A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity, but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Unable to deliver on orders, the company became so strapped for cash that employee paychecks began to bounce. Finally, out of cash, the company ceased operations entirely three years later. Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?
> For each general fund transaction in items 1 through 12, select its appropriate recording next to letters A through O. A letter may be selected once, more than once, or not at all. Recording of Transactions A. Credit Revenues B. Debit Expenditures C
> After all noncash assets have been converted into cash in the liquidation of the Adam and Kay Partnership, the ledger contains the following account balances: Available cash should be distributed with $32,000 going to accounts payable and then $
> Governmental accounting gives substantial recognition to budgets, which are being recorded in the governmental unit’s accounts. Required: What is the purpose of a governmental accounting system, and why is the budget recorded in the accounts
> On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account, which records the acquisition cost of fixed assets, minus the accumulated depreciation (AD) account, which records the total depreciation taken by t
> Imprudential, Inc., has an unfunded pension liability of $550 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6.4 per
> Gordon Driving School’s 2014 balance sheet showed net fixed assets of $1.32 million, and the 2015 balance sheet showed net fixed assets of $1.51 million. The company’s 2015 income statement showed a depreciation expense of $137,000. What was the company’
> Barrett, Inc., has sales of $19,800, costs of $10,900, depreciation expense of $2,100, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?
> You are planning to save for retirement over the next 30 years. To do this, you will invest $750 per month in a stock account and $250 per month in a bond account. The return of the stock account is expected to be 11 percent per year, and the bond accoun
> In Problem 21, suppose the firm wishes to keep its debt–equity ratio constant. What is EFN now?
> Draw up an income statement and balance sheet for this company for 2014 and 2015.
> First Simple Bank pays 4.1 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10
> The discussion of EFN in the chapter implicitly assumed that the company was operating at full capacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90 percent capacity. Full-capacity sales would be $1,000/.90 = $1,
> Consider the following abbreviated financial statements for Weston Enterprises: a. What is owners’ equity for 2014 and 2015? b. What is the change in net working capital for 2015? c. In 2015, Weston Enterprises purchased $2,350 in new
> What is the future value in six years of $1,000 invested in an account with an APR of 7.5 percent, a. Compounded annually? b. Compounded semiannually? c. Compounded monthly? d. Compounded continuously? e. Why does the future value increase as the compoun
> The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expense
> Cusic Industries had the following operating results for 2015: sales 5 $20,300; cost of goods sold 5 $14,500; depreciation expense 5 $2,900; interest expense 5 $690; dividends paid 5 $660. At the beginning of the year, net fixed assets were $15,470, curr
> The discussion of EFN in the chapter implicitly assumed that the company was operating at full capacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90 percent capacity. Full-capacity sales would be $1,000/.90 = $1,
> Shelton, Inc., has sales of $435,000, costs of $216,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What is the
> In Problem 18, suppose Rainbow Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the change in the firm’s long-t
> One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will charge 1.1 percent per month interest on the overdue balance. If the current balance is $18,450, how long will
> The discussion of EFN in the chapter implicitly assumed that the company was operating at full capacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90 percent capacity. Full-capacity sales would be $1,000/.90 = $1,
> During 2015, Rainbow Umbrella Corp. had sales of $590,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $455,000, $85,000, and $125,000, respectively. In addition, the company had an interest expense of $65,000
> Well-known financial writer Andrew Tobias argues that he can earn 177 percent per year buying wine by the case. Specifically, he assumes that he will consume one $10 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay $10 per week o
> In addition to common- size financial statements, common–base year financial statements are often used. Common–base year financial statements are constructed by dividing the current year account value by the base year
> Corporation Growth has $82,500 in taxable income, and Corporation Income has $8,250,000 in taxable income. a. What is the tax bill for each firm? b. Suppose both firms have identified a new project that will increase taxable income by $10,000. How much
> First National Bank charges 10.3 percent compounded monthly on its business loans. First United Bank charges 10.5 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?
> The DuPont identity presented in the chapter is commonly referred to as the three-factor DuPont identity. Another common way that the DuPont identity is expressed is the five-factor model, which is: Derive the five-factor DuPont identity (EBT is earnings
> Josipovich, Inc., is obligated to pay its creditors $11,300 very soon. a. What is the market value of the shareholders’ equity if assets have a market value of $12,400? b. What if assets equal $9,600?
> Compute the future value of $1,000 compounded annually for a. 10 years at 6 percent. b. 10 years at 12 percent. c. 20 years at 6 percent. d. Why is the interest earned in part (c) not twice the amount earned in part (a)?
> Find the APR, in each of the following cases: APR Number of Times Compounded EAR Semiannually 8.9% Monthly 18.8 Weekly 10.4 Infinite 13.6
> Panda Inc.’s net income for the most recent year was $9,620. The tax rate was 34 percent. The firm paid $2,380 in total interest expense and deducted $3,170 in depreciation expense. What was the company’s cash coverage ratio for the year?
> Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales 5 $44,000; costs 5 $27,500; addition to retained earnings 5 $5,200; dividends paid 5 $1,670; interest expense 5 $1,850; tax rate 5 40 percent.
> A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expan
> Find the EAR in each of the following cases: APR Number of Times Compounded EAR 6.7% Quarterly 12.4 Monthly 9.8 Daily 8.4 Infinite
> The Whisenhunt Company has a ratio of long-term debt to long-term debt and equity of .29 and a current ratio of 1.20. Current liabilities are $1,280, sales are $6,140, profit margin is 8.9 percent, and ROE is 17.6 percent. What is the amount of the firm’
> Schwert Corp. shows the following information on its 2015 income statement: sales = $215,000; costs = $117,000; other expenses = $6,700; depreciation expense = $18,400; interest expense = $10,000; taxes = $25,370; dividends = $9,500. In addition, you’re
> A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expan
> The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $12,000 per year forever. If the required return on this investment is 4.7 percent, how much will you pay for the policy? Suppose the Perpetual L
> A company has net income of $314,000 a profit margin of 8.9 percent, and an accounts receivable balance of $152,800. Assuming 80 percent of sales are on credit, what is the company’s days’ sales in receivables?
> Synovec Company has a debt–equity ratio of .70. Return on assets is 8.4 percent, and total equity is $840,000. What is the equity multiplier? Return on equity? Net income?
> During the year, the Senbet Discount Tire Company had gross sales of $925,000. The firm’s cost of goods sold and selling expenses were $490,000 and $220,000, respectively. Senbet also had notes payable of $740,000. These notes carried an interest rate of
> A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expan
> An investment offers $5,650 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?
> The Optical Scam Company has forecast a sales growth rate of 15 percent for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the external funds needed for next year. b. Construct the firm&acir
> A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expan
> The Stancil Corporation provided the following current information: Determine the cash flows from the firm and the cash flows to investors of the firm. Proceeds from long-term borrowing $17,800 Proceeds from the sale of common stock 5,000 Purchases o
> Investment X offers to pay you $3,900 per year for nine years, whereas Investment Y offers to pay you $6,100 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is
> Prince Albert Canning PLC had a net loss of £26,832 on sales of £294,813. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? Why? In dollars, sales were $372,484. What was the net
> Ritter Corporation’s accountants prepared the following financial statements for year-end 2015: a. Explain the change in cash during 2015. b. Determine the change in net working capital in 2015. c. Determine the cash flow generated by t
> A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analyzing financial ratios for a company: Time trend analysis and peer group analysis. In time trend
> Wilkinson Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24Â percent? Year Cash Flow $
> A and Firm B have debt–total asset ratios of 25 percent and 40 percent and returns on total assets of 8 percent and 7 percent, respectively. Which firm has a greater return on equity?
> Why is the goal of financial management to maximize the current value of the company’s stock? In other words, why isn’t the goal to maximize the future value?
> Referring back to the Ford example at the beginning of the chapter, note that we suggested that Ford’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?
> Given the information for Jordan’s Golf Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2015 was $975,000 and that the firm reduced its net working capital investment by $132,000. What was the firm
> Compute the future value of $1,900 continuously compounded for a. 9 years at an APR of 12 percent. b. 5 years at an APR of 8 percent. c. 17 years at an APR of 5 percent. d. 10 years at an APR of 9 percent.
> The Wintergrass Company has an ROE of 11.4 percent and a payout ratio of 25 percent. a. What is the company’s sustainable growth rate? b. Can the company’s actual growth rate be different from its sustainable growth rate? Why or why not? c. How can the c
> A ratio that is becoming more widely used is return on investment. Return on investment is calculated as net income divided by long- term liabilities plus equity. What do you think return on investment is intended to measure? What is the relationship bet
> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March
> Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Larry Ellison of Oracle has been one of the best-compensated CEOs in the United States, ea
> True or false: All assets are liquid at some price. Explain.
> Could a company’s cash flow to stockholders be negative in a given year? (Hint: Yes.) Explain how this might come about. What about cash flow to creditors?
> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March
> The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed $510,000 in the common stock account and $3.6 million in the additional paid-in surplus account. The 2015 balance sheet showed $545,000 and $3.85 million in the same two accounts, respectively. I
> Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $360 million. Current assets, fixed assets, and short-term debt are 20 percent, 75 percent,
> Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it be more useful than ROA in comparing two companies?
> Could a company’s change in net working capital be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?
> Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?
> The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $1.625 million, and the 2015 balance sheet showed long-term debt of $1.73 million. The 2015 income statement showed an interest expense of $185,000. What was the firm’s cash flo
> The most recent financial statements for Williamson Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $9,0
> Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkie under the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of $1,100
> As you increase the length of time involved, what happens to future values? What happens to present values?
> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March
> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March
> Why is it not necessarily bad for the operating cash flow to be negative for a particular period?
> One of the implicit assumptions we made in calculating the external funds needed was that the company was operating at full capacity. If the company is operating at less than full capacity, how will this affect the external funds needed?
> The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago: During the past year, the company issued 5 million shares of new stock at a total price of $63 million, and issu
> Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover = 2.85 Profit margin = 5.9% Equity multiplier = 1.70 Payout ratio = 60%
> One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not converted into a common- size statement. Why do you th
> Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?
> Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March
> If the Hunter Corp. has a ROE of 12 percent and a payout ratio of 15 percent, what is its sustainable growth rate?
> Sankey, Inc., has current assets of $4,900, net fixed assets of $25,000, current liabilities of $4,100, and long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How much is net working capital?
> At 6.5 percent interest, how long does it take to double your money? To quadruple it?
> Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?
> On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain.
> The most recent financial statements for Wise Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum incre
> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 7% $ 1,284 810 12 4,341 16,500 17 402,662 21,500 8 147,350
> Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate? Do you know,
> How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?
> Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?
> The Stefani Co. had $198,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal tax rate?
> The most recent financial statements for Heine, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $3,500 was paid, and the company wishes to maintain a constant payout ratio. Next yearâ€&
> First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a $7,000 deposit in each bank, how much more money would you earn from your Second City
> Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 242 4 $ 345 410 8 927 51,700 16 152,184 18,750 27 538,600
> In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the sustainable growth rate for Rosengarten, you will find it
> Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?
> Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?
> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will
> You have just won the lottery. You will receive $4,500,000 today, and then receive 40 payments of $1,600,000. These payments will start one year from now and will be paid every six months. A representative from Greenleaf Investments has offered to purcha
