Foundations of Financial Management 16th Edition

Harrod's Sporting Goods Case 1 Ratio Analysis Purpose: The case allows the student to examine ratio analysis within the context of a customer-banking arrangement. The firm has a disagreement with the bank over how much it should be paying in relation to prime (no prior knowledge of banking is required for

Allison Boone, M.D. Case 10 Time Value of Money Purpose: The case brings the time value of money into a legal settlement context, where present value concepts are frequently utilized. Many professors may also be able to draw on their own personal expertise to enhance the discussion of the case. The

Billy Wilson, All American Case 11 Time Value of Money Purpose: The case provides the student with an interesting opportunity to examine the time value of money. Pro football contractual issues are frequently in the news so the student will be dealing with a contemporary situation. The student also will become

Sandra Gilbert, Retiree Case 12 Time Value of Money Purpose: The case provides the student to a very important issue in the age of baby boomers. Although retirement is not an issue directly affecting students, it is one in which they are likely to be called on for advice by parents and

Gilbert Enterprises Case 13 Stock Valuation Purpose: This case gives the student an opportunity to examine valuation concepts from both a theoretical dividend valuation model approach and a price-earnings ratio approach. Because an initial period of supernormal growth is assumed, a review of Appendix 10C is necessary for the case. However, this

Baines Investment, Inc. Case 14 Stock Valuation Purpose: The case illustrates the use of the capital asset pricing model (CAPM) in valuing stock. Because of the detailed explanations given in the case, it can be introduced after Chapter 10 even though the CAPM discussion is in Chapter 11. The author of

Atlantic Airlines Case 15 Bond Valuation Purpose: The case is intended to increase the students skills in bond valuation. To make matters more interesting the top of junk bonds is introduced and becomes the central focus of the discussion and the calculations. The student is asked to consider whether the higher

Berkshire Instruments Case 16 Cost of Capital Purpose: The case gives the student additional opportunities to work with issues related to cost of capital. It focuses on the irrelevance of historical cost and the close relationship of retained earnings and new common stock in supplying equity capital. The concept of the marginal

Galaxy Systems, Inc. Case 17 Divisional Cost of Capital Purpose: The case combines risk analysis with discount rate considerations. To emphasize how many multidivisional corporations operate, the case actually gets into the topic of divisional hurdle rates. The student is able to see how different divisions in a corporation might have

Aerocomp, Inc. Case 18 Methods of Investment Evaluation Purpose: The emphasis is on comparing the payback method, the internal rate of return, and the net present value approaches for a series of investments. As the student progresses through the calculations, the various advantages and disadvantages of the different approaches become evident.

Phelps Toy Company Case 19 Capital Budgeting and Cash Flow Purpose: The case gives the student a good opportunity to do cash flow analysis. The use of variable discount rates based on project risk gives insight into how some corporations adjust for risk exposure. Also, the use of an appropriate time

Chem-Med Company Case 2 Ratio Analysis Purpose: The case allows the student to go into financial analyses in more depth than in possible with end-of-chapter problems. In addition to computing a series of ratios, the student must consider industry data and trends for the purpose of evaluating relative performance. The student

Global Resources Case 20 Risk-Adjusted Discount Rates Purpose: The case covers the process of adjusting the discount rate to account for the risk in a project. It clearly demonstrates that the risk-adjusted discount rate approach can affect (and change) the ranking of investments. It further brings an international dimension into the

Inca, Inc. Case 21 Capital Budgeting with Risk Purpose: The student goes through the statistical procedure of determining risk for investments. Though one investment alternative provides the higher net present value, is also has a much higher coefficient of variation and the student must take this into consideration in describing his

Robert Boyle & Associates, Inc. Case 22 Going Public and Investment Banking Purpose: The pros and cons of going public are considered in this case. Although the firm is a fictitious company, it is compared to a number of actual companies in the Real Estate Investment Trust (REIT) industry in order

Glazer Drug Co. Case 23 Initial Public Offering Purpose: The case deals with computing the cost of going public, the dilutive effects of an IPO, and the return that must be earned on the net proceeds in order to avoid dilution. The case involves the generic drug industry, which has an

Leland Industries Case 24 Debt Financing Purpose: The case gives the student a chance to understand the many factors influencing bonds. Initially the student concentrates on the variables affecting a bond rating and actually makes a basic bond rating decision. The relationship of bond ratings to yield to maturity also is

Warner Motor Oil Company Case 25 Bond Refunding Purpose: The case gives the student a clear insight into the refunding process. The importance of the call privilege is emphasized. Clearly, a refunding would not be feasible if the old issue had to be reacquired at market value. The case also provides an

Midsouth Exploration Company Case 26 Preferred Stock Purpose: The case allows the student to examine many of the attributes of preferred stock. Particularly important is the cumulative feature when the company is in arrears, as well as a potential solution to that problem. The tax consequences of preferred stock to the

Alpha Biogenetics Case 27 Poison Pill Purpose: The case gives the student exposure to the poison pill and the entire issue of antitakeover amendments. Through running the numbers in the case, the student is able to view how poison pills can protect the current position of management. There is also dialogue

Montgomery Corporation Case 28 Dividend Policy Purpose: The key issue is whether the firms cash dividend should be considered an active or residual variable in setting the actual payment. There is enough bickering between directors and officers of the firm to give the student plenty of insight into this issue. Though

Orbit Chemical Company Case 29 Dividend Policy Purpose: This case has a completely different emphasis from the prior dividend case, Montgomery Corporation. The Orbit Chemical Company case stresses the critical emphasis of the statement of cash flows in determining whether a company has the ability to make dividend payments. The emphasis

Glen Mount Furniture Company Case 3 Financial Leverage Purpose: The potential impact of changes in the debt level on earnings per share is the central focus of the case. However, the instructor can derive educational benefits that go well beyond this point. The central figure in the case is frustrated by

Hamilton Products Case 30 Convertibles Purpose: The case encourages the student to more fully appreciate the financial characteristics of convertible bonds. It also allows the student to see that the pure bond value is not necessarily stable, but may change because of changing interest rates or business risk. The student not

Acme Alarm Systems Case 31 Merger Terms and Stock Price Purpose: The case is structured so that the student can analyze the effect of a merger on earnings per share and stock price. In doing the analysis, the student will see that a high premium over market value for a target

Carlson Airlines Case 32 Merger Analysis and Cash Flow Purpose: The case demonstrates the use of capital budgeting techniques in a merger analysis. There are a number of tax implications the student must consider. The student will also evaluate the impact of terminal value on the analysis. This factor is frequently

Security Software, Inc. Case 33 Convertibles Purpose: The case allows the student to view the hybrid nature of convertible securities. While it would be very difficult for the firm to issue either equity or bonds in a post-recession bear market, convertible securities offer the opportunity to enter the market at a lower

National Brands vs. A-1 Holdings Case 34 Merger Analysis Purpose: This case features a surprise attack tender offer. The acquisition candidate decides to counter with a Pac Man defense in which they make an offer for the potential acquiring company. Both firms are considering various financing packages to establish their strategy

KFC and the Colonel Case 35 General Business Considerations Purpose: This case is different from the prior 34 and may only appeal to certain instructors. It is a real-world documentation of the process that Colonel Harland Sanders went through in selling out Kentucky Fried Chicken to John Young Brown, Jr. in

Genuine Motor Products Case 4 Combined Leverage Purpose: The case illustrates the potential impact on a company when it goes from dependence on labor intensive variable costs to fixed cost automation. The effects are further highlighted when the new equipment is heavily financed by debt. The upside is emphasized through increased

Gale Force Surfing Case 5 Working CapitalLevel vs. Seasonal Production Purpose: The case forces the student to view the impact of level versus seasonal production on inventory levels, bank loan requirements, and profitability. It also considers the efficiencies (or inefficiencies) covered by the different production plans. The computations in the case

Modern Kitchenware Co. Case 6 Cash Discount Purpose: The case illustrates how the offering of a cash discount can affect the profitability of the firm. Three different cash discount policies are evaluated in terms of cost, freed up funds and the associated profitability. The impact of a cash discount on sales

Landis Apparel Co. Case 7 Current Asset Management Purpose: The case illustrates the relationship between profitability and required investment. The turnover ratio for accounts receivable is particularly important, with an investment in inventory also included in the analysis. Sensitivity analysis is further considered in this case. Relation to Text: The case should

Fresh & Fruity Foods, Inc. Case 8 Current-Asset Management Purpose: The student must focus on accounts receivable as an investment (use of funds) and the financial advantages of reducing the commitment to this asset. At the same time the firm is also considering reductions to its accounts payable balance in order

Pierce Control Systems Case 9 Bank Financing Purpose: The case allows the student to compare the cost of floating rate bank financing with longer-term fixed rate financing. The relative cost of each under different economic scenarios is considered and expected values are computed. There is also a brief consideration of the term

The Goals and Activities of Financial Management Author's Overview The major thrust of this chapter is to establish the objectives of financial management and the importance of the financial manager to the organization. The introduction focuses on the financial decisions that a company like 3M makes and allows the instructor to bring the real world

Valuation and Rates of Return Author's Overview The student can clearly see that the material covered in the previous chapter on time value of money is now being applied. The recurring theme throughout the chapter is that valuation is based on the present value of benefits to be received in the future. The instructor

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 value of future cash flows. 10-2. Why might investors demand a lower rate of return for an investment in Microsoft

10-5. Solution: Essex Biochemical Calculator Solution: (a) 30 years to maturity N I/Y PV PMT FV 30 17 CPT PV 883.41 150.0 1,000 30 17 CPT PV 883.41 150.0 1,000 30 17 CPT PV 883.41 150.0 1,000 Answer: $883.41 Bond price (b) 20 years to maturity N I/Y PV PMT FV 20

10-14. Solution: Katie Pairy Fruits Inc. Calculator Solution: N I/Y PV PMT FV 20 12 CPT PV 1,224.08 150 1,000 20 12 CPT PV 1,224.08 150 1,000 20 12 CPT PV 1,224.08 150 1,000 Answer: $1,224.08 Bond price N I/Y PV PMT FV 20 12 CPT PV 224.08 30 0 20 12 CPT PV 224.08 30 0 20 12

10-24. Solution: North Pole Cruise Lines a. Original price $6.00 $100 .06 p p p D PK = = = b. Current value $6.00 $42.86 .14 = c. The price of preferred stock will increase as yields decline. Since preferred stock is a fixed income security, its price is inversely related to yields as would be true with bond prices.

Chapter 10: Valuation and Rates of Return 10-35. Solution: Beasley Ball Bearings a. D1$4.000 (1.02) = $4.08 D2$4.080 (1.02) = 4.162 D3$4.162 (1.02) = 4.245 D4$4.245 (1.02) = 4.330 a. D1$4.000 (1.02) = $4.08 D2$4.080 (1.02) = 4.162 D3$4.162 (1.02) = 4.245 D4$4.245 (1.02) = 4.330 a. D1$4.000 (1.02) = $4.08 D2$4.080 (1.02)

Cost of Capital Author's Overview Chapter 11 on "Cost of Capital" naturally follows Chapter 10 on "Valuation and Rates of Return." The instructor should emphasize at the outset that the investors' required rate of return translates into the cost of financing for the firm. There should be a dual emphasis on properly determining the aftertax

11-11. Solution: Terrier Company a. Kd = Yield (1 T) = 10% (1 .40)= 10% (.60)= 6.00% = 10% (1 .40)= 10% (.60)= 6.00% = 10% (1 .40) = 10% (.60) = 6.00% b. Kd(new) = Yield (1 T) = 9% (1 .25)= 9% (.75)= 6.75% = 9% (1 .25)= 9% (.75)= 6.75% = 9% (1 .25) = 9% (.75) = 6.75% c.

11-21. Solution: Sauer Milk Inc. a. Cost Weighted (aftertax) Weights Cost Plan A Debt 4.0% 30% 1.20%Preferred stock 8.0 15 1.20Common equity 12.0 55 6.60 Debt 4.0% 30% 1.20%Preferred stock 8.0 15 1.20Common equity 12.0 55 6.60 Debt 4.0% 30% 1.20% Preferred stock 8.0 15 1.20 Common equity 12.0 55 6.60 9.00% Plan B Debt 4.5% 40% 1.80%Preferred stock 8.5 15

11-28. Solution: Nolan Corporation a. Cost (aftertax) Weights Weighted Cost Debt (Kd).................... Preferred stock (Kp)..................... Common equity (Ke) (retained earnings).......................Weighted average cost of capital (Ka).................................. 9.60% 9.00 10.00 50% 30 20 4.80% 2.70 2.00 9.50% Debt (Kd).................... Preferred stock (Kp)..................... Common equity (Ke) (retained earnings).......................Weighted average cost of capital (Ka).................................. 9.60% 9.00 10.00 50% 30 20

The Capital Budgeting Decision Author's Overview While early comments on administrative procedures and accounting considerations are helpful, the major thrust of Chapter 12 is on the various methods for ranking investment proposals. The basic selection methods are established, mutually exclusive versus non-mutually exclusive events are compared, and the reinvestment assumption, capital rationing and the net

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, the collection of data, the evaluation of projects, and the reevaluation of prior decisions. investment opportunities, the collection of data, the evaluation of

12-10. Solution: X-treme Vitamin Company a. Payback Method Payback for Project A10,000 .83 years 12,000 = Payback for Project B10,000 1 year 10,000 = Under the Payback Method, you should select Project A because of the shorter payback period. Payback for Project A10,000 .83 years 12,000 = Payback for Project B10,000 1 year 10,000

12-16. Solution: Skyline Corporation Present Value of Inflows Find the present value of a deferred annuity A = $34,000, n = 10, i = 12%PVA= A PVIFA (Appendix D) PVA= $34,000 5.650 = $192,100 A = $34,000, n = 10, i = 12%PVA= A PVIFA (Appendix D) PVA= $34,000 5.650 = $192,100 A

12-20. Solution: Turner Video a. Reinvestment assumption of NPV No. of Year Inflows Rate Periods Value 1 $15,000 12% 4 1.574 $23,6102 17,000 12% 3 1.405 23,8853 21,000 12% 2 1.254 26,3344 25,000 12% 1 1.120 28,0005 29,000 0 1.000 29,000$130,829 1 $15,000 12% 4 1.574 $23,6102 17,000 12% 3 1.405 23,8853 21,000 12% 2 1.254

Chapter 12: The Capital Budgeting Decision 12-25. Solution: Telstar Communications Corporation First, determine annual depreciation. Percentage Depreciation Depreciation Annual Year Base (Table 12-9) Depreciation 1 $380,000 .333 $ 126,5402 380,000 .445 169,1003 380,000 .148 56,2404 380,000 .074 28,120$380,000 1 $380,000 .333 $ 126,5402 380,000 .445 169,1003 380,000 .148 56,2404 380,000 .074 28,120$380,000 1 $380,000 .333 $ 126,540 2 380,000 .445

Chapter 12: The Capital Budgeting Decision 12-29. (Continued) Next, determine the net present value. Cash Flow Present Year (Inflows) PVIF at 12% Value 1 $29,064 .893 $ 25,9542 33,960 .797 27,0663 30,600 .712 21,7874 17,400 .636 11,0665 15,672 .567 8,8866 15,672 .507 7,9467 15,672 .452 7,0848 13,560 .404 5,4789 11,400 .361 4,11510 11,400 .322

Chapter 12: The Capital Budgeting Decision 12-33. Solution: Hercules Exercise Equipment Co. a. Percentage Depreciation Depreciation Annual Year Base (Table 12-9) Depreciation 1 $58,000 .200 $11,6002 58,000 .320 18,560Total Depreciation to Date $30,160Purchase Price $58,000 Total Depreciation to Date 30,160Book Value $27,840b. Book Value $27,840Sales Price 24,800Tax Loss on the Sale $ 3,040c. Tax Loss on the

Risk and Capital Budgeting Author's Overview Though risk is discussed throughout the text, Chapter 13 provides the most explicit portrayal of its impact on the decision-making process of the firm. The actual measurement of risk through the computation of the mean, standard deviation, and coefficient of variation is presented in detail. The introduction of the

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 require a higher return from risky investments. There must be a premium or additional compensation for risk taking. Risk-averse corporate managers

13-8. Solution: Coefficient of Variation (V) = Standard deviation/Expected value Ranking from Lowest to Highest A $970/$1,980 = .49 E (.22)B $1,190/$820 = 1.45 C (.24)C $3,100/$12,700 = .24 A (.49)D $630/$1,140 = .55 D (.55)E $14,100/$62,700 = .22 B (1.45) A $970/$1,980 = .49 E (.22)B $1,190/$820 = 1.45 C (.24)C $3,100/$12,700 = .24 A

13-21. Solution: Oklahoma Pipeline Company a. Standard deviationyear 1 D D ( )D D- 2 ( )D D- P 2 ( )D D- P $55 70 15 225 .40 9070 70 0 0 .20 085 70 +15 225 .40 90180180 13.416 s= = Standard deviationyear 5 D D( )D D- 2( )D D- P 2(

COMPREHENSIVE PROBLEMS Comprehensive Problem 1. Gibson Appliance Co. (portfolio effect of a merger) (LO13-5) Gibson Appliance Co. is a very stable billion-dollar company with a sales growth of about 7 percent per year in good or bad economic conditions. Because of this stability (a coefficient of correlation with the economy of +.4,

Capital Markets Author's Overview This chapter on capital markets is basic to the understanding of the flow of funds through the economy and the relationship of capital markets to corporate bonds, stocks, and preferred stock. Students often view bonds as uninteresting and unimportant securities, so special emphasis has been placed on them to show their

Investment Banking: Public and Private Placement Author's Overview This chapter presents a detailed account of the functions of the investment banker. By making maximum use of material covered under the "distribution process," the instructor can present a good picture of the marketing channels and pricing mechanisms that are frequently utilized in a public distribution. Such

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 investment banking house agrees to buy the securities from the corporation and resell them to other security dealers and the public at

15-10. Solution: Wrigley Corporation a. Spread = $20.50 $19.00 = $1.50% underwriting spread = $1.50/$20.50 = 7.32%b. Spread = $1,009 $994 = $15% underwriting spread = $15/$1,009 = 1.49% a. Spread = $20.50 $19.00 = $1.50% underwriting spread = $1.50/$20.50 = 7.32%b. Spread = $1,009 $994 = $15% underwriting spread = $15/$1,009

Chapter 15: Investment Banking: Public and Private Placement 15-19. Solution: Presley Corporation a. $25 Price 95% = $23.75 Net Price $23.75 Net Price 800,000 New Shares $19,000,000 Proceeds before Out-of-Pocket Costs 260,000 Out-of-Pocket Costs$18,740,000 Net Proceeds $23.75 Net Price 800,000 New Shares $19,000,000 Proceeds before Out-of-Pocket Costs 260,000 Out-of-Pocket Costs$18,740,000 Net Proceeds $23.75

Long-Term Debt and Lease Financing Author's Overview This chapter covers a broad range of debt topics including secured versus unsecured debt, sinking fund provisions, bond prices, yields, ratings, and conversion and call features. The student gets a good indoctrination into the various influences on bond prices, which can be strongly reinforced by problems at the

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 1977? In 1977, the average U.S. manufacturing corporation had its interest covered almost eight times. By the 2000s, the ratio had been

16-6. Solution: Florida Investment Company a. Present value of interest payments PVA = A PVIFA (n = 20, i = 6%) Appendix D PVA = $50 11.470 = $573.50 PVA = A PVIFA (n = 20, i = 6%) Appendix D PVA = $50 11.470 = $573.50 PVA = A PVIFA (n =

16-16. Solution: Mr. Robinson Mrs. Pinson a. Present value of interest payments PVA = A PVIFA (n = 10*, i = 5.00%) Appendix D PVA = 45 7.722 = $347.49 PVA = A PVIFA (n = 10*, i = 5.00%) Appendix D PVA = 45 7.722 = $347.49 PVA = A PVIFA (n

16-19. Solution: The Sunbelt Corporation First compute the discount rate 12% (1 .36) = 12% .64 = 7.68%. Round up to 8 percent. 12% (1 .36) = 12% .64 = 7.68%. Round up to 8 percent. 12% (1 .36) = 12% .64 = 7.68%. Round up to 8 percent. Outflows 1. Payment on call provision $40,000,000 7.5%

Chapter 16: Long-Term Debt and Lease Financing Appendix 16A1. Settlement of claims in bankruptcy liquidation (LO16-5) The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders claims are shown. Liquidation Assets Book Value Value Accounts receivable........................ $1,400,000 $1,200,000Inventory..................................................1,800,000

Common and Preferred Stock Financing Author's Overview The first part of the chapter gives the student a clear view of the changing nature of stock ownership through increasing institutional participation and the declining importance of individual stock ownership. The residual nature of common stock as compared to other securities is examined as well as cumulative

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 of large institutional investors because they fear these shareholders may side with corporate raiders in voting their shares in mergers or

17-10. Solution: Northern Airlines Mr. Michaels controls 280,000 votes (40,000 shares 7 directors). Mr. Baker controls 245,000 votes (35,000 shares 7 directors).If Mr. Michaels casts 100,000 votes for Scott, this will leave 60,000 votes (180,000/3) for each of the other three candidates that he favors.Mr. Baker could elect four of seven directors with

Chapter 17: Common and Preferred Stock Financing 17-20. Solution: Enterprise Storage Company a. $7.75 per share 440,000 shares 6 years = $ 20,460,000dividends in arrears a. $7.75 per share 440,000 shares 6 years = $ 20,460,000dividends in arrears a. $7.75 per share 440,000 shares 6 years = $ 20,460,000 dividends in arrears b. Stock Price Present value

Dividend Policy and Retained Earnings Author's Overview The key initial question to be asked is: How does a corporation determine the amount of dividends to be paid? The discussion should move to the marginal principle of retained earnings with the associated emphasis on dividends as a passive variable in the decision-making process. The corporate life-cycle

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 of retained earnings suggests that the corporation must do an analysis of whether the corporation or the stockholders can earn the most

18-10. Solution: Pills Berry Company a. Annual dividend yield = Cash dividends/Price = $1.80/$60 = 3.00% = $1.80/$60 = 3.00% = $1.80/$60 = 3.00% b. Earnings per share = Cash dividends/.5 = $1.80/.5 = $3.60P/E ratio = Price/Earnings per share= $60/$3.60 = 16.67x = $1.80/.5 = $3.60P/E ratio = Price/Earnings per share= $60/$3.60 = 16.67x = $1.80/.5 = $3.60 P/E

Chapter 18: Dividend Policy and Retained Earnings 18-18. Solution: Ace Products a. Common stock (2,640,000 shares at $5 par) $13,200,000 *Capital in excess of par 8,600,000**Retained earnings 18,200,000 Net worth $40,000,000 a. Common stock (2,640,000 shares at $5 par) $13,200,000 *Capital in excess of par 8,600,000**Retained earnings 18,200,000 Net worth $40,000,000 a. Common stock (2,640,000

Convertibles, Warrants, and Derivatives Author's Overview Because the material in the chapter can be viewed from both a corporate finance and investments perspective, the student's interest in the chapter is usually quite high. The student is given an in depth exposure to convertibles, with primary attention devoted to valuation procedures. There is also material on

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 rate is lower than on a straight issue.b. This type of security may be the only device for allowing a small

19-12. Solution: Olsen Mining Company a. $41.30 stock price 32 shares = $1,321.60 conversion value + 10.00 conversion premium $1,331.60 bond price a. $41.30 stock price 32 shares = $1,321.60 conversion value + 10.00 conversion premium $1,331.60 bond price a. $41.30 stock price 32 shares = $1,321.60 conversion value + 10.00 conversion premium $1,331.60

Chapter 19: Convertibles, Warrants, and Derivatives 19-20. Solution: Online Network Inc. a. Basic earnings per share Earnings $650,000 $6.50 Shares 100,000 = = = b. Diluted earnings per share Adjusted earnings after taxes Shares outstanding + All convertible securities = $650,000 $67, 200* 100,000 16,000** + =+ $717, 200 $6.18 116,000 = = *Interest savings (1 Tax rate) = $96,000 (1 .30) = $96,000 (.70)

Review of Accounting Author's Overview As already discussed, finance is a blend of accounting, economics, and other disciplines. This chapter will prove invaluable in establishing the relationship between accounting and finance, whether the student has already taken accounting or not. Though it is assumed that every student taking the introductory course in managerial finance has

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 volatility in performance, the debt-equity structure of the firm, the dividend payment policy, the quality of management, and a

2-12. Solution: Lemon Auto Wholesalers Income Statement a.Sales.................................................................. $1,000,00 0 Cost of goods sold (78% of sales)..................... $ 780,000 Gross profit................................................... $ 220,000Selling and administrative expense(12% of sales)............................................... $ 120,000Depreciation...................................................... $ 11,000Operating profit............................................ $ 89,000 Interest expense................................................. $ 8,000Earnings before taxes.................................... $ 81,000Taxes @ 30%.................................................... $ 24,300Earnings after taxes....................................... $ 56,700 Gross profit................................................... $ 220,000Selling

Chapter 02: Review of Accounting 2-22. Solution: Nova Electronics a. Cash flow from operations activities $6.00 million Capital expenditures 1.20 Common stock dividends 0.40 Preferred stock dividends 0.55 Free cash flow $3.85 million Capital expenditures 1.20 Common stock dividends 0.40 Preferred stock dividends 0.55 Free cash flow $3.85 million Capital expenditures 1.20 Common

External Growth through Mergers Author's Overview The discussion of mergers and acquisitions brings together a number of topics discussed earlier in the text. The instructor is able to take a second look at earnings per share growth, price-earnings ratios, stockholder wealth maximization, and portfolio considerations. These topics are considered in the present existing merger environment.

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. Computers, telecommunications, public utilities, pharmaceuticals, and energy. Computers, telecommunications, public utilities, pharmaceuticals, and energy. 20-2. What is the difference between a merger and a consolidation? In a merger, two or more companies are

Chapter 20 - External Growth through Mergers 20-6 Solution: Noble Corporation and Barnes Enterprises (approach similar to Table 203) a. Total earnings: Noble $ 1,820,000+ Barnes $ 5,620,000 Combined earnings $ 7,440,000Shares outstanding: Orig. Noble shares 2,810,000+ New Noble shares 650,000Postmerger shares outstanding 3,460,000 a. Total earnings: Noble $ 1,820,000+ Barnes $ 5,620,000 Combined earnings

International Financial Management Author's Overview The instructor should stress the importance of international financial management (and international trade) to the class. The students can easily appreciate the everyday events that bring the world closer together. An important point is that international finance has the same elements as domestic financial management only the issues tend to

Chapter 21 International Financial Management Discussion Questions 21-1. What risks does a foreign affiliate of a multinational firm face in todays business world? In addition to the normal risks that a domestic firm faces (such as the risk associated with maintaining sales and market share, the financial risk of too much leverage, and so

Chapter 21: International Financial Management 21-2. Solution: One dollar is worth 2.929 Polish zloty ($1/0.3414) and one British pound is worth 1.4973 dollars. Thus, 2.929 Polish zlotys per dollar times 1.4973 dollars per British pound equals 4.39 Polish zlotys per British pound. The answer is 4.39. Thus, 2.929 Polish zlotys per dollar times 1.4973

Financial Analysis Author's Overview The student should be directed to view the thirteen ratios as an overall package that can be used to evaluate any firm. The use of the Saxton Company analysis provides continuity to the discussion. The authors like to stress that ratios are easier to remember than students think. For example, emphasize

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 lendersLiquidity ratios because their concern is with the firms ability to pay short-term obligations as they come due. Short-term lendersLiquidity ratios because

3-9. Solution: Network Communications Total assets $1,500,000 Current assets 612,000 Fixed assets $ 888,000 Current assets 612,000 Fixed assets $ 888,000 Current assets 612,000 Fixed assets $ 888,000 Sales Fixed assets Fixed asset turnover $2,664,000 $888,000 3 = = Total assets $1,500,000 Debt 319,000 Stockholders equity $1,181,000 Stockholders equity $1,181,000 Stockholders equity $1,181,000 Net income = Sales

3-20. Solution: Perez Corporation 20X1 20X2 a. Sales $8,000,000 $10,000,000 10x 10x Inventory 8,00,000 1,000,000 = = = b. Cost of goods sold $6,000,000 $9,000,000 7.5x 9x Inventory 800,000 1,000,000 = = = c. Based on the sales-to-inventory ratio, the turnover has remained constant at 10x. However, based on the cost of goods sold to inventory ratio, it has improved from 7.5x to

3-27. Solution: Jolie Foster Care Homes Inc. a. Net income Total assets 20X1 $155,000/$2,390,000 = 6.49% 20X2 $191,000/$2,700,000 = 7.0720X3 $208,000/$2,730,000 = 7.6220X4 $192,000/$2,470,000 = 7.77 20X2 $191,000/$2,700,000 = 7.0720X3 $208,000/$2,730,000 = 7.6220X4 $192,000/$2,470,000 = 7.77 20X2 $191,000/$2,700,000 = 7.07 20X3 $208,000/$2,730,000 = 7.62 20X4 $192,000/$2,470,000 = 7.77 Comment: There is a strong upward movement in return on assets over the

3-33. Solution: Griggs Corporation Sales/Total assets = 2.4 times Total assets = $1,200,000/2.4Total assets = $500,000 Total assets = $1,200,000/2.4Total assets = $500,000 Total assets = $1,200,000/2.4 Total assets = $500,000 Cash = 2% of total assets Cash = 2% $500,000Cash = $10,000 Cash = 2% $500,000Cash = $10,000 Cash = 2% $500,000 Cash = $10,000 Sales/Accounts receivable = 8 times Accounts receivable

Chapter 03: Financial Analysis COMPREHENSIVE PROBLEM Comprehensive Problem 1. Lamar Swimwear (trend analysis and industry comparisons)(LO3) Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to

Financial Forecasting Author's Overview Developing pro forma statements is a fairly involved process. However, the rewards to students are high in terms of understanding the interaction of accounting data and financial forecasting. The development of pro forma financial statements is an integrative exercise, so there is little reward for a halfway approach. The use of

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 future level of asset needs and the associated financing that will be required. Furthermore, one can track actual

Chapter 04: Financial Forecasting 4.15. Solution: Bradley Corporation (Continued) Sales (14,000 @ $19) $266,000Cost of goods sold:New inventory: Quantity (units)............ 12,500 Cost per unit................. $ 14Total............................... $175,000Old inventory: Quantity (units)............ 1,500 Cost per unit................. $ 10Total............................... $ 15,000Total cost of goods sold............................. $190,000Gross profit.................... $ 76,000 Sales (14,000 @ $19) $266,000Cost of goods sold:New

Chapter 04: Financial Forecasting 4-21. Solution: Denver Corporation Cash Payments Schedule Dec. Jan. Feb. March April May June July Sales $15,000 $17,00 0 $19,000 $25,000 $15,00 0 $21,000 $23,000 Purchases (40% of next months sales) 6,000 6,800 7,600 10,000 6,000 8,400 9,200 Payment (50% of current purchases)3,400 3,800 5,000 3,000 4,200 4,600Material payment (50% of previous months purchases)3,000 3,400 3,800 5,000 3,000

Chapter 04: Financial Forecasting 4-26. Solution: Archer Electronics Cash Receipts Schedule April May June July Aug. Sept. Sales $370,000 $350,000 $ 325,000 $325,000 $340,000 $380,000Cash Sales (20%) 74,000 70,000 65,000 65,000 68,000 76,000 Credit Sales (80%) 296,000 280,000 260,000 260,000 272,000 304,000Collections (month after sale) 50%148,000 140,000 130,000 130,000 136,000Collections (second month after sale) 50%148,000

COMPREHENSIVE PROBLEM Comprehensive Problem 1. Mansfield Corporation (external funds requirement) (LO4) Mansfield Corporation had 20X1 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: Percent Cash.................................................................. 5% Accounts receivable...................................................15 Inventory....................................................................20 Net fixed assets..........................................................40 Accounts payable.......................................................15 Accruals.....................................................................10 Profit margin after taxes.............................................10% The dividend payout rate is 50 percent of earnings, and

Operating and Financial Leverage Author's Overview Though the student has probably covered break-even analysis in other courses, the material in Chapter 5 offers an opportunity to more fully explore the financial effects of all forms of leverage on the firm. The contrast between aggressive and conservative approaches should be emphasized particularly through the useful technique

Chapter 5 Operating and Financial Leverage Discussion Questions 5-1. Discuss the various uses for break-even analysis. Such analysis allows the firm to determine at what level of operations it will break even (earn zero profit) and to explore the relationship between volume, costs, and profits. will break even (earn zero profit) and to explore the

11. Degree of leverage (LO2 and 5) The Harding Company manufactures skates. The companys income statement for 20X1 is as follows: HARDING COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (10,500 skates @ $60 each)................................. $630,000 Less: Variable costs (10,500 skates at $25)................... 262,500 Fixed costs................................................................. 200,000 Earnings before interest and taxes (EBIT)....................

5-17. Solution: Cain Supplies Cain EBIT $50,000 Less: Interest 9,000 EBT $41,000Less: Taxes @ 20% 8,200EAT $32,800Shares 20,000EPS $1.64P/E 19xStock price $ 31.16 EBT $41,000Less: Taxes @ 20% 8,200EAT $32,800Shares 20,000EPS $1.64P/E 19xStock price $ 31.16 EBT $41,000 Less: Taxes @ 20% 8,200 EAT $32,800 Shares 20,000 EPS $1.64 P/E 19x Stock price $ 31.16 18. Leverage and stockholder wealth (LO4) Sterling Optical

5-24. Solution: Edsel Research Labs Income Statement a. Return on assets = 5% EBIT = $1,350,000 Current Plan D Plan E EBIT $1,350,000 $1,350,000 $1,350,000 Less: Interest 675,000 1 1,417,5002 337,5003 EBT 675,000 67,500 1,012,500 L Less: Taxes (30%) 202,500 20,250 303,750 EAT 472,500 47,250 708,750 Common shares 1,350,0004675,00052,025,0006 EPS $.35 $0.07 $0.35 Less: Interest 675,000

Chapter 05: Operating and Financial Leverage COMPREHENSIVE PROBLEM Comprehensive Problem 1. Ryan Boot Company (review of Chapters 2 through 5) (multiple LOs from Chapters 2 through 5) RYAN BOOT COMPANY Balance Sheet December 31, 20X1 Assets Liabilities and Stockholders Equity Cash........................................... $ 50,000 Accounts payable................... $2,200,000 Marketable securities................ 80,000 Accrued expenses................... 150,000 Accounts receivable.................. 3,000,000 Notes payable (current).......... 400,000 Inventory................................... 1,000,000

Working Capital and the Financing Decision Author's Overview The chapter introduces the student to the topic of working capital management. The emphasis is on the build-up of current assets and how they can best be financed. Examples of McGraw-Hill, Target, and Limited Brands are used to show that seasonal earning and sales go hand in

Chapter 6 Working Capital and the Financing Decision Discussion Questions 6-1. Explain how rapidly expanding sales can drain the cash resources of a firm. Rapidly expanding sales will require a buildup in assets to support the growth. In particular, more and more of the increase in current assets will be permanent in nature. A

6-11. Solution: Atlas Sporting Goods Inc. a. Most aggressive Low liquidity $840,000 15% = $126,000Short-term financing 840,000 9% = 75,600Anticipated return $ 50,400b. Most conservative High liquidity $840,000 12% = $ 100,800Long-term financing 840,000 11% = 92,400Anticipated return $ 8,400 Low liquidity $840,000 15% = $126,000Short-term financing 840,000 9% = 75,600Anticipated return $

Chapter 06: Working Capital and the Financing Decision 6-21. Solution: Bombs Away Video Games Corporation a. Production and inventory schedule in units Beginning Inventory + Production1 Sales2= Ending Inventory Jan. 25,000 +12,600 20,000 =17,600 Feb. 17,600 +12,600 18,600 =11,600 Mar. 11,600 +12,600 5,000 =19,200 Apr. 19,200 +12,600 5,000 =26,800May 26,800 +12,600 4,000 =35,400June 35,400 +12,600 7,000 =41,000

Current Asset Management Author's Overview The instructor should stress the profitability-liquidity trade-offs to be found in the current asset accounts. The student should think of the less liquid current assets as representing a competitive investment for capital. The four different topics for discussion in the chapter are all worthy of detailed coverage. The material on

Chapter 7 Current Asset Management Discussion Questions 7-1. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit? Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must

7-12. Solution: Nowlin Pipe and Steel Company a. 2SO 2 72,000 $6 EOQ C $2.40 $864,000 360,000 600 units $2.40 = = = = = b. 72,000 units/600 units = 120 orders c. EOQ/2 = 600/2 = 300 units (average inventory) 13. Economic ordering quantity (LO5) Fisk Corporation is trying to improve its inventory control system and has

Chapter 07: Current Asset Management 7-20. Solution: Slow Roll Drum Co. a. Added sales........................................................... $180,000 Accounts uncollectible (12% of new sales)............ 21,600 Annual incremental revenue.................................. 158,400Collection costs..................................................... 16,200Production and selling costs (72% of new sales)............................................... 129,600Annual income before taxes................................... 12,600Taxes (34%)........................................................... 4,284 Incremental income after taxes.............................. $ 8,316 Annual incremental revenue.................................. 158,400Collection costs..................................................... 16,200Production and selling

Sources of Short-Term Financing Author's Overview The instructor has the opportunity to cover the various sources of short-term financing with an eye toward the borrower's size and the relative cost of doing business. Since banking is such a rapidly changing area, the instructor may wish to highlight some of the changes that are taking place.

Chapter 8 Sources of Short-Term Financing Discussion Questions 8-1. Under what circumstances would it be advisable to borrow money to take a cash discount? It is advisable to borrow in order to take a cash discount when the cost of borrowing is less than the cost of foregoing the discount. If it cost us 36

8-12. Solution: Maxim Air Filters Inc. Effective rate of interest with 20% compensating balance = Interest rate 10% 10% 12.5% 1 C 1 .2 .8 or Interest Days of the year (360) Principal Compensating balance Days loan is outstanding $30, 000 $30,000 1 1 12.5% $300,000 $60,000 $240,000 13. Compensating balances (LO2) Digital Access Inc. needs

Chapter 08: Sources of Short-Term Financing 8-24. Solution: Neveready Flashlights, Inc. a. $10,400 360 Effective rate of interest = $340,000 55 3.06% 6.55 20.04% = = b. ( ) 3% 360 Cost of lost discount = 97% 72 17 3.09% 6.55 20.24% - = = c. Yes, because the cost of borrowing is less than the cost of losing the discount. d. ( )

Time Value of Money Author's Overview This is one of the most important chapters in the book as far as student comprehension is concerned. The instructor should first determine how much prior knowledge of time value of money the students have acquired from accounting or lower mathematics. While most students are generally familiar with the

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 of a single amount, whereas the present value represents the current worth. The future value represents the expected worth of

9-8. Solution: a. 12 1 (1 ) 1 $105,000 (1.08) $41,696.94 n PV FV i PV PV = + = = Take $47,000 today instead of $105,000 in 12 years. Take $47,000 today instead of $105,000 in 12 years. Take $47,000 today instead of $105,000 in 12 years. b. 9 1 (1 ) 1 $105,000 (1.08) $52,526.14 n PV FV i PV PV = + = = Take the $105,000 in 9

9-16. Solution: 20 1 1(1 ) 1 1(1.10) $19,500 .10 $166,014.49 n A A A i PV A i PV PV -+ = - = = Carrie Tune should not accept $160,000 for the future rights because they are worth more than that. Calculator Solution: N I/Y PV PMT FV 20 10 CPT PV 166,014.49 19,500 0 20 10 CPT PV 166,014.49 19,500 0 20 10 CPT PV 166,014.49 19,500 0

9-24. Solution: .a 10 1 1(1 ) 1 1(1.10) $35,000 .10 $215,059.85 n A A A i PV A i PV PV -+ = - = = .b Present Value of the Annuity 10 1 1(1 ) 1 1(1.10) $35,000 .10 $215,059.85 n A A A i PV A i PV PV -+ = - = = Discount two years off 2 1 (1 ) 1 $215,059.85 (1.10) $177,735.41 n PV FV i PV PV = + = = Calculator Solution: (a) (a) (a) N I/Y PV PMT FV 10 10 CPT PV 215,059.85

9-30. Solution: .a 10 1 (1 ) 1 $28,974 (1.08) $13, 420.57 n PV FV i PV PV = + = = .b 10 (1 ) 1 $28,974 (1.08) 1 .08 $2,000.06 A n FV A i i A A =+ - =- = Calculator Solution: (a) N I/Y PV PMT FV 10 8 CPT PV 13,420.57 0 28,974 10 8 CPT PV 13,420.57 0 28,974 10 8 CPT PV 13,420.57 0 28,974 Answer: $13,420.57 (b) N I/Y PV PMT FV N I/Y

9-38. Solution: Payment #1 1 1 (1 ) 1 $2,000 (1.09) $1,834.86 n PV FV i PV PV = + = = Payment #2 2 1 (1 ) 1 $3,500 (1.09) $2,945.88 n PV FV i PV PV = + = = Payment #3 3 1 (1 ) 1 $4,500 (1.09) $3,474.83 n PV FV i PV PV = + = = Annuity Value after three years Annuity Value after three years Annuity Value after three years 7 1 1(1 ) 1 1(1.09) $5,000

9-42. Solution: Part 1 5 (1 ) $10,000 (1.10) $16,105.10 n FV PV i FV FV = + = = Part 2 12 12 1 1(1 ) 1 1(1.11) .11 $16,105.10 1 1(1.11) .11 $16,105.10 6.492 $2,480.62 n A A i PV A i PV A A A A - + = = - = - = = Calculator Solution: Step one:N I/Y PV PMT FV5 10 10,000 0 CPT FV 16,105.10 Step one:N I/Y PV PMT FV5 10 10,000 0 CPT FV 16,105.10 Step one: N I/Y PV PMT

9-46. Solution: PV of college costs five years from today (Part 1) 4 1 1(1 ) 1 1(1.10) $17,000 .10 $17,000 (3.170) $53,887.71 n A A A A i PV A i PV PV PV -+ = - = = = Accumulation of $2,000 per year for 10 years (Part 2) 10 (1 ) 1 (1.10) 1 $2,000 .10 $2,000 (15.937) $31,874.85 n A A A A i FV A i FV FV FV + - = - = = = Part 1