Principles of Marketing 17th Edition

to retire outstanding debt), and working capital management (modifying the firm’s credit collection policy with its customers). 2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates. 3. The primary disadvantage

in a project. The relevant cost is what the asset or input is actually worth today, not, for example, what it cost to acquire. 2. For tax purposes, a firm would choose MACRS because it provides for larger depreciation deductions earlier. These larger deductions reduce taxes, but have no other cash consequences. Notice that the choice

(not good). The concern arises any time there is an active market for used product. 8. Definitely. The damage to Porsche’s reputation is definitely a factor the company needed to consider. If the reputation was damaged, the company would have lost sales of its existing car lines. 9. One company may be able to produce at

and recover the NWC at the end of the project. The NPV of the project is: NPV = –$270,000 – 25,000 – $42,000(PVIFA11%,5) + $25,000/1.115 = –$435,391.39 Now we can find the EAC of the project. The EAC is: EAC = –$435,391.39 / (PVIFA11%,5) = –$117,803.98 17. We will need the aftertax salvage value of

of the equipment at the end of the project’s life. The aftertax salvage value is the market value of the equipment minus any taxes paid (or refunded), so the aftertax salvage value in four years will be: Taxes on salvage value = (BV – MV)tC Taxes on salvage value = ($0 – 400,000)(.38) Taxes on

is greatest with a new product because the cash flows are probably harder to predict. 2. With a sensitivity analysis, one variable is examined over a broad range of values. With a scenario analysis, all variables are examined for a limited range of values. 3. It is true that if average revenue is less than

are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. a. The total variable cost per unit is the sum of the two variable costs, so: Total variable costs per unit = $5.43 + 3.13 Total variable

and costs increase. Scenario Base Best Worst Unit sales 190 209 171 Variable cost $11,200 $10,080 $12,320 Fixed costs $410,000 $369,000 $451,000 Using the tax shield approach, the OCF and NPV for the base case estimate is: OCFbase = [($18,000 – 11,200)(190) – $410,000](0.65) + 0.35($1,700,000/4) OCFbase = $722,050 NPVbase = –$1,700,000 + $722,050(PVIFA12%,4) NPVbase = $493,118.10 The OCF and NPV for the worst case estimate are: OCFworst = [($18,000 – 12,320)(171) – $451,000](0.65)

$7,205,000(PVIFA10%,7) + $1,250,000/1.107 NPV = $12,068,405.23 So, the sensitivity of the NPV to changes in the quantity sold is: NPV/Q = ($10,841,563.69 – 12,068,405.23)/(51,000 – 52,000) NPV/Q = $1,226.84 For an increase (decrease) of one set of clubs sold per year, the NPV increases (decreases) by $1,226.84. 23. a. First we need to determine the total additional

was not foreseeable, at least not by most. 2. As in the previous question, it’s easy to see after the fact that the investment was terrible, but it probably wasn’t so easy ahead of time. 3. No, stocks are riskier. Some investors are highly risk averse, and the extra possible return doesn’t attract them relative to the

financial statement anomaly. Since (2) is stronger than (1), both imply that a profit opportunity exists; under (3) and (4), this information is fully impounded in the current price and no profit opportunity exists. Under (3), if the market is not strong form efficient, then this information could be used as a profitable trading

to the chapter on pricing bonds, we find the current price is: P1 = $80(PVIFA7%6 + $1,000(PVIF7%6 = $1,047.67 So the nominal return is: R = ($1,047.67 - 1,030) + 80]/$1,030 = 0948 or 9.48% And, using the Fisher equation, we find the real return is: 1 +R=(1+r)(1+h) r =

in a variety of assets, this unique portion of the total risk can be eliminated at little cost. On the other hand, there are some risks that affect all investments. This portion of the total risk of an asset cannot be costlessly eliminated. In other words, systematic risk can be controlled, but only

per se that are being cheered on. Nonetheless, Wall Street does encourage corporations to takes actions to create value, even if such actions involve layoffs. 10. Earnings contain information about recent sales and costs. This information is useful for projecting future growth rates and cash flows. Thus, unexpectedly low earnings often lead market participants

the weight of the risk-free asset is one minus the weight of the stock since the portfolio weights must sum to one, or 100 percent. So: p = 0.95 = wS(1.35) + (1 – wS)(0) 0.95 = 1.35wS + 0 – 0wS wS = 0.95/1.35 wS = .7037 And, the weight of the risk-free asset is: wRf

than this, value is created. 2. Book values for debt are likely to be much closer to market values than are equity book values. 3. No. The cost of capital depends on the risk of the project, not the source of the money. 4. Interest expense is tax-deductible. There is no difference between pretax and aftertax equity

on the book value of the liability, and it ignores taxes. Equity is inherently more risky than debt (except, perhaps, in the unusual case where a firm’s assets have a negative beta). For this reason, the cost of equity exceeds the cost of debt. If taxes are considered in this case, it can be

the equipment including floatation costs is: Amount raised(1 – .0671) = $20,000,000 Amount raised = $20,000,000/(1 – .0671) = $21,439,510 Even if the specific funds are actually being raised completely from debt, the flotation costs, and hence true investment cost, should be valued as if the firm’s target capital structure is used. 19. We first

Debt issues are larger because large companies have the greatest access to public debt markets (small companies tend to borrow more from private lenders). Equity issuers are frequently small companies going public; such issues are often quite small. 2. From the previous question, economies of scale are part of the answer. Beyond this, debt

are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. a. The new market value will be the current shares outstanding times the stock price plus the rights offered times the rights price, so: New market value

to the systematic risk of the firm’s assets. Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt financing, increases, so does financial risk and, hence, the overall risk of the equity. Thus, Firm B could have a

flying. The other side is that Continental abused the bankruptcy code. Rather than renegotiate labor agreements, Continental simply abrogated them to the detriment of its employees. In this, and the last several, questions, an important thing to keep in mind is that the bankruptcy code is a creation of law,

$3,184,615.38 The WACC remains at 9 percent. Due to taxes, EBIT for an all-equity firm would have to be higher for the firm to still be worth $23 million. 12. a. With the information provided, we can use the equation for calculating WACC to find the cost of equity. The equation for WACC is: WACC =

timing of dividend payments doesn’t affect the present value of all future dividends. 2. A stock repurchase reduces equity while leaving debt unchanged. The debt ratio rises. A firm could, if desired, use excess cash to reduce debt instead. This is a capital structure decision. 3. Friday, December 29 is the ex-dividend day. Remember not to

steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The aftertax dividend is the pretax dividend times one minus the tax rate, so: Aftertax dividend = $4.60(1 – .15) = $3.91 The stock price

on hand, and they allow customers to purchase on credit and take a relatively long time to pay. 2. These are firms that have a relatively long time between the time purchased inventory is paid for and the time that inventory is sold and payment received. Thus, these are firms that have relatively short payables

sources, so it will save on interest expense. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have

May une Beginning cash balance $140,000 $101,600 $104,100 Cash receipts Cash collections from credit sales 283,500 361,400 371,700 Total cash available $423,500 463,000 475,800 Cash disbursements Purchases $168,000 $147,800 $176,300 Wages, taxes, and expenses 53,800 51,000 78,300 Interest 13,100 13,100 13,100 Equipment purchases 87,000 147,000 Total cash disbursements $321,900 $358,900

in the target cash balance. c. Increase. This will increase the amount of cash that the firm has to hold in non-interest bearing accounts, so they will have to raise the target cash balance to meet this requirement. d. Decrease. If the credit rating improves, then the firm can borrow more easily, allowing it to lower the

opportunity cost. It could be invested (by shareholders) in potentially more profitable ways. Question 10 discusses another reason. 2. If it has too much cash it can simply pay a dividend, or, more likely in the current financial environment, buy back stock. It can also reduce debt. If it has insufficient cash, then it

they can hold in their portfolios. f. The primary disadvantage of the repo market is the generally very short maturities available. 10. The concern is that excess cash on hand can lead to poorly thought-out management decisions. The thought is that keeping cash levels relatively low forces management to pay careful attention to cash flow and

desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it—namely that higher returns can generally be found by investing the cash into productive assets—low liquidity levels are also desirable to the

borrows more than it pays in interest, its cash flow to creditors will be negative. 10. The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences unless the new accounting information caused stockholders to revalue the derivatives. 11. Enterprise value is the theoretical takeover price. In the event

flow from the new policy is the quantity sold times the new price, all times one minus the default rate, so: Cash flow from new policy = 40,000($537)(1 – .03) Cash flow from new policy = $20,835,600 The incremental cash flow is the difference in the two cash flows, so: Incremental cash flow = $20,835,600

require immediate payment. A bankers acceptance is when a bank guarantees the future payment of a commercial draft. A promissory note is an IOU that the customer signs. A trade acceptance is when the buyer accepts the commercial draft and promises to pay it in the future. 1. a. b. c. d. e. 2. Trade credit is usually granted on open account.

the firm’s production process), work-in-progress (partially completed products), and finished goods (products ready for sale). From the firm’s perspective, the demand for finished goods is independent from the demand for the other types of inventory. The demand for raw material and work-in-progress is derived from, or dependent on, the firm’s needs for these inventory

forward market than in the spot market (SFr 1.53 versus SFr 1.50). b. The franc is expected to depreciate relative to the dollar because it will take more francs to buy one dollar in the future than it does today. C. Inflation in Switzerland is higher than in the United

improves because a sale of the exported goods for a fixed number of euros will be worth more dollars. American importers: their situation in general worsens because the purchase of the imported goods for a fixed number of euros will cost more in dollars. b. American exporters: they would generally

after accounting for the exchange ratio. An investor could invest in a risk neutral portfolio by purchasing the underpriced asset and selling the overpriced asset. When the prices of the assets revert to an equilibrium, the positions could be closed. 2. Overconfidence is the belief that one’s abilities are greater than they are. An

a supplier. Since a decline in lumber prices would reduce the income of a lumber supplier, it has hedged its price risk by selling lumber futures. Losses in the spot market due to a fall in lumber prices are offset by gains on the short position in lumber futures. 2. Buying call options gives the

more attractive than the rate available from issuing a floating-rate bond. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However,

credit, then there is a decrease in the current ratio if it was initially greater than 1.0. b. Reducing accounts payable with cash increases the current ratio if it was initially greater than 1.0. c. Reducing short-term debt with cash increases the current ratio if it was initially greater than 1.0. d. As

make sense. e. For a hospital such as Holy Cross, revenues and costs expressed on a per bed basis would be useful. f. For a college textbook publisher such as McGraw-Hill/Irwin, the leading publisher of finance textbooks for the college market, the obvious standardization would be per book sold. 11. Reporting the sale of Treasury

number is found by: $10,157 / $8,436 = 1.2040 This means the cash balance in 2009 is 1.2040 times as large as the cash balance in 2008. The common-size, common-base year answers for Question 15 are found by dividing the commonsize percentage for 2009 by the common-size percentage for 2008. For example, the

from operating activities $ 64,497 Investment activities Fixed asset acquisition Net cash from investment activities $(53,307) $(53,307) Financing activities Increase in notes payable Dividends paid Increase in long-term debt Net cash from financing activities $ (1,000) (20,000) 10,000 $(11,000) Net increase in cash $ Cash, end of year $ 22,050 29. Earnings per share Earnings per share $ 36,475 $ (2,534) (1,566) 190 = Net income / Shares = $36,475 / 25,000 = $1.46 per share P/E ratio P/E

firm's assets, employees, and, in fact, just about every aspect of its operations and financing exist to directly or indirectly support sales. Put differently, a firm's future need for things like capital assets, employees, inventory, and financing are determined by its future sales level. 2. Two assumptions of the sustainable

arranged if the company had taken quick enough action. Sometimes it becomes apparent that help is needed only when it is too late, again emphasizing the need for planning. 9. All three were important, but the lack of cash or, more generally, financial resources ultimately spelled doom. An inadequate cash

do not vary directly with sales. HEIR JORDAN CORPORATION Balance Sheet ($) (%) Assets Current assets Cash $ 3,050 Accounts receivable 6,900 Inventory 7,600 Total $ 17,550 Fixed assets Net plant and equipment 34,500 Total assets 8.03 18.16 20.00 46.18 90.79 $52,050 136.97 Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity ($) (%) $ 1,300 6,800 $ 8,100 25,000 3.42 n/a n/a n/a $15,000 3,950 $18,950 n/a n/a n/a $52,050 n/a 11. Assuming costs vary with sales and a 15 percent increase in sales, the pro forma income

is: D/E = EM – 1 D/E = 1.43 – 1 D/E = 0.43 20. We are given the profit margin. Remember that: ROA = PM(TAT) We can calculate the ROA from the internal growth rate formula, and then use the ROA in this equation to find the total asset turnover. The retention ratio is: b = 1

which corresponds to retention ratio of 1, or total earnings retention. The maximum sustainable growth rate for this company is: Maximum sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Maximum sustainable growth rate = [.0645(1)] / [1 – .0645(1)] Maximum sustainable growth rate = .0690 or 6.90% 31. We know that

one of two mutually exclusive projects to accept ultimately depends upon which one of the following? A. initial cost of each project B. timing of the cash inflows C. total cash inflows of each project D. required rate of return E. length of each project's life [c] D. Refer to section 9.5 [/c] Assume the spot rate for the Japanese yen

to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan [c] E. Refer to section 6.4 [/c] Travis invested $9,250 in an account that pays 6 percent simple interest. How much more could he have earned over a 7-year period

to section 7.5 [/c] Parkway Express needs $318,000 a week to pay bills. The standard deviation of the weekly disbursements is $31,000. The firm has established a lower cash balance limit of $60,000. The applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $65. Based on the BAT model, what

II only B.III and IV only C.II, III, and IV only D.I, III, and IV only E.I, II, III, and IV [c] D. Refer to section 11.3 [/c] Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000 shares of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of stock

payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: A. accounts payable. B. long-term debt. C. fixed assets. D. retained earnings. E. common stock. [c] B. Refer to section 4.3 [/c] You have won a contest and will receive $2,500 a year in real terms for the next

0.97 B. 1.01 C. 1.08 D. 1.15 E. 1.22 [c] B. Earnings per share = ($320,000 × .042)/14,000 = $0.96 Price-sales ratio = (24 × $0.96)/($320,000/14,000) = 1.01 [/c] Which type of business organization has all the respective rights and privileges of a legal person? A. sole proprietorship B. general partnership C. limited partnership D. corporation E. limited liability company [c] D. Refer to section 1.2 [/c] On the day you

involved in the transaction. IV. When a warrant is exercised, the issuer must issue new shares of stock. A. I only B. II only C. I and III only D. II and IV only E. I and IV only [c] D. Refer to section 24.7 [/c] One year ago, you purchased a stock at a price of $47.50 a share. Today,

the following? A. current yield B. effective rate C. compound rate D. simple rate E. discount rate [c] E. Refer to section 5.2 [/c] Callable bonds generally: A. grant the bondholder the option to call the bond anytime after the deferment period. B. are callable at par as soon as the call-protection period ends. C. are called when market interest rates increase. D. are

shares of stock outstanding and net income of $420. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase? A. $1.83 B. $1.89 C. $1.96 D. $2.00 E. $2.08 [c] A. Price per share = $3,750/250 = $15 Number of shares repurchased = (0.25 × $1,200)/$15 =

account prior to recording the receipt of that check to a customer's account. C. is used to reduce the disbursement float of a firm. D. is efficient regardless of the locations selected for lockbox destinations. E. automatically records payments to a customer's account when the customer's check is received at the lockbox location. [c] B. Refer to section

only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV [c] E. Refer to section 26.4 [/c] What is the value of a 6-month put with a strike price of $27.50 given the Black-Scholes option pricing model and the following information? A. $6.71 B. $6.88 C. $7.24 D. $7.38 E. $7.62 [c] D. P = ($27.50 × 2.71828-0.035×0.5)

retirement account D. payment to an unsecured creditor E. payment of employee wages [c] E. Refer to section 16.10 [/c] You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rates? A.

will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously will sales. If the firm is operating at full capacity and no new debt or equity is issued, how much external financing is needed to support the 16 percent growth rate in sales? A. $-10,246 B. -$8,122 C. -$6,708 D. $2,407 E. $3,309 [c] B. Dividends =

values? A. percentage of sales method B. sales dilution method C. sales reconciliation method D. common-size method E. trend method [c] A. Refer to section 4.3 [/c] Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000.

years E. never [c] C. Payback = $8,000/$1,190 = 6.72 years [/c] To convince investors to accept greater volatility, you must: A. decrease the risk premium. B. increase the risk premium. C. decrease the real return. D. decrease the risk-free rate. [c] B. E. increase the risk-free rate. Refer to section 12.4 [/c] The accounts receivable approach to credit policy supports the theory that: A. a firm's

can generally be cancelled without penalty. Refer to section 27.1 [/c] The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent. What is the degree of operating leverage if the contribution margin per unit is $47? A. 0.38 B.

conditions. E. protective covenants. [c] E. Refer to section 7.2 [/c] Which of the following shareholders tend to favor a high dividend policy? I. retired individuals II. endowment funds III. corporate investors IV. investors with high dividend tax rates but low capital gains tax rates A. I and III only B. II and IV only C. I, II, and III only D. II, III,

the U.S. is yielding 4.5 percent. What approximate real rate of return should you expect on a risk-free Norwegian security? A. 1.0 percent B. 1.5 percent C. 2.0 percent D. 2.5 percent E. 3.0 percent [c] B. Approximate real rateN = Approximate real rateU.S. = 0.045 - 0.03 = 1.5 percent [/c] The Leeward Company just issued 15-year, 8 percent, unsecured

foresight model B. personalization C. recapitalization D. offsetting leverage E. homemade dividend policy [c] E. Refer to section 17.2 [/c] Public offerings of debt and equity must be registered with which one of the following? A. New York Board of Governors B. Federal Reserve C. NYSE Registration Office D. Securities and Exchange Commission E. Market Dealers Exchange [c] D. Refer to section 1.5 [/c] A firm is technically insolvent

risk E. taxability risk [c] B. Refer to section 7.4 [/c] Which one of the following statements is correct given the following two sets of project cash flows? A. The cash flows for Project B are an annuity, but those of Project A are not. B. Both sets of cash flows have equal present values as of time zero

required to improve their safety standards A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only [c] D. Refer to section 13.5 [/c] Which one of the following best defines the variance of an investment's annual returns over a number of years? A. The average squared

management will set both the lower and the upper desired levels of cash. E. the cash balance fluctuates in a random manner. [c] E. Refer to section 19.A [/c] John's Auto Repair just took out an $89,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment

spot rate is C$1.2103 and the one-year forward rate is C$1.1952. The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S. A. $0.003 B.

of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock? A. 8.52 percent B. 8.74 percent C. 8.65 percent D. 9.05 percent E. 9.28 percent [c] C. E(r) = (0.45× 0.13) + (0.50 × 0.06) + (0.05 × -0.04) = 8.65 percent [/c] The Green Hornet

expected to increase by 3.25 percent annually. What is one share of this stock worth to you if you require a 12.5 percent rate of return on similar investments? A. $42.92 B. $43.40 C. $45.12 D. $45.88 E. $46.50 [c] A. [/c] The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta

I and III only B. II and IV only C. I and IV only D. III and IV only E. I, II, and III only [c] A. Refer to section 18.3 [/c] The City Street Corporation's common stock has a beta of 1.2. The risk-free rate is 3.5 percent and the expected return on the market is 13 percent. What

long-term C. zero net present values for all stock investments D. arbitrage opportunities which develop on a routine basis E. realizing negative returns on a routine basis [c] C. Refer to section 12.6 [/c] Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The

The rights offer would raise a total of $70 million. What is the subscription price? A. $26.48 B. $27.06 C. $27.50 D. $28.18 E. $29.10 [c] B. Number of new shares = $70m/PS NEx = 7m/($70m/PS) = 0.1PS PX = $46 = [0.1PS($53) + PS]/(0.1PS + 1); PS = $27.06 [/c] Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate

loss D. greater control over the business affairs of the partnership E. maximum loss limited to the capital invested [c] E. Refer to section 1.2 [/c] You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.2 million. Over the past five years, the price of land in the area

valuation period. [c] B. Refer to section 9.2 [/c] Princeton Enterprises is a diversified company. In addition to its primary business operations, the firm is also the sole shareholder of a wholly owned subsidiary. As part of its restructuring plan, Princeton has decided to implement an IPO offering for shares in the subsidiary. This offering is equivalent to

$160,000, and a common stock account value of $20,000. The company is planning a 2-for-5 reverse stock split. What will the par value per share be after the split? A. $0.15 B. $0.20 C. $1.00 D. $2.50 E. $5.00 [c] D. Par value per share = ($20,000/20,000 shares) × 5/2 = $2.50 [/c] Which one of the following terms is defined as

tax rate C. substantial tax shields from other sources D. low probabilities of financial distress E. minimal taxable income [c] D. Refer to section 16.6 [/c] Which of the following statements are true based on the historical record for 19262007? I. Risk and potential reward are inversely related. II. Risk-free securities produce a positive real rate of return each year. III.

the most risky security in the portfolio. C. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E. can be less than the standard deviation of the least risky

equity value = $50,000 × 0.767 = $38,350 [/c] You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 4.5 percent per year? A. 4.17

owner the right to purchase two shares of stock in the company at $14 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 11 percent. What is the value of one warrant? A. $7.00 B. $13.58 C. $14.00 D. $16.67 E. $21.57 [c] E. Total warrant value = $1,000 - $784.27 = $215.73 Price per warrant =

pay for a purchase. C. The credit period begins on the invoice date. D. With terms of 2/10, net 30, the net credit period is 20 days. E. With EOM dating, all sales are assumed to have occurred on the 15th of each month. [c] C. Refer to section 20.2 [/c] You are considering renting a kiosk in

generated from every dollar of net fixed assets? (Use 2009 values.) A. $0.88 B. $1.87 C. $2.33 D. $2.59 E. $3.09 [c] D. Fixed asset turnover for 2009 = $36,408/$14,080 = 2.59 For every $1 in net fixed assets, the firm generates $2.59 in sales. [/c] What was the highest annual rate of inflation during the period 1926-2007? A. between 0 and 3

on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money? A.31.97 years B.34.56 years C.42.03 year D.48.19 years E.You will never run out of money. [c] D. t = 578.33688 months/12 = 48.19 years [/c] Which one of the following variables

rate is 34 percent. What is the company's target debt-equity ratio? A. 0.89 B. 0.92 C. 0.98 D. 1.01 E. 1.02 [c] E. WACC = 0.105 = 0.155(E/V) + (0.085) (D/V) (1 - 0.34) 0.105(V/E) = 0.155 + 0.085(0.66) (D/E) 0.105(1 + D/E) = 0.155 + 0.0561(D/E) D/E = 1.02 [/c] You are considering a new product launch. The project will cost $630,000, have

the bond prior to maturity II. choose when you wish to receive interest payments III. convert the bond into a TIPS IV. convert the bond into equity shares A. I and III only B. I and IV only C. II and III only D. III and IV only E. I, II, and IV only [c] B. Refer to section 7.4 [/c] Miller Mfg.

section 3.1 [/c] Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if

its purchases 60 days after the invoice date. Sales are highest during July and August. Currently, Jill is preparing the cash disbursements section of the firm's cash budget. Which one of the following statements is supported by this information? A. Inventory purchases will be highest during the months of July and August. B. Inventory

$982.19 D. $1,021.15 E. $1,077.94 [c] E. Simple interest = $1,650 + ($1,650 × .05 × 20) = $3,300 Annual compounding = $1,650 × (1.05)20 = $4,377.94 Difference = $4,377.94 - $3,300 = $1,077.94 [/c] The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. tax reconciliation statement. D. statement

discount rates unfairly punishes low-risk divisions within a firm. C. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. D. The pure play method is most frequently used for projects involving the expansion of a firm's current operations. E. Firms that elect to use the pure play method for

cash flow is projected to be $45 × 9,000 = $405,000. The relevant discount rate is 14 percent, and the initial investment required is $1,730,000. After the first year, the project can be dismantled and sold for $1,350,000. If expected sales are revised based on the first year's performance, it would make sense to

increasing which one of the following? A. accounts receivable B. cost of goods sold C. accounts payable D. fixed assets E. inventory [c] D. Refer to section 4.3 [/c] Which one of the following statements related to options is correct? A. American stock options can be exercised but not resold. B. A European call is either equal to or less valuable than

distress D. minimize operational costs while maximizing firm efficiency E. maintain steady growth while increasing current profits [c] B. Refer to section 1.3 [/c] A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and $7,500 over three years, respectively. What is the discounted payback period if the required rate of return is 16

year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the net income from this proposed project? A. $18,508.75 B. $40,211.24 C. $66,441.67 D. $123,391.67 E. $136,709.48 [c] D. Net income = [$304,000 - ($1,370,000/12)] × [1 -

9.75 percent? A. $32.26 B. $35.48 C. $72.68 D. $76.92 E. $79.81 [c] D. P0 = $7.50/0.0975 = $76.92 [/c] A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and $4,100 over the next four years, respectively. What is the payback period? A. 1.73 years B. 2.51 years C. 2.94 years D. 3.51 years E. 3.94 years [c] C. [/c] The Mountain Top Shoppe has

return. D. increase the initial cash outflow of the project. E. have no effect on the present value of the project. [c] D. Refer to section 14.6 [/c] Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital must be a positive