Archives

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 […]

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 […]

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 […]

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 […]

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, […]

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 […]

Atlantic Airlines Case 15 Bond Valuation Purpose: The case is intended to increase the student’s 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 […]

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 […]

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 […]

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, […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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. […]

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 […]

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 […]

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 […]

Montgomery Corporation Case 28 Dividend Policy Purpose: The key issue is whether the firm’s 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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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, […]

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. […]

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 […]

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 […]

Gale Force Surfing Case 5 Working Capital—Level 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) […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

10-5. Solution: Essex Biochemical Calculator Solution: (a) 30 years to maturity N I/Y PV PMT FV Answer: $883.41 Bond price (b) 20 years to maturity N I/Y PV PMT FV 20 17 CPT PV −887.44 150.0 1,000 Answer: $887.44 Bond […]

10-14. Solution: Katie Pairy Fruits Inc. Calculator Solution: N I/Y PV PMT FV Answer: $1,224.08 Bond price N I/Y PV PMT FV 20 12 CPT PV −224.08 30 0 Answer: $224.08 + 1,000 = 1,224.08 Bond price a. Present Value […]

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 […]

Chapter 10: Valuation and Rates of Return 10-35. Solution: Beasley Ball Bearings b. Dividends PV(15%) PV of Dividends D1$4.080 .870 $ 3.550 D24.162 .756 3.146 D34.245 .658 2.793 D44.330 .572 2.477 $11.966 c. 5 4 5 4.330 (1.02) $4.417 e […]

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 […]

11-11. Solution: Terrier Company a. Kd = Yield (1 – T) b. Kd(new) = Yield (1 – T) = 9% (1 – .25) = 9% (.75) = 6.75% c. It has gone up. The before-tax yield is lower, but the […]

11-21. Solution: Sauer Milk Inc. a. Cost Weighted (aftertax) Weights Cost Plan A 9.00% Plan B Debt 4.5% 40% 1.80% Preferred stock 8.5 15 1.28 Common equity 13.0 45 5.85 8.93% Plan C Debt 5.0% 45% 2.25 Preferred stock 18.7 […]

11-28. Solution: Nolan Corporation a. Cost (aftertax) Weights Weighted Cost Retained earnings b. % of retained earnings within the capital structure $18 million $90 million .20 X= = = 11-28. (Continued) c. Cost (aftertax) Weights Weighted Cost Debt (Kd)……………….. Preferred […]

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 […]

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 12-2. Why does capital budgeting rely on analysis of […]

12-10. Solution: X-treme Vitamin Company a. Payback Method b. Net Present Value Method Project A Year Cash Flow PVIFA Present Value 1 $12,000 .909 $10,908 2 $ 8,000 .826 $ 6,608 3 $ 6,000 .751 $ 4,506 Present value of […]

12-16. Solution: Skyline Corporation Present Value of Inflows Find the present value of a deferred annuity Discount from beginning of the third period (end of second period to present): FV = $192,100, n = 2, i = 12% PV = […]

12-20. Solution: Turner Video a. Reinvestment assumption of NPV No. of Year Inflows Rate Periods Value b. Reinvestment assumption of IRR No. of Year Inflows Rate Periods Value 1 $15,000 11% 4 1.518 $ 22,770 2 17,000 11% 3 1.368 […]

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 Then, determine the annual cash flow. Earnings before depreciation and taxes (EBDT) will be the same […]

Chapter 12: The Capital Budgeting Decision 12-29. (Continued) Next, determine the net present value. Cash Flow Present Year (Inflows) PVIF at 12% Value New asset should be purchased. Calculator Solution: Using a financial calculator, Press the following keys: 2nd, CF, […]

Chapter 12: The Capital Budgeting Decision 12-33. Solution: Hercules Exercise Equipment Co. a. Percentage Depreciation Depreciation Annual Year Base (Table 12-9) Depreciation f. Depreciation schedule on the new equipment Percentage Depreciation Depreciation Annual Copyright © 2017 McGraw-Hill Education. All rights […]

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 […]

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. 13-2. Discuss the concept of risk and how it might be measured. Risk may be defined in […]

13-8. Solution: Coefficient of Variation (V) = Standard deviation/Expected value Ranking from Lowest to Highest 9. Coefficient of variation and time (LO13-1) Digital Technology wishes to determine its coefficient of variation as a company over time. The firm projects the […]

13-21. Solution: Oklahoma Pipeline Company a. Standard deviation—year 1 D D ( )D D– 2 ( )D D– P 2 ( )D D– P $55 70 –15 225 .40 90 70 70 0 0 .20 0 85 70 +15 225 […]

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 […]

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 […]

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 […]

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 15-2. What is the purpose of […]

15-10. Solution: Wrigley Corporation c. The stock alternative has the larger percentage spread. This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated. 11. Secondary offering […]

Chapter 15: Investment Banking: Public and Private Placement 15-19. Solution: Presley Corporation a. $25 Price  95% = $23.75 Net Price b. Earnings per Share before Stock Issue = $7,200,000/2,100,000 = $3.43 c. Earnings per Share after Stock Issue = […]

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 […]

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? 16-2. What are some specific features of […]

16-6. Solution: Florida Investment Company a. Present value of interest payments Present value of principal payment at maturity PV = FV × PVIF (n = 20, i = 6%) Appendix B PV = $1,000 × .312 = $312.00 Total present […]

16-16. Solution: Mr. Robinson – Mrs. Pinson a. Present value of interest payments Present value of principal payment at maturity PV = FV × PVIF (n = 10*, i = 5.00%) PV = $1,000 × .614 = $614.00 Appendix B […]

16-19. Solution: The Sunbelt Corporation First compute the discount rate Outflows 1. Payment on call provision $40,000,000 × 7.5% = $3,000,000 $3,000,000 (1 – .36) = $1,920,000 2. Underwriting cost on new issue Actual expenditure 1.8% × $40,000,000 = $720,000 […]

Chapter 16: Long-Term Debt and Lease Financing Appendix 16A–1. 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. […]

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 […]

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 17-2. Why might a corporation use […]

17-10. Solution: Northern Airlines Mr. Michaels controls 280,000 votes (40,000 shares × 7 directors). 11. Different classes of voting stock (LO17-1) Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, […]

Chapter 17: Common and Preferred Stock Financing 17-20. Solution: Enterprise Storage Company b. Stock Price Present value of common stock dividends PV Factor Present Amount at 14% Value D1$1.15 .877 $1.01 D21.25 .769 .96 D31.35 .675 .91 D4 1.45 .592 […]

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 […]

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 […]

18-10. Solution: Pills Berry Company a. Annual dividend yield = Cash dividends/Price b. Earnings per share = Cash dividends/.5 = $1.80/.5 = $3.60 P/E ratio = Price/Earnings per share = $60/$3.60 = 16.67x 11. Dividend yield (LO18-1) The shares of […]

Chapter 18: Dividend Policy and Retained Earnings 18-18. Solution: Ace Products *240,000 shares × ($20 market price – $5 par value) = 240,000 × $15 = $3,600,000 $ 5,000,000 Beginning capital in excess of par account + $ 3,600,000 Additional […]

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 […]

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: 19-2. Why are investors willing to pay a premium […]

19-12. Solution: Olsen Mining Company b. 7% × $1,000 = $70 annual interest Annual interest $70 5.26% Bond price $1,331.60 = = c. $23.40 stock price × 32 shares = $748.80 conversion value +100.00 conversion premium $848.80 bond price Annual […]

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 = […]

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. […]

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 […]

2-12. Solution: Lemon Auto Wholesalers Income Statement a.Sales………………………………………………………… $1,000,00 0 Cost of goods sold (78% of sales)………………… $ 780,000 2-12. (Continued) b.Sales………………………………………………………… $1,050,900 Cost of goods sold (74% of sales) ……………….. $ 777,666 Gross profit…………………………………………… $ 273,234 Selling and administrative […]

Chapter 02: Review of Accounting 2-22. Solution: Nova Electronics a. Cash flow from operations activities $6.00 million b. Free cash flow represents the funds that are available for special financial activities, such as a leveraged buyout, increased dividends, common stock […]

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 […]

Chapter 20 External Growth through Mergers Discussion Questions 20-1. Name three industries in which mergers have been prominent. 20-2. What is the difference between a merger and a consolidation? In a merger, two or more companies are combined, but only […]

Chapter 20 – External Growth through Mergers 20-6 Solution: Noble Corporation and Barnes Enterprises (approach similar to Table 20–3) New earnings per share for Barnes Enterprises $7,440,000 $2.15 3,460,000 = = b. Earnings per share of Barnes Enterprises increased because […]

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 […]

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 as the risk 21-2. What […]

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. 3. Purchasing power theory (LO21-2) From the base price level of 100 in 1979, Saudi Arabian and […]

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 […]

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? Long-term lenders—Leverage ratios because they are concerned […]

3-9. Solution: Network Communications Total assets $1,500,000 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 Net income = Sales Profit margin = $2,664,000 8% = $213,120 […]

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 […]

3-27. Solution: Jolie Foster Care Homes Inc. a. Net income Total assets 20X1 $155,000/$2,390,000 = 6.49% Comment: There is a strong upward movement in return on assets over the four-year period. b. Net income Stockholders’ equity 20X1 $155,000/$761,000 = 20.37% […]

3-33. Solution: Griggs Corporation Sales/Total assets = 2.4 times Cash = 2% of total assets Cash = 2% × $500,000 Cash = $10,000 Sales/Accounts receivable = 8 times Accounts receivable = $1,200,000/8 Accounts receivable = $150,000 Sales/Inventory = 10 times […]

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. […]

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 […]

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 4-2. Explain how the […]

Chapter 04: Financial Forecasting 4.15. Solution: Bradley Corporation (Continued) Value of ending inventory: Beginning inventory (3,250  $10)…………… $ 32,500 + Total production (12,500  $14)…………. $175,000 Total inventory available for sale………. $207,500 – Cost of goods sold….. $190,000 Copyright […]

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 month’s sales) 6,000 6,800 7,600 10,000 6,000 […]

Chapter 04: Financial Forecasting 4-26. Solution: Archer Electronics Cash Receipts Schedule April May June July Aug. Sept. 4-26. (Continued) Archer Electronics Cash Payments Schedule April May June July Aug. Sept. Purchases $155,000 $145,000 $145,000 $205,000 $225,000 $220,000 Payments (month after […]

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 […]

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. […]

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 5-2. What factors would cause a difference in the use of […]

11. Degree of leverage (LO2 and 5) The Harding Company manufactures skates. The company’s 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: […]

5-17. Solution: Cain Supplies Cain EBIT $50,000 Less: Interest 9,000 18. Leverage and stockholder wealth (LO4) Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $132,000. The separate […]

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 1$13,500,000 debt @ 5% = $675,000 2$675,000 interest + ($6,750,000 new debt @ 11%) = […]

Chapter 05: Operating and Financial Leverage COMPREHENSIVE PROBLEM Comprehensive Problem 1. Ryan Boot Company (review of Chapters 2 through 5) (multiple LO’s from Chapters 2 through 5) RYAN BOOT COMPANY Balance Sheet December 31, 20X1 Assets Liabilities and Stockholders’ Equity […]

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, […]

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 […]

6-11. Solution: Atlas Sporting Goods Inc. a. Most aggressive 6-11. (Continued) c. Moderate approach Low liquidity $840,000 × 15% = $126,000 Long-term financing 840,000 × 11% = –92,400 Anticipated return $ 33,600 OR High liquidity $840,000 × 12% = $ […]

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 […]

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 […]

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 […]

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 […]

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 First compute the accounts receivable balance. Accounts receivable = average collection × average daily period sales $180,000 120 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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)? FV = PV (1 + i)n future value   luePresent va 1 […]

9-8. Solution: a. 12 1 (1 ) 1 $105,000 (1.08) $41,696.94 n PV FV i PV PV = ´ + = ´ = b. 9 1 (1 ) 1 $105,000 (1.08) $52,526.14 n PV FV i PV PV = ´ […]

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 […]

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 […]

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 […]

9-38. Solution: Payment #1 1 1 (1 ) 1 $2,000 (1.09) $1,834.86 n PV FV i PV PV æ ö = ´ ç ÷ + è ø = ´ = Payment #2 2 1 (1 ) 1 $3,500 (1.09) $2,945.88 […]

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 […]

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 –+ = ´ – = […]