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business
principles of finance

Questions and Answers of Principles Of Finance

Suppose the Robinson Company had a cost of goods sold of $1,000,000 in 2019 and $1,200,000 in 2020.a. Calculate the inventory turnover for each year. Comment on your findings.b. What would have been
Rework Problem 8 assuming that Genatron Manufacturing expects its sales to increase by 20 percent in 2021. What is the amount of external financing needed?Data from Problem 8Genatron
The Robinson Company from Problem 2 had net sales of $1,200,000 in 2019 and $1,300,000 in 2020.a. Determine the receivables turnover in each year.b. Calculate the average collection period for each
Genatron Manufacturing expects its sales to increase by 10 percent in 2021. Estimate the firm’s external financing needs by using the percent-of-sales method for the 2020 data. Assume that no
What will happen to the break-even point if the contribution margin rises (falls)?
Financial statements for the Genatron Manufacturing Corporation for 2020 and 2019 are shown in the text.Balance sheetASSETS20202019Cash$40,000$50,000Accts.
How is the Du Pont system related to both the balance sheet and the income statement?
This problem uses the financial statements for the Genatron Manufacturing Corporation for the years 2020 and 2019 from Problem 6.a. Calculate Genatron’s dollar amount of net working capital in each
The Robinson Company had a cost of goods sold of $1,000,000 in 2019 and $1,200,000 in 2020.a. Calculate the inventory turnover for each year. Comment on your findings.b. What would have been the
Financial researchers at Smith Sharon, an investment bank, estimate the current security market line as: E(Ri) = 4.5 + 6.8(βi)a. Explain what happens to expected return as beta increases from 1.0 to
Define what is meant by a portfolio and describe how the expected return on a portfolio is computed.
Get stock price data from finance.yahoo.com for 10 stocks in the Dow Jones Industrial Average for the prior 10 days and use these prices to compute a price-weighted index for each of these 10 days.
Describe the meaning of buying on margin.
Explain the meaning of simple interest.
Describe the terms autocratic capitalism and democratic capitalism and discuss the model followed by the U.S.
Discuss the meaning of the financial account and identify its major components.
Assume the interest rate on a one-year U.S. government debt security is currently 9.5 percent compared with a 7.5 percent on a foreign country’s comparable maturity debt security. If
What are sight and time drafts? Indicate how they differ.
How has the value of the U.S. dollar changed relative to other major currencies in recent years? What is “hedging” and how are forward contracts used to manage foreign exchange risk?
Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc
Assume a U.S. dollar is worth 10.38 Mexican Pesos and .64 euros. Calculate the implied value of a Mexican Peso in terms of a euro.
Describe the international monetary system currently in use.
What is an international monetary system based on “flexible exchange rates”?
What is the purpose of an international monetary system?
Identify the eight individuals who served as chairs of the Fed Board of Governors since the early 1950s. Indicate each individual’s approximate time and length of service as chair.
What is finance?
Two methods for estimating a company’s cost of common stock capital are ________.a. The historic method and the current methodb. The weighted valuation model and the beta modelc. The constant
Given the answers to Problems 1, 2, and 4, what is SodaFizz’s WACC when the CAPM is used to calculate SodaFizz’s equity cost of capital? 1. SodaFizz has debt outstanding that has a market
What is the primary difference between a fixed annuity and a variable annuity?
Assume all of the same facts as in exercise 6 above, except that Maria begins immediately and makes each of her payments at the beginning of each 6-month period instead of the end. What is the
Which earned a higher average annual return, a portfolio of T-bonds from 1980 to 2000 or from 2000 to 2020? Why do think this was so?
A scatter plot is a visualization for ________.a. Univariate data onlyb. Bivariate data onlyc. Either univariate or bivariate datad. Test scores
Based on the scatter plot shown, will the correlation coefficient be a positive value or negative value? Would you estimate that the correlation is significant for the relationship between radio ads
Based on the presentation shown in the video, is the FTSE 100 index correlated with the value of sterling? Or are the two measures uncorrelated? What data leads to your conclusion?
Will the sign of the correlation coefficient always be the same as the sign of the slope of the best-fit linear regression model?
Explain why diversification reduces unsystematic risk but not systematic risk.
How would you describe Bogle’s attitude toward risk in the stock market? Do you agree with this attitude? Why or why not?
Which of the following is a disadvantage of using the payback method?a. It only considers cash flows that occur after the project breaks even.b. It ignores the time value of money.c. It is difficult
Describe the disadvantages of using the payback period to evaluate a project.
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. What is the payback
According to the video, how should a company use NPV and IRR to decide whether a project should be undertaken?
A company should accept a project if ________.a. The NPV of the project is positiveb. The NPV of the project is negativec. The IRR of the project is positived. The IRR of the project is negative
Explain why a company would want to accept a project with a positive NPV and reject a project with a negative NPV.
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company
In the video, Trim Corp. is considering a project that is expected to have cash inflows of $350, $250, and $150 in years 1, 2, and 3, respectively. What do you think would happen to the NPV of the
The net present value of a project equals ________.a. The future value of the cash inflows minus the future value of the cash outflowsb. The present value of the cash inflows minus the future value
Westland Manufacturing could spend $5,000 to update its existing fluorescent lighting fixtures to newer fluorescent fixtures that would be more energy efficient. Explain why updating the light
If Westland Manufacturing finds that its cost of funds is 11%, what will happen to the NPV of the project in problem 2?Data from problem 2Westland Manufacturing spends $20,000 to update the lighting
The IRR of a project is the discount rate that ________.a. Makes the NPV equal to zerob. Equates the present value of the cash inflows to the future value of the cash outflowsc. Makes the NPV
When faced with a decision between two good but mutually exclusive projects, should a manager base the decision on NPV or IRR? Why?
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company
How would the numbers in your Excel spreadsheet change because of the COVID-19 pandemic? Create an NPV profile for Tokyo’s Olympic Games given the changes that were caused by the pandemic.
The IRR method assumes that ________.a. Cash flows are reinvested at the firm’s cost of attracting funds when they are receivedb. Cash flows of a project are never reinvestedc. Cash flows are
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company
When cash outflows occur during more than one time period, ________.a. The project’s NPV will definitely be negativeb. The project can have multiple IRRsc. The project should not be doned. The time
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company
The discounted payback period method ________.a. Is used to compare two projects that have different livesb. Fails to consider the time value of moneyc. Provides an objective criterion for an
Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company
Which of the following is a method of adjustment for comparing projects of different lives?a. IRRb. Modified IRRc. Payback periodd. Equal annuity
Holiday Hotels is considering two different floorings to use in its buildings. The less expensive tile will need to be replaced every five years. The more durable, more expensive tile will need to be
When a company can only fund some of its good projects, it should rank the projects by ________.a. PIb. IRRc. NPVd. Payback period
You will be living in your college town for two more years. You are considering purchasing a townhouse that will cost you $250,000 today. You estimate that if you do, your expenses for each of the
If a company is considering two mutually exclusive projects, which of the following statements is true?a. The company must do both projects if it chooses to do one of the projects.b. The IRR method
Why does a company’s capital have a cost?
SodaFizz has debt outstanding that has a market value of $3 million. The company’s stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz’s
What is the formula for calculating WACC? What do each of the components of this formula represent?
Sandage Auto Parts has debt outstanding with a market value of $2 million. The company’s common stock has a book value of $3 million and a market value of $8 million. What weight is equity in
Why is the rate that debt holders require to entice them to lend money to a company different from the company’s effective cost of debt capital?
The yield to maturity on SodaFizz’s debt is 7.2%. If the company’s marginal tax rate is 21%, what is SodaFizz’s effective cost of debt?
In the video, the tax rate for Brick and Mortar Co. was 30%. What would your calculation of the company’s WACC be if there was a change in the tax code and the tax rate for Brick and Mortar Co.
The capital structure of a company refers to ________.a. Whether the company purchases assets or liabilities with its equityb. The proportion of debt and equity the company uses in financing is
Assume that the corporate tax rate is 21%. Congress is discussing increasing the corporate tax rate to 32%. How might this change the capital structures that companies choose?
SodaFizz paid a dividend of $2 per share last year; its dividend has been growing at a rate of 2% per year, and that growth rate is expected to continue into the future. The stock of SodaFizz is
Why doesn’t one optimal capital structure exist for commercial real estate businesses?
Which of the following should be used when calculating the weights for a company’s capital structure?a. Book valuesb. Current market valuesc. Historic accounting valuesd. Par and face values
Describe the order of claimants and how it impacts the returns that various providers of capital require to entice them to provide funding to a company.
SodaFizz has a beta of 1.1. If the risk-free rate is 3% and the market risk premium is 11%, what is the cost of equity capital for SodaFizz according to the capital asset pricing model?
How do you think a family that runs a multigenerational commercial real estate business will think about risk compared to a young entrepreneur who is beginning to build a commercial real estate
Explain what is meant by trade-off theory.
Given the answers to Problems 1, 2, and 3, what is SodaFizz’s WACC when the constant dividend growth model is used to calculate its equity cost of capital? 1, SodaFizz has debt outstanding
Which of the following would be the most reasonable approach to calculating the cost of debt for a company?a. Using the coupon rate on the company’s existing bondsb. Using the interest amount
Net debt equals ________.a. Debt/Equityb. Debt × (1 – Tax Rate)c. Total debt minus the cash and risk-free assets the company ownsd. The yield to maturity of a company’s bonds divided by the tax
Shirley Manufacturing paid $1 million in interest payments last year. The company is in the 21% tax bracket and has $15 million in debt outstanding. How much was the company’s interest tax shield
Unlevered equity refers to ________.a. The equity in a firm with no debtb. A firm’s equity minus the firm’s debtc. The equity in a firm in the absence of taxation and transaction costsd. The
In perfect capital markets, ________.a. A company’s WACC does not change as it changes its capital structureb. A company can lower its WACC by using more debt in its capital structurec. A company
King Medical Supplies has issued preferred stock that pays a yearly dividend of $4 per share. This preferred stock is trading at a price of $47 per share. What is King’s cost of preferred stock
The interest tax shield occurs because ________.a. Interest payments are a tax-deductible expenseb. Interest payments are made from after-tax incomec. Investors require a lower rate of return the
As a company increases the weight of debt in its capital structure, ________.a. Its cost of debt capital fallsb. The weight of equity capital also increasesc. The value of the interest tax shield
McPherson Pharmaceutical has common stock that is trading for $75 per share. The company paid a dividend of $5.25 last year. This dividend is expected to increase at a rate of 3% per year. What is
Issuing new stock ________.a. Costs the same as retaining earningsb. Will not impact a company’s WACCc. Is the most expensive source of capital because of flotation costsd. Is the cheapest source
A company is said to be in financial distress if ________.a. It is not fully exploiting the interest tax shieldb. It needs to raise capital to finance a new projectc. It has difficulty meeting its
ABC Company has the following data for its monthly sales. Complete the % of Annual Sales row. Gross Sales % of Annual Sales Jan Apr May Jun Jul Aug Sep Oct Nov Dec $40,000 $42,000 $47,000 $56,000
If a bond with a face value of $1,000 has a conversion ratio of 10 shares, the conversion price is ________.a. $0.01b. $10c. $100d. $1,000
Which type of financial statement analysis is most commonly used to create a baseline estimate for a financial forecast?a. Trend analysisb. Common-size analysisc. Ratio analysisd. Liquidity analysis
Javier’s firm has created a forecasted income statement that shows the firm with a net profit of $25,000 for the coming year. What can we assume about Javier’s cash flows?
What is a pro forma financial statement? What are some scenarios in which you might find a pro forma financial statement helpful?
What key element of the income statement is used to estimate several other key income statement lines?a. Cost of goods soldb. Gross marginc. Salesd. Fixed costs
ABC Company anticipates its sales being a bit lower than normal in January and February of the coming year due to major road construction on the street where it is located, which will draw away foot
Lulu’s firm’s sales grew by 9%, 11%, and 10% over the past three years, respectively. Lulu wants to take her first pass at forecasting sales for next year. What percent sales growth would you
Why might someone compile a pro forma financial statement that is intentionally inaccurate? What factors contribute to the accuracy of a pro forma?

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