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978-0077454432 Chapter 1
Chapter 01: The Goals and Functions of Financial Management 1-1 Chapter 1 The Goals and Functions of Financial Management Discussion Questions 1-1. How did the recession of 2007–2009 compare with other recessions since the Great Depression in terms of length? […]
978-0077454432 Chapter 10 Part 1
Chapter 10: Valuation and Rates of Return Chapter 10 Valuation and Rates of Return Discussion Questions 10-1. How is valuation of any financial asset related to future cash flows? The valuation of a financial asset is equal to the present […]
978-0077454432 Chapter 10 Part 2
Chapter 10: Valuation and Rates of Return 10-11 7. Bond maturity effect (LO3) For problem 6 graph the relationship in a manner similar to the bottom half of Figure 10-2. Also explain why the pattern of price change takes place. […]
978-0077454432 Chapter 10 Part 3
Chapter 10: Valuation and Rates of Return Tyler Food Corporation Approximate Yield to Maturity is represented by Y’ Principal payment Price of the bond Annual interest payment Number of years to maturity Y’= 0.6 (Price of the bond) 0.4 (Principal […]
978-0077454432 Chapter 10 Part 4
Chapter 10: Valuation and Rates of Return 10-31 1 e 0 D Kg P =+ e $3.80 K 4% 7.6% 4% 11.6% $50.00 = + = + = 33. Common stock required rate of return (LO5) A firm pays a […]
978-0077454432 Chapter 10 Part 5
Chapter 10: Valuation and Rates of Return $3.10 Value of Stock Price at the end of Year 3 4 3 4 3 e D P D D (1 g) $1.452 (1.10) $1.597 Kg = = + = = − 3 […]
978-0077454432 Chapter 11 Part 1
Chapter 11: Cost of Capital Chapter 11 Cost of Capital Discussion Questions 11-1. Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? Though an investment […]
978-0077454432 Chapter 11 Part 2
Chapter 11: Cost of Capital 11-11 Russell Container Corporation (Continued) a. Kd = Yield (1 – T) b. It has gone down. Although the before-tax yield is higher, the larger tax deduction (35 percent versus 25 percent) more than offsets […]
978-0077454432 Chapter 11 Part 3
Chapter 11: Cost of Capital 11-21 50 percent debt level. 22. Weighted average cost of capital (LO1) Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order shown in […]
978-0077454432 Chapter 11 Part 4
Chapter 11: Cost of Capital 11-31 11–28. (Continued) c. Cost (aftertax) Weights Weighted Cost Debt (Kd) ………………. Preferred stock (Kp) .. New common stock (Kn) ……………………… Marginal cost of capital (Kmc) ……………………. 5.60% 9.00 13.20 45% 15 40 2.52% 1.35 […]
978-0077454432 Chapter 11 Part 5
Chapter 11: Cost of Capital 11-38 CP 11-1. (Continued) g. Percent 15% 13.5% 10% A B C D 5% 0 25 50 75 100 Amount of Capital ($ millions) Top bar represents return on investment Kmc 12.16% 11.63% 11.30% 11.20% […]
978-0077454432 Chapter 12 Part 1
Chapter 12: The Capital Budgeting Decision 12-1 Chapter 12 The Capital Budgeting Decision Discussion Questions 12-1. What are the important administrative considerations in the capital budgeting process? Important administrative considerations relate to: the search for and discovery of investment opportunities, […]
978-0077454432 Chapter 12 Part 2
Chapter 12: The Capital Budgeting Decision 12-11 12. Internal rate of return (LO4) King’s Department Store is contemplating the purchase of a new machine at a cost of $13,869. The machine will provide $3,000 per year in cash flow for […]
978-0077454432 Chapter 12 Part 3
Chapter 12: The Capital Budgeting Decision 12-21 3 25,000 .751 18,775 12–18. (Continued) b. Internal Rate of Return We will average the inflows to arrive at an assumed annuity. $15,000 20,000 25,000 10,000 5,000 $75,000/5 = $15,000 We divide the […]
978-0077454432 Chapter 12 Part 4
Chapter 12: The Capital Budgeting Decision c. Net Present Value Profile 12-23. (Continued) d. Since the projects are not mutually exclusive, they both can be selected if they have a positive net present value. At a 9% cost of capital, […]
978-0077454432 Chapter 12 Part 5
Chapter 12: The Capital Budgeting Decision 12-41 29. MACRS depreciation and net present value (LO4) Universal Electronics is considering the purchase of manufacturing equipment with a 10–year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–8 to […]
978-0077454432 Chapter 12 Part 6
Chapter 12: The Capital Budgeting Decision 12-50 d. Net Present Value Cash Flow Present Year (inflows) PVIF at 12% Value 1 $132,200 .893 $118,055 2 126,120 .797 100,518 3 96,672 .712 68,830 33. Replacement decision analysis (LO4) Hercules Exercise Equipment […]
978-0077454432 Chapter 13 Part 1
Chapter 13: Risk and Capital Budgeting Chapter 13 Risk and Capital Budgeting Discussion Questions 13-1. If corporate managers are risk-averse, does this mean they will not take risks? Explain. Risk-averse corporate managers are not unwilling to take risks, but will […]
978-0077454432 Chapter 13 Part 2
Chapter 13: Risk and Capital Budgeting 13-11 8. Coefficient of variation (LO1) Five investment alternatives have the following returns and standard deviations of returns. Alternative Returns: Expected Value Standard Deviation A ………………………………. $ 1,000 $ 590 B ………………………………. 3,000 600 […]
978-0077454432 Chapter 13 Part 3
Chapter 13: Risk and Capital Budgeting 13-21 b. Recalculate the net present value of the Australian Mine at a 15 percent discount rate. Years Cash Flow n Factor PVIFA @ 15% Present Value 5–15 $300,000 (15 – 4) (5.847 – […]
978-0077454432 Chapter 13 Part 4
Chapter 13: Risk and Capital Budgeting 13–23. (Continued) Standard deviation—year 10 D D (D D)− 2 (D D)− P 2 (D D)− P 40 80 –40 1,600 .30 480 80 80 0 0 .40 0 120 80 +40 1,600 .30 […]
978-0077454432 Chapter 13 Part 5
Chapter 13: Risk and Capital Budgeting 13-41 COMPREHENSIVE PROBLEMS Comprehensive Problem 1. Gibson Appliance Co. (portfolio effect of a merger) (LO5) Gibson Appliance Co. is a very stable billion-dollar company with a sales growth of about 7 percent per year […]
978-0077454432 Chapter 14
Chapter 14: Capital Markets 14-1 Chapter 14 Capital Markets Discussion Questions 14-1. In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets? The federal government, government agencies, and state and local governments all compete […]
978-0077454432 Chapter 15 Part 1
Chapter 15: Investment Banking: Public and Private Placement Chapter 15 Investment Banking: Public and Private Placement Discussion Questions 15-1. In what way is an investment banker a risk taker? The investment banker is a risk taker (underwriter) in that the […]
978-0077454432 Chapter 15 Part 2
Chapter 15: Investment Banking: Public and Private Placement 15-11 Wrigley Corporation a. Spread = $15.70 – $15.00 = $0.70 % underwriting spread = $.70$15.70 = 4.46% b. Spread = $1,001 – $992 = $9 % underwriting spread = $9/$1,001 = […]
978-0077454432 Chapter 15 Part 3
Chapter 15: Investment Banking: Public and Private Placement 15-21 e. In the long run, it appears that the company is better off because of the additional investment. Earnings per share are 19. Dilution and rates of return (LO3) The Presley […]
978-0077454432 Chapter 15 Part 4
Chapter 15: Investment Banking: Public and Private Placement 3 million shares (P/E EPS) 3 million (16 $1.25) 3 million $20 $60.0 million Total value to the company $103.5 million 15–22. (Continued) c. Total value to […]
978-0077454432 Chapter 16 Part 1
Chapter 16: Long-Term Debt and Lease Financing 16-1 Chapter 16 Long-Term Debt and Lease Financing Discussion Questions 16-1. Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since […]
978-0077454432 Chapter 16 Part 2
Chapter 16: Long-Term Debt and Lease Financing a. Bond A $92 interest/$875 market price = 10.51% current yield Bond B $82 interest/$900 market price = 9.11% current yield b. Bond A. It has a higher current yield. c. Approximate yield […]
978-0077454432 Chapter 16 Part 3
Chapter 16: Long-Term Debt and Lease Financing Present value of principal payment at maturity PV = FV × PVIF (n = 20*, i = 6%) PV = $1,000 × .312 = $312.00 Appendix B Total present value Present value of […]
978-0077454432 Chapter 16 Part 4
Chapter 16: Long-Term Debt and Lease Financing c. Original amount $900,000 16-31 -10% 90,000 Net cost $810,000 $810,000 A = $143,363 5.650 = COMPREHENSIVE PROBLEM Comprehensive Problem 1. Broadband, Inc. Bond prices refunding (LO2& 3) Barton Simpson, the chief financial […]
978-0077454432 Chapter 16 Part 5
Chapter 16: Long-Term Debt and Lease Financing 16A–1. Solution: Titanic Boat Co. a. Liquidation value of assets $5,200,000 Liabilities 7,600,000 Difference ($2,400,000) b. Preferred and common stock will not participate in the distribution because the liquidation value of the assets […]
978-0077454432 Chapter 17 Part 1
Chapter 17: Common and Preferred Stock Financing Chapter 17 Common and Preferred Stock Financing Discussion Questions 17-1. Why has corporate management become increasingly sensitive to the desires of large institutional investors? Corporate management has become increasingly sensitive to the desires […]
978-0077454432 Chapter 17 Part 2
Chapter 17: Common and Preferred Stock Financing 17-11 the board. 10. Cumulative voting (LO2) In problem 9, if nine directors were to be elected, and Ms. Ramsey and her friends had 60,001 shares and Mr. Clark had 40,001 shares plus […]
978-0077454432 Chapter 17 Part 3
Chapter 17: Common and Preferred Stock Financing 17-21 Robbins Petroleum Company a. $6.50 per share × 850,000 shares × 4 years = $22,100,000 × 90% = $19,890,000 compensation b. $875.54 21. Preferred stock dividends in arrears and valuing common stock […]
978-0077454432 Chapter 18 Part 1
Chapter 18: Dividend Policy and Retained Earnings Chapter 18 Dividend Policy and Retained Earnings Discussion Questions 18-1. How does the marginal principle of retained earnings relate to the returns that a stockholder may make in other investments? The marginal principle […]
978-0077454432 Chapter 18 Part 2
Chapter 18: Dividend Policy and Retained Earnings 18-11 10. Dividend yield (LO1) The stock of North American Dandruff Company is selling at $80 per share. The firm pays a dividend of $2.50 per share. a. What is the dividend yield? […]
978-0077454432 Chapter 18 Part 3
Chapter 18: Dividend Policy and Retained Earnings 18-21 benefits have taken place. 19. Stock dividend and cash dividend (LO4) Health Systems, Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: Common stock (3,000,000 shares at […]
978-0077454432 Chapter 18 Part 4
Chapter 18: Dividend Policy and Retained Earnings 18-27 b. If the firm simply uses a payout ratio of 40 percent of net income, how much in total cash dividends will be paid? c. If the firm pays a 10 percent […]
978-0077454432 Chapter 19 Part 1
Chapter 19: Convertibles, Warrants, and Derivatives Chapter 19 Convertibles, Warrants, and Derivatives Discussion Questions 19-1. What are the basic advantages to the corporation of issuing convertible securities? The advantages to the corporation of a convertible security are: a. The interest […]
978-0077454432 Chapter 19 Part 2
Chapter 19: Convertibles, Warrants, and Derivatives 19-11 19–11. Solution: Pittsburgh Steel Company (Continued) Pure bond value where n = 50, i = 6% PV of annuity = $40 semiannually × 15.762 = $630.48 PV of principal payment = $1,000 × […]
978-0077454432 Chapter 19 Part 3
Chapter 19: Convertibles, Warrants, and Derivatives 19-20 $600,000 $49,000* 100,000 28,000** + = + $649,400 $5.07 128,000 == *interest savings × (1 – tax rate) 21. Earnings per share with convertibles (LO5) Myers Drugs, Inc., has 2 million shares of […]
978-0077454432 Chapter 2 Part 1
Chapter 02: Review of Accounting Chapter 2 Review of Accounting Discussion Questions 2-1. Discuss some financial variables that affect the price-earnings ratio. The price-earnings ratio will be influenced by the earnings and sales growth of the firm, the risk or […]
978-0077454432 Chapter 2 Part 2
Chapter 02: Review of Accounting 2-11 2-10. Solution: Precision Systems Sales…………………………………………………….. $800,000 11. Depreciation and earnings (LO1) Stein Books, Inc. sold 1,400 finance textbooks for $195 each to High Tuition University in 2010. These books cost $150 to produce. Stein […]
978-0077454432 Chapter 2 Part 3
Chapter 02: Review of Accounting 2-21 Increase in inventory – decreases cash flow (use) Dividend payment – decreases cash flow (use) Increase in accrued expenses – increases cash flow (source) 21. Depreciation and Cash flow (LO5) The Jupiter Corporation has […]
978-0077454432 Chapter 2 Part 4
Chapter 02: Review of Accounting 2-28 28. Statement of cash flows (LO4) Prepare a statement of cash flows for the Jeter Corporation. Follow the general procedures indicated in Table 2–10. _______________________________________________________________________ JETER CORPORATION Income Statement For the Year Ended December […]
978-0077454432 Chapter 20 Part 1
Chapter 20 – External Growth through Mergers Chapter 20 External Growth through Mergers Discussion Questions 20-1. Name three industries in which mergers have been prominent. Computers, telecommunications, public utilities, pharmaceuticals, and energy. 20-2. What is the difference between a merger […]
978-0077454432 Chapter 20 Part 2
Chapter 20 – External Growth through Mergers a. Total earnings Noble $ 1,200,000 + Barnes $ 3,600,000 Combined earnings $ 4,800,000 20-11 Shares outstanding Original Noble Shares 2,400,000 + New Noble shares 600,000 Postmerger shares outstanding 3,000,000 New earnings per […]
978-0077454432 Chapter 21 Part 1
Chapter 21: International Financial Management Chapter 21 International Financial Management Discussion Questions 21-1. What risks does a foreign affiliate of a multinational firm face in today’s business world? In addition to the normal risks that a domestic firm faces (such […]
978-0077454432 Chapter 21 Part 2
Chapter 21: International Financial Management 21-8 3. Purchasing power theory (LO2) From the base price level of 100 in 1981, Saudi Arabian and U.S. price levels in 2010 stood at 200 and 412, respectively. If the 1981 $/riyal exchange rate […]
978-0077454432 Chapter 3 Part 1
Chapter 03: Financial Analysis Chapter 3 Financial Analysis Discussion Questions 3-1. If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, in which ratios would each group be most interested, and for what reasons? Short-term lenders–liquidity ratios […]
978-0077454432 Chapter 3 Part 2
Chapter 03: Financial Analysis 3-11 Haines Corp. 2009 2010 a. Cost of goods sold $1,500,000 $1,875,000 60.0% 62.5% Sales 2,500,000 3,000,000 == It is decreasing profitability. b. Selling & admin. expense $205,000 $210,000 8.2% 7.0% Sales 2,500,000 3,000,000 == It […]
978-0077454432 Chapter 3 Part 3
Chapter 03: Financial Analysis 3-17. Solution: Cable Corporation and Multi-Media, Inc. a. Cable Multi- Corporation Media, Inc. Net income $30,000 $100,000 12% 22.2% Stockholders’ equity $250,000 $450,000 = = = Multi-Media Inc. has a much higher return on stockholders’ equity […]
978-0077454432 Chapter 3 Part 4
Chapter 03: Financial Analysis J. Lo Wedding Gowns a. Income before interest and taxes Times interest earned Interest $60,000 5,000 12x = = = 3-24. (Continued) b. Income before fixed charges and taxes Fixed charge coverage Fixed charges $60,000 10,000 […]
978-0077454432 Chapter 3 Part 5
Chapter 03: Financial Analysis 3-41 31. Inflation and inventory accounting effect (LO5) The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. CANTON CORPORATION Income Statement for 2010 Sales ………………………………………………………… $100,000 (10,000 units at $10) Cost […]
978-0077454432 Chapter 3 Part 6
Chapter 03: Financial Analysis 3-51 Bonds payable ………………………………. 150,000 Total liabilities ……………………………… $320,000 Stockholders’ equity Preferred stock, $50 per value …………. 100,000 Common stock, $1 par value …………… 80,000 Capital paid in excess of par ……………. 190,000 Retained earnings ………………………….. […]
978-0077454432 Chapter 3 Part 7
Chapter 03: Financial Analysis 3-60 CP 3-1. (Continued) The liquidity ratios also are not encouraging. Both the current and quick one and one to one respectively. The debt to total assets ratio is particularly noticeable in regard to industry comparisons. […]
978-0077454432 Chapter 4 Part 1
Chapter 04: Financial Forecasting Chapter 4 Financial Forecasting Discussion Questions 4-1. What are the basic benefits and purposes of developing pro forma statements and a cash budget? The pro-forma financial statements and cash budget enable the firm to determine its […]
978-0077454432 Chapter 4 Part 2
Chapter 04: Financial Forecasting 4-11 Beginning inventory at these costs on July 1 was 3,000 units. From July 1 to December 1, 2011, Bradley produced 12,000 units. These units had a material cost of $3, labor of $5, and overhead […]
978-0077454432 Chapter 4 Part 3
Chapter 04: Financial Forecasting 4-21 21. Schedule of cash payments (LO2) The Denver Corporation has forecast the following sales for the first seven months of the year: January……… ……. $10,000 May……… $10,000 February……… ….. 12,000 June……… 16,000 March……… ……… 14,000 […]
978-0077454432 Chapter 4 Part 4
Chapter 04: Financial Forecasting 4-31 26. Complete cash budget (LO2) Archer Electronics Company’s actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. Sales Purchases April (actual) …………………………….. $320,000 […]
978-0077454432 Chapter 4 Part 5
Chapter 04: Financial Forecasting 4-41 COMPREHENSIVE PROBLEM Comprehensive Problem 1. Mansfield Corporation (external funds requirement) (LO4) Mansfield Corporation had 2010 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: […]
978-0077454432 Chapter 5 Part 2
Chapter 05: Operating and Financial Leverage c. Q (P VC) DCL Q(P VC) FC I 20,000($60 $30) 20,000($60 $30) $400,000 $50,000 $600,000 $600,000 4x $600,000 $400,000 $50,000 $150,000 − = − − − − = − − − = = […]
978-0077454432 Chapter 5 Part 3
Chapter 05: Operating and Financial Leverage 5-21 5-16. Solution: a. Cain Auto Supplies and Able Auto Parts Cain Able EBIT $10,000 $10,000 Less: Interest 5,000 10,000 EBT 5,000 0 Less: Taxes @ 30% 1,500 0 EAT 3,500 0 Shares 10,000 […]
978-0077454432 Chapter 5 Part 4
Chapter 05: Operating and Financial Leverage 5-31 5-21. (Continued) d. The debt financing plan provides a greater earnings per share in comparison to the equity plan. Conversely, with increasing sales, the debt plan becomes more attractive. Based on projected overall […]
978-0077454432 Chapter 5 Part 5
Chapter 05: Operating and Financial Leverage 5-41 5-26. (Continued) c. Silverman Plan (based on Mrs. Gold’s Assumption) Sales ($1,400,000 units at $4.50) $6,300,000 −Fixed costs ($1,500,000 1.15) 1,725,000 −Variable costs (1,400,000 units $3) 4,200,000 Operating income (EBIT) $ […]
978-0077454432 Chapter 5 Part 6
Chapter 05: Operating and Financial Leverage 5-48 e. What would be the required new funds if the company brings its ratios into line with the industry average during 2011? Specifically examine receivables turnover, inventory turnover, and the profit margin. Use […]
978-0077454432 Chapter 6 Part 2
Chapter 06: Working Capital and the Financing Decision 6-11 b. If Short-term Rates Change 1st year $200,000 × .10 = $20,000 2nd year $200,000 × .15 = $30,000 10. Optimal policy mix (LO5) Assume that Hogan Surgical Instruments Co. has […]
978-0077454432 Chapter 6 Part 3
Chapter 06: Working Capital and the Financing Decision 6-21 b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months […]
978-0077454432 Chapter 6 Part 4
Chapter 06: Working Capital and the Financing Decision 6-28 22. Level production and related financing effects (LO3) Esquire Products, Inc., expects the following monthly sales: January …………. $24,000 May ………… $4,000 September ……… $25,000 February ……….. 15,000 June ………… 2,000 […]
978-0077454432 Chapter 7 Part 2
Chapter 07: Current Asset Management 7-11 accounts receivable between various time frames. 12. Economic ordering quantity (LO5) Midwest Tires has expected sales of 12,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per […]
978-0077454432 Chapter 7 Part 3
Chapter 07: Current Asset Management 7-21 Then compute return on incremental investment. $11,022 18.37% $60,000 = Yes, extend credit. 18.37% is greater than 10%. 21. Credit policy and return on investment (LO4) Global Services is considering a promotional campaign that […]
978-0077454432 Chapter 8 Part 2
Chapter 08: Sources of Short-Term Financing 13. Compensating balances (LO2) Computer Graphics Company needs $250,000 in funds for a project. a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow? b. Given your […]
978-0077454432 Chapter 8 Part 3
Chapter 08: Sources of Short-Term Financing 8-24. (Continued) e. $6,850 360 Effective interest rate = $375,000 $75,000 60 $6,850 6 2.28% 6 $300,000 16.8% − = = = No, do not borrow with a compensating balance of […]
978-0077454432 Chapter 9 Part 1
Chapter 09: Time Value of Money Chapter 9 Time Value of Money Discussion Questions 9-1. How is the future value (Appendix A) related to the present value of a single sum (Appendix B)? The future value represents the expected worth […]
978-0077454432 Chapter 9 Part 2
Chapter 09: Time Value of Money 9-11 Appendix B PV = FV × PVIF Discount rate = 11% 24. Present value (LO3) Mr. Flint retired as president of Color Title Company but is currently on a consulting contract for $45,000 […]
978-0077454432 Chapter 9 Part 3
Chapter 09: Time Value of Money 9-21 IFA PV FV PV (10%,3periods) $48,680 .751 $36.559 = = = $52,736 9-38. (Continued) OR Take the PVIFA for 10 years at 10% and subtract the PVIFA for 3 years at 10% […]
978-0077454432 Chapter 9 Part 4
Chapter 09: Time Value of Money 9-45. (Continued) Subtract this value from $200,000 to determine how much you need to accumulate on the next 14 payments. $200,000 88,203 $111,797 − Determine the revised semi-annual payment necessary to accumulate this sum […]
Finance Chapter 1 1 During the 1930s, financial practice revolved around such topics as the preservation of
Chapter 01 – The Goals and Functions of Financial Management 1. As finance emerged as a new field, much emphasis was placed on mergers and acquisitions. TRUE 1-1 Bloom’s: Remember Difficulty: Basic Learning Objective: 01-01 The field of finance integrates […]
Finance Chapter 1 2 The Sarbanes-Oxley Act set up the Public Company Accounting Oversight Board with the
Chapter 01 – The Goals and Functions of Financial Management 62. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the A. options pricing model. B. theories of working capital management. C. theories […]
Finance Chapter 10 1 You hold a long-term bond yielding ten percent. If interest rates fall shortly before you sell the
Chapter 10 – Valuation and Rates of Return 1. The valuation of a financial asset is based on the concept of determining the present value of future cash flows. TRUE 10-1 Bloom’s: Understand Difficulty: Basic Learning Objective: 10-01 The valuation […]
Finance Chapter 10 2 An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth
Chapter 10 – Valuation and Rates of Return 69. The longer the time to maturity: A. the greater the price increase from an increase in interest rates. B. the less the price increase from an increase in interest rates. C. […]
Finance Chapter 10 3 Market Enterprises would like to issue bonds and needs to determine the approximate rate they
Chapter 10 – Valuation and Rates of Return 98. Market Enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. A firm with similar risk recently issued bonds with the following […]
Finance Chapter 11 1 The discount rate that equates a future stream of expected dividends to the current price is a
Chapter 11 – Cost of Capital 1. It is standard practice to evaluate investment decisions using the cost of the specific financing method involved. FALSE Bloom’s: Understand Difficulty: Basic Learning Objective: 11-02 The cost of capital is normally the discount […]
Finance Chapter 11 2 The general rule for using the weighted average cost of capital (WACC) in capital budgeting
Chapter 11 – Cost of Capital 63. A firm is paying an annual dividend of $2.65 for its preferred stock which is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock […]
Finance Chapter 12 1 Possibly the most overlooked part of the capital budgeting process is the search for new
Chapter 12 – The Capital Budgeting Decision 1. Capital budgeting decisions involve a minimum time horizon of five years. FALSE Bloom’s: Understand Difficulty: Basic Learning Objective: 12-01 A capital budgeting decision represents a long-term investment decision. 2. A good capital […]
Finance Chapter 12 2 Assuming that a firm has no capital rationing constraint and that a firm’s investment
Chapter 12 – The Capital Budgeting Decision 69. Assuming that a firm has no capital rationing constraint and that a firm’s investment alternatives are not mutually exclusive, the firm should accept all investment proposals A. for which it can obtain […]
Finance Chapter 12 3 The Taylor Corporation is using a machine that originally cost $88,000. The machine is being
Chapter 12 – The Capital Budgeting Decision 107. A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following 2 projects: Project A has a cost of $335,000 and the following cash flows: year […]
Finance Chapter 13 1 Projects with high positive correlation are sometimes valuable because they allow us to smooth
Chapter 13 – Risk and Capital Budgeting 1. A basic assumption in financial theory is that most investors and managers are risk seekers. FALSE 13-1 Bloom’s: Understand Difficulty: Basic Learning Objective: 13-02 Most investors are risk-averse; which means they dislike […]
Finance Chapter 13 2 Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small portion
Chapter 13 – Risk and Capital Budgeting 58. A project’s cash flows have a beta of 1.2, a standard deviation of $340, and a coefficient of variation of 0.40. What is the expected cash flow? A. $850 B. $167 C. […]
Finance Chapter 14 1 The European Central Bank that was created with the European Monetary Union has no control
Chapter 14 – Capital Markets 1. The European Central Bank issues bonds, notes, and bills denominated in the new Euro currency. TRUE Bloom’s: Remember Difficulty: Basic Learning Objective: 14-02 The primary participants raising funds in domestic capital markets are the […]
Finance Chapter 14 2 All of the following are recognized as an important influences in the development of the
Chapter 14 – Capital Markets 62. Which of the following statements concerning futures markets is false? A. Futures markets allow investors to manage risk. B. Futures markets can be used to hedge against changing commodity prices. C. Interest rate futures […]
Finance Chapter 15 1 The investment banker is someone who buys large new issues of stocks and then sells them to
Chapter 15 – Investment Banking: Public and Private Placement 1. The investment banker is someone who buys large new issues of stocks and then sells them to the public after their price has risen. FALSE Bloom’s: Remember Difficulty: Basic Learning […]
Finance Chapter 15 2 In order to avoid long-term dilution, a corporation should determine whether the necessary
Chapter 15 – Investment Banking: Public and Private Placement 75. Which of the following activities is not a service provided by investment bankers? A. Underwriting initial public offerings B. Raising capital via mutual fund offerings C. Advising in mergers D. […]
Finance Chapter 16 1 When a company defaults on a secured debt, it is rare for the secured asset to be sold and the
Chapter 16 – Long-Term Debt and Lease Financing 1. Over the decades, the times interest earned ratio of the Standard and Poor’s’ 500 corporations has held fairly steady. FALSE Bloom’s: Remember Difficulty: Intermediate Learning Objective: 16-01 Analyzing long-term debt requires […]
Finance Chapter 16 2 The Haavelmo Widget Corporation has just signed a 60-month lease on an asset with a 6-year
Chapter 16 – Long-Term Debt and Lease Financing 71. A call feature allows: A. the bondholder to redeem the bond before the maturity date. B. the corporation to redeem the bond before the maturity date. C. the corporation to convert […]
Finance Chapter 16 3 Shannon Corporation has two bonds outstanding. Both bonds have coupon rates of 7%.
Chapter 16 – Long-Term Debt and Lease Financing 109. Which of the following are advantages of leasing? A. A lease obligation may be substantially less restrictive than the provisions of a bond indenture. B. There may be no down payment […]
Finance Chapter 17 1 The type of shareholder voting has become less important with the influence of takeovers,
Chapter 17 – Common and Preferred Stock Financing 1. Common stockholders have a residual claim to income, in other words they are last in line. TRUE Bloom’s: Remember Difficulty: Basic Learning Objective: 17-01 Common stockholders are the owners of the […]
Finance Chapter 17 2 Which of the following actions will provide the shareholders with the most total wealth when
Chapter 17 – Common and Preferred Stock Financing 64. Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering? A. Exercise the rights for new shares. B. Sell the […]
Finance Chapter 18 1 The “marginal principle of retained earnings” holds that corporate investment should
Chapter 18 – Dividend Policy and Retained Earnings 1. The “marginal principle of retained earnings” holds that corporate investment should provide a return equal to or higher than that a stockholder could earn. TRUE 18-1 Bloom’s: Remember Difficulty: Basic Learning […]
Finance Chapter 18 2 Firm X has declared a stock dividend that pays one share of stock for every 5 shares owned.
Chapter 18 – Dividend Policy and Retained Earnings 67. In the maturity stage, a firm A. is growing about the same rate as the economy as a whole. B. has returns on assets lower than those of the industry norm. […]
Finance Chapter 19 1 The face value of a convertible bond divided by the conversion price equals the number
Chapter 19 – Convertibles, Warrants, and Derivatives 1. A convertible security is one that can be converted into common stock only at the option of the issuer. FALSE Bloom’s: Remember Difficulty: Basic Learning Objective: 19-01 Convertible securities can be converted […]
Finance Chapter 19 2 A warrant which does not expire until several years in the future which provides its
Chapter 19 – Convertibles, Warrants, and Derivatives 67. If the stock price rises substantially above the conversion price, an advantage to the corporation would be A. the premium would decrease. B. the floor price would offer the investor downside protection. […]
Finance Chapter 2 1 Equity is a measure of the monetary contributions that have been made directly or indirectly
Chapter 02 – Review of Accounting 1. The income statement is the major device for measuring the profitability of a firm over a period of time. TRUE Bloom’s: Understand Difficulty: Basic Learning Objective: 02-01 The income statement measures profitability. The […]
Finance Chapter 2 2 A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in capital
Chapter 02 – Review of Accounting 72. A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in capital account. The firm issued 1,000,000 shares of common stock. What is the par value of the common stock? […]
Finance Chapter 2 3 Identify each of the following as increasing (+) or decreasing ( ) cash flows from operating
Chapter 02 – Review of Accounting 116. Hoover Inc. has current assets of $350,000 and fixed assets of $650,000. Current liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in preferred stock outstanding and the firm has issued […]
Finance Chapter 20 1 Risk averse investors may discount the future earnings of the merged firm at a higher
Chapter 20 – External Growth through Mergers 1. In a merger, two or more companies are combined to form an entirely new entity. FALSE 20-1 Bloom’s: Remember Difficulty: Intermediate Learning Objective: 20-01 Firms engage in mergers for financial motives and […]
Finance Chapter 20 2 The elimination of overlapping functions and the meshing of two firms’ strong areas or
Chapter 20 – External Growth through Mergers 53. Synergy is A. the 2 + 2 = 3 effect. B. the 2 + 2 = 4 effect. C. the 2 + 2 = 5 effect. D. always present in a merger. […]
Finance Chapter 21 1 When a country has a weak currency relative to other countries, visiting that country
Chapter 21 – International Financial Management 1. The North American Free Trade Association (NAFTA) continues to generate more foreign trade despite some negative political views. TRUE Bloom’s: Remember Difficulty: Basic Learning Objective: 21-01 The multinational corporation is one that crosses […]
Finance Chapter 21 2 Assume that you had dollar quotes for the Japanese Yen and the British Pound.
Chapter 21 – International Financial Management 69. The belief that shifts in exchange rates result from increasing or decreasing demand for a country’s exports (or the corresponding opposite movements in supply of a country’s imports) form the basis for the […]
Finance Chapter 3 1 Profitability ratios allow one to measure the ability of the firm to earn an adequate return
Chapter 03 – Financial Analysis 1. Ratios are used to compare different firms in the same industry. TRUE 3-1 Difficulty: Basic Learning Objective: 03-01 Ratio analysis provides a meaningful comparison of a company to its industry. Chapter 03 – Financial […]
Finance Chapter 3 2 Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are
Chapter 03 – Financial Analysis 66. A firm has total assets of $3,000,000. It has $1,200,000 in long-term debt. The stockholders equity is $1,000,000. What is the debt to total asset ratio? A. 45% B. 75% C. 55% D. 67% […]
Finance Chapter 3 3 Given the balance sheet and income state for Simmons Maintenance Company, compute the ratios that are also shown for the industry average
Chapter 03 – Financial Analysis 3-41 Chapter 03 – Financial Analysis 106. Refer to the figure above. Compute Marni’s after tax profit margin. A. 7.5% B. 3.75% C. 50% D. None of these. AACSB: Analytic Bloom’s: Apply Difficulty: Intermediate Learning […]
Finance Chapter 4 1 The generation of sales and profits ensures that there will be adequate cash on hand to
Chapter 04 – Financial Forecasting 1. An increase in sales and/or profits means there is also an increase in cash on the balance sheet. FALSE Bloom’s: Understand Difficulty: Basic Learning Objective: 04-02 The three financial statements for forecasting are the […]
Finance Chapter 4 2 Seventy percent of Ellis’ sales are on credit with 60 percent of receivables collected in the
Chapter 04 – Financial Forecasting 61. Wiggles Right forecasted sales of $5,000 in October, $4,000 in November and $4,000 in December. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How […]
Finance Chapter 5 1 For firms in industries that offer some degree of stability, are in a positive stage of growth
Chapter 05 – Operating and Financial Leverage 1. Leverage is the use of fixed costs to magnify returns at high levels of operation. TRUE Bloom’s: Understand Difficulty: Basic Learning Objective: 05-01 Leverage represents the use of fixed cost items to […]
Finance Chapter 5 2 Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach
Chapter 05 – Operating and Financial Leverage 63. Cash breakeven analysis A. is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially. B. is important when analyzing long-term profitability. C. includes depreciation expense […]
Finance Chapter 6 1 The key to current asset planning is the ability of management to forecast sales accurately
Chapter 06 – Working Capital and the Financing Decision 1. The faster a firm’s growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. FALSE Bloom’s: Understand Difficulty: Intermediate Learning Objective: 06-01 […]
Finance Chapter 6 2 Assuming level production throughout the year, and assuming receivables are collected in
Chapter 06 – Working Capital and the Financing Decision 75. Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the cash budget requires the […]
Finance Chapter 6 3 Which of the following combinations of asset structures and financing patterns is likely to
Chapter 06 – Working Capital and the Financing Decision 106. An aggressive, risk-oriented firm will likely A. borrow long-term and carry low levels of liquidity. B. borrow short-term and carry low levels of liquidity. C. borrow long-term and carry high […]
Finance Chapter 7 1 Unfortunately, float is too complicated to be effectively managed through any combination
Chapter 07 – Current Asset Management 1. In the management of cash and marketable securities, the primary concern is profitability. FALSE Bloom’s: Understand Difficulty: Basic Learning Objective: 07-01 Current asset management is an extension of concepts discussed in the previous […]
Finance Chapter 7 2 In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government
Chapter 07 – Current Asset Management 75. Some of the services provided around the clock by SWIFT are A. international payments between banks. B. foreign exchange. C. trade finance transactions. D. all of these. Bloom’s: Understand Difficulty: Intermediate Learning Objective: […]
Finance Chapter 7 3 Assuming that we can earn a 10% return on accounts receivable, which of the following actions
Chapter 07 – Current Asset Management 118. Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in […]
Finance Chapter 8 1 Even during slack loan periods, banks will never loan out money at an interest rate lower than the
Chapter 08 – Sources of Short-Term Financing 1. The largest source of short-term funds for most companies is suppliers (trade credit). TRUE Bloom’s: Understand Difficulty: Basic Learning Objective: 08-01 Trade credit from suppliers is normally the most available form of […]
Finance Chapter 8 2 Holland Construction Co. has an outstanding 180-day bank loan of $475,000 at an annual
Chapter 08 – Sources of Short-Term Financing 76. Analog Computers needs to borrow $475,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $475,000 […]
Finance Chapter 8 3 Brand Advertising is offered a 3/10 net 40 trade discount by its supplier. In the past Brand has
Chapter 08 – Sources of Short-Term Financing 109. The effective rate on a $20,000 installment loan with quarterly payments, $2,000 in interest, for 2 years is: A. 16% B. 7.4% C. 29.5% D. 8.9% AACSB: Analytic Bloom’s: Apply Difficulty: Intermediate […]
Finance Chapter 9 1 If a single amount were put on deposit at a given interest rate and allowed to grow, its future
Chapter 09 – The Time Value of Money 9-1 1. An amount of money to be received in the future is worth less today than the stated amount. Bloom’s: Understand Difficulty: Basic Learning Objective: 09-01 Money has a time value […]
Finance Chapter 9 2 Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to
Chapter 09 – The Time Value of Money 63. Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of […]
Finance Chapter 9 3 Sara Shouppe has invested $100,000 in an account at her local bank. The bank will pay her a
Chapter 09 – The Time Value of Money 87. Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with […]