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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

Balance sheet As of the end of 2012, Summerville Paving, Inc., had current assets of $86,000, current liabilities of $45,000, long-term debt of $340,000, and total shareholder equity of 294,000. What
Standardized statements You are trying to explain standardized statements to your friend, who is an avid golfer. He doesn’t understand, so you try it in his language. “Standardizing your
Market and book values Exactly 3 years ago, you bought a van for your firm at a cost of $37,000. The van falls within a 5-year property class. Today, a competitor came to you and offered to buy the
Ratio analysis Discuss the five categories of ratio analysis, detailing the role they play in determining the financial well-being of the firm.
Profitability ratios Holly’s Fish Farm, Inc., has a current ratio of 2.1 times. In addition, she has total assets of $571,000 and total debt of $214,000. Holly’s ROE is 18.7 %. What is her net
DuPont identity Explain the difference between the DuPont Identity and a standard ratio. What does the DuPont allow that the standard ratio does not?
Profitability ratios Billy’s Sheet Factory had taxable income of $20 million last year. In addition, they have total assets of $36 million and a tax rate of 35 %. What is Billy’s return on assets?
Growth rates Internal and sustainable growth rates measure the firm’s expected growth rate, with restrictions. Discuss those restrictions and how you can draw similarities between the way they are
DuPont identity Nanny’s Doll Emporium has a profit margin of 11 %, total asset turnover of .8 times, and return on equity of 16.3 %. What percentage of the firm’s capital structure is debt?
DuPont identity The firm’s net income is $59,423, total assets is $458,008, total sales is $380,083, and debt-to-equity ratio is 2.81 times. What is the firm’s ROE?
Long-term solvency ratios If the firm has an equity multiplier of 1.85 times, what is the firm’s existing capital structure?
Internal growth rate Your firm had net income of $590,000 last year. The firm has debt of $2.4 million and equity of $1.8 million. The firm paid a dividend per share of $.05 for each of their five
Sustainable growth rate Mac and Lindsey’s Doughnut Shop, Inc., had a taxable income of $1,152,546 and a tax rate of 35 %. They have 500,000 shares outstanding and have a dividend per share (DPS) of
Standardized statements Create common-size income statements and balance sheets for Gennifer’s Basket Shop, whose 2012 statements are below. Gennifer's Basket Shop, Inc. Income statement for the
Ratio analysis Complete a ratio panel on Gennifer’s Basket Shop, Inc., using all ratios included in Table 2.7. Gennifer has 5,000 shares outstanding, each selling at $24 per share.
Ratio analysis Gennifer’s Basket Shop has two primary competitors, Bob’s Weave Shop and Harriet’s Container Station. The ratios for each of those firms are presented below. Based upon your work
Cash flows Describe the difference between cash flows and income. Why are we most concerned with cash flows?
Operating cash flow Your firm has total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 35 %. The firm does not have interest expenses. What is the operating cash flow?
Cash flow identity Hariet from accounting has forgotten her finance classes from school and just said, “I don’t understand what this cash flow identity is all about. Where are the assets,
Change in NWC Gil’s Barrel Company has cash flow from assets of $162,489.Last year, they bought $334,489 worth of new long-term assets, while selling off$217,555. In addition, the firm had EBIT of
Change in NWC Suppose a firm had current assets of $13,500,000 and current liabilities of $6,590,000 in 2011. In 2012, the firm had current liabilities of$5,480,000. If the firm’s change in NWC is
Cash flow identity Is it possible for any (or all) of the three pieces of the cash flow identity to have negative values? For all that can, create a basic scenario that would explain the negative
Cash flow identity Your boss just burst into your cubicle, sweating profusely and screaming that the firm’s cash flow from assets is negative for last year.“We’re going under, we’re going
Net capital spending A firm’s cash flow from assets is 34,562. During the year, they added $78,000 in NWC. The firm had EBIT of $156,700, depreciation of $26,425, and interest of $8,779. The firm
Incremental cash flows Consider the following cash flows: sunk costs, opportunity costs, and interest expense. Should these cash flows be considered as relevant to the project?
Cash flow to creditors At the beginning of the year, long-term debt of a firm is$280 and total debt is $340. At the end of the year, long-term debt is $260 and total debt is $350. The interest paid
Cash flow from assets Jill’s Grape Vineyard, Inc., had net income last year of$126,555 from $358,000 of sales. They paid interest of $23,000 and depreciation of $9,500. The firm increased their
Project net capital spending and change in NWC Is it possible for an accepted project to require a decrease in net capital spending or net working capital? If so, what does that mean for the company?
Project expected cash flows You have been asked to obtain estimates of cash flows for a massive project the company is considering. Your head spins.Where do you start? On what number is everything
Cash flow from assets You have calculated your cash flow from assets to be$8,800. Suppose you have net capital spending of $14,000 and a decrease in NWC of $2,000. You have EBIT of $25,500 and
Project expected cash flows “I just don’t get it,” your study-mate sighs, “I’m getting a positive number for net capital spending, but you’re saying that it is really an outflow for the
Cash flow Suppose you are given the following information for Stone’s Masonry Service.(a) Create the income statement for 2011 and 2012.(b) Create the balance sheet for both 2011 and 2012.(c) What
Project expected cash flows Suppose you are considering a 7-year project with the following annual pro forma statement.In addition, the project is going to require net capital spending of 10,000 and
Project expected cash flows Your neighbor and good ole boy, Bo Duke, doesn’t understand why you don’t consider the right-hand side of the cash flow identity in estimated project expected cash
Depreciation, taxes, and interest How does depreciation affect project expected cash flows? How do taxes affect project expected cash flows? How does interest affect project expected cash flows?
Project expected cash flows Suppose Scotty’s Exotic Pets, LLC, is considering a project that has a life of 4 years and total NINV of $450,000. During the first year, the company has estimated sales
Time value of money Explain why this concept is so important in business.What are the potential pitfalls you may encounter if you fail to correctly account for the time value of money?
Future value Suppose you have $5,000 to invest. If you invest it in an account earning 5.5 % annually over the next ten years, what will it be worth at the end of those ten years?
Simple versus compound interest Briefly discuss the differences between simple and compound interest. How do these differences affect both the present and future values of cash flows?
Present value If you are to receive a lump sum payment of $1,430 in eight years, what is it worth today? Suppose the APR is 14 %, compounded annually?
Compounding versus discounting What is the difference between compounding cash flows and discounting cash flows? Give an example of when you would use each.
Present value You are to receive $13,900. You will receive it at the end of twenty three years from now. If the APR is 6 %, compounding monthly, what is the present value of the lump sum?
Lump sums and interest rates What is the relationship between interest rate changes and present values? What about future values? Why do these relationships exist?
Future value Suppose you have $3,598 and want to invest it at 8 %, compounded quarterly. How much money would you have at the end of twenty five years?
Lump sums and time periods What is the relationship between time periods and present values? What about future values? Why do these relationships exist?
Future value You just found a wallet laying on the ground outside of the Business School. Being a selfish and immoral person, you keep the $300 you find inside. However, being knowledgeable of the
Annual percentage rate What is the APR? How is it calculated, and what is its influence on present and future values?
Present value Suppose you just received an inheritance of $25,000, but you can’t get it until you’re 21.Assume you are now only thirteen years old. If the interest rate is 4.5 % APR, compounded
EAR and APR Discuss the difference between the effective annual return(EAR) and the annual percentage rate (APR). Discuss the advantages and disadvantages of both rates and possible situations where
Future value You recently won a drawing at work with a grand prize of$1,000. Being wise in the ways of finance, upon winning you immediately invest it in one of those online savings accounts that
More frequent compounding What is the relationship between the number of compounding periods per year and present values? What about future values?Why do these relationships exist?
Present value You have just bought an Andrew Luck rookie card. Assume you can jump in your time machine and see that he will turn out to be the greatest quarterback to ever play the game. As such,
Loan types What are the basic characteristics of the three loan types: pure discount, interest-only, and amortized loans. How do they differ? In what instances would you expect to see each of these?
Internal rate of return Suppose a project is expected to have a 2-year life and is expected to generate net cash flows of $10,000 in year one. In year two, the cash flow decreases to $8,000. If the
PV of unequal cash flows You decide to become a professional gambler. You estimate that you can make $20,000 next year betting on sports. You then figure you will be better at it, so you estimate you
Interest rate You have identified your dream home. Unfortunately, it costs $350,000, and you currently have a grand total of $78,000. What interest rate must an account give you in order to have the
Annuities and lump sums What is the difference between investing $120 at the end of the year and investing $10 at the end of each month of that same year?
Interest rate Your savings account has doubled in the past thirteen years. You put one payment of $10,000 in at time 0.What annual interest rate have you earned?
Interest rates Suppose you have $1,000 to invest and are considering two alternative options. Option 1 has an APR of 10 %, compounded quarterly, while option two has an APR of 12 %, compounding
Time period On your tenth birthday, you received $100, which you invested at a 4.5 % interest rate, compounded annually. That investment is now worth$3,000. How old are you now?
Annuities, interest rates, and time periods Discuss the relationships between the interest rate and the present and future value of annuities. What about the relationship between time periods and the
Time period You’re a boating enthusiast. You have recently found the vessel of your dreams, a 20-foot, 500 horsepower piece of nautical delight. However, it costs $55,000 and as of now you only
Ordinary annuity What are the four characteristics of an ordinary annuity?Give two real-life examples of an annuity.
Finance versus accounting You have a friend that is a rising junior in college and is in the process of making a tough decision. She has narrowed her choice for major to either accounting or finance
Income statement Discuss the form and function of the typical income statement.Why is it important for a firm?
Dividends versus retained earnings Hank from the board of directors has issued a proposal that the firm start paying 98% of their profits in dividends. “There’s no better way to keep shareholders
Corporate taxes Julie is getting ready to file both her personal and corporate tax returns. She is confused because the tax rates seem to work differently. Explain to Julie what is going on with
Corporate tax rates Compare and contrast how corporate tax rates work currently to how it worked just a few years ago? What is the difference between a tiered modified flat tax rate system versus a
Market versus book values Your company has a large machine that originally cost $100,000. They just sold it for $20,000 and actually got a tax reward for doing so. How could they have received a tax
Balance sheet Discuss the form and function of the balance sheet. Why is it important for a firm?
Cash flow statement Discuss the form and function of the cash flow statement.What are the three sections and what is the ultimate purpose?
Accounting statements All three of the core financial statements are linked together. Explain how.
Using accounting statements Your neighbor across the office just made the statement, “I don’t understand how accounting statements help in finance at all. Accounting tells us what has happened
Peer analysis How do you determine if values on accounting statements are“good” or “bad.” Discuss the difficulties of doing so, along with potential solutions to those difficulties.
Standardized statements You are trying to explain standardized statements to your friend, who is an avid golfer. He doesn’t understand, so you try it in his language. “Standardizing your
Ratio analysis Discuss the categories of ratio analysis, detailing the role they play in determining the financial well-being of the firm.
DuPont identity Explain the difference between the DuPont Identity and a standard ratio. What does the DuPont allow that the standard ratio does not?
Growth rates Internal and sustainable growth rates measure the firm’s expected growth rate, with restrictions. Discuss those restrictions and how you can draw similarities between the way they are
Cash flows Describe the difference between cash flows and sales or between cash flow and income. Why are we most concerned with cash flows?
Cash flow identity Harriet from Accounting has forgotten her finance classes from school and just said, “I don’t understand what this cash flow identity is all about. Where are the assets,
Cash flow identity Is it possible for any (or all) of the three pieces of the cash flow identity to have negative values? For all that can, create a basic scenario that would explain the negative
Cash flow identity Your boss just burst into your cubicle, sweating profusely and screaming that the firm’s cash flow from assets is negative for last year.“We’re going under, we’re going
Incremental cash flows Consider the following cash flows: sunk costs, opportunity costs, and interest expense. Should these cash flows be considered as relevant to the project? Why or why not?
Pro forma financial statements What’s different between standard accounting statements and pro forma accounting statements? What’s similar?
Project net capital spending and change in NWC Is it possible for an accepted project to require a decrease in net capital spending or net working capital? If so, what does that mean for the company?
Project expected cash flows You have been asked to obtain estimates of cash flows for a massive project the company is considering. Your head spins. Where do you start? On what number is everything
Project expected cash flows “I just don’t get it,” your study-mate sighs, “I’m getting a positive number for net capital spending, but you’re saying that it’s subtracted? That doesn’t
Project expected cash flows Your neighbor and good ole boy, Bo Duke, doesn’t understand why you don’t consider the right-hand side of the cash flow identity in estimated project expected cash
Depreciation, taxes, and interest How does depreciation affect project expected cash flows? How do taxes affect project expected cash flows? How does interest affect project expected cash flows?
Operating cash flow Your firm has total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 21%. The firm does not have interest expenses. What is the operating cash flow?
Change in NWC Gil’s Barrel Company has cash flow from assets of $162,489.Last year, they bought $334,489 worth of new long-term assets while selling off $217,555. In addition, the firm had EBIT of
Change in NWC Suppose a firm had current assets of $13,500,000 and current liabilities of $6,590,000 in 2019. In 2020, the firm had current liabilities of $5,480,000. If the firm’s change in NWC is
Net capital spending A firm’s cash flow from assets is −$34,562. During the year, they added $78,000 in NWC. The firm had EBIT of $156,700, depreciation of $26,425, and interest of $8,779. The
Cash flow to creditors At the beginning of the year, long-term debt of a firm is $280 and total debt is $340. At the end of the year, long-term debt is $260 and total debt is $350. The interest paid
Cash flow to shareholders Billy’s Bean Barn had net income of $500,000 and a payout ratio of 62%. Total equity increased this year by $85,000 over last year. Given this, what is the cash flow to
Cash flow from assets Jill’s Grape Vineyard, Inc. had the net income last year of $126,555 from $358,000 of sales. They paid the interest of $23,000 and depreciation of $9,500. The firm increased
Cash flow from assets You have calculated your cash flow from assets to be$12,800. Suppose you have net capital spending of $14,000 and a decrease in NWC of $2,000. You have EBIT of $25,500 and
Cash flow Suppose you are given the following information for Stone’s Masonry Service:(a) Create the income statement for 2019 and 2020.(b) Create the balance sheet for both 2019 and 2020.(c) What
Project expected cash flows Suppose you are considering a seven-year project with the following annual pro forma statement:In addition, the project is going to require net capital spending of 10,000
Project expected cash flows You are in charge of evaluating a project that is designed to produce coffee cups. The project requires the purchase of a new machine that costs $75,000 and will require

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