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business
principles managerial finance

Questions and Answers of Principles Managerial Finance

14–12 Explain why credit scoring is typically applied to consumer credit decisions rather than to mercantile credit decisions.
14–11 What is the role of the five C’s of credit in the credit selection activity?
14–10 What factors make managing inventory more difficult for exporters and multinational companies?
14–9 Briefly describe the following techniques for managing inventory: (1) ABC system, economic order quantity (EOQ) model, (2) just-in-time (JIT) system, and (3) three computerized systems for
14–8 What are likely to be the viewpoints of each of the following managers about the levels of the various types of inventory: finance, marketing, manufacturing, and purchasing? Why is inventory
1.. What problem might occur with the full implementation of RFID technology in retail industries? Specifically, consider the amount of data that might be collected. Wal-Mart Stores, Inc., the
14–7 Why is it important for a firm to minimize the length of its cash conversion cycle?
14–6 What are the benefits, costs, and risks of an aggressive funding strategy and of a conservative funding strategy? Under which strategy is the borrowing often in excess of the actual need?
14–5 Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy?
14–4 What is the difference between the firm’s operating cycle and its cash conversion cycle?
14–3 Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to
14–2 What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are net working capital, liquidity, and risk of insolvency
14–1 Why is working capital management one of the most important and time-consuming activities of the financial manager? What is net working capital?
LG 6 Understand the management of receipts and disbursements, including float, speeding up collections, slowing down payments, cash concentration, zerobalance accounts, and investing in marketable
LG 5 Review the procedures for quantitatively considering cash discount changes, other aspects of credit terms, and credit monitoring.
LG 4 Explain the credit selection process and the quantitative procedure for evaluating changes in credit standards.
LG 3 Discuss inventory management: differing views, common techniques, and international concerns.
LG 2 Describe the cash conversion cycle, its funding requirements, and the key strategies for managing it.
LG 1 Understand working capital management, net working capital, and the related trade-off between profitability and risk.
1.. One way to lower the market price of a firm’s stock is via a stock split. Rock-O Corporation finds itself in a different situation: Its stock has been selling at relatively low prices. To
P13–19 ETHICS PROBLEM Assume that you are the CFO of a company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings,
P13–14 Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share.General Mills is regarded as a
P13–12 Stock dividend: Investor Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common
P13–11 Stock dividend: Investor Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders
P13–5 Dividend constraints A firm has $800,000 in paid-in capital, retained earnings of$40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the
P13–3 Residual dividend policy As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s
P13–2 Dividend payment Kathy Snow wishes to purchase shares of Countdown Computing, Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on
E13–2 Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments that require financing of $950,000 and $1.75 million, respectively.Chancellor
E13–1 Stephanie’s Cafes, Inc., has declared a dividend of $1.30 per share for shareholders of record on Tuesday, May 2. The firm has 200,000 shares outstanding and will pay the dividend on May
13–12 Compare a stock split with a stock dividend.
13–11 Why do firms issue stock dividends? Comment on the following statement:“I have a stock that promises to pay a 20 percent stock dividend every year, and therefore it guarantees that I will
13–10 Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies?
13–9 What five factors do firms consider in establishing dividend policy?Briefly describe each of them?
13–8 Contrast the basic arguments about dividend policy advanced by Miller and Modigliani (M and M) and by Gordon and Lintner.
13–7 Does following the residual theory of dividends lead to a stable dividend?Is this approach consistent with dividend relevance?
13–6 What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit?
13–5 What effect did the Jobs and Growth Tax Relief Reconciliation Act of 2003 have on the taxation of corporate dividends? On corporate dividend payouts?
13–4 Who are holders of record? When does a stock sell ex dividend?
13–3 The dividend payout ratio equals dividends paid divided by earnings.How would you expect this ratio to behave during a recession? What about during an economic boom?
13–2 Why do rapidly growing firms generally pay no dividends?
13–1 What are the two ways that firms can distribute cash to shareholders?
1..Do you agree that corporate managers would manipulate their stock’s value prior to a buyback, or do you believe that corporations are more likely to initiate a buyback to enhance shareholder
LG 6 Explain stock splits and the firm’s motivation for undertaking them.
LG 5 Evaluate stock dividends from accounting, shareholder, and company points of view.
LG 4 Review and evaluate the three basic types of dividend policies.
LG 3 Discuss the key factors involved in establishing a dividend policy.
LG 2 Describe the residual theory of dividends and the key arguments with regard to dividend irrelevance and relevance.
LG 1 Understand cash payout procedures, their tax treatment, and the role of dividend reinvestment plans.
P10–19 NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax
P10–18 IRR, investment life, and cash inflows Oak Enterprises accepts projects earning more than the firm’s 15% cost of capital. Oak is currently considering a 10-year project that provides
P10–17 Long-term investment decision, IRR method Billy and Mandy Jones have $25,000 to invest. On average, they do not make any investment that will not return at least 7.5% per year. They have
P10–15 Internal rate of return Peace of Mind, Inc. (PMI), sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it
P10–13 NPV and EVA A project costs $2,500,000 up front and will generate cash flows in perpetuity of $240,000. The firm’s cost of capital is 9%.a. Calculate the project’s NPV.b. Calculate the
P10–11 Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the
P10–9 NPV and maximum return A firm can purchase new equipment for a $150,000 initial investment.The equipment generates an annual after-tax cash inflow of $44,400 for 4 years.a. Determine the net
P10–8 NPV Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car’s inventor has offered Simes the choice of either a
P10–6 NPV for varying costs of capital Dane Cosmetics is evaluating a new fragrancemixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of
P10–5 NPV Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%.a. Initial investment is
P10–4 Long-term investment decision, payback method Bill Williams has the opportunity to invest in project A that costs $9,000 today and promises to pay annual end-ofyear payments of $2,200,
P10–2 Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first
P10–1 Payback period Jordan Enterprises is considering a capital expenditure that requires an initial investment of $42,000 and returns after-tax cash inflows of $7,000 per year for 10 years. The
E10–4 Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project
E10–3 Axis Corp. is considering investment in the best of two mutually exclusive projects.Project Kelvin involves an overhaul of the existing system; it will cost $45,000 and generate cash inflows
1.. What are the potential risks to a company of unethical behaviors by employees? What are potential risks to the public and to stakeholders? Corporate ethics codes are often faulted for being
10–13 Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?
10–12 How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?
10–11 In addition to using NPV to evaluate projects, most firms also use IRR.Based on the information provided at MFL, use a spreadsheet to rank various projects based on their IRRs.
10–10 Do the net present value (NPV) and internal rate of return (IRR) always agree with respect to accept–reject decisions? With respect to ranking decisions? Explain.
10–9 What are the acceptance criteria for IRR? How are they related to the firm’s market value?
10–8 What is the internal rate of return (IRR) on an investment? How is it determined?
10–7 Almost all firms have to deal with limited financial resources and therefore cannot undertake all positive NPV projects. Based on the information provided at MFL, use a spreadsheet to rank
10–6 Explain the similarities and differences between NPV, PI, and EVA.
10–5 What are the acceptance criteria for NPV? How are they related to the firm’s market value?
10–4 How is the net present value (NPV) calculated for a project with a conventional cash flow pattern?
10–3 What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment?
10–2 What is the payback period? How is it calculated?
10–1 What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.
LG 6 Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach.
LG 5 Use net present value profiles to compare NPV and IRR techniques.
LG 4 Calculate, interpret, and evaluate the internal rate of return (IRR).
LG 3 Calculate, interpret, and evaluate the net present value (NPV) and economic value added(EVA).
LG 2 Calculate, interpret, and evaluate the payback period.
LG 1 Understand the key elements of the capital budgeting process.
P9–21 ETHICS PROBLEM During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecasts of Wall Street stock
P9–20 Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50–50 mix of
P9–16 Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its
P9–12 The effect of tax rate on WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital
P9–9 Cost of common stock equity: CAPM J&M Corporation common stock has a beta,b, of 1.2. The risk-free rate is 6%, and the market return is 11%.a. Determine the risk premium on J&M common stock.b.
P9–7 Cost of preferred stock Taylor Systems has just issued preferred stock. The stock has a 12% annual dividend and a $100 par value and was sold at $97.50 per share.In addition, flotation costs
P9–6 After-tax cost of debt Bella Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax
P9–2 Cost of debt using both methods Currently, Warren Industries can sell 15-year,$1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the
E9–5 Oxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm’s capital structure targets the following proportions: debt, 55%; preferred stock, 10%; and common
E9–4 Weekend Warriors, Inc., has 35% debt and 65% equity in its capital structure. The firm’s estimated after-tax cost of debt is 8% and its estimated cost of equity is 13%.Determine the firm’s
E9–3 Duke Energy has been paying dividends steadily for 20 years. During that time, dividends have grown at a compound annual rate of 7%. If Duke Energy’s current stock price is $78 and the firm
E9–2 Your firm, People’s Consulting Group, has been asked to consult on a potential preferred stock offering by Brave New World. This 15% preferred stock issue would be sold at its par value of
E9–1 A firm raises capital by selling $20,000 worth of debt with flotation costs equal to 2% of its par value. If the debt matures in 10 years and has a coupon interest rate of 8%, what is the
1.. Why don’t firms generally use both short- and long-run weighted average costs of capital? As U.S. financial markets experienced and recovered from the 2008 financial crisis and 2009 “great
9-15 Describe the logic underlying the use of target weights to calculate the WACC, and compare and contrast this approach with the use of historical weights. What is the preferred weighting scheme?
9-14 What is the relationship between the firm’s target capital structure and the weighted average cost of capital (WACC)?
9-13 What is the weighted average cost of capital (WACC), and how is it calculated?

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