Question and Answer - 35

Extra Value Inc.
is expected to generate EBIT of $20 million next year, with anticipated

depreciation and amortization of $3 million. Extra Value has debt of $40 million. Comparable
firms are trading at average forward-looking EV/EBITDA ratios of five times. Based on the
EV/EBITDA method, estimate the value of Extra Va
1. Free Cash Inc. is anticipated to make earnings before interest and taxes (EBIT) of $30,000,
$40,000, and $50,000 in each of the next three years. Depreciation is estimated to be $3,000,
$3,500, and $4,000 in each of the next three years. Capital expenditures are estimated to be
$8,000, $9,000, and $10,000 in each of
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Consider the same estimated costs as in question 15. Fastest Company is not planning to issue
preferred shares in the future but anticipates a target capital structure of 40 percent debt and 60
percent common equity. Reestimate Fastest Company's WACC.
Fastest Company has a debt rating of A and a tax rate of 35 percent. The current long-term
government bond yield is 2 percent. Suppose the typical spread between long-term government
yields and A-rated firms is about 2 percent. Estimate Fastest Company's after-tax cost of debt.
Suppose Fastest Company's current balance sheet showed book value weights of 32 percent debt,
11 percent preferred shares, and 57 percent common equity. Assuming its cost of debt was 3
percent, the cost of preferred shares was 5 percent, and the cost of common equity was 9 percent,
estimate Fastest Company's WACC (base
What is the value of an all-equity firm that: a. Has a dividend payout ratio of 100 percent b. Is
expected to generate net income each year (forever) of $1 million, and c. Has a required equity
return (also the ROE) of 16 percent?
Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that
the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the
U.S. and Mexico. The U.S. commonly obtains its imports from Canada and Mexico. Mexico
commonly obtains its imports from the U.S.
Based on the chart of betas in Figure 10-16, If an investment in the overall stock market was
expected to return 10 percent over the next year, what return would you expect if you invested in
IBM?
What would you expect to happen to the price of Fastest Company's preferred shares if inflation
increased and the Fed increased interest rates, with banks following suit?
Which of the following is not a perfect capital markets assumption? a. There are no taxes. b. No
firm faces financial distress or bankruptcy. c. Individuals can borrow or lend at the same rate as
firms. d. As insiders, managers have access to more information than investors regarding the
future prospects of the fir
What type of investor is most likely to purchase a private placement?
Spencer Co. is a U.S. firm that has a large subsidiary in Singapore, which generates a large
amount of earnings. Spencer's stock is commonly valued at about 16 times its reported earnings
per share. The earnings generated by the Singapore subsidiary in this period are the same as in
the previous period. The Singapore d
Explain why a hotel company might have a higher proportion of debt in its capital structure
relative to a drug company.
How would your answer in question 5 change if Fastest Company's debt rating deteriorated to
BBB and the typical spread between long-term government yields and BBB-rated firms was 3
percent?
Assume that interest rate parity exists and will continue to exist. As of today, the one-year
interest rate of Singapore is 4% versus 7% in the U.S. The Singapore central bank is expected to
decrease interest rates in the future so that as of December 1, you expect that the one-year
interest rate in Singapore will be 2
Suppose BetLev Inc. has a capital structure with 65 percent debt and 35 percent equity, a
(levered) beta of 1.3, and a corporate tax rate of 35 percent. Estimate the unlevered beta of
BetLev.
Suppose an all-equity firm has a beta estimated to be 1.2. If the firm changes its capital structure
such that its debt-to-equity ratio is now 0.4, what should be the revised beta estimate if it also
faces a tax rate of 35 percent?
Calculate the cash flow coverage ratio based on the following information: EBIT = $540,000;
depreciation and amortization = $65,000; interest payments = $180,000; principal repayment =
$75,000; and tax rate = 35 percent.
How would your answer in question 9 change if the dividend was expected to be $1.80 and the
perpetual growth of the dividend 4 percent?
Assume that the country of Dreeland has a currency (called the dree) that tends to move in
tandem with the Chile peso and is expected to continue to move in tandem with the Chilean peso
in the future. Indianapolis Co., a U.S. firm, has a large amount of receivables in the dree. It
expects that the dree will depreciate
This morning, a Canadian dollar call option contract has a $.71 strike price, a premium of $.02,
and expiration date of one month from now. This afternoon, news about international economic
conditions increased the level of uncertainty surrounding the Canadian dollar. However, the spot
rate of the Canadian dollar was s
Suppose Fastest Company, a new start-up firm, initially has $50 million in common equity and
its common shareholders require or expect a return of 14 percent on this investment. After the
first year, Fastest Company makes an after-tax profit of $6 million (assume for now that Fastest
Company does not have any preferred
Bag Company of the U.S. has a business of offering cruises along the coast of Argentina that are
solely for American tourists. The cruise ships charge American tourists in U.S. dollars but all of
their expenses such as payments to its employees are in Argentine pesos. The cruise ships are
very profitable. You want to
Explain whether Fastest Company would consider investing in any project with an expected
return less than the estimated WACC.
According to the trade-off model of capital structure, why is there an optimal capital structure for
a particular firm?
Now suppose the firm in question #9 has a payout ratio of 30 percent. Given the earnings
retention, what will be next year's dividend, at what rate will the firm be able to grow the
dividend, and what will be the value of the firm? Compare your answer to this question to your
answer for question #9.
Some U.S.-based MNCs have business in developing countries in which it is difficult to hedge
their exposure to exchange rate risk. Their forecasts of the currency's future exchange rate is
subject to much error because the currencies in these countries tend to be very volatile, and could
possibly depreciate by 20% or m
1that interest rate parity exists. Does the forward rate quoted today for the Australian dollar
exhibit a premium, or a discount, or does your answer vary with specific conditions? Briefly
explain.
On the basis of the following stock information, describe the features of the stock and assess its
performance: dividends per share = $0.80, current share price = $28.50, current dividend yield =
2.8 percent, current P/E multiple = 24.5, share price one year ago = $24.00 and market total
return over the past year = 16.
Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co.
wants to forecast the value of the Japanese yen in one month. The Japanese interest rate is lower
than the U.S. interest rate. Kentucky Co. will either use the spot rate or the one-month forward
rate to forecast the future
What is the modified internal rate of return for the project in question 6 if the finance rate is 10
percent and the reinvestment rate is 13 percent? In question 6 What is the net present value of a
project with a $40,000 initial investment and expected net cash flows of $15,000, $20,000, and
$25,000 in each of the n
How can a firm hedge long term currency positions? Elaborate on each method.
During the period from 2008 (when the international credit crisis occurred) and 2014, the U.S.
government maintained interest rates at extremely low levels. Assume that interest rate parity
existed over that time period. Write a short essay on what the interest rate conditions in the U.S.
imply about the forward rate o
Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40 and the
spot rate of the Japanese yen was $.01. At that time, the one-year interest rate of the euro and
Japanese yen was 3% and the one-year U.S. interest rate was 7%. One year ago, you used the
one-year forward rate of the euro
Assume that interest rate parity exists. Today, the one-year U.S. interest rate is equal to 8%,
while Mexico's one-year interest rate is equal to 10%. Today, the two-year annualized U.S.
interest rate is equal to 11%, while the two-year annualized Mexican interest rate is equal to
11%. West Virginia Co. uses the forwar
Suppose the current long-term government bond yield is 2 percent and the estimated market risk
premium is 5 percent. Fastest Company's beta is estimated to be 1.15. Using CAPM, estimate
Fastest Company's cost of common equity.
Twice Lucky, Inc. was planning a 10-year bond issue with a 6% coupon rate. Just prior to the
issue, a major credit rating agency announced a surprise upgrade in its rating. How might this
announcement impact the planned bond issue? Explain.
Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital
structure. The projected EPS would then be $2.50. In a world with no financial distress,
determine what the stock price should be and explain why in the real world the stock price would
be less than that amount.
Historical U.S. market returns tend to approximately follow a normal distribution, which implies
that returns are plus or minus one standard deviation from the mean (arithmetic return) two-
thirds of the time and are plus or minus two standard deviations from the mean 95% of the time.
Based on the information in Figur
Explain how syndicated loans are used in international markets.
Pepper Inc. is expected to have before-tax earnings of $2.5 million next year. The tax rate is 35
percent. There are 2 million common shares outstanding. Comparable firms in the same industry
are estimated to have price-earnings multiples of 10 to 16. Estimate the intrinsic value of
Pepper's share price based on the pr
Bigco Inc. is considering acquiring Smallco Inc., a publically traded firm in the same industry.
Smallco is currently trading at $12 per share and has 20 million shares; it is believed to be
trading at its fair value. Bigco feels that the present value of potential synergies is $50 million.
What is the highest bid pric
How would your answer in question #5 change if the interest rate was 5 percent? Question-5
Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7
percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?
Brazil commonly has a much higher nominal interest rate than the U.S. Yet, some large
institutional investors do not invest in Brazilian money market securities, even when they believe
the securities have no credit (default) risk. Use the international Fisher effect (IFE) to explain
why the Brazilian money market secur
Explain why the Greece credit crisis can cause contagion effects throughout Europe.
Which of the following would not be a characteristic of a firm that would tend to have a high
proportion of debt in its capital structure: a. Steady profitability b. A large amount of fixed assets
c. Many growth opportunities d. In a regulated industry
Given the "stylized facts" related to IPO performance, if you were able to obtain IPO shares at
the issue price, when might be the best time to sell the shares: after the first day of trading or
three-to-five years later?
Based on the information in Figure 9.5 and focusing on mean returns for "all stocks," What is the
range of returns that are two standard deviations from the mean?
Now suppose BetLev wishes to have a target capital structure of 50 percent debt and 50 percent
equity. What will be its levered beta at the target capital structure?
Assume that a firm's earnings per share (EPS) are expected to be $2.00 next year and that
analysts have determined that an appropriate forward-looking multiple is 15 times the projected
earnings. What should the stock price be?
Calculate an EBIT breakeven between a debt firm (DF) and an all-equity firm (EF) based on the
following information: DF interest = $40,000; DF number common shares = 6,000; EF number
of common shares = 10,000; and tax rate = 35 percent. Check your answer by calculating the
EPS for both DF and EF at the breakeven EBIT.
Assume that the annual U.S. interest rate is currently 8 percent and Japan's annual interest rate is
currently 7 percent. The spot rate of the Japanese yen is $.01. The one-year forward rate of the
Japanese yen is $.01. Assume that as covered interest arbitrage occurs, the interest rates are not
affected, and the spot
Depreciation is a noncash charge. Why then is it important in Lease-Buy analysis?
What is the profitability index for the project in question 6? What is the modified internal rate of
return for the project in question 6 if the finance rate is 10 percent and the reinvestment rate is 13
percent? In question 6 What is the net present value of a project with a $40,000 initial investment
and expected
Explain the relationship between the cost of raising funds from the firm's perspective and the
required return on bonds, preferred shares, and common shares from the investor's perspective.
PrivCo Inc. is a small private firm with a book value of assets of $550,000 and liabilities of
$250,000. Its assets include property listed at a cost of $80,000 but with a recently assessed
market value of $125,000. In addition, PrivCo has $60,000 of inventory that is entirely obsolete
and has no liquidation value. Oth
How would your answer in question 13 changes if the current long-term government bond yield
was 3 percent and Fastest Company's beta was 1.5? In question 13 suppose the current long-term
government bond yield is 2 percent and the estimated market risk premium is 5 percent. Fastest
Company's beta is estimated to be 1.1
All things being equal, would you expect to receive a higher or lower interest payment if a bond
had a sinking fund?
Thomson Trucking has $16 billion in assets, and its tax rate is 40%. Its basic earning power
(BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE)
ratio?
Suppose a firm is involved in major litigation and is expected to lose its case, which would cost
the firm millions of dollars. Surprisingly the firm wins the case and immediately the stock price
jumps. Is the observation of the price increase consistent with the semi strong form of the
efficient market hypothesis? Exp
The managers of many U.S.-based MNCs have heard arguments that an MNC's exposure to
currency movements will have unfavorable effects on its cash flows and earnings in some
periods, and favorable effects on its cash flows and earnings in other periods, and that these
effects will offset in the long run. Yet the managers
What is the average arithmetic return over two years for a stock that goes from $10 to $20, then
back to $10?
Review the logic regarding how currency options are priced. Consider a speculator who plans to
purchase currency options for the option at the money on whatever currency has the lowest
premium. He also who plans to sell currency options for the option at the money on whatever
currency has the highest premium. Another s
Nesmith Corporationâ€™s outstanding bonds have a $1,000 par value, an 8% semiannual

coupon, 14 years to maturity, and an 11% YTM. What is the bondâ€™s price?
Bedrock Company has $70 million in debt and $30 million in equity. The debt matures in 1 year
and has a 10% interest rate, so the company is promising to pay back $77 million to its debt
holders 1 year from now. The company is considering two possible investments, each of which
will require an upfront cost of $100 mill
Patterson Brothers recently reported an EBITDA of $7.5 million and net income of $2.1 million.
It had $2.0 million of interest expense, and its corporate tax rate was 30%. What was its charge
for depreciation and amortization?
Bond X is non callable and has 20 years to maturity, an 8% annual coupon, and a $1,000 par
value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You
(and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with
similar risk will be 7.5%.How much
You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your
brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of
current interest rate premiums: â€¢ Inflation premium = 3 25% â€¢ Liquidity premium = 0 6%
â€¢ Maturity risk premium = 1.85% â€¢ Defau
An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11%
annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. a. What will the
value of each bond be if the going interest rate is 6%, 8%, and 12%? Assume that only one more
interest payment is to be made on Bond S a
Baxley Brothers has a DSO of 23 days, and its annual sales are $3,650,000. What is its accounts
receivable balance? Assume that it uses a 365-day year.
Sawyer Corporationâ€™s 2015 sales were $5 million. Its 2010 sales were $2.5 million. a. At
what rate have sales been growing? b. Suppose someone made this statement: â€œSales doubled
in 5 years. This represents a growth of 100% in 5 years; so dividing 100% by 5, we find the
growth rate to be 20% per year.â€ Is the sta
Madsen Motorsâ€™s bonds have 23 years remaining to maturity. Interest is paid annually; they
have a $1,000 par value; the coupon interest rate is 9%; and the yield to maturity is 11%. What is
the bondâ€™s current market price?
In 2011, Microsoft acquired Skype (based in Luxembourg) for about $8.5 billion. Write a short
essay that describes the general process that Microsoft would have used to determine how much
it was willing to pay for Skype. Some analysts claim that Skype as an independent company was
not worth $8.5 billion, but that it is
Electronics World Inc. paid out $22.4 million in total common dividends and reported $144.7
million of retained earnings at year-end. The prior yearâ€™s retained earnings were $95.5
million. What was the net income? Assume that all dividends declared were actually paid.
Pelzer Printing Inc. has bonds out standing with 9 years left to maturity. The bonds have a 9%
annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to
changes in interest rates, the bondâ€™s market price has fallen to $910.30. The capital gains
yield last year was âˆ’8.97%. a. What i
Can the following equation be used to find the value of a bond with N years to maturity that pays
interest once a year? Assume that the bond was issued several years ago.
Write a short essay to provide your opinion about whether the traditional payment methods for
international trade insulate an MNC's business when there are strained relations between two
countries?
Last year Janet purchased a $1,000 face value corporate bond with an 8% annual coupon rate and
a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.45%. If
Janet sold the bond today for $820.17, what rate of return would she have earned for the past
year?
Ingraham Inc. currently has $205,000 in accounts receivable, and its days sales outstanding
(DSO) is 71 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to
pay their bills on time. If this policy is adopted, the companyâ€™s average sales will fall by
15%. What will be the level of account
Edelman Engines has $17 billion in total assets. Its balance sheet shows $1.7 billion in current
liabilities, $10.2 billion in long-term debt, and $5.1 billion in common equity. It has 300 million
shares of common stock outstanding, and its stock price is $20 per share. What is Edelmanâ€™s
market/book ratio?
Assume that the risk-free rate is 3.5% and the market risk premium is 4%. What is the required
return for the overall stock market? What is the required rate of return on a stock with a beta of
0.8?
The real risk-free rate, r* , is 1.7%. Inflation is expected to average 1.5% a year for the next 4
years, after which time inflation is expected to average 4.8% a year. Assume that there is no
maturity risk premium. An 11-year corporate bond has a yield of 8.7%, which includes a
liquidity premium of 0.3%. What is its d
In recent years, some U.S.-based MNCs (such as Apple) have taken advantage of the very low
interest rates in the U.S. by borrowing large amount of dollars to finance their operations. Write
a short essay that explains the advantages and possible disadvantages (if any) due to this type of
financing. Consider how it affe
You are considering a 10-year, $1,000 par value bond. Its coupon rate is 8%, and interest is paid
semiannually. If you require an â€œeffectiveâ€ annual interest rate (not a nominal rate) of
7.1225%, how much should you be willing to pay for the bond?
Given the factors that affect the value of a foreign currency, describe the type of economic or
other conditions in Mexico that could cause the Mexican peso to weaken, and therefore to
adversely affect your business?
MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power (BEP)
ratio is 11%, and its return on assets (ROA) is 6%. What is MPIâ€™s times-interest-earned
(TIE) ratio?
If you deposit money today in an account that pays 4% annual interest, how long will it take to
double your money?

The Corrigan Corporationâ€™s 2015 and 2016 financial statements follow, along with some
industry average ratios. a. Assess Corriganâ€™s liquidity position, and determine how it
compares with peers and how the liquidity position has changed over time. b. Assess
Corriganâ€™s asset management position, and determine how i
You want to buy a car, and a local bank will lend you $40,000. The loan will be fully amortized
over 5 years (60 months), and the nominal interest rate will be 8% with interest paid monthly.
What will be the monthly loan payment? What will be the loanâ€™s EAR?
The real risk-free rate is 2.05%. Inflation is expected to be 3.05% this year, 4.75% next year, and
2.3% thereafter. The maturity risk premium is estimated to be 0.05 Ã— (t -1)%, where t =
number of years to maturity. What is the yield on a 7-year Treasury note?
Find the following values using the equations and then a financial calculator.
Compounding/discounting occurs annually. a. An initial $600 compounded for 1 year at 6% b.
An initial $600 compounded for 2 years at 6% c. The present value of $600 due in 1 year at a
discount rate of 6% d. The present value of $600 due in 2
A bond has a $1,000 par value, 12 years to maturity, and an 8% annual coupon and sells for
$980. a. What is its yield to maturity (YTM)? b. Assume that the yield to maturity remains
constant for the next three years. What will the price be 3 years from today?
Find the interest rates earned on each of the following: a. You borrow $720 and promise to pay
back $792 at the end of 1 year. b. You lend $720 and the borrower promises to pay you $792 at
the end of 1 year. c. You borrow $65,000 and promise to pay back $98,319 at the end of 14
years. d. You borrow $15,000 and promise
Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different
common stocks. The portfolioâ€™s beta is 1.25. Now suppose you decided to sell one of the
stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock
with a beta of 0.80. What would yo
Some U.S.-based MNCs have been maintaining a very large amount of cash in foreign countries,
because they would be subject to a corporate income tax on these funds if they were remitted to
the parent. The tax is implemented to cover the difference between the corporate tax rate
imposed by the U.S. government and the ta
Kristina just won the lottery, and she must choose among three award options. She can elect to
receive a lump sum today of $62 million, to receive 10 end-of-year payments of $9.5 million, or
to receive 30 end-of-year payments of $5.6 million. a. If she thinks she can earn 7% annually,
which should she choose? b. If she
Pacific Packagingâ€™s ROE last year was only 5%; but its management has developed a new
operating plan that calls for a debt-to-capital ratio of 40%,which will result in annual interest
charges of $561,000. The firm has no plans to use preferred stock and total assets equal total
invested capital. Management projects a
The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding, and it pays an annual
interest rate of 7%. In addition, it has $600,000 of common stock on its balance sheet. It finances
with only debt and common equity, so it has no preferred stock. Its annual sales are $2.7 million,
its average tax rate is 35
Susan and Stan Britton are a married couple who file a joint income tax return, where the tax
rates are based on the tax tables presented in the chapter. Assume that their taxable income this
year was $375,000. a. What is their federal tax liability? b. What is their marginal tax rate? c.
What is their average tax rate
An investor in Treasury securities expects inflation to be 2.1% in Year 1, 2.7% in Year 2, and
3.65% each year thereafter. Assume that the real risk-free rate is 1.95% and that this rate will
remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities
yield 6.00%. What is the differenc
Harper Industries has $900 million of common equity on its balance sheet; its stock price is $80
per share; and its market value added (MVA) is $50 million. How many common shares are
currently outstanding?
A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 7%. He has
been offered three possible 4-year contracts. Payments are guaranteed, and they would be made
at the end of each year. Terms of each contract are as follows:As his adviser, which contract
would you recommend that he accept?
Barton Industries has operating income for the year of $3,500,000 and a 36% tax rate. Its total
invested capital is $20,000,000 and its after-tax percentage cost of capital is 8%. What is the
firmâ€™s EVA?
Suppose you are the money manager of a $4.82 million investment fund. The fund consists of
four stocks with the following investments and betas:If the marketâ€™s required rate of return is
8% and the risk-free rate is 4%, what is the fundâ€™s required rate of return?
As explained in the appendix, U.S. tax laws have encouraged U.S.-based MNCs to consider
moving their parent to another country in order to reduce their taxes. Write a short essay that
presents your opinion of this issue. Should U.S.-based MNCs be allowed to move their parent
without consequences? Should the U.S. govern
In recent years, U.S. short-term interest rates have been close to zero. Write a short essay to
provide your opinion on whether you (as a manger of an MNC) might be more willing to use
dollar-denominated short-term debt to cover short-term funding needs for subsidiaries in foreign
countries that generate positive earni
Suppose 2-year Treasury bonds yield 4.1%, while 1-year bonds yield 3.2%. r* is 1%, and the
maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year
bond 1 year from now? Calculate the yield using a geometric average. b. What is the expected
inflation rate in Year 1? Year 2?
How long will it take $300 to double if it earns the following rates? Compounding occurs once a
year. a. 6% b. 13% c. 21% d. 100%
Donna Jamison, a 2011 graduate of the University of Florida, with 4 years of banking
experience, was recently brought in as assistant to the chairperson of the board of Dâ€™Leon
Inc., a small food producer that operates in north Florida and whose specialty is high-quality
pecan and other nut products sold in the snack
A stock has a required return of 9%, the risk-free rate is 4.5%, and the market risk premium is
3%. a. What is the stockâ€™s beta? b. If the market risk premium increased to 5%, what would
happen to the stockâ€™s required rate of return? Assume that the risk-free rate and the beta
remain unchanged.
Lourdes Corporationâ€™s 12% coupon rate, semiannual payment, $1,000 par value bonds,
which mature in 25 years, are callable 6 years from today at $1,025. They sell at a price of
$1,278.56, and the yield curve is flat. Assume that interest rates are expected to remain at their
current level. a. What is the best estimate
One-year Treasury securities yield 4.85%. The market anticipates that 1 year from now, 1-year
Treasury securities will yield 5.2%. If the pure expectations theory is correct, what is the yield
today for 2-year Treasury securities? Calculate the yield using a geometric average.
Assume the following relationships for the Caulder Corp.:Sales/Total

assets .......................................Â Â Â 1.3Ã— Return on assets (ROA) ..............................Â Â
Â 4.0% Return on equity (ROE) ............................... Â Â 8.0%Calculate Caulderâ€™s profit
margin and debt-to-capital ratio
You are given the following information: Stockholdersâ€™ equity as reported on the firmâ€™s
balance sheet = $6.5 billion, price/earnings ratio = 9, common shares outstanding = 180 million,
and market/book ratio = 2 0. Calculate the price of a share of the companyâ€™s common stock.
Mizner, Inc., is a U.S. based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a
one year loan of 10 million pesos for operating expenses. It can borrow pesos at 11% and can use
peso revenues to be received over the year to repay the loan. Alternatively, it can borrow dollars
at 6%. Interest rate parity ex
Your client is 26 years old. She wants to begin saving for retirement, with the first payment to
come one year from now. She can save $8,000 per year, and you advise her to invest it in the
stock market, which you expect to provide an average return of 10% in the future. a. If she
follows your advice, how much money wi
The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its
initial inventory level is $526,350, and it will raise funds as additional notes payable and use
them to increase inventory. How much can its short-term debt (notes payable) increase without
pushing its current ratio below 2
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.6%
rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is
6.0%. Mudd has a beta of 1.5, and its realized rate of return has averaged 8.5% over the past 5
years.
Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the
required rate of return on a stock with a beta of 2?
You have $33,556.25 in a brokerage account, and you plan to deposit an additional $5,000 at the
end of every future year until your account totals $220,000. You expect to earn 12% annually on
the account. How many years will it take to reach your goal?
Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of
$1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200. a.
What are the bondâ€™s nominal yield to maturity and its nominal yield to call? Would an
investor be more likely to earn the Y
Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to
have a basic earning power ratio of 35%. CC will own no securities, so all of its income will be
operating income. If it so chooses, CC can finance up to 30%of its assets with debt,which will
have an 8% interest rate. If it choo

An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years,
has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual
coupon, while Bond Z is a zero coupon bond. a. Assuming that the yield to maturity of each
bond remains at 8.2% over the next 4 years,
As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid
monthly. To carry receivables, you must borrow funds from your bank at a nominal 9%, monthly
compounding. To offset your overhead, you want to charge your customers an EAR (or EFF%)
that is 3% more than the bank is charging
A firmâ€™s bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual
coupon, are callable in 4 years at $1,154, and currently sell at a price of $1,283.09. What are
their nominal yield to maturity and their nominal yield to call? What return should investors
expect to earn on these bonds?
What is the present value of a $600 perpetuity if the interest rate is 5%? If interest rates doubled
to 10%, what would its present value be?
Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds
have a $1,000 par value and a coupon rate of 10%. a. What is the yield to maturity at a current
market price of (1) $865 and (2) $1,166? b. Would you pay $865 for each bond if you thought
that a â€œfairâ€ market interest
A crisis in a foreign country will commonly cause a substantial reduction in cash flows (and
valuations) of an MNC's subsidiaries based in that country. Explain why the MNC will not
necessarily sell its subsidiaries even if these subsidiaries are not profitable?
A companyâ€™s 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity
are yielding 5.2% per year, and the real risk-free rate (r* ) is 2.75%. The average inflation
premium is 2.05%; and the maturity risk premium is estimated to be 0.1 Ã— (t -1)%, where t =
number of years to maturity. If the liquid
Interest rates on 4-year Treasury securities are currently 6.7%, while 6-year Treasury securities
yield 7.25%. If the pure expectations theory is correct, what does the market believe that 2-year
securities will be yielding 4 years from now? Calculate the yield using a geometric average.
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As
a result, the analyst has been warned not to ignore the cross-product between the real rate and
inflation. If the real risk-free rate is 5% and inflation is expected to be 18% each of the next 4
years, what is the yield
It is now January 1, 2016, and you are considering the purchase of an outstanding bond that was
issued on January 1, 2014. It has an 8% annual coupon and had a 30-year original maturity.
There is 5 years of call protection (until December 31, 2018), after which time it can be called at
108â€”that is, at 108% of par, or
A stockâ€™s returns have the following distribution:Calculate the stockâ€™s expected return,
standard deviation, and coefficient of variation.
Seven years ago the Templeton Company issued 20-year bonds with an 11% annual coupon rate
at their $1,000 par value. The bonds had a 7.5% call premium,with 5 years of call protection.
Today Templeton called the bonds. Compute the realized rate of return for an investor who
purchased the bonds when they were issued and
For 2016, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating
costs (including depreciation). The company has $15 million of total invested capital. Its after-
tax cost of capital is 10%, and its federal-plus-state income tax rate was 36%. What was the
firmâ€™s economic value added (EVA),
Stock R has a beta of 2.0, Stock S has a beta of 0.45, the required return on an average stock is
10%, and the risk-free rate of return is 5%. By how much does the required return on the riskier
stock exceed the required return on the less risky stock?
a. Find the present values of the following cash flow streams at a 5% discount rate.b. What are
the PVs of the streams at a 0% discount rate?
A 7% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a
current yield of 7.5401%. What are the bondâ€™s price and YTM?
An individual has $20,000 invested in a stock with a beta of 0.6 and another $75,000 invested in
a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her
portfolioâ€™s beta?
A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a
yield of 8.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the
default risk premium on the corporate bond?
1. If Logan invests the excess cash in U.S. Treasury bills, would this reduce the firm's exposure
to exchange rate risk? 2. Logan decided to use the excess cash to pay off the British loan.
However, a friend advised him to invest the cash in British Treasury bills, stating that "the loan
provides an offset to the pou
Which of the following actions are most likely to directly increase cash as shown on a firmâ€™s
balance sheet? Explain and state the assumptions that underlie your answer. a. It issues $4
million of new common stock. b. It buys new plant and equipment at a cost of $3 million. c. It
reports a large loss for the year. d.
Seabreeze Co. needs to finance some dollar-denominated expenses for one year. It can borrow
euros cheaper than dollars. Interest rate partiy exists. The one-year forward rate of the euro
contains a premium of 4%. If it believes the euro will appreciate by 6% over the next year, would
its expected financing expense be
You borrow $230,000; the annual loan payments are $20,430.31 for 30 years. What interest rate
are you being charged?
Given the following information, determine the beta coefficient for Stock L that is consistent
with equilibrium: rÌ‚ L = 10.5%; rRF = 3.5%; rM = 9.5%.
Your parents will retire in 19 years. They currently have $350,000 saved, and they think they
will need $800,000 at retirement. What annual interest rate must they earn to reach their goal,
assuming they donâ€™t save any additional funds?
Whatâ€™s the future value of a 5%, 5-year ordinary annuity that pays $800 each year? If this
was an annuity due, what would its future value be?
Spectra Energy Corp. (based in Houston) has substantial operations in Canada, and generates
much revenue in Canadian dollars. It borrows funds denominated in Canadian dollars (rather
than U.S. dollars) to finance its Canadian operations. Write a short essay that explains the
potential benefits from such a strategy. Exp
Beale Manufacturing Company has a beta of 1.1, and Foley Industries has a beta of 0.30. The
required return on an index fund that holds the entire stock market is 11%. The risk-free rate of
interest is 4.5%. By how much does Bealeâ€™s required return exceed Foleyâ€™s required
return?
An investment will pay $150 at the end of each of the next 3 years, $250 at the end of Year 4,
$300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn
11% annually, what is its present value? Its future value?
Suppose rRF = 4%, rM = 10%, and bi = 1 4. a. What is ri, the required rate of return on Stock i?
b. Now suppose that rRF (1) increases to 5% or (2) decreases to 3%. The slope of the SML
remains constant. How would this affect rM and ri? c. Now assume that rRF remains at 4%, but
rM (1) increases to 12% or (2) falls to 9
In its most recent financial statements, Nessler Inc. reported $75 million of net income and $825
million of retained earnings. The previous retained earnings were $784 million. How much in
dividends were paid to shareholders during the year? Assume that all dividends declared were
actually paid.
Over the years, Master son Corporationâ€™s stockholders have provided $34,000,000 of capital
when they purchased new issues of stock and allowed management to retain some of the
firmâ€™s earnings. The firm now has 2,000,000 shares of common stock outstanding, and the
shares sell at a price of $28 per share. How much va
Ferrell Inc. recently reported net income of $8 million. It has 540,000 shares of common stock,
which currently trades at $21 a share. Ferrell continues to expand and anticipates that 1 year
from now, its net income will be $13.2 million. Over the next year, it also anticipates issuing an
additional 81,000 shares of st
Consider the following information for Stocks A, B, and C. The returns on the three stocks are
positively correlated, but they are not perfectly correlated. (That is, each of the correlation
coefficients is between 0 and 1.)Fund P has one-third of its funds invested in each of the three
stocks. The risk-free rate is 5.
Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until
maturity. They have an 11% annual coupon payment, and their current price is $1,185. The
bonds may be called in 5 years at 109% of face value Call price $1,090 . a. What is the yield to
maturity? b. What is the yield to call if t
Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year
2 and thereafter is expected to be constant at some level above 3.25%. Assume that the
expectations theory holds and the real risk-free rate (r ) is 2.5%. If the yield on 3-year Treasury
bonds equals the 1-year yield plu
Find the future values of these ordinary annuities. Compounding occurs once a year. a. $500 per
year for 8 years at 14% b. $250 per year for 4 years at 7% c. $700 per year for 4 years at 0% d.
Rework parts a, b, and c assuming they are annuities due.
If you invest $8,000 at 12%, how long will it take to triple?
What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk
pay 5% annually?
The real risk-free rate is 2.25%. Inflation is expected to be 2.5% this year and 4.25% during the
next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year
Treasury securities? What is the yield on 3-year Treasury securities?
Explain the following statement: Our tax rates are progressive.
Bank A pays 2% interest compounded annually on deposits, while Bank B pays 1.75%
compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your
choice of banks be influenced by the fact that you might want to with draw your funds during the
year as opposed to at the end of the year?Assume tha
Deb Co. has interest-bearing debt of $122 million, non-interest-bearing debt of $33 million, and
equity of $76 million. Calculate Deb Co.'s debt-to-assets, debt-to-equity, and long-term-debt-to-
capital ratios.
How do repurchases help firms manage the signaling effect of dividends.
Why do we refer to depreciation and amortization as "noncash items"?
Referring to the Cranberry Company of the previous problem: a. Calculate the DOL when sales
are 20%, 30% and 40% above breakeven. b. Suppose automated equipment is added which
increases fixed costs by $20,000 per month. How much will total variable cost have to decrease
to keep the breakeven point the same? c. Ca
Suppose a preferred share pays perpetual quarterly dividends of $1.00 and has a per annum
dividend yield of 8 percent. What is the fair value of this preferred share?
The Brown Owl Corporation manufactures high quality outdoor equipment for adventurous
people who enjoy hiking, hunting, climbing, and trekking under extreme conditions. The firm
has been very successful with things like cold weather clothing, boots, mountain climbing
equipment, and camping gear. However, all of their p
What is the FV of $1,250.63 for 3 years at 7%?
How much will $175 grow into if it is invested at 16% for 30 years?
Nextime Ltd. has operating profits (EBIT) of $87 million, a tax rate of 35 percent, net working
capital of $129 million, and fixed assets of $285 million. Calculate Nextime's return on invested
capital, or ROIC. Then describe three methods by which a firm can increase its ROIC.

What is the primary goal of an enterprise?
What is the equivalent annual cost of a piece of equipment that requires an initial investment of
$50,000, is expected to last seven years, and requires annual maintenance costs of $4,000 if the
appropriate discount rate is 9 percent?
1. What would be the impact on Top-A1's pro forma net earnings if sales were to change to
$200,000? 2. What would be the impact on Top-A1's pro forma long-term debt if sales were to
change to $200,000 and the age of payables were to change to 45 days?
Vaughn Clothing of the previous problem has a real option possibility. Carlson Flooring has
expressed an interest in trading buildings with Vaughn after Vaughn's is refurbished. Carlson has
offered to reimburse Vaughn for 70% of its refurbishment costs at the end of the first year if they
make the trade. Vaughn would t
Explain the concepts of sovereign debt and a sovereign debt crisis. Why is such a crisis different
for a Eurozone country than for a country with a unique currency.
Suppose three optometrists wished to form a business that was expected to last until the oldest
one was about to retire. The three had known each other since college and were close friends
who trusted one another. What type of firm might be appropriate?
What is the present value of a perpetual stream of annual cash flows, with the first cash flow of
$100 to be received in one year and with all subsequent cash flows growing at a rate of 3 percent,
assuming a discount rate of 8 percent?
Quick-E Inc.'s current assets consist of cash of $5 million, account receivables of $27 million,
inventory of $37 million, and it has current liabilities of $48 million. Calculate Quick-E's current
ratio and quick ratio.
Explain why a company may have deferred income taxes on its balance sheet.
Calculate the present value (PV) of a cash inflow of $500 in one year and a cash inflow of
$1,000 in five years, assuming a discount rate of 15 percent.
Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and
equity of $40 million, as well as year 2 revenues of $87 million, net income of $22 million,
assets of $70 million, and equity of $50 million. Calculate Star's return on equity (ROE) for each
year based on the DuPont meth
John Cleaver's grandfather died in 2015 and left him a trunk that had been locked in his attic for
years. At the bottom of the trunk John found a packet of 50 U.S. Savings Bonds that had never
been cashed in. The bonds were purchased for $11.50 each in 1923, and pay 3% interest as long
as they're held. (Assume annual c
What would you pay for an annuity paying $3,000 per year for 12 years if the interest rate is
10%?
Which financial statement presents information related to changes in retained earnings and share
repurchase?
At what interest rate will $750 grow into $3,132.83 in 15 years?
What are the annual payments on a loan of $350,000 to be repaid over 10 years at 8%?
What are the four key components of gross domestic product?
The Rollins Metal Company is engaged in a long-term planning process and is trying to choose
among several strategic options, which imply different future growth rates for the company.
Management feels that the main benefit of higher growth is that it enhances the firm's current
stock price. However, high growth strate
Wally Wholesale has revenue of $487,000, end-of-year receivables of $112,000, account

payables of $70,000, and inventory of $91,000. Assume purchases equal cost of sales of
$372,000. Estimate Wally Wholesale's age of inventory, age of receivables, and age of payables.
Consider two bonds, Bond A and Bond B, both with a coupon rate of 10 percent and a yield to
maturity of 10 percent. These are standard bonds with semiannual coupon payments. Bond A
matures in 5 years; Bond B matures in 10 years. What is the price of each bond?
How much would you have to save each year to have $65,000 in 10 years if the interest rate is
expected to be 7%?
For questions 1 to 7, please use the following projections for Top-A1 Inc.: Total sales of
$150,000 Cost of goods sold equal to 76 percent of sales Total expenses equal to 14 percent of
sales Tax rate of 35 percent Beginning equity of $50,000 Beginning inventory of $12,000 Age of
ending inventory of 60 days Min
How a recession is typically measured?
Fixem Co. has revenue of $125 million, property and equipment of $42 million, and accumulated
depreciation and amortization of $6 million. Estimate the fixed asset turnover ratio.
Consider two bonds, Bond C and Bond D, both with a yield to maturity of 10 percent and with 5
years to maturity. These are standard bonds with semiannual coupon payments. Bond C has a
coupon rate of 10 percent (with semiannual coupon payments); Bond D does not pay any
coupons (i.e., it a zero-coupon bond). What is the
How much will $650 per year deposited at 12% be worth in 8 years?
Smallco has cash from operating activities of $220 million, cash from investing activities of ($93
million), cash from financing activities of ($107 million), and a beginning cash balance of $27
million. What will Smallco's ending cash balance be?
Calculate the NPV at 12% and the IRR for the following projects. Find IRR's to the nearest
whole percent. a. An initial outflow of $10,000 followed by three inflows of $4,000. b. An initial
outflow of $10,000 followed by inflows of $3,000, $4,000, and $5,000. c. An initial outflow of
$10,000 followed by inflows of
Develop a list of factors that would result in a firm having high supply risk and high demand
risk.
Describe the four stages of the business cycle.
Describe the three key cash-related activities of a firm.
Describe the ways in which international business has changed over the last 60 years. Include the
concepts of an MNC and the different types of foreign investment.
A bond that pays 10% interest compounded annually on a $1,000 face value will mature in 20
years. The interest rate is now 12%. What should the bond's market price be?
What is the net present value of a project with a $40,000 initial investment and expected net cash
flows of $15,000, $20,000, and $25,000 in each of the next three years, assuming an appropriate
discount rate of 10 percent?
Develop a list of key success factors in the auto manufacturing industry.
Describe how financial management is related to accounting.
Vaughn Clothing is considering refurbishing its store at a cost of $1.4 million. Management is
concerned about the economy and whether a competitor, Viola Apparel, will open a store in the
neighborhood. Vaughn estimates that there is a 60% chance that Viola will open a store nearby
next year. The state of the economy p
Jesters-R-Us, Inc. is a publicly traded company that has assets on its balance sheet of $125
million and liabilities of $75 million. The firm also has 4 million common shares that are
currently trading for $21 per share. Estimate the firm's market-to-book ratio.
How long will it take $5,000 invested at 14% to double?
Consider the bonds in question 7. Suppose interest rates decline, causing the yield to maturity for
each bond to immediately decline to 9 percent. What is the new price of each bond? (Hint:
Consider the semiannual yield to maturity.)
If a firm has goodwill on its balance sheet, what, if anything, does this imply about the firm's
previous acquisition activities?
BE Enterprises has fixed costs of $50 million. Its gross margin percentage is 18 percent. What
sales level must it achieve in order to break even?
What are the two key drivers of value?
What is a sinking fund. How is it related to time value?
Compare the typical profitability of a stage 2 firm versus a stage 3 firm.
1. Now, assume Top-A1's sales in the subsequent year increase by 15 percent. If all the other
relationships remain the same, what will be the pro forma net earnings in two years? 2. Again,
assume Top-A1's sales in the subsequent year increase by 15 percent. If all the other
relationships remain the same, what will be
Calculate the present value (PV) of an annuity stream of five annual cash flows of $1,200, with
the first cash flow received in one year, assuming a discount rate of 10 percent.
Why is low and steady inflation important?
Consider the financial statements for Ace Inc. for questions 1 to 8: 1. Identify the sources of cash
and uses of cash for each year. Create a sources and uses statement. 2. Estimate the age of
inventory for each year. 3. Estimate the age of accounts receivable for each year. 4. Estimate the
age of accounts payable
A $1,000 par value, 30 year bond is 5 years old. It pays interest once a year at an annually
compounded coupon rate of 12%. The market is returning 8% on comparable bonds. What is the
bond's market price?
Explain the difference between real assets and financial assets
Explain why equity is not the same as cash.
What is the internal rate of return for the project in question 2? In Question 2, what is the net
present value of a simple one-period project with an initial investment of $12,000 and an
expected net cash flow in one year of $15,000, assuming a discount rate of 8 percent?
What are the three goals of the Federal Reserve?
Explain how the two methods of cash distribution work, and describe their impact on
shareholders. Does everyone always receive cash? If not are some stockholders left out?
Vaughn Clothing of the previous problem has a real option possibility. Carlson Flooring has
expressed an interest in trading buildings with Vaughn after Vaughn's is refurbished. Carlson has
offered to reimburse Vaughn for 70% of its refurbishment costs at the end of the first year if they
make the trade. Vaughn woul
What is the highest discount rate at which the project would still be acceptable (i.e., a zero
NPV)?
Consider the bonds in question 5. Suppose interest rates decline, causing the yield to maturity for
each bond to immediately decline to 9 percent. What is the new price of each bond? (Hint:
Consider the semiannual yield to maturity.) In questions 5 Consider two bonds, Bond A and
Bond B, both with a coupon rate of 10 p
What is meant by transparency in the context of trading stocks on an exchange?
Using Home Depot's 2010 and 2011 balance sheets in Figure 3.2 and statements of earnings in
Figure 3.3 in Chapter 3, set up the ratios presented in Figure 4.4 for Home Depot for 2010 and
2011, indicating the numerator and denominator of each. Confirm the answers presented in
Figure 4.4.
Describe the two hypotheses that explain the shape of the yield curve.
Hanover Inc. spent Â£11.5 million building a factory in England several years ago when the
British Pound cost $1.5500. The plant operation was set up as a British subsidiary to
manufacture Hanover's product for sale and distribution in the U.K. and Europe. Hanover closed
its consolidated books for the 2015 fiscal year
A project has the following cash flows a. What is the project's payback period? b. Calculate the
projects NPV at 12%. c. Calculate the project's PI at 12%.
What is the fair value today of a common share with expected annual dividends of $1.00, $1.05,
and $1.10 in each of the next three years and an expected share price of $20 in three years,
assuming a required return of 9 percent?
Provide the missing information for the following projects using the present value of an annuity
function [time value of money (TVM) keys rather than the cash flow (CF) function keys].
What information would need to be gathered in order to assess the economy's current position
within the business cycle?
How much would you have to put in the bank today to have $42,800 in 9 years if the interest rate
is 7%?
What is the present value of a perpetual stream of annual cash flows of $100, with the first cash
flow to be received in one year, assuming a discount rate of 8 percent?
What is the value of a common share with an expected perpetual stream of annual dividends,
with the first dividend of $2.00 to be received in one year and with all subsequent dividends
growing at a rate of 5 percent, assuming a required rate of return of 12 percent?
The Griffin Company is launching a maritime project by purchasing a small, previously owned
cargo ship for $2M which will be used to ferry iron ore across the Great Lakes The ship will be
depreciated over four years straight line. Freight revenue and expenses from the venture are
forecast below Year______________ Re
What problems does an institutional investor face when it places a very large buy or sell order
for a block of stock through an exchange?
What is the net present value of a simple one-period project with an initial investment of $12,000
and an expected net cash flow in one year of $15,000, assuming a discount rate of 8 percent?
Describe the three shapes of the yield curve that tend to be associated with different business
cycle stages.
Indicate whether each of the following is a source or use of cash: a. An increase in accounts
receivable b. A decrease in inventories c. An increase in accounts payable d. A decrease in a
bank loan e. An increase in retained earnings
Number One Retail, Inc. has a gross profit of $55 million, operating expenses of $22 million
(which includes $6 million in depreciation and amortization), and interest expenses of $8
million. Its corporate tax rate is 35 percent. Calculate the firm's earnings before interest, taxes,
depreciation, and amortization (EBIT
How many years will it take for $850 per year to accumulate to $20,000 if the interest rate is
8%?
Wholesale Lumber, Ltd. is a firm that distributes lumber to building supply and home
improvement retail stores. The firm's cost of sales for the most recent year was $45 million, its
beginning inventory was $16 million, and its ending inventory was $18 million. Estimate
Wholesale Lumber's purchases of lumber materials
IOU Inc. has EBIT of $58,000, depreciation and amortization of $12,000, interest expenses of
$21,000, principal repayments of $17,000, and a tax rate of 35 percent. Calculate IOU Inc.'s
interest coverage ratio and debt service coverage ratio.
How much is a guaranteed promise of $15,750 to be received in 12 years' worth today if interest
is 14%?
Griffin Ross Construction Inc. (GRC) builds upscale homes in several New England cities. The
firm is subject to the ups and downs of the construction industry and has a historical beta of 2.1.
GRC has traditionally operated with a capital structure of approximately 20% debt and 80%
equity. The owner Griffin Ross, is in
What is the payback period of a project with average annual cash outflows of $8,000, average
annual cash inflows of $10,000, and an initial investment of $13,000?
At what interest rate will $1,000 grow into $3,642.50 in 15 years?
Bigco's balance sheet one year ago indicated retained earnings of $450 million. This year,
Bigco's net income was $35 million. It paid its preferred shareholders a dividend of $5 million
and paid its common shareholders a regular dividend of $6 million, along with a special one-time
dividend of $10 million. What should
If you deposit $207.86 in an account that pays 4% and leave it there for 12 years how much will
you have in the accounts?
Identify the sources and uses of cash for Home Depot by comparing the 2011 and 2012 balance
sheets.
Describe Porter's Five Forces that govern the competition within an industry. Compare and
contrast the Porter analysis for the utilities industry.
What interest rate will make $7,500 per year accumulate to $279,600 in 15 years?
How do sole proprietorships, general partnerships, limited liability companies, S corporations,

and C corporations differ?
Randall Corporation has a relevant range extending to 31,500 units each month. The following
performance report provides information about Randall's budget and actual performance for
November.RequirementFill in all missing numbers in the table. Be sure to label any variances as
favorable or unfavorable.
Dakota Corporation is preparing its balanced scorecard for the past quarter. The balanced
scorecard contains four perspectives: financial, customer, internal business process, and learning
and growth. Through its strategic management planning process, Dakota Corporation has
selected two specific objectives for each of
Refer to the Epic Sports Data Set. Compute each division's residual income. Interpret your
results. Are your results consistent with each division's ROI? Epic Sports Company makes
snowboards, downhill skis, cross-country skis, skateboards, surfboards, and in-line skates. The
company has found it beneficial to split op
Explain how the cash flow cycle works.
What is the profitability index for the project? Of a simple one-period project with an initial
investment of $12,000 and an expected net cash flow in one year of $15,000, assuming a
discount rate of 8 percent?
Refer to the Popping Bubbles' data in P10-49B. The company sold 70,000 bubble kits during
March and its actual operating income was as follows: Data in P10-49B Requirements 1. Prepare
an income statement performance report for October. 2. What accounts for most of the difference
between actual operating income and
The following is a partial performance report for a revenue center for the Southwest Division of
Hosta Restaurants. Fill in the missing amounts. Indicate whether each variance is favorable (F)
or unfavorable (U).
Each autumn, as a hobby, Joann Denton weaves cotton placemats to sell at a local craft shop.
The mats sell for $20 per set of four mats. The shop charges a 15% commission and remits the
net proceeds to Denton at the end of December. Denton has woven and sold 22 sets in each of
the last two years. She has enough cotton
NYC Paints is a national paint manufacturer and retailer. The company is segmented into five
divisions: Paint Stores (branded retail location), Consumer (paint sold through stores such as
Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and
Administration. The following is select
Last month, Talley Corporation purchased and used the same quantity of material in producing
its product, speed bumps for traffic control. Complete the following table.
Newton Industries has a relevant range extending to 31,800 units each month. The following
performance report provides information about Newton's budget and actual performance for
April:RequirementFill in all missing numbers in the table. Be sure to label any variances as
favorable or unfavorable.
Dyson, the vacuum cleaner manufacturer, made a large investment in a battery technology firm,
Sakti3. Sakti3 is a Michigan-based start-up that is working on a solid-state battery. These solid-
state batteries would last approximately twice as long as current lithium-ion batteries. Solid-state
batteries also do not use l
The Blue Lamp, a local Italian restaurant, expects sales to be $400,000 in January. Its average
customer restaurant bill is $50. Only 15% of the restaurant bills are paid with cash; 75% are paid
with credit cards, and 10% with debit cards. The transaction fees charged by the credit and debit
card issuers are as follows
The following is a partially completed performance report for Sunshine Pools. 1. How many
pools did Sunshine Pools originally think it would install in April? 2. How many pools did
Sunshine Pools actually install in April? 3. How many pools is the flexible budget based on?
Why? 4. What was the budgeted sales price
Wellfleet Corporation is preparing its operating expenses budget. The budgeted unit sales for the
upcoming quarter are as follows: The company's variable operating expenses are $3.00 per unit.
Fixed monthly operating expenses include $5,700 for salaries, $3,800 for office rent, and $2,900
for depreciation. How much op
Birdfeeders Unlimited makes backyard birdfeeders. The company sells the birdfeeders to home
improvement stores for $15 per birdfeeder. Each birdfeeder requires 1.5 board feet of wood,
which the company obtains at a cost of $4 per board foot. The company would like to maintain
an ending stock of wood equal to 10% of the
During the week, the Spartan Restaurant Group's French fry manufacturing facility incurred
1,500 hours of direct labor. Direct laborers were paid $12.20 per hour. The standard hourly labor
rate is $11.80. Standards indicate that for the volume of output actually achieved, the factory
should have used 2,200 hours. Requ
The Production Department of Whistler Manufacturing has prepared the following schedule of
units to be produced over the first quarter of the upcoming year: Each unit requires 6.0 hours of
direct labor. Direct labor workers are paid an average of $19 per hour. How much direct labor
will be budgeted in January, Februar
One subunit of Contest Sports Manufacturing Company had the following financial results last
month: Requirements 1. Complete the performance evaluation report for this subunit (round to
four decimals). 2. Based on the data presented, what type of responsibility center is this subunit?
3. Which items should be inves
City Grow Products is a manufacturer of large flower pots for urban settings. The company has
these standards: Direct materials (resin)..........................................9.2 pounds per pot at a cost of
$4.55 per pound Direct labor............................................................1.6 hours at a cost o
Hugo Medical Supply has applied for a loan. Pacific Commerce Bank has requested a budgeted
balance sheet as of April 30 and a combined cash budget for April. As Hugo Medical Supply's
controller, you have assembled the following information: a. March 31 equipment balance,
$52,600; accumulated depreciation, $41,300 b.
Refer to the Country Designs data set. Prepare a standard cost income statement for the
company's management. Assume that sales were $650,000 and actual marketing and
administrative expenses were $78,000. Country Designs is a manufacturer of large flower pots
for urban settings. The company has these standards: Count
World Class Rings produces class rings. Its best-selling model has a direct materials standard of
16 grams of a special alloy per ring. This special alloy has a standard cost of $63.30 per gram. In
the past month, the company purchased 16,800 grams of this alloy at a total cost of $1,061,760.
A total of 16,300 grams we
Crooked River Coffee purchases green coffee beans from various suppliers and then roasts the
coffee beans in its roasting facility. The roasted beans are sold in 25-pound cases to grocery
stores and restaurants for $70 per case. Each case of roasted coffee beans requires 25 pounds of
unroasted green coffee beans. The c
Stone Canyon Muffins sells its muffins to restaurants and coffee houses for an average selling
price of $27 per case. The following information relates to the budget for Stone Canyon Muffins
for this year (all figures are annual totals unless otherwise noted): Budgeted sales in
cases...................................
Bent Tree Coffee purchases green coffee beans from various suppliers and then roasts the coffee
beans in its roasting facility. The roasted beans are sold in 20-pound cases to grocery stores and
restaurants for $75 per case. Each case of roasted coffee beans requires 20 pounds of unroasted
green coffee beans. The compa
Refer to the Epic Sports Data Set. 1. Compute each division's sales margin. Interpret your results.
2. Compute each division's capital turnover (round to two decimal places). Interpret your results.
3. Use your answers to Question 2 along with your answers to Question 1 to recalculate ROI
using the expanded formula.
Movies are expensive to produce and market. According to IMDb, the most expensive film on
record is Pirates of the Caribbean: On Stranger Tides, with a total budget of $378.5 million.11
This movie and its budget were widely publicized prior to the premiere of the film, and
moviegoers were eager to see the results of th
Monocle Corporation is preparing its manufacturing overhead budget. The direct labor budget
for the upcoming quarter is as follows: The company's variable manufacturing overhead rate is
$1.70 per direct labor hour, and the company's fixed manufacturing overhead is $3,800 per
month. How much manufacturing overhead will
Refer to the Country Designs data set. Assume the company uses a standard cost accounting
system. Country Designs is a manufacturer of large flower pots for urban settings. The company
has these standards: Country Designs allocated fixed manufacturing overhead to production
based on standard direct labor hours. Last
Gutierrez Company, a publicly held corporation, operates a regional chain of large drugstores.
Each drugstore is operated by a general manager and a controller. The general manager is
responsible for the day-to-day operations of the store, while the controller is responsible for the
budget and other financial tasks. Th
Refer to Epic Sports Data Set. 1. Calculate each division's ROI. 2. Top management has extra
funds to invest. Which division will most likely receive those funds? Why? 3. Can you explain
why one division's ROI is higher? How could management gain more insight? Epic Sports
Company makes snowboards, downhill skis, cr
Results from Supreme Corporation's most recent year of operations are presented in the
following table: Operating income ................................................ $ 8,060 Total
assets ........................................................... $15,500 Current liabilities ......................................
Refer to the Outrageous Bubbles data in P10-43A. The company sold 60,000 bubble kits during
March, and its actual operating income was as follows: Requirements 1. Prepare an income
statement performance report for March. 2. What accounts for most of the difference between
actual operating income and master budget op
Assume the Small Components Division of Martin Manufacturing produces a video card used in
the assembly of a variety of electronic products. The division's manufacturing costs and variable
selling expenses related to the video card are as follows: Cost per unit Direct
materials........................................
Jubilee Company segments its company into four distinct divisions. The net revenues, operating
profit, and total assets for these divisions are disclosed in the footnotes to Jubilee Company's
consolidated financial statements and the following presented information: Notes to
Consolidated Financial Statements Note 1-B
Dollar Discount Store is a local discount store with the following information: â€¢ October sales
are projected to be $300,000. â€¢ Sales are projected to increase by 10% in November and
another 20% in December and then return to the October level in January. â€¢ 25% of sales are
made in cash, while the remaining 75
Caesars Entertainment Corporation reports several types of revenues in its Form 10-K, including
Casino, Food and Beverage, Rooms, and Other. Questions 1. Would Caesars PalaceÂ® Las
Vegas be likely to use these categories (as listed in the Form 10-K for Caesars Entertainment
Corporation) as its segments in its interna
Caesars PalaceÂ® Las Vegas will use budgets to make its financial plans. Let's assume that
Caesars prepares budgets for each of its hotel towers, including the new Julius Tower. Here is a
list of budgeting assumptions10 for the Julius Tower for 2016: Data table for Julius Tower
budget assumptions Number of hotel room
BOGO Company segments its company into four distinctive divisions. The net revenues,
operating profit, and total assets for these divisions are disclosed in the footnotes to BOGO
Company's consolidated financial statements and presented here. Corporate includes the costs of
our corporate headquarters, centrally manage

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