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business
principles managerial finance

Questions and Answers of Principles Managerial Finance

P5–34 Relationship between future value and present value: Mixed stream Using the information in the accompanying table, answer the questions that follow.a. Determine the present value of the mixed
P5–35 Relationship between future value and present value: Mixed stream The table below shows a mixed cash flow stream except that the cash flow for year 3 is missing.Suppose that somehow you know
P5–37 Compounding frequency, time value, and effective annual rates For each of the cases in the following table:a. Calculate the future value at the end of the specified deposit period.b.
P5–38 Continuous compounding For each of the cases in the following table, find the future value at the end of the deposit period, assuming that interest is compounded continuously at the given
P5–42 Deposits to accumulate future sums For each of the cases shown in the following table, determine the amount of the equal, annual, end-of-year deposits necessary to accumulate the given sum at
P5–47 Loan payment Determine the equal, annual, end-of-year payment required each year over the life of the loans shown in the following table to repay them fully during the stated term of the
P5–51 Growth rates You are given the series of cash flows shown in the following table.a. Calculate the compound annual growth rate between the first and last payment in each stream.b. If year-1
P5–55 Choosing the best annuity Raina Herzig wishes to choose the best of four immediate-retirement annuities available to her. In each case, in exchange for paying a single premium today, she will
P5–57 Loan rates of interest John Flemming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one
P5–58 Number of years to equal future amount For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given
P5–60 Number of years to provide a given return In each of the following cases, determine the number of years that the given annual end-of-year cash flow must continue to provide the given rate of
1... At the end of 2015, Uma Corporation is considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined
ST10–1 All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M
E10–1 Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000;
E13–3 Ashkenazi Companies has the following stockholders’ equity account:Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend
ST15–1 Cash discount decisions The credit terms for each of three suppliers are shown in the following table. (Note: Assume a 365-day year.)a. Determine the approximate cost of giving up the cash
ST9–1 Individual costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following
E10–2 Herky Foods is considering acquisition of a new wrapping machine. The initial investment is estimated at $1.25 million, and the machine will have a 5-year life with no salvage value. Using a
E13–4 The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share(EPS) and dividends paid per
ST7–2 Free cash flow valuation Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of $12,500,000 and no preferred stock. Its weighted
E13–5 The current stockholders’ equity account for Hilo Farms is as follows:Hilo has announced plans to issue an additional 5,000 shares of common stock as part of its stock dividend plan. The
P13–1 Dividend payment procedures At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10.The firm has 300,000 shares of
E10–5 Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on
P13–4 Dividend constraints The Howe Company’s stockholders’ equity account follows:The earnings available for common stockholders from this period’s operations are $100,000, which have been
P9–1 Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new
P10–3 Choosing between two projects with acceptable payback periods Shell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John
P13–6 Low-regular-and-extra dividend policy Bennett Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes that strict
P15–3 Credit terms Purchases made on credit are due in full by the end of the billing period.Many firms extend a discount for payment made in the first part of the billing period. The original
P9–3 Before-tax cost of debt and after-tax cost of debt David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following information on the security.a. Calculate the
P13–7 Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table.a. If the firm’s dividend policy were based on a constant payout
P9–4 Cost of debt using the approximation formula For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity
P13–8 Alternative dividend policies Given the earnings per share over the period 2008–2015 shown in the following table, determine the annual dividend per share under each of the policies set
P7–3 Preferred dividends In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock
P9–5 The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different
P10–7 Net present value: Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether
ST11–2 Risk-adjusted discount rates CBA Company is considering two mutually exclusive projects, A and B. The following table shows the CAPM-type relationship between a risk index and the required
P13–9 Stock dividend: Firm Columbia Paper has the following stockholders’ equity account.The firm’s common stock has a current market price of $30 per share.a. Show the effects on Columbia of a
P15–6 Cash discount decisions Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services
E6–2 The yields for Treasuries with differing maturities on a recent day were as shown in the table below.a. Use the information to plot a yield curve for this date.b. If the expectations
P13–10 Cash versus stock dividend Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share.a. Show the effects on the firm of a
E6–3 The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table.Use the information in the
P9–8 Cost of preferred stock Determine the cost for each of the following preferred stocks. Preferred stock Par value Sale price Flotation cost Annual dividend A $100 $101 $9.00 11% B 40 38 $3.50
E6–5 Calculate the risk premium for each of the following rating classes of long-term securities, assuming that the yield to maturity (YTM) for comparable Treasuries is 4.51% Rating class Nominal
E11–4 Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $25,000, has a 5-year life, and has no residual value at the end of the 5
P13–13 Stock split: Firm Growth Industries’ current stockholders’ equity account is as follows:a. Indicate the change, if any, expected if the firm declares a 2-for-1 stock split.b. Indicate
P7–8 Common stock value: Constant growth Use the constant-growth model (Gordon growth model) to find the value of each firm shown in the following table. Firm Dividend expected next year Dividend
c. Determine J&M’s cost of common stock equity using the CAPM.P9–10 Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is
P10–12 Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16%cost of capital.a. Calculate each
E11–5 Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk
P9–11 Retained earnings versus new common stock Using the data for each firm shown in the following table, calculate the cost of retained earnings and the cost of new common stock using the
E11–6 Outcast, Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, M and N. The cash flows for each project are presented
P13–15 Stock split versus stock dividend: Firm Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders’ equity position shown. The current stock price is $120
P10–14 Internal rate of return For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that
P13–16 Stock dividend versus stock split: Firm The board of Wicker Home Health Care, Inc., is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per
P14–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.a. Divide the firm’s
P7–11 Common stock value: Constant growth Elk County Telephone has paid the dividends shown in the following table over the past 6 years.The firm’s dividend per share next year is expected to be
P9–13 WACC: Book weights Ridge Tool has on its books the amounts and specific (aftertax)costs shown in the following table for each source of capital.a. Calculate the firm’s weighted average cost
P11–2 Expansion versus replacement cash flows Edison Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.a. If
P13–17 Stock repurchase The following financial data on the Bond Recording Company are available:The firm is currently considering whether it should use $400,000 of its earnings to pay cash
P6–2 Real rate of interest To estimate the real rate of interest, the economics division of Mountain Banks—a major bank holding company—has gathered the data summarized in the following table.
P9–14 WACC: Book weights and market weights Webster Company has compiled the information shown in the following table.a. Calculate the weighted average cost of capital using book value weights.b.
P10–16 IRR: Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm’s warehouse capacity.The relevant cash
P13–18 Stock repurchase Harte Textiles, Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclic downturn in the home furnishings
P9–15 WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the
P14–7 Marginal costs Jimmy Johnson is interested in buying a new Jeep SUV. There are two options available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a
P15–16 Accounts receivable as collateral Kansas City Castings (KCC) is attempting to obtain the maximum loan possible using accounts receivable as collateral. The firm extends net-30-day credit.
P6–4 Yield curve A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in
P15–17 Accounts receivable as collateral Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as
P6–5 Nominal interest rates and yield curves A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following average annual rates of
P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The
P11–6 Book value Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 on page 112 for the applicable
P6–6 Nominal and real rates and yield curves A firm wishing to evaluate interest rate behavior has gathered data on the nominal rate of interest and on inflationary expectations for five U.S.
P7–16 Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public
P9–18 Weighted average cost of capital John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years and can be repaid without
P10–20 NPV, with rankings Botany Bay, Inc., a maker of casual clothing, is considering four projects. Because of past financial difficulties, the company has a high cost of capital at 15%.a.
P11–7 Change in net working capital calculation Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of
P15–19 Factoring Blair Finance factors the accounts of the Holder Company. All eight factored accounts are shown in the following table, with the amount factored, the date due, and the status on
P6–7 Term structure of interest rates The following yield data for a number of highestquality corporate bonds existed at each of the three points in time noted.a. On the same set of axes, draw the
P7–17 Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 per share. Although you are
P9–19 Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data.The firm is in the 40%
P10–21 All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $150,000.The company’s board of
P6–8 Risk-free rate and risk premiums The real rate of interest is currently 3%; the inflation expectation and risk premiums for a number of securities followa. Find the risk-free rate of interest,
P7–18 Book and liquidation value The balance sheet for Gallinas Industries is as follows.Additional information with respect to the firm is available:(1) Preferred stock can be liquidated at book
P10–22 Payback, NPV, and IRR Rieger International is attempting to evaluate the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash
P6–9 Risk premiums Eleanor Burns is attempting to find the nominal rate of interest for each of two securities—A and B—issued by different firms at the same point in time.She has gathered the
P7–19 Valuation with price/earnings multiples For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples.
P10–23 NPV, IRR, and NPV profiles Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following
P11–10 Calculating initial investment DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will
1.. Nova Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following
P10–24 All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax
P10–25 All techniques with NPV profile: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%.
P7–22 Integrative: Risk and valuation Giant Enterprises’ stock has a required return of 14.8%.The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that
P10–26 Integrative: Multiple IRRs Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following
P11–13 Incremental operating cash flows Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that will last 5 more years.The new lathe is expected to
P6–13 Valuation of assets Using the information provided in the following table, find the value of each asset Cash flow Asset End of year Amount A 1 $ 5,000 Appropriate required return 18% 2 5,000
P7–23 Integrative: Risk and valuation Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the
P10–27 Integrative: Conflicting Rankings The High-Flying Growth Company (HFGC) has been growing very rapidly in recent years, making its shareholders rich in the process.The average annual rate of
P10–28 ETHICS PROBLEM Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent
1.. The Drillago Company is involved in searching for locations in which to drill for oil.The firm’s current project requires an initial investment of $15 million and has an estimated life of 10
P11–16 Relevant cash flows: No terminal value Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3

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