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business
principles managerial finance

Questions and Answers of Principles Managerial Finance

P3–19 Profitability analysis In early 2013, Pepsi reported revenues of $65.64 billion with earnings available for common stockholders of $6.12 billion. Pepsi’s total assets at the time were
P3–10 Statement of retained earnings Hayes Enterprises began 2015 with a retained earnings balance of $928,000. During 2015, the firm earned $377,000 after taxes. From this amount, preferred
P3–3 Income statement preparation On December 31, 2015, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed
E3–5 If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont
E3–3 Cooper Industries, Inc., began 2015 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders.
E3–2 Explain why the income statement can also be called a “profit-and-loss statement.”What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two
3–20 What three areas of analysis are combined in the modified DuPont formula?Explain how the DuPont system of analysis is used to dissect the firm’s results and isolate their causes.
3–19 Describe how you would use a large number of ratios to perform a complete ratio analysis of the firm.
3–18 Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is
3–17 How do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a feel for the firm’s return and risk?
3–16 Which measure of profitability is probably of greatest interest to the investing public? Why?
3–15 What would explain a firm’s having a high gross profit margin and a low net profit margin?
3–14 What three ratios of profitability are found on a common-size income statement?
3–13 What ratio measures the firm’s degree of indebtedness? What ratios assess the firm’s ability to service debts?
3–12 What is financial leverage?
3–11 To assess the firm’s average collection period and average payment period ratios, what additional information is needed, and why?
3–10 In Table 3.5, most of the specific firms listed have current ratios that fall below the industry average. Why? The exception to this general pattern is Whole Foods Market, which competes at
3–9 Under what circumstances would the current ratio be the preferred measure of overall firm liquidity? Under what circumstances would the quick ratio be preferred?
3–8 Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?
3–7 To what types of deviations from the norm should the analyst pay primary attention when performing cross-sectional ratio analysis?Why?
3–6 What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?
3–5 With regard to financial ratio analysis, how do the viewpoints held by the firm’s present and prospective shareholders, creditors, and management differ?
3–4 How is the current rate (translation) method used to consolidate a firm’s foreign and domestic financial statements?
3–3 Why are the notes to the financial statements important to professional securities analysts?
3–2 Describe the purpose of each of the four major financial statements.
3–1 What roles do GAAP, the FASB, and the PCAOB play in the financial reporting activities of public companies?
LG 6 Use a summary of financial ratios and the DuPont system of analysis to perform a complete ratio analysis.
LG 5 Use ratios to analyze a firm’s profitability and its market value.
LG 4 Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt.
LG 3 Use ratios to analyze a firm’s liquidity and activity.
LG 2 Understand who uses financial ratios and how.
LG 1 Review the contents of the stockholders’ report and the procedures for consolidating international financial statements.
1... You have been assigned the task of putting together a statement for the ACME Company that shows its expected inflows and outflows of cash over the months of July 2016 through December 2016.You
P4–21 ETHICS PROBLEM The SEC is trying to get companies to notify the investment community more quickly when a “material change” will affect their forthcoming financial results. In what sense
P4–14 Multiple cash budgets: Scenario analysis Brownstein, Inc., expects sales of $100,000 during each of the next 3 months. It will make monthly purchases of $60,000 during this time. Wages and
P4–9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and$60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and$100,000, respectively. The firm has
P4–8 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 4.9 on page 125 and the following
P4–7 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only source of
P4–3 MACR depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $430,000 this year.The company’s financial
P4–2 Depreciation In early 2015, Sosa Enterprises purchased a new machine for $10,000 to make cork stoppers for wine bottles. The machine has a 3-year recovery period and is expected to have a
P4–1 Depreciation On March 20, 2015, Norton Systems acquired two new assets. Asset A was research equipment costing $17,000 and having a 3-year recovery period.Asset B was duplicating equipment
E4–5 Rimier Corp. forecasts sales of $650,000 for 2016. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include
E4–4 During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an
E4–3 Determine the operating cash flow (OCF) for Kleczka, Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of$2,500, cost of goods
E4–2 Classify the following changes in each of the accounts as either an inflow or an outflow of cash. During the year (a) marketable securities increased, (b) land and buildings decreased, (c)
E4–1 The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation
4–20 What is the financial manager’s objective in evaluating pro forma statements?
4–19 What are the two basic weaknesses of the simplified approaches to preparing pro forma statements?
4–18 What is the significance of the “plug” figure, external financing required? Differentiate between strategies associated with positive values and with negative values for external financing
4–17 Describe the judgmental approach for simplified preparation of the pro forma balance sheet.
4–16 Why does the presence of fixed costs cause the percent-of-sales method of pro forma income statement preparation to fail? What is a better method?
4–15 How is the percent-of-sales method used to prepare pro forma income statements?
4–14 What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches?
4–13 What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?
4–12 How can the two “bottom lines” of the cash budget be used to determine the firm’s short-term borrowing and investment requirements?
4–11 Briefly describe the basic format of the cash budget.
4–10 What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
4–9 Which three statements result as part of the short-term (operating)financial planning process?
4–8 What is the financial planning process? Contrast long-term (strategic)financial plans and short-term (operating) financial plans.
4–7 From a strict financial perspective, define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).
4–6 Why do we exclude interest expense and taxes from operating cash flow?
4–5 Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement?
4–4 Why is depreciation (as well as amortization and depletion) considered a noncash charge?
4–3 Explain why a decrease in cash 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.
4–2 Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.
4–1 Briefly describe the first four modified accelerated cost recovery system(MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the
LG 6 Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements.
LG 5 Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet.
LG 4 Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget.
LG 3 Understand the financial planning process, including long-term(strategic) financial plans and short-term (operating)financial plans.
LG 2 Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow.
LG 1 Understand tax depreciation procedures and the effect of depreciation on the firm’s cash flows.
P11–35 ETHICS PROBLEM The Environmental Protection Agency sometimes imposes penalties on firms that pollute the environment (see the Focus on Ethics box on page 000).But did you know that there is
P11–32 Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm’s
P11–31 NPV and ANPV decisions Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past
P11–26 Mutually exclusive investments and risk Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 6 years.The cost of the first
P11–23 Simulation Ogden Corporation has compiled the following information on a capital expenditure proposal:1. The projected cash inflows are normally distributed with a mean of $36,000 and a
P11–22 Impact of inflation on investments You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future endof-year cash inflows
P11–15 Terminal cash flow: Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated
P11–14 Terminal cash flow: Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs.
P11–12 Incremental operating cash flows Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower
P11–11 Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in
P11–9 Initial investment at various sale prices Edwards Manufacturing Company (EMC)is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost
P11–8 Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold
P11–5 Sunk and opportunity cash flows Dave and Ann Stone have been living at their present home for the past 6 years. During that time, they have replaced the water heater for $375, have replaced
P11–4 Sunk costs and opportunity costs Covol Industries is developing the relevant cash flows associated with the proposed replacement of an existing machine tool with a new, technologically
P11–3 Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and$1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin
P11–1 Relevant cash flow and timeline depiction For each of the following projects, determine the relevant cash flows, and depict the cash flows on a time line.a. A project that requires an initial
E11–3 A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000. Since then, it has taken depreciation deductions totaling$124,250. What is the
E11–2 Canvas Reproductions, Inc., has spent $4,500 dollars researching a new project. The project requires $20,000 worth of new machinery, which would cost $3,000 to install.The company would
E11–1 Iridium Corp. has spent $3.5 billion over the past decade developing a satellitebased telecommunication system. It is currently trying to decide whether to spend an additional $350 million on
ST11–1 Determining relevant cash flows A machine currently in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under MACRS using a 5-year recovery period; it
11–24 Comparing projects with unequal lives is often done by comparing the projects’ annualized net present value. Based on the information provided at MFL, use a spreadsheet to compare projects
11–23 Compare and contrast the internal rate of return approach and the net present value approach to capital rationing. Which is better? Why?
11–22 What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?
11–21 What is the difference between the strategic NPV and the traditional NPV? Do they always result in the same accept–reject decisions?
11–20 What are real options? What are some major types of real options?
11–19 Explain why a mere comparison of the NPVs of unequal-lived, ongoing, mutually exclusive projects is inappropriate. Describe the annualized net present value (ANPV) approach for comparing
11–18 How are risk classes often used to apply RADRs?
11–17 Explain why a firm whose stock is actively traded in the securities markets need not concern itself with diversification. Despite this reason, how is the risk of capital budgeting projects

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