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principles managerial finance

Questions and Answers of Principles Managerial Finance

P6–16 Bond valuation: Annual interest Calculate the value of each of the bonds shown in the following table, all of which pay interest annually. Bond ABCDE Par value Coupon interest rate Years to
P11–17 Integrative: Determining relevant cash flows Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was
P11–18 Recognizing risk Caradine Corp., a media services firm with net earnings of$3,200,000 in the last year, is considering the following projects.The media services business is cyclical and
P11–19 Breakeven cash inflows and risk Blair Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Blair to build a new gas
P6–19 Bond value and time: Changing required returns Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates
P11–20 Basic scenario analysis Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed
P6–20 Yield to maturity The relationship between a bond’s yield to maturity and coupon interest rate can be used to predict its pricing level. For each of the bonds listed, state whether the
P11–21 Scenario analysis Automated Food Distribution Corp. (AFDC) produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in
P6–22 Yield to maturity Each of the bonds shown in the following table pays interest annually.a. Calculate the yield to maturity (YTM) for each bond.b. What relationship exists between the coupon
P11–24 Risk-adjusted discount rates: Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 15%, and the
P11–25 Risk-adjusted discount rates: Tabular After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk
P6–25 Bond valuation: Semiannual interest Calculate the value of each of the bonds shown in the following table, all of which pay interest semiannually. ABCDE Bond Par value $1,000 Coupon interest
P11–28 Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess
P11–27 Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type riskadjusted discount rate (RADR)
1.. Isis Corporation has two projects that it would like to undertake. However, due to capital restraints, the two projects—Alpha and Beta—must be treated as mutually exclusive. Both projects are
P11–34 Capital rationing: NPV approach A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million.a.
P11–33 Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5
P11–30 Unequal lives: ANPV approach JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to
P11–29 Unequal lives: ANPV approach Evans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm’s ongoing need for additional
What premise about share value underlies the constant-growth valuation(Gordon growth) model that we use to measure the cost of common stock equity, rs?
What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment? How does discounted payback partially address these weaknesses?
Do the net present value (NPV) and internal rate of return (IRR)agree with respect to accept–reject decisions? With respect to ranking decisions?
What three types of project cash flows may exist for a given project?How are expansion and replacement decisions different? Explain.
What effect do sunk costs and opportunity costs have on a project’s cash flows?
Explain how to use each of the following inputs to calculate the initial cash flow: (a) cost of the new asset, (b) installation costs, (c) proceeds from the sale of the old asset, (d) tax on the sale
Referring to the basic format for calculating an initial cash flow, explain how a firm would determine the depreciable value of the new asset.
How does depreciation enter into the calculation of operating cash flows? How does the income statement format in Table 11.6 relate to Equation 11.2 for finding operating cash flow (OCF)?
How are the net operating cash flows that are associated with a replacement decision calculated?
Diagram and describe the three types of project cash flows for a capital budgeting project.
What is operating leverage, and how does it relate to project risk?
What is capital rationing? In a perfect world, should capital rationing exist? Why does it frequently occur in practice?
Comparing projects with unequal lives is often done by comparing the projects’ annualized net present value. With the information provided at MyLab Finance, use a spreadsheet to compare projects
What is a recapitalization?
Revisit Example 13.4 for Lo Road and Hi Road companies. The required returns on equity and debt are higher for Hi than for Lo.How can the cost of capital for both firms be 12%?
Suppose someone borrows from a bank to buy a new car. A few months later, the borrower realizes that he will have to default on this loan in a few months, after which the bank will repossess the car.
What two ways can firms distribute cash to shareholders?
What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit from such a plan?
Contrast the basic arguments about dividend policy advanced by Miller and Modigliani and by Gordon and Lintner.
Why do firms issue stock dividends? Comment on the following statement:“I have a stock that promises to pay a 20% stock dividend every year, and therefore it guarantees that I will break even in
Is there a cost associated with taking an early payment discount? Is there any cost associated with giving up a discount? How do borrowing costs affect the decision to take or forego an early payment
What is “stretching accounts payable”? What effect does this action have on the cost of giving up a discount?
What is leasing? Define, compare, and contrast operating leases and financial (or capital) leases. Can a company “hide” assets and debt by leasing assets rather than borrowing money to buy them?
List and discuss the advantages and disadvantages of leasing.
What is the general relationship between the intrinsic and market values of a warrant? In what circumstances are these values quite close?What is a warrant premium?
Describe the procedures typically used by an acquirer to value a target company, whether it is being acquired for its assets or as a going concern.
Discuss macro and micro political risk. What is the emerging third path to political risk?
Compare the following risk preferences: (a) risk averse, (b) risk neutral, and(c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk
Define return, and describe how to find the total rate of return on an investment.
Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases.
Explain each of the three other approaches to common stock valuation:(a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?
How does a rights offering protect a firm’s stockholders against ownership dilution?
What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM. Why is the YTM a good measure of the required
If the required return on a bond differs from its coupon rate, describe the behavior of the bond price over time as the bond moves toward maturity.
What relationship between the required return and the coupon rate will cause a bond to sell at a discount? At a premium? At its par value?
What procedure is used to value a bond that pays annual interest?Semiannual interest?
How is the cost of bond financing typically related to the cost of shortterm borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?
List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium.
What does each of the following yield curves reflect about interest rates: (a) downward sloping, (b) upward sloping, and (c) flat? What is the “normal” shape of the yield curve?
What is the real rate of interest? Differentiate it from the nominal rate of interest.
What role does an investment bank play in a public offering? Describe an underwriting syndicate.
What is the capital market? What are broker markets? What are dealer markets? How do they differ?
ETHICS PROBLEM One of the key risk areas that corporates need to manage is“ethical risks.” Do you think that management of ethical risks is as important for businesses as management of financial
Corporate taxes and the use of debt Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate
Interest versus dividend expense Derwent Ltd. has announced that the earnings before income and taxes is going to be £300,000 for the current year. Assuming corporate tax rate for Derwent Ltd. is a
Interest versus dividend income Depot Logistics Inc. has declared pretax income from its operations of $560,000. In addition, it also received interest payment of$40,000 on bond stock held in
Double taxation and implied cost of limited liability You are contemplating starting a new business as either a sole proprietorship or a corporation. On the one hand you really value the limited
Marginal corporate tax rates Using the corporate tax rate schedule given in the previous problem, perform the following:a. Find the marginal tax rate for the following levels of corporate earnings
Average corporate tax rates Ordinary income in 2017 was taxed subject to the rates shown in the accompanying table. Using the data in the table, perform the following:a. Calculate a firm’s tax
Corporate taxes Southern Textile Ltd. is a manufacturer of sportswear and supplies products to a number of European retail stores. Its registered office is in Singapore.During 2017, the firm earned
Identifying agency problems, costs, and resolutions You are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson
Marginal cost–benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division
Marginal cost–benefit analysis and the goal of the firm Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system.The new system would require an
Cash flows Sheldon Smith spends many hours monitoring his personal cash flows every month. Sheldon earns 5% on his short-term investments while paying prime plus 2% (prime is 9%) on the mortgage. The
Accrual income versus cash flow for a period The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the end of the financial year, the dealer still owed The Motor
For the current year, Ross Corporation had pretax ordinary income of $500,000 and sold for $150,000 an asset purchased previously for $125,000. Calculate the total tax liability for the company.
You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments toward
Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions. One disagreement, however,
You want to purchase a new car for $43,000 as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount due at the beginning of each month
How can you determine the size of the equal, end-of-year deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
Rather than comparing future values, you often compare the effective annual rates of various investment opportunities with differing compounding frequencies. Use Excel to calculate the effective
What if your short-term investments in the previous review question provide continuous compounding? Use Excel to determine the future value of your company’s short-term investments based on
You are responsible for managing your company’s $1,000,000 worth of short-term investments over the next four years, and you know that the compounding frequency is quite important. Use Excel to
You have just graduated from college and begun your new career, and now it is time to buy your first home. You qualify for a 3.65%mortgage interest rate, and you can afford to make a $780 monthly
Rather than making contributions to an IRA at the end of each year, you decide to make equal $5,000 contributions at the beginning of each year for 30 years. Assuming a 9.5% annual rate of return,
Because tax time comes around every year, you smartly decide to make equal $5,000 contributions to your IRA at the end of every year for 30 years. Assuming a 9.5% annual rate of return, use Excel to
What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate? Why doesn’t this chapter provide an equation showing you how to
It is never too soon to begin investing for a child’s college education.Assume it will cost $108,000 for your child’s college education and that you can safely earn 4% annually for the next 18
It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Use Excel to find the future value of a $5,000 IRA contribution that will grow at
What is the difference between future value and present value? Which approach is generally preferred by financial managers?
Describe the judgmental approach for preparing the pro forma balance sheet.
Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method?
Define and differentiate between a firm’s operating cash flow (OCF)and its free cash flow (FCF).
Why do we exclude interest expense from operating cash flow?
Why is depreciation considered a noncash charge?
Explain why a decrease in the cash account is classified as a cash inflow(source) and why an increase in cash is classified as a cash outflow(use) in preparing the statement of cash flows.
What is the financial planning process? Contrast long-term (strategic)financial plans with short-term (operating) financial plans.
What three areas of analysis are combined in the modified DuPont formula?Explain how the manager uses the DuPont system of analysis to dissect the firm’s results and isolate their causes.
What three ratios of profitability appear on a common-size income statement?
When performing cross-sectional ratio analysis, the analyst should pay primary attention to what types of deviations from the norm?Why?
P3–28 ETHICS PROBLEM Do some reading in periodicals or on the Internet to find out more about the Sarbanes-Oxley Act’s provisions for companies. Select one of those provisions, and indicate why

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