, cost-based pricing or competition-based pricing? Explain. pg93
1. Does Cath Kidston’s pricing strategy truly differentiate it from the competition? pg93
10-14 If the unit variable cost for each computer is €350 and the manufacturer has fixed costs totalling €2 million, how many computers must this manufacturer sell to break even? How many must it
Reflective thinking; Ethical reasoning)10-13 A consumer purchases a computer for €800 from a retailer. If the retailer’s mark-up is 30 per cent and the wholesaler’s mark-up is 10 per cent, both
10-12 Is this similar to the ‘freemium’ model used by many US game producers? Explain this model and discuss examples of games that use this model. (AACSB: Communication pg93;
10-11 Is it ethical for game producers to use game playing data to encourage consumers to spend more? Explain why or why not. (AACSB: Communication; Ethical reasoning) pg93
10-10 Camel is not the only Amazon tracking or online price tracking application. Find and describe an example of another online price tracking tool for consumers.(AACSB: Communication; Use of IT)
10-9 Go to http://us.camelcamelcamel.com/ and set up a free account. Track ten products that interest you. Did any of the products reach your desired price? Write a report on the usefulness of this
Communication; Reflective thinking) pg93
10-6 If you’ve ever travelled to another country, such as Germany, you may have noticed that the price on a product is the total amount you actually pay when you check out. That is, no sales tax is
10-8 What is the Consumer Price Index (CPI)? Select one of the reports available at www.bls.gov/cpi/home.htm and create a presentation on price changes over the past two years. Discuss reasons for
10-5 What other issues beyond the market and the economy must marketers consider when setting prices? (AACSB:Communication) pg93
10-4 Name and describe the four types of markets recognised by economists and discuss the pricing challenges posed by each. (AACSB: Communication) pg93
10-3 What is target costing and how is it different from the usual process of setting prices? (AACSB: Communication)
10-2 Name and describe the types of costs marketers must consider when setting prices. Describe the types of costbased pricing and the methods of implementing each.(AACSB: Communication) pg93
10-1 How does value-based pricing differ from cost-based pricing? (AACSB: Communication) pg93
5. Can Reckitt extend its position in emerging markets. If so, how can this be achieved? pg93
4. Will Reckitt be able to maintain its market position in so many areas when strong competitors enter with their own niche products? Why or why not? pg93
3. Based on the product life cycle, what challenges does Reckitt face in managing its brand portfolio? Are the challenges for Mr Kapoor different to those faced earlier by Mr Brecht? In what ways?
2. Is Reckitt’s product development customer-centred?pg93Justify and explain your answer.
1. How has Reckitt been able to achieve leadership positions in so many different areas?
9-13 What other factors must a dentist consider before offering this service in addition to their in-office service?(AACSB: Communication; Reflective thinking) pg93
9-12 What types of fixed costs are associated with this service?Estimate the total fixed costs for this additional service, and, assuming a contribution margin of 40 per cent, determine the amount of
9-10 Discuss the ethical issues surrounding orphan drugs.Should pharmaceutical companies be allowed to charge such high prices for these drugs? (AACSB: Communication;Ethical reasoning) pg93
9-9 Discuss other existing products that have created new life for the product by embracing Internet, mobile or social media platforms. Suggest an app for another tangible pg93
9-8 In what stage of the product life cycle is the Reading Rainbow television programme? Has the mobile app changed that? Explain. (AACSB: Communication; Reflective thinking) pg93
9-7 The ‘Internet of Things’ — a term that refers to everyday objects being connected to the Internet — is growing.Thermostats, ovens, cars, toothbrushes, and even baby clothes are connecting
9-6 Find an example of a company that launched a new consumer product within the last five years. Develop a presentation showing how the company implemented the 4 Ps in launching the product and
9-5 It appears that the sky is the limit regarding ideas for smartphone/tablet apps. In a small group, create an idea for new apps related to (1) business, (2) health, (3) education,(4) sports and
9-3 What are the benefits of an innovation management system and how can a company install such a system?pg93Do all products follow this pattern? Explain. (AACSB:Communication; Reflective thinking)
9-2 What decisions must be made once a company decides to go ahead with commercialisation for a new product?(AACSB: Communication) pg93
1. What do you think that the John Lewis brand means to consumers?Is this brand a strength or a weakness as the company moves forward? pg93•process? What is required in a good marketing strategy
8-13 What brand development strategy is Kellogg’s undertaking?(AACSB: Communication; Reflective thinking) pg93
8-10 Discuss two examples of similar types of wearable technology for humans. (AACSB: Communication; Reflective thinking) pg938-14 Assume the company expects to sell 5 million packages of Pop-Tarts
The presence of personal taxes reduces the tax advantage associated with corporate debt. As long as the personal tax on stock income is less than that on debt income, however, the net tax advantage
(3) Value with $7 million in debt:(1 - .40)(1 - ,251 Value = $10,000 + 1 - .30 I $7,000= $12,500
b. (1) Value if unlevered (in thousands): the same as before, namely,$10,000 (10 million).(2) Value with $4 million in debt:I (1 - .40)(1 - .25)Value = $10,000 + 1 - 1 - .30 I $4,000
(3) Value with $7 million in debt:Value = $10,000 + .40($7,000) = $12,800 Due to the tax subsidy, the firm is able to increase its value in a linear manner with more debt.
2.a. (1) Value if unlevered (in thousands):Chapter 9 Theory of Capital S t r u c t u r e 285 EBIT $ 3,000 Profit before taxes 3,000 Taxes 1,200 Profit after taxes .$Tm =1; required equity return .18
(2) It is lower because Zoom uses less debt in its capital structure. As the equity capitalization is a linear function of the debt-to-equity ratio when we use the net operating income approach, the
b. (1)Total value of firm $2,000,000 Market value of debt (~20,% ) 400.000 Market value of equity (80%) $1,600,000 Net operating income $ 360,000 Interest on debt (8%) 32,000 Earnings to common $
(2) Implied required equity return = $280,000/$1,000,000 = 28%
3;- Solutions to Self- correction Problems Net operating income $ 360,000 Overall capitalization rate .18 Total value of firm $2,000,000 Market value of debt (50%) 1,000,000 Market value of stock
10. Archer-Deloitte Company wishes to finance a $15 million expansion program and is trying to decide between debt and equity. Management believes the market does not appreciate the company's profit
b. Does the value of the debt increase proportionally with the increase in its face value? Why or why not?284 Part 111 Financing and Dividend Policies
a. What is the effect on the value of the stock and on the value of the debt if the standard deviation is 50 percent?
9. Suppose in Problem 8 that Mohave Sand and Transit Company decided to issue$2 million in additional debt (face value) with a 3-year maturity and to repurchase$2 million in stock.
c. Does one party gain at the expense of the other? If this is the case, how can the other party protect itself?
b. If the company were to increase the riskiness of its business so that the standard deviation became 50 percent, what would happen to the value of the stock and to the value of the debt?
a. Treating the stock as an option and using the Black-Scholes option model, Eq. (5-3) in Chapter 5, determine the value of the equity and the value of debt.
8. Mohave Sand and Transit Company currently has an overall value of $8 million.The debt has a face value of $4 million and is represented by discount bonds that mature in 3 years. The standard
b. With bankruptcy and agency costs, what is the optimal capital structure?
a. (1) At a tax rate of 50 percent (federal and state), what is the weighted average cost of capital of the company at various leverage ratios in the absence of bankruptcy and agency costs? (2) What
7. Acme-Menderhall Corporation is trying to determine an appropriate capital structure. It knows that as its leverage increases, its cost of borrowing will eventually increase, as will the required
6. Petroles Vintage Wine Company is presently family owned and has no debt.The Petroles family is considering going public by selling some of their stock in the company. Investment bankers tell them
c. What would be the tax advantage if the personal tax rate on common stock income were (1) 30 percent? (2) 20 percent? (Assume that all else stays the same.)
b. Determine the tax advantage with both corporate and personal income taxes. Why does your answer to part b differ from that to part a?
a. Determine the tax advantage to Loveless Electrical Products Company for the use of debt under the assumption of corporate income taxes but no personal income taxes. (Assume the debt is perpetual
5. Loveless Electrical Products Company has $4 million in debt outstanding.The corporate income tax rate is 35 percent. In an extensive study of investors, G. Rosenberg and Associates, an outside
c. The required return on equity for the company's stock is 20 percent while it remains all equity financed. What is the value of the firm?What is the value if it is recapitalized?
b. What is the present value of the debt tax shield?
a. If the corporate tax rate is 40 percent, what is the income to all security holders (1) if the company remains all equity financed? (2) if it is recapitalized?
4. Zapatta Cottonseed Oil Company has $1 million in earnings before interest and taxes. Currently it is all equity financed. It may issue $3 million in per282 Part 111 Financing and Dividend Policies
c. Are your conclusions in part a confirmed?
b. Construct a graph in terms of k,, k, and k, based on the data given.
a. By observation, what do you think is the optimal capital structure?
3. The Blalock Corporation has a $1 million capital structure and will always maintain this book-value amount. Blalock currently earns $250,000 per year before taxes of 50 percent, has an all-equity
b. When will this arbitrage process cease?
a. You own $22,500 worth of Green stock. Show the process and the amount by w ch you could reduce your outlay through the use of arbitrage.
2. The Kelly Company and the Green Company are identical in every respect except that the Kelly Company is not levered, while the Green Company has$2 million in 12 percent bonds outstanding. There
b. Determine the answers to part a if the company were to sell the additional$10 million in debt.Chapter 9 Theory of Capital Structure 281
a. Using the net operating income approach and an overall capitalization rate of 11 percent, compute the total market value, the stock market value, and the implied required return on equity for the
3. UEtoile du Nord Resorts is considering various levels of debt. Presently, it has no debt and a total market value of $15 million. By undertaking leverage, it believes that it can achieve a net tax
a. Why do your answers differ?
b. Personal as well as corporate taxes now exist. The marginal personal tax rate on common stock income is 25 percent, and the marginal personal tax rate on debt income is 30 percent. Determine the
a. In the absence of personal taxes, what is the value of the company in an MM world (1) with no leverage? (2) with $4 million in debt? (3)with $7 million in debt?
2. Massey-Moss Corporation has earnings before interest and taxes of $3 million and a 40 percent tax rate. Its required rate of return on equity in the absence of borrowing is 18 percent.
b. Zoom has the same net operating income as Abacus. (1) What is the implied required equity return of Zoom? (2) Why does it differ from that of Abacus?
a. (1) If you own 2 percent of the stock of Abacus, what is your dollar return if the company has net operating income of $360,000 and the overall capitalization rate of the company, ko, is 18
1. Abacus Calculation Company and Zoom Calculators, Inc., are identical except for capital structures. Abacus has 50 percent debt and 50 percent equity, whereas Zoom has 20 percent debt and 80
4. The absence of corporate income taxes is assumed. MM remove this assumption later.
3. Firms can be categorized into "equivalent return" classes. All firms within a class have the same degree of business risk. As we shall see later, this assumption is not essential for their proof.
2. The average expected future operating earnings of a firm are represented by subjective random variables. It is assumed that the expected values of the probability distribution of all investors are
1. Capital markets are perfect. Information is costless and readily available to all investors. There are no transactions costs, and all securities are infinitely divisible. Investors are assumed to
4. The expected values of the subjective probability distributions of expected future operating earnings for each company are the same for all investors in the market.5. The operating earnings of the
3. The fir111 has a policy of paying 100 percent of its earnings in dividends.Thus, we abstract from the dividend decision.254 Part 111 Financing and Dividend Policies
2. The ratio of debt to equity for a firm is changed by issuing debt to repurchase stock or issuing stock to pay off debt. In other words, a change in capital structure is effected immediately. In
1. There are no corporate or personal income taxes and no bankruptcy costs.(Later, we remove these assumptions.)
b. To pay this price, the assumptions of the CAPM must hold. The company is being valued according to its systematic risk only. The effect of the acquisition on the total risk of Williams Warbler
5.a. The estimated required rate of return for the acquisition is Using this rate to discount the net cash flows, we obtain Net Cash Present-Value Present Years flow Factor Value The maximum price
b. If the CAPM approach gives an opposite decision, the key to deciding would be the importance of market imperfections. As indicated earlier, if a company's stock is traded in imperfect markets, if
4.a. The coefficients of variation (standard deviation/NPV) for the alternatives are Existing projects .50 Plus project 1 .60 Plus project 2 .61 Plus projects 1 and 2 .63 The cdcient of variation
3. If the proxy companies are used in a CAPM approach, it is clear that different systematic risks are involved in the two divisions. The proxy companies in the health food business have more debt

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