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business
intermediate financial management

Questions and Answers of Intermediate Financial Management

2. Sanchez Hydraulics Company has outstanding a 14 percent coupon bond with 3 years to maturity. Interest payments are made semiannually. Assume a face value of $100.
c. Compute the internal rate of return of each stream if the initial investment at time 0 were $600.
b. Compute the present value of each stream if the discount rate is 14 percent.
a. Calculate the terminal value of each stream at the end of year 5 with an interest rate of 10 percent.
3. When the market price equals the face value, the yield to maturity equals the coupon rate
2. When a bond sells at a premium, its yield to maturity is less than the coupon rate.
1. When a bond's market price is less than its face value of $100 so that it sells at a discount, the yield to maturity exceeds the coupon rate.
8. How does the notion of risk and reward govern the behavior of financial managers?
7. As an investor, do you believe that some managers are paid too much? Do not their rewards come at your expense?
6. In recent years, there have been a number of environmental, pollution, hiring, and othe; replations imposed on businesses. In view of these changes, is maximizationof shareholder wealth still a
5. Should the managers of a company own sizable amounts of stock in the company?What are the pros and cons?
4. What are the major functions of the financial manager? What do these functions have in common?
3. Beta-Max Corporation is considering two investment proposals. One involves the development of 10 discount record stores in Chicago. Each store is expected to provide an annual after-tax profit of
1. Why should a company concentrate primarily on wealth maximization instead of profit maximization?2. "A basic rationale for the objective of maximizing the wealth position of the stockholder as a
4. Application Using any CAFR that you select, conduct an FCA.
3. Application In the case study, we examined the budgetary solvency in the city of Lucille.Now the city manager wants an analysis of all four dimensions of FCA—cash solvency, budgetary solvency,
2. Calculation Table 12.10 shows expenditure data for the past five years in an urban city.1. Compute the correlation coefficients for these factors.2. Prepare a paragraph interpreting the results.
Define the following Long-term debt ratio Net assets per capita Long-term debt per capita Socioeconomic/organizational factors Theoretical justification of measurement Measurement controllability
1. Key TermsService solvency Measurement validity Measurement reliability Measurement affordability Cash ratio Quick ratio Operating ratio Own-source ratio Net asset ratio
1. Key Terms Financial condition analysis (FCA)Purpose of FCA Scope of FCA FCA modeling Financial condition Solvency Cash solvency Budgetary solvency Long-run solvency
Access a state or local government’s CAFR for the last two years.1. Go to the General Fund Balance Sheet (likely included in the Governmental Funds Balance Sheet). Compare key assets, liabilities,
1. Key TermsBalance sheet for funds Statement of revenues, expenditures, and changes in fund balance Proprietary funds Enterprise funds Internal service funds Fiduciary funds Pension trust funds
1. Key Terms Accounting equation for funds Fund balances Governmental funds Measurement focus Income determination (economic resource measurement) focus Current financial resource measurement focus
2. CAFR Access the CAFR of a government for the last three years. Refer to the statement of activities to compare changes in expenses, program revenues, net(expenses) revenues, general revenues, and
1. Key Terms Revenues Program revenues General revenues Net (expenses) revenues Special items Transfers Change in net assets Accrual basis Cash basis Modified accrual basis
1. Key Terms Statement of activities Governmental activities Business-type activities Expenses Indirect expenses Direct services
2. Financial Analysis of the CAFR Access the CAFRs of three recent years of a government. Refer to the Statement of Net Assets to conduct an analysis on assets, liabilities, and net assets to
1. Key Terms Debit and credit Primary government Component units Monetary denominator Objective evidence Cost convention Conservatism Going concern Materiality Accrual accounting basis
1. Key Terms Accounts receivable Inventory Prepaid expenses Long-term assets or fixed assets Current liability Noncurrent liabilities Accounts payable Long-term debts Deferred revenues Restricted net
1. Key Terms Net assets Current assets Noncurrent assets Cash or cash equivalents Investments
1. Key Terms Net worth Balance sheet Statement of net assets Statement of financial position Statement of activities Fundamental accounting equation Assets Liabilities
3. Do you see any investment opportunities for the foundation’s cash?If yes, develop an investment strategy for the foundation.You are a financial analyst in the Bridgetown Foundation—a public
2. Assuming a lower limit of $1,000,000, a transaction fee of $200, and a 5 percent annual interest rate, use the Miller-Orr model to determine the upper limit and the return point of the cash
1. Create a cash budget for the next year. Use the proper forecasting techniques (from Chapter 1) and defend your reasoning for your choice of technique.You are a financial analyst in the Bridgetown
2. Assuming a lower limit of $200, a transaction cost of $10, and an annual interest rate of 10 percent, what is the upper limit and what is the return point using the Miller-Orr model? Table 8.6
1. Calculate the variance of net daily cash flows. Table 8.6 Cash Flows of Selected Days ($) Day Receipts 1 50 Disbursement 70 10 234567896 90 40 80 80 100 120 70 140 50 50 80 40 130 110 60 100 110
1. Key Terms Return point Transaction cost Daily interest rate Net cash flows Variance of daily net cash flows Decision rules in the Miller-Orr model
1. Key Terms Investment plans Low-risk investments Miller-Orr model Lower limit Upper limit Spread
1. Key Terms Cash safety Liquidity Investment returns Cash budget Cash receipts Cash disbursements Cash balance Optimal cash balance
4. Historical Comparison of the Indicators Make an effort to obtain CAFRs for the past three years, and compare the indicators in Questions 2 and 3 over time. Report your monitoring findings.
Use the information in the above question to compute the following financial indicators. Discuss briefly the meaning of each indicator.1. Total revenue per resident. (Note: To find out the population
8. Current liabilities for the primary entity in the Statement of Net Assets(Total Liabilities – Noncurrent or Long-Term Liabilities). The CAFR typically has three sections: an introduction, a
7. Total liabilities for the primary entity in the Statement of Net Assets. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial
6. Current assets for the primary entity in the Statement of Net Assets(Total Assets – Noncurrent or Capital Assets). The CAFR typically has three sections: an introduction, a financial section,
5. Change in net assets for the primary entity in the Statement of Activities. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial
4. Total expenses for the primary entity in the Statement of Activities. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section
3. Total revenue for the primary entity in the Statement of Activities(general revenues plus program revenues). The CAFR typically has three sections: an introduction, a financial section, and a
2. Total net assets for the primary entity in the Statement of Net Assets. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial
1. Total assets for the primary entity in the Statement of Net Assets. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is
1. Key Terms Financial results indicators Total asset turnover Fixed asset turnover Return on assets Return on net assets Comprehensive Annual Financial Report (CAFR)Three steps in detecting
1. Key TermsLong-term (or noncurrent) assets Liabilities Asset reserves Fund equity (balance)Fund operating surplus (or deficit)Funds General fund Enterprise funds Debt ratio
1. Key Terms Total expenditures Expenditures per capita Financial process indicators Liquidity Current ratio Current assets Current liabilities Net assets Changes in net assets
1. Key Terms Purposes of financial performance monitoring Three elements in financial monitoring Financial indicators Nonfinancial indicators Financial input indicators Total revenue Revenue per
5. CBA for Education Conduct a CBA for obtaining a master’s degree from a public college. Explain explicitly any assumptions in your analysis.
4. Cost-Effectiveness Analysis Sometimes it is rather difficult to convert benefits into monetary gains. In the Sunny Village case, we can choose not to convert the benefit to monetary terms, but
3. The Sensitivity Analysis in CBA In CBA, assumptions must be made about benefits, costs, the discount rate, and the lifetime of a project. In reality, these assumptions change. For example, in this
2. Calculations Table 6.4 shows cost and benefit flows of two public infrastructure projects.1. Use a 5 percent discount rate to compute the NPV for both projects.2. Recalculate the NPV for both
1. Key Terms Measurable and quantifiable project objectives Project outcomes Project outputs Project (accounting) cost Opportunity cost Cost-effectiveness analysis (CEA)
1. Key Terms Cost-benefit analysis (CBA)Net present value (NPV)Present value of benefits Benefit/cost ratio Achievable project objectives Mutually inclusive project objectives Mutually exclusive
5. Incremental Cost Analysis and Zero-Based Budgeting Incremental cost analysis is a potentially useful tool for zero-based budgeting(ZBB). ZBB requires the development of program costs in an
4. Incremental Cost Analysis Referring to the above problem, suppose that the city wants a two-year deal.In the second year of the deal, the recycling materials from the city will be 5,000 tons. The
3. Incremental Cost Analysis A county’s recycling program collected 46,280 tons of recyclable refuse this year. The cost of the program includes five vehicles that can partly process the recycles.
2. Suppose that, at a new production level of 30,000, the fixed cost increases to $4.5 million, what are the incremental and marginal costs for the additional 10,000 units? Table 5.3 Cost
1. What are the incremental and marginal costs for producing 5,000 additional units? Table 5.3 Cost Comparison in Incremental Cost Analysis TC for in-house Personnel services Office rental
1. Key Terms Sunk cost Fixed cost (FC)Variable cost (VC)Quantity range Mixed cost Incremental cost (IC)Marginal cost (MC)
4. Present Value Analysis: Lease or Buy Decisions One of the many uses of PVC and annualized cost is for making a so-called“lease or buy” decision. Suppose that the purchase price of a heavy-duty
3. Present Value Analysis The Education Association of Metro Orlando (EAMO) is a public service organization that provides after-school services for children. EAMO recently received a federal grant
6. Suppose the length of the loan is twenty years in Question 5 above, what should be your monthly payment of principal and interest for the next twenty years?
5. Suppose that you borrow a ten-year $100,000 loan to purchase a house and the annual interest rate is 7 percent, what should be your monthly payment of principal and interest for the next ten
4. What is the annualized cost of $12,000 of computer equipment that lasts five years with an annual discount rate of 5 percent?
3. What is the present value of a stream of future values that include$200 now, $500 one year from now, $500 two years from now, and$500 three years from now?
2. What is the present value of $1,000 two years from now, with an annual discount rate of 5 percent?
1. What is the present value of $1,000 one year from now, with an annual discount rate of 5 percent?
1. Review Key Terms Present value Future value Time value of money Discount rate Present value of cost Annualized cost
U.S. state and local governments are required to report expenses of service functions in a Comprehensive Annual Financial Report (CAFR). Gain access to a recent CAFR. Go to the “Financial
Cost allocation is one of most difficult tasks in total cost estimation. The use of cost base in cost allocation determines the accuracy of calculation. Two types of measures are often used as cost
4. In the above question, suppose that the use of the network follows a pattern in which the number of hours in use is 2,920 for Year 1, 2,190 for Year 2, and 1,460 for Year 3. All other conditions
1. Review Key Terms Cost pool Activity-based costing (ABC)Personnel cost Operating cost Capital cost Cost depreciation Straight-line depreciation Usage rate depreciation Average cost as a measure of
1. Review Key Terms Total cost (or full cost) (TC)Average cost (or unit cost) (AC)Direct cost Indirect cost Cost allocation Overhead rate Cost base
1. Review Key Terms Public service agencies Break-even production Cost Expenditure Cost objective Cost time frame Cost items (or cost elements)
Numerous policy and management actions have financial consequences that can lead to revenue shortage. Identify one of these actions from your local communities and perform an RDA.
Table 2.11 shows police expenditures and population figures for the past ten years. What is the estimated police expenditure per capita for the next year? Table 2.11 An Example of Expenditure
3. If the actual shortage is $275,654, what is the estimation error of the shortage?City A is expecting a decline in its residential water/sewer user charges as a result of population decline. Table
2. What is the revenue shortage of this user charge as the result of the consumption decline?City A is expecting a decline in its residential water/sewer user charges as a result of population
1. What is the total estimated amount of the water/sewer user charge this year?City A is expecting a decline in its residential water/sewer user charges as a result of population decline. Table 2.10
A state plans to increase the number of items exempted from its retail sales tax. The tax amount is defined as (Retail Sales Value – Exemption) × Tax Rate. Table 2.9 shows the expected change.1.
1. Review Key Terms Intergovernmental assistance as a revenue option Use of financial reserves as a revenue option Institutional/policy changes as a revenue option Applicability of revenue options
1. Review Key Terms Purchase price estimation of expenditure growth Demographics estimation of expenditure growth Comparable scenarios estimation of expenditure growth Increasing taxes as a revenue
1. Review Key Terms Resource development analysis (RDA)Revenue shortage Steps in RDA Elements in revenue shortage estimation Revenue loss Revenue base Revenue rate Flat rate Block rate
Forecast the three largest revenues from a government of your choice.
Table 1.12 shows a city’s miscellaneous revenues for the last ten years. An investigation reveals that the drastic increase from Year 5 to Year 6 was due to a new reclassification of the city’s
Franchise taxes are levied on businesses that gain a franchise right of doing business in a jurisdiction’s territory. The data in Table 1.10 are franchise tax revenues in the city of Sunbelt,
4. Use Excel to build a regression model. Use this model to forecast the receipt of licenses, permits, and fees in Year 8. Is this a more accurate method than SMA, TMA, or EXS? Table 1.9 presents the
3. Use the most accurate method to forecast the receipts of licenses, permits, and fees in Years 9, 10, and 11. Use the Year 8 actual figure instead of the forecast figure. Also consider three
2. If we know that the receipt of licenses, permits, and fees in Year 8 was $23,210,218, which of the above forecasting techniques is most accurate?Table 1.9 presents the historical information of
1. Use SMA (from the receipts of the last three years), EXS, and TMA(consider three incremental changes for your computation) to forecast the revenue in Year 8. Table 1.9 presents the historical
2. If a revenue can be expressed as total annual forecast revenue =10.40 + 5.50 (the year in forecast). What is the forecast revenue in Year 10? What is the forecast in Year 11? What is the
2. Calculations Table 1.8 shows the time-series data of certain revenues.1. Use SMA, with an average of three years, to forecast the revenue in Year 6. Use your calculator to forecast, and then use
1. Review Key Terms Transformation moving average (TMA)Revenue trend Upward trend Downward trend Incremental changes Regression against time Time-series forecasting Quasi-causal forecasting model
1. Review Key Terms Delphi technique Forecast subject Forecast horizon Forecasting techniques Simple moving average (SMA)Exponential smoothing (EXS)Smoothing constant or αUnderforecast Overforecast

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