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> Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2021 are as follows: The company records sales net of employee discounts. Employee discounts for 2021 totaled $4,000. Required: Estimate Sparro

> Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2021, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company w

> Home Stop sells two product categories, furniture and accessories. Information pertaining to its 2021 year-end inventory is as follows: Required: 1. Determine the carrying value of inventory at year-end, assuming the lower of cost or market (LCM) rule is

> Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows. The cost to sell for each product consists of a 15 percent sales commission. The normal profit for each product is 40 percent of the selling

> Refer to the situation described in BE 11–17. Assume that the present value of the estimated future cash flows generated from the division’s assets is $22 million and that their fair value approximates fair value less costs to sell. What amount of impair

> Almaden Hardware Store sells two product categories, tools and paint products. Information pertaining to its 2021 year-end inventory is as follows: Required: 1. Determine the carrying value of inventory at year-end, assuming the lower of cost or net real

> In November 2021, the Brunswick Company signed two purchase commitments. The first commitment requires Brunswick to purchase 10,000 units of inventory at $10 per unit by December 15, 2021. The second commitment requires the company to purchase 20,000 uni

> Capwell Corporation uses a periodic inventory system. The company’s ending inventory on December 31, 2021, its fiscal-year end, based on a physical count, was determined to be $326,000. Capwell’s unadjusted trial balance also showed the following account

> The December 31, 2021, inventory of Tog Company, based on a physical count, was determined to be $450,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $50,000. The purchase was recorded and pa

> You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2021, you discover the following errors related to the 2019 and 2020 financial statements: a. Inventory at December 31, 2019, was understated by $6,00

> Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2021, the company decided to switch to the average cost method. Data for 2021 are as follows: Additional Information: a. Th

> On January 1, 2021, Pet Friendly Stores adopted the retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2021 and 2022 are as follows: Required: 1. Estimate the 2021 and 2022 ending inventory and cost of goods sol

> Raleigh Department Store uses the conventional retail method for the year ended December 31, 2019. Available information follows: a. The inventory at January 1, 2019, had a retail value of $45,000 and a cost of $27,500 based on the conventional retail me

> On January 1, 2021, HGC Camera Store adopted the dollar-value LIFO retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2021 and 2022 are as follows: Required: Estimate the 2021 and 2022 ending inventory and cost

> Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2021, the records indicate the following data: Required: Assuming the price level increased from 1.00 at January 1 to 1.10 at December 31, 2021, use the dollar-valu

> Refer to the situation described in BE 11–17. Assume that the undiscounted sum of estimated future cash flows is $24 million instead of $28 million. What amount of impairment loss should C&R recognize? Data from BE 11-17: Collison and Ryder Company (C&R

> The following account balances were taken from the 2021 adjusted trial balance of the Bowler Corporation: sales revenue, $325,000; cost of goods sold, $168,000; salaries expense, $45,000; rent expense, $20,000; depreciation expense, $30,000; and miscella

> The adjusted trial balance of Pacific Scientific Corporation on December 31, 2021, the end of the company’s fiscal year, contained the following income statement items ($ in millions): sales revenue, $2,106; cost of goods sold, $1,240; selling expense, $

> Consider a project lasting one year only. The initial outlay is $1,000, and the expected inflow is $1,200. The opportunity cost of capital is r = .20. The borrowing rate is rD = .10, and the tax shield per dollar of interest is Tc = .21. a. What is the p

> Suppose Wishing Well (see Problem 6) is evaluating a new motel and resort on a romantic site in Madison County, Wisconsin. Explain how you would forecast the after-tax cash flows for this project. (Hints: How would you treat taxes? Interest expense? Cha

> Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 10.2%: WACC = (1 − Tc)rD D/V + rE E/V = (1 − .21)(.085)(.40) + .125(.60) = .102 Goldensacks Company is advising Nevada Hydro to issue $75 million of preferred stock at a divi

> Table 19.4 shows a simplified balance sheet for the Dutch manufacturer Rensselaer Felt. Calculate this company’s weighted-average cost of capital. The debt has just been refinanced at an interest rate of 6% (short term) and 8% (long ter

> Table 19.3 shows a book balance sheet for the Wishing Well Motel chain. The company’s long-term debt is secured by its real estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 10% interest o

> Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company’s shares is 12%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? b. Suppose the company issues debt, repurchases shares,

> Take another look at the valuations of Rio in Tables 19.1 and 19.2. Now use the live spreadsheets in Connect to show how Rio’s value depends on: a. The forecasted long-term growth rate. b. The required amounts of investment in fixed assets and working ca

> Take another look at the APV calculation for the perpetual crusher project in Section 19-4. This time assume that the corporation investing in the project has hit the 30% constraint on interest deductions as a percentage of EBITDA. How does the constrain

> Calculate the weighted-average cost of capital (WACC) for Federated Junkyards of America, using the following information: 1) Debt: $75,000,000 book value outstanding. The debt is trading at 90% of book value. The yield to maturity is 9%. 2) Equity: 2,5

> True or false? a. Financial slack means having cash in the bank or ready access to the debt markets. b. Financial slack is most valuable to firms with few investment opportunities and poor prospects. c. Managers with excessive financial slack may be temp

> Suppose the current price of gold is $1,200 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. What is the p

> The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory predict about the relationship between book profitabil

> True or false? a. If the probability of default is high, managers and stockholders will be tempted to take on excessively risky projects. b. If the probability of default is high, stockholders may refuse to contribute equity even if the firm has safe pos

> This question tests your understanding of financial distress. a. What are the costs of going bankrupt? Define these costs carefully. b. “A company can incur costs of financial distress without ever going bankrupt.” Explain how this can happen. c. Explain

> Look at some real companies with different types of assets. What operating problems would each encounter in the event of financial distress? How well would the assets keep their value?

> On February 29, 2019, when PDQ Computers announced bankruptcy, its share price fell from $3.00 to $.50 per share. There were 10 million shares outstanding. Does that imply bankruptcy costs of 10 × (3.00 – .50) = $25 million? Explain.

> What is the relative tax advantage of corporate debt if the corporate tax rate is Tc = .21, the personal tax rate is Tp = .37, but all equity income is received as capital gains and escapes tax entirely (TpE = 0)? How does the relative tax advantage chan

> Look back at the Johnson & Johnson example in Section 18-1. Suppose Johnson & Johnson increases its long-term debt to $45 billion. It uses the additional debt to repurchase shares. Reconstruct Table 18.4B with the new capital structure. How much addition

> People often convey the idea behind MM’s proposition 1 by various supermarket analogies, for example, “The value of a pie should not depend on how it is sliced,” or, “The cost of a whole chicken should equal the cost of assembling one by buying two drums

> Consider the following three tickets: Ticket A pays $10 if is elected as president, ticket B pays $10 if is elected, and ticket C pays $10 if neither is elected. (Fill in the blanks yourself.) Could the three tickets sell for less than the present value

> Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the capital asset pricing model is correct. Gamma pays taxes at a marginal rate of 25%. Draw a graph plotting Gamma’s cost of equity and

> There is an active, competitive leasing (i.e., rental) market for most standard types of commercial jets. Many of the planes flown by the major domestic and international airlines are not owned by them but leased for periods ranging from a few months to

> Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds at an interest rate of 7% and has a debt value of $200

> Hubbard’s Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12% and the rate of interest on the bonds is 6%. Assuming that the bonds are default-risk-free, draw a graph that shows the expected return o

> Look back to Section 17-1. Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate. a. What are rA and rE? b. Su

> “MM totally ignore the fact that as you borrow more, you have to pay higher rates of interest.” Explain carefully whether this is a valid objection.

> What is wrong with the following arguments? a. As the firm borrows more and debt becomes risky, both stock- and bondholders demand higher rates of return. Thus, by reducing the debt ratio, we can reduce both the cost of debt and the cost of equity, makin

> Suppose that new security designs could be patented.14The patent holder could restrict use of the new design or charge other firms royalties for using it. What effect would such patents have on MM’s capital-structure irrelevance theory?

> Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy ba

> Here are key financial data for House of Herring Inc.: House of Herring plans to pay the entire dividend early in January 2026. All corporate and personal taxes were repealed in 2024. a. Other things equal, what will be House of Herringâ€&#153

> Go back to the first Rational Demiconductor balance sheet. Now assume that Rational wins a lawsuit and is paid $1 million in cash. Its market capitalization rises by that amount. It decides to pay out $2 per share instead of $1 per share. Explain what ha

> Suppose that you are considering investing in an asset for which there is a reasonably good secondary market. Specifically, your company is Delta Airlines, and the asset is a Boeing 757—a widely used airplane. How does the presence of a secondary market

> In 2017, Entergy paid a regular quarterly dividend of $.89 per share. a. Match each of the following dates. b. On one of these dates, the stock price fell by about $.89. Which date? Why? c. Entergy’s stock price in November 2017 was abo

> In April 2019, Van Dyck Exponents offered 100 shares for sale in an IPO. Half of the shares were sold by the company and the other half by existing shareholders, each of whom sold exactly half of their existing holding. The offering price to the public w

> Find the prospectus for a recent IPO. How do the issue costs compare with, a. Those of the Marvin issue? b. Those shown in Table 15.3? Can you suggest reasons for the differences?

> Refer to Section 15.1 and the Marvin Prospectus Appendix at the end of this chapter to answer the following questions. a. If there is unexpectedly heavy demand for the issue, how many extra shares can the underwriters buy? b. How many shares are to be so

> Complete the passage using the following terms: limited partners, venture capital, private, underwriters, general partners, private equity, corporate ventures, partnerships, private, angel investors. (Note: Not all terms will be used) Equity capital in y

> True or false? a. Venture capital companies know that managers are more likely to work hard if they can be assured of a good steady salary. b. Venture capital companies generally advance the money in stages. c. Venture capital companies are generally pas

> Look at Marvin’s first attempt to raise financing. (Refer to Section 15.1 and the Marvin Prospectus in the appendix at the end of this chapter.) Suppose that First Meriam decides that Marvin’s shares are worth only $0.80 each. a. How many shares will Ma

> Ethelbert.com is a young software company owned by two entrepreneurs. It currently needs to raise $400,000 to support its expansion plans. A venture capitalist is prepared to provide the cash in return for a 40% holding in the company. Under the plans f

> True or false? a. Venture capitalists typically provide first-stage financing sufficient to cover all development expenses. Second-stage financing is provided by stock issued in an IPO. b. Underpricing in an IPO is only a problem when the original invest

> Problem 23 contains details of a rights offering by Pandora Box. Suppose that the company had decided to issue new stock at €4. How many new shares would it have needed to sell to raise the same sum of money? Recalculate the answers to questions (b) to (

> Your brother-in-law wants you to join him in purchasing a building on the outskirts of town. You and he would then develop and run a Taco Palace restaurant. Both of you are extremely optimistic about future real estate prices in this area, and your broth

> Spike Equino is the CEO of a private medical equipment company that is proposing to sell 100,000 shares of its stock in an open auction. Suppose the company receives the bids in the following table. a. What will be the company’s total r

> Fishwick Enterprises has 200,000 shares outstanding, half of which are owned by Jennifer Fishwick and half by her cousin. The two cousins have decided to sell 100,000 shares in an IPO. Half of these shares would be issued by the company to raise new cash

> Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After three months, my investment record is as follows: a. What is the average underpricing in dollars of this sample of IPOs? b. What is

> Each of the following terms is associated with one of the events beneath. Can you match them up? a. Best efforts b. Bookbuilding c. Shelf registration d. Rule 144A Events: A. Investors indicate to the underwriter how many shares they would like to buy i

> Which of the following features would increase the value of a corporate bond? Which would reduce its value? a. The bond is convertible into shares. b. The bond is secured by a mortgage on real estate. c. The bond is subordinated.

> In 2018, Beta Corporation earned gross profits of $760,000. a. Suppose that Beta was financed by a combination of common stock and $1 million of debt. The interest rate on the debt was 10%, and the corporate tax rate in 2018 was 21%. How much profit was

> Suppose that East Corporation has issued voting and nonvoting stock. Investors hope that holders of the voting stock will use their power to vote out the company’s incompetent management. Would you expect the voting stock to sell for a higher price? Expl

> Saga City has a declassified board with nine directors. a. How many directors come up for election each year? b. Would Saga be more or less vulnerable to a hostile takeover if it had a classified board?

> What do we mean when we say that stockholders have control rights and residual cash flow rights? How in practice do they exercise their control rights?

> True or false? a. Banks are huge investors in corporate equity. b. Insurance companies are huge investors in corporate debt. c. Rather than investing directly in corporate equities, most households prefer to pool their risk in a hedge fund. d. Many indiv

> Look back to the cash flows for projects F and G in Section 5-3. The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from eac

> True or false? a. Net stock issues by U.S. nonfinancial corporations in most years are small but positive. b. Most capital investment by U.S. companies is funded by retained earnings and reinvested depreciation. c. Debt ratios in the United States are lo

> True or false? a. In the United States, most common shares are owned by individual investors. b. An insurance company is a financial intermediary. c. Investments in partnerships cannot be publicly traded.

> We mention several causes of the financial crisis. What other causes can you identify? You will probably want to review some of the entries under Further Reading before you answer.

> Construct a timeline of the important events in the financial crisis that started in the summer of 2007. When do you think the crisis ended? You will probably want to review some of the entries under Further Reading before you answer.

> Some individuals are eager to spend income before it arrives; others want to postpone consumption. Give some examples of intermediaries that provide services to these individuals.

> Explain briefly how each of the following allow individuals or companies to spread their risk: a. An exchange traded fund. b. Commodity markets. c. A life insurance company.

> Financial markets and intermediaries channel savings from investors to corporate investment. The savings make this journey by many different routes. Give a specific example for each of the following routes: a. Investor to financial intermediary, to finan

> True or false? a. Exchange traded funds are hedge funds that can be bought and sold on the stock exchange. b. Hedge funds provide small investors with low-cost diversification. c. The sale of insurance policies is a source of financing for insurance comp

> Which of the following are financial markets? a. NASDAQ. b. Vanguard Explorer Fund. c. JP Morgan Chase. d. Chicago Mercantile Exchange.

> True or false? a. Financing for public corporations must flow through financial markets. b. Financing for private corporations must flow through financial intermediaries. c. Almost all foreign exchange trading occurs on the floors of the FOREX exchanges

> The Finance in Practice box in Section 1-2 describes three corporate practices that have been criticized as unethical. Select one of these and discuss at what point (if any) the practice slide into unethical behavior does.

> Fill in the blanks, using the following terms: floating rate, common stock, convertible, subordinated, preferred stock, senior, warrant. a. If a lender ranks behind the firm’s general creditors in the event of default, his or her loan is said to be. b.

> Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to contradict the weak, semistrong, or strong form of the efficient-market hypothesis. a. Tax-exempt municipal bonds offer lower pretax re

> Fama and French show that average stock returns on firms with small market capitalizations have been significantly higher than average returns for “large-cap” firms. What are the possible explanations for this result? Does the result disprove market effi

> Reliable Electric, a major Ruritanian producer of electrical products, is considering a proposal to manufacture a new type of industrial electric motor that would replace most of its existing product line. A research breakthrough has given Reliable a two

> “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not so.

> Explain why setting a higher discount rate is not a cure for upward-biased cash-flow forecasts.

> Draw up an outline or flowchart tracing the capital budgeting process from the initial idea for a new investment project to the completion of the project and the start of operations. Assume the idea for a new obfuscator machine comes from a plant manager

> Explain how each of the following actions or problems can distort or disrupt the capital budgeting process. a. Overoptimism by project sponsors. b. Inconsistent forecasts of industry and macroeconomic variables. c. Capital budgeting organized solely as a

> True or false? a. The approval of a firm’s capital budget allows managers to go ahead with any project included in the budget. b. Capital budgets and project authorizations are mostly developed “bottom up.” Strategic planning is a “top-down” process. c.

> You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 30,000 units per year Unit price: $50 Variable cost: $30 Fixed cost: $300,000 The project will last for

> What is the NPV of the electric scooter project under the following scenario? Unit sales are 20% below expectations. Unit price is 10% below expectations. Unit variable cost remains at 50% of revenue. Fixed costs increase by 5%. Investment in plant and e

> A project currently generates sales of $10 million, variable costs equal 50% of sales, and fixed costs are $2 million. The firm’s tax rate is 21%. What are the effects of the following changes on cash flow? a. Sales increase from $10 million to $11 milli

> Emperor’s Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of five years, and expected sales are 6 million jars of makeup a year. Fixed costs are $2 million a year, and variable costs ar

> Use the spreadsheet for the guano project in Chapter 6 to undertake a sensitivity analysis of the project. Make whatever assumptions seem reasonable to you. What are the critical variables? What should the company’s response be to your analysis?

> The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cu

> Respond to the following comments: a. “The random-walk theory, with its implication that investing in stocks is like playing roulette, is a powerful indictment of our capital markets.” b. “If everyone believes you can make money by charting stock prices,

> Decision trees Magna Charter is a new corporation formed by Agnes Magna to provide an executive flying service for the southeastern United States. The founder thinks there will be a ready demand from businesses that cannot justify a full-time company pla