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6. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form […]

CHAPTER 1 THE McGEE CAKE COMPANY 1. The advantages to an LLC are: 1) Reduction of personal liability. A sole proprietor has unlimited liability, which can include the potential loss of all personal assets. 2) Taxes. Forming an LLC may […]

Chapter 10 A Job at S&S Air Input area: Risk-free rate 4.00% 10-year return Standard deviation S&P 500 Index fund 9.15% 19.35% Small-cap stock fund 14.05% 26.82% Large company stock fund 9.53% 23.82% Bond fund 8.73% 11.45% Output area: Sharpe […]

5. The market is not weak form efficient. 6. Yes, historical information is also public information; weak form efficiency is a subset of semi-strong form efficiency. 7. Ignoring trading costs, on average, such investors merely earn what the market offers; […]

5. The Sharpe ratio is: Sharpe ratio = [E(R) – RF] /  Using the historical return as the expected return, the Sharpe ratio for each fund is: S&P 500 Index fund = (.0915 – .04) / .1935 = .27 […]

CHAPTER 11 THE BETA FOR FLIR SYSYTEMS NOTE: The example below shows the results from January 2015. The actual answer to the case will change based on current market conditions 1. The information used for the analysis is presented below. […]

4. a. This is a systematic risk; market prices in general will most likely decline. b. This is a firm specific risk; the company price will most likely stay constant. c. This is a systematic risk; market prices in general […]

Input area: 3 month Risk-free Monthly risk-free Stock price Return S&P 500 S&P 500 return Stock risk premium Market risk premium 30 Jun-13 0.0005 0.0000417 26.11$ 0.1071 1606.28 -0.0150 0.1071 -0.0150 31 Jul-13 0.0004 0.0000333 31.44$ 0.2039 1685.73 0.0495 0.2039 […]

CHAPTER 12 THE COST OF CAPITAL FOR LAYTON MOTORS NOTE: The example below shows the results during November 2015. The actual answer to the case will change based on current market conditions. 1. The book value of the company’s liabilities […]

6. Two primary advantages of the SML approach are that the model explicitly incorporates the relevant risk of the stock, and the method is more widely applicable than is the DGM model, since the SML doesn’t make any assumptions about […]

Input area: Bond maturity Book value Price YTM 3/1/2019 920,000,000$ 94.347 2.028% 3/1/2021 1,380,000,000$ 92.625 2.754% BV of debt 2,300,000,000$ BV of equity per share 10.190$ Output area: 2) RE from CAPM 9.86% 3) Book value Percent of total Quoted […]

6. Homemade leverage refers to the use of borrowing on the personal level as opposed to the corporate level. 7. One answer is that the right to file for bankruptcy is a valuable asset, and the financial manager acts in […]

CHAPTER 13 STEPHENSON REAL ESTATE RECAPITALIZATION 1. If Stephenson wishes to maximize the overall value of the firm, it should use debt to finance the $50 million purchase. Since interest payments are tax deductible, debt in the firm’s capital structure […]

Chapter 13 Input area: Shares outstanding 9,000,000 Share price 42.50$ Purchase price of land 50,000,000$ Output area: 2) Assets 382,500,000$ Equity 382,500,000$ Total assets 382,500,000$ Debt & Equity 382,500,000$ 3) a) Perpetual aftertax earnings 7,200,000$ NPV of purchase 7,600,000$ b) […]

5. The implication is that the company should not retain earnings unless the ROE of the new project is greater than the shareholders required return on equity. This is an intuitive result. Shareholders want the company to retain earnings for […]

4. Friday, December 29 is the ex-dividend day. Remember not to count January 1 because it is a holiday, and the exchanges are closed. Anyone who buys the stock before December 29 is entitled to the dividend, assuming they do […]

5. It is clear that the stock was sold too cheaply, so Zipcar had reason to be unhappy. 6. No, but, in fairness, pricing the stock in such a situation is extremely difficult. 7. It’s an important factor. Only 9.68 […]

Filing fees 15,000$ NASDAQ listing fee 125,000$ Transfer agent fee 6,500$ Engraving expenses 450,000$ Other expenses 75,000$ Audit cost/year 300,000$ IPO size 125,000,000$ Input area: Underwriter fee 7.00% Legal fees and expenses 1,800,000$ SEC registration fees 13,500$ Output area: Underwriter […]

Since the company must currently provide audited financial statements due to the bond covenants, the audit costs are not incremental costs and should not be included in the calculation of the fees. So, the sum of the other fees is: […]

35 36 37 38 39 40 41 Discount on purchases 9,032.22 9,744.72 9,440.00 9,124.44 Wages, taxes, and other costs (259,050.00) (275,550.00) (298,800.00) (277,200.00) Interest and dividends (115,000.00) (115,000.00) (115,000.00) (115,000.00) Outlay (325,000.00) Cash flow 41,690.11$ 44,947.61$ 113,664.00$ (245,841.78)$ 1 2 […]

CHAPTER 16 PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 1 1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses, dividends, interest, and capital outlays. The payables paid each quarter are based off the […]

4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will probably increase, depending on how close the suppliers are and how well they can estimate need. The operating cycle will decrease because the inventory […]

5. Such instruments go by a variety of names, but the key feature is that the dividend adjusts, keeping the price relatively stable. This price stability, along with the dividend tax exemption, makes so-called adjustable rate preferred stock very attractive […]

Input area: Sales price in dollars 98,000$ Variable cost in dollars 81,000$ Profit 16,999$ Profit at a $/€ exchange rate of $1.37 Profit 22,276$ Breakeven $/€ exchange rate 1.07$ Exchange rate movement -17.35% Output area: Dollars per plan at current […]

b. The inflation rate in Australia should be higher. c. Nominal interest rates in Australia should be higher; relative real rates in the two countries should be the same. 6. The main advantage is the avoidance of the tariff. Additional […]

Case Solutions Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green Input area: 2015 2016 Cost of goods sold 203,963$ 257,528$ Cash 29,429 31,267 Depreciation 57,576 65,076 Interest expense 12,530 14,345 […]

4. Depreciation is a non-cash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting. Interest expense is a cash outlay, but it’s a financing cost, not an operating cost. 5. Market […]

CHAPTER 2 CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS Below are the financial statements that you are asked to prepare. 1. The income statement for each year will look like this: Income statement 2015 2016 Sales $400,111 $487,712 Cost […]

immediate payment, the firm might have a difficult time meeting its obligations. A current ratio of 1.50 means the firm has 50% more current assets than it does current liabilities. This probably represents an improvement in liquidity; short-term obligations can […]

Total debt ratio = ($18,544,680 – 11,360,184) / $18,544,680 Total debt ratio = .39 times Debt–equity ratio = ($2,594,496 + 4,590,000) / $11,360,184 Debt–equity ratio = .63 times Equity multiplier = $18,544,680 / $11,360,184 Equity multiplier = 1.63 times Times […]

Long-term debt 4,590,000$ Fixed assets Net PP&E 14,778,816$ Shareholder Equity Common stock 180,000$ Retained earnings 11,180,184$ Total Equity 11,360,184$ Total Assets 18,544,680$ Total L&E 18,544,680$ Return on assets 6.51% Return on equity 10.62% Retention ratio 0.7961 Internal growth rate 5.46% […]

8. The key considerations would be: (1) Is the rate of return implicit in the offer attractive relative to other, similar risk investments? and (2) How risky is the investment; i.e., how certain are we that we will actually get […]

S&S Air’s Mortgage Input area: Loan amount 35,000,000$ 30-year loan APR 6.10% Loan length (years) 30 Loan length (years) 20 Output area: 1) 30-year loan payment 212,098.17$ 20-year loan payment 252,774.22$ 2) Month Beginning Balance Total Payment Interest Payment Principal […]

CHAPTER 5 S&S AIR’S MORTGAGE 1. The payment for a loan repaid with equal payments is the annuity payment with the loan value as the PV of the annuity. So, the 30-year loan payment will be: 2. The interest payment […]

5. If the total amount of money is fixed, you want as much as possible as soon as possible. The team (or, more accurately, the team owner) wants just the opposite. 6. The better deal is the one with equal […]

4. A provision with a specific call date and prices would increase the coupon rate. The call provision would only be used when it is to the company’s advantage, thus the bondholder’s disadvantage. The downside is the higher coupon rate. […]

6. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used to establish the coupon rate necessary for a particular issue to initially sell for par value. Bond issuers also ask potential […]

Chapter 7 Input area: 2) Industry EPS 0.91$ Industry payout ratio 54.04% Industry retention ratio 45.96% Industry growth rate 6.89% Year Dividend 11.68$ 21.87$ 32.09$ 42.34$ 52.61$ 62.79$ Shares owned by each sibling 50,000 Ragan EPS 4.85$ Dividend to each […]

Now we can find the stock price, which is: P0 = D1 / (R – g) P0 = $1.50(1.1174) / (.14 – .1174) P0 = $74.24 Using this industry EPS, the industry payout ratio is: Industry payout ratio = $.49 […]

5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred. However, the preferred is less risky because of the dividend and liquidation preference, so it is possible the preferred […]

MIRR 12.51% =MIRR(D8:D17,D19,D19) Profitability index 1.04 =NPV(D19,D9:D17)/-D8 NPV 28,451,509.51$ =NPV(D19,D9:D17)+D8 Input area: Year Cash flow 0(650,000,000)$ 180,000,000$ 2121,000,000$ 9(72,000,000)$ Required return 12% Output area: Payback period 4.31 IRR 13.25% =IRR(D8:D17) IRR -59.39% =IRR(D8:D17,-0.99) Chapter 8 Bullock Gold Mining 3162,000,000$ 4221,000,000$ […]

b. The worst problem associated with payback period is that it ignores the time value of money. In addition, the selection of a hurdle point for payback period is an arbitrary exercise that lacks any steadfast rule or method. The […]

CHAPTER 8 BULLOCK GOLD MINING 1. An example spreadsheet is: 3. There are many possible variations on the VBA code to calculate the payback period. Below is a VBA program from http://www.vbaexpress.com/kb/getarticle.php?kb_id=252. PAYBACK = i Exit Function ElseIf x < […]

4. Management’s discretion to set the firm’s capital structure is applicable at the firm level. Since any one particular project could be financed entirely with equity, another project could be financed with debt, and the firm’s overall capital structure remain […]

CHAPTER 9 CONCH REPUBLIC ELECTRONICS This is an in-depth capital budgeting problem. The initial cash outlay at Time 0 is the cost of the new equipment, $34,500,000. The R&D costs and marketing costs are both sunk costs. The sales each […]

Price 485$ VC 205$ FC 5,100,000$ Tax rate 35% NWC percentage 20% Required return 12% Sensivity analysis New price 495$ Quantity change 100 NOTE: Change in units per year Chapter 9 Input Area: Equipment 34,500,000$ Salvage value 5,500,000$ R&D 750,000$ […]

Western Steer purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $94,250? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and […]

Which one of the following will decrease the aftertax cost of debt for a firm? A. Decrease in the firm’s beta B. Increase in tax rates C. Increase in the risk-free rate of return D. Decrease in the market price […]

Which one of the following is an underwriting of securities where the offer price is determined by investor bids? A. Private placement B. Best efforts underwriting C. Initial public offering D. Green Shoe option E. Dutch auction Ben invested $7,500 […]

Municipal bonds are: A. generally purchased by tax-exempt investors. B. risk-free. C. issued by federal, state, and local governmental bodies. D. zero coupon bonds. E. generally callable. China Importers would like to spend $215,000 to expand its warehouse. However, the […]

Which of these would be the most common evidence of indebtedness when a sale is made on open account? A. Sight draft B. Commercial draft C. Banker’s acceptance D. Promissory note E. Invoice A stock is priced at $38.24 a […]

Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments Which […]

Which one of the following combinations will always result in an increased dividend yield? A. Increase in the stock price combined with a lower dividend amount B. Increase in the stock price combined with a higher dividend amount C. Decrease […]

Rock Bottom Carpets sells 3,100 carpets a year at an average price per carpet of $1,640. The carrying cost per unit is $218.40. The company orders 500 carpets at a time and has a fixed order cost of $78 per […]

For the period 1926-2014, which one of the following had the smallest risk premium? A. Large-company stocks B. Small-company stocks C. Long-term corporate bonds D. U.S. Treasury bills E. Long-term government bonds D. Assume you earned 17.1 percent on your […]

The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin? A. 15.06 percent B. 13.57 percent C. 15.84 percent D. 16.92 percent […]

Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? A. Static theory of interest rates B. M&M Proposition I C. Financial risk D. Interest tax shield E. Homemade leverage Your […]

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Inflation premium C. Liquidity premium […]

Phil’s Carvings sells its inventory in 93 days, on average. Costs of goods sold for the year are $187,200. What is the average value of the firm’s inventory? Assume a 365-day year. A. $20,129 B. $47,698 C. $57,132 D. $61,096 […]

Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities? A. Designated market maker B. Floor sweeper C. Investment firms D. Supplemental liquidity provider […]

Rooster’s currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and $41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The inventory has a book value of $53,300 and […]

Tim’s Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is […]

A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate? A. 5.72 percent B. 6.84 percent C. 7.12 percent D. […]

You currently own a portfolio valued at $52,000 that has a beta of 1.16. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15. What does the […]

Show Place Decor has estimated quarterly sales for next year, starting with Quarter 1, of $38,600, $53,400, $48,900, and $69,800. Purchases are equal to 62 percent of the following quarter’s sales and the accounts payable period is 30 days. Assume […]

The dividend yield on a stock will increase if the: A. dividend growth rate decreases. B. stock price decreases. C. capital gains rate decreases. D. stock price increases. E. tax rate on dividends increases. Leisure Products has sales of $738,800, […]

The current yield on a bond is equal to the annual interest divided by the: A. issue price. B. maturity value. C. face amount. D. current market price. E. current par value. Lockboxes should be located: A. in every town […]

A U.S. firm has total assets valued at £318,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £.61 = $1. Today, the exchange rate is £.63 = $1. By what amount […]

The common stock of Mill Stones has a beta that is 8 percent greater than the overall market beta. Currently, the market risk premium is 7.65 percent while the U.S. Treasury bill is yielding 4.3 percent. What is the cost […]

On June 22, Roy’s Welding Shop purchased $2,618 worth of goods. The terms of the sale were 2/15, net 45. What is the effective annual rate of interest for the credit period for this sale? A. 27.86 percent B. 31.38 […]

Which one of the following statements matches M&M Proposition I without taxes? A. The cost of equity capital has a positive linear relationship with a firm’s capital structure. B. The dividends paid by a firm determine the firm’s value. C. […]

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? A. Positive operating cash flow B. Negative cash flow to creditors C. Positive cash flow to stockholders […]

Orchard Farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it […]

If sales are $211,000, the profit margin is 6.3 percent, and the capital intensity ratio is . 94, what is the return on assets? A. 4.42 percent B. 6.08 percent C. 6.39 percent D. 6.92 percent E. 6.70 percent Anne […]

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s? A. Increased stock market volatility B. Corporate accounting and financial fraud C. Increased executive compensation D. Increased foreign investment in U.S. stock markets […]

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: A. for the portfolio must equal 1.0. B. for the portfolio must be less than the market risk premium. C. for each […]

The primary goal of financial management is most associated with increasing the: A. dollar amount of each sale. B. traffic flow within the firm’s stores. C. the fixed costs while lowering the variable costs. D. firm’s liquidity. E. market value […]

Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000. The current cost of equity is 17.6 percent and the tax rate is 35percent. The company is in the process of issuing $4.3 […]

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent […]

What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering? A. Syndicate B. Underwriting cartel C. Firm commitment group D. Dutch auction group E. Venture capitalists The cost of preferred […]

Which one of the following methods of analysis has the greatest bias toward short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback Today, you are borrowing $7,800 to purchase […]

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? A. $2,861.62 B. $2,311.92 C. $2,900.15 D. $3,248.87 E. $3,545.60 Which one of these will increase the operating cycle? A. Decreasing […]

Which one of the following can occur if the operating cycle decreases while both the accounts receivable and the accounts payable periods remain constant? A. Inventory period remains constant B. Cash cycle increases C. Inventory turnover rate increases D. Accounts […]

Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’ equity? A. $36,900 B. $66,700 C. $71,600 D. $89,400 E. $106,300 […]

S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a normal economy, and 1.2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 2 percent, 90 percent, and […]

Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take […]

Which one of the following is the rate that most international banks charge when they loan Eurodollars to other banks? A. ADR B. LIBOR C. Cross-rate D. Gilt rate E. Swap rate Consider an asset that costs $311,000 and is […]

Farmer’s Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this […]

Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan […]

Which one of the following statements is true regarding the period 1926-2014? A. The returns on small-company stocks were less volatile than the returns on large-company stocks. B. The risk-free rate of return remained constant over the time period. C. […]

A firm has a cost of debt of 7.8 percent and a cost of equity of 15.6 percent. The debt-equity ratio is .52. There are no taxes. What is the firm’s weighted average cost of capital? A. 11.76 percent B. […]

Which one of the following is the equity risk arising from the daily operations of a firm? A. Strategic risk B. Financial risk C. Liquidity risk D. Industry risk E. Business risk Which one of the following will increase the […]

Eight years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 7.25 percent interest, compounded annually? A. $57,124.39 B. $63,215.46 C. $58,419.05 D. $61,798.47 E. $53,003.15 Which one of the […]

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? A. $798.48 B. $1,240.23 C. $1,992.43 […]

A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent. The debt-equity ratio is .72. There are no taxes. What is the firm’s cost of debt? A. 6.53 percent B. […]

Chestnut Tree Farms has identified the following two mutually exclusive projects: Over what range of discount rates would you choose Project A? A. 7.13 percent or less B. 7.13 percent or more C. 6.38 percent or more D. 6.38 percent […]

Which statement is true concerning a controlled disbursement account? A. The number of checks that can be disbursed on any one day is limited. B. The bank will inform the firm of the amount that needs to be transferred on […]

One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the […]

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium Which […]