How do U.S. bank discount yields differ from bond equivalent yields?
> Tina ‘ s Business Inc. bought machines some time ago for $25,000. She decided to sell all the assets from this pool at the end of this year. The pool of assets had a UCC of $5,000 before the sale, and the whole asset class was sold for $45,000. Calculate
> Suppose Prince Rupert Fly ‘ n ’ Fish Inc. (see Practice Problem 48) decides to sell its first aircraft for $50,000 in year 2 (purchased for $90,000 in year 1). As before, the second plane costs $100,000 and is bought and put in service in year 2. Find th
> What is moral hazard and why did it become the buzz word of the 2008 financial crisis?
> Determine liquidity ratios including working capital ratio, current ratio, and quick ratio for year 2. Explain the differences among the ratios.
> What is the apparent tax rate (tax paid as a percentage of net income) for firms A and B in Practice Problem 46?
> Suppose firms A and B have identical revenues and operating expenses, so that each has earnings before amortization and taxes of exactly $1 million. Both firms will report amortization of $250,000 on their public financial statements. On its tax return,
> Omar ’s business purchased several pieces of machinery some time ago for $25,000. At the beginning of the current year, this pool of assets had a UCC of $15,000. During the year, Omar decided to sell all the assets from this pool. For each of the three s
> Adam has saved C$1,000 and plans to go surfing in Australia next summer. He won’t need the money for a year, so he decides to invest it. Adam could invest the money in Canada, where a T‐bill will earn 4.5 percent, and then convert it to Australian dollar
> You are a financial advisor and one of your clients comes to you with a convertible bond that has a coupon rate of 8 percent. The market interest rate is 6 percent. The share price of the company that issued the bond is going down, and you don’t expect t
> Determine leverage ratios, including debt ratio and debt‐equity ratio, in both years. Has Excelsior Inc. improved on its leverage ratios in year 2? Year 2 Statement of Comprehensive Income (SMillion) Net sales 1,850 Taxable income
> Explain yield to maturity in terms of the spot rate.
> Calculate the fixed asset turnover for Finns ’ Fridges for years 1 and 2 (note that net fixed assets correspond to “property and equipment (net)” on the company ’ s statement of financial position). Has the company become more or less productive in terms
> Find the operating margin for Finns ’ Fridges for both years (you may assume that the net operating income is equal to the firm ’ s EBIT). Was there an increase or a decrease in the operating margin, and is this a good trend or a bad one?
> How have management compensation schemes been designed to better align owner-manager interests? How well have these schemes performed in this regard?
> We can calculate cash flow from operations (CFO) as net income + non‐cash expenses + change in working capital ignoring cash. In year 2, the change in working capital for Finns ’ Fridges was -$25. Find the CFO and use this figure to calculate the cash fl
> In year 1, a firm had cash and cash equivalents of $150,000, accounts receivable of $35,000, and inventories of $23,000. In year 2, it had cash and cash equivalents of $80,000, accounts receivable of $20,000, and inventories of $15,000. Calculate the cha
> The managers of Corine ’ s Candies like to use the EBITDA multiple to value the firm. EBITDA was approximately $10 million in 2016. Use the market value of equity from Practice Problem 34 and a debt value of $20 million to find the total enterprise valu
> At maturity, each of the following zero coupon bonds (pure discount bonds) will be worth $1,000. For the following each bond, fill in the missing quantity in table. Assume semi‐annual compounding. Price Maturity (Years) Yield to Mat
> The shares of Corine ’ s Candies Inc. are currently trading at $18.20. There are four million shares outstanding. The company ’ s 2016 net income was $5.2 million. Find the market value of equity for the company and the P/E ratio of the shares.
> For each of the following YTM figures, calculate the price and current yield for a 10‐year, 5‐percent, semiannual‐ pay bond with a face value of $1,000. a . YTM = 4 percent b . YTM = 5 percent c . YTM = 6 percent
> For each of the following YTM figures, calculate the price and current yield for a two‐year, 7‐percent, annual‐pay bond with a face value of $1,000. a . YTM = 6 percent b . YTM = 7 percent c . YTM = 8 percent
> Construct a balance sheet and income statement for the business, assuming no income tax.
> Use the average dividend payout ratio from years 1 and 2, and the forecast net income figure from Practice Problem 29, to estimate the total amount of dividends that will be paid by the company in year 3.
> You bought a bond last year for $102.50 and just sold it for $98.50. What has happened to the interest rate over that period?
> How are trusts distinct from corporations?
> Stephen has learned that his great‐aunt intends to give him $ 5,000 each year he is studying at university. Tuition must be paid in advance, so Stephen would like to receive his payments at the beginning of each school year. How much will his great‐aunt
> Calculate book value per share, dividend yield, dividend payout, market‐to‐book ratio, earnings per share, and price‐to‐earnings ratio given the following information: shareholders’ equity is $945,000; number of shares outstanding is 500,000; total divid
> Explain briefly why events in the United States affected countries around the world so drastically.
> Identify and briefly describe the two major stock markets in the United States.
> Explain why global financial markets are so important to Canadians.
> Discuss how the three most important types of financial intermediaries operate.
> How is a traditional bond structured?
> Explain how to calculate the CCA expense for an asset class in a given year.
> Why would firms prefer to receive dividend income and make interest payments rather than make dividend payments and receive interest payments?
> Is the yield to call always greater than the yield to maturity?
> As the CFO of your company, it falls to you to make the final decision on large expenditures. Recently, your controller has proposed purchasing a new computer system at a cost of $50,000. He believes the system will deliver savings of $60,000 in the acco
> What is a bond indenture?
> In what ways are bonds different from mortgages?
> Which sector or sectors of the economy are net providers of financing and which are the net users of financing?
> Why does simple interest take into account the time value of money?
> Explain how simple interest payments are determined.
> Distinguish between real and financial assets.
> What is finance?
> How do cash flow statements alleviate the impact of most major accounting assumptions?
> What happens to the net income figure when a firm’s accountants make more aggressive accounting assumptions? Briefly explain.
> Why can effective rates often be very different from quoted rates?
> Summarize the main responsibilities of the finance function (including CFO, treasurer, and controller) in a non-financial company.
> How does the formula for determining the price of a T-bill resemble the formula for determining the price of a zero coupon bond? Why is this so?
> Why is a 6 percent U.S. mortgage not the same as a 6 percent Canadian mortgage?
> The rowboats Randy purchased (see Practice Problem 25) are a class 7 asset, so they have a CCA rate of 15 percent. Determine the amount of the capital cost allowance for each of the four years the boats will be used (include the “half‐year rule”).
> If you have a retractable bond, under what conditions will you exercise your right to sell the bond back to the bond issuer?
> Suppose that a 6‐percent, annual‐pay, Government of Canada bond that matures in two years has a yield to maturity of 6.75 percent. If inflation is expected to be 2.5 percent per year over the next two years, what coupon rate would you expect to find on a
> Why is there no simple analytical formula for the yield to maturity?
> Which types of bonds have more interest rate risk: short-term or long-term bonds?
> What is an “opportunity cost”?
> Differentiate between debits and credits with respect to assets and liabilities.
> The following two bonds are identical (FV = $1,000, 8‐ percent coupon rate paid semi‐annually), except that they mature at different times.
> Explain how loan and mortgage payments can be determined using annuity concepts.
> Why do interest rates differ between Canada and the United States?
> Why do interest rates on different-maturity Canada bonds differ?
> How does the expected rate of inflation affect nominal interest rates?
> Xiang wishes to have $1 million in 25 years. He cannot afford to make large deposits at the moment; however, he believes that he will be able to increase his deposits by 4 percent per year for the next 25 years. He will make his first deposit in one year
> Distinguish between primary and secondary markets.
> Explain how to calculate the present value of a growing annuity.
> Explain how to evaluate a growing perpetuity.
> What is the relationship between FVIFs and PVIFs? Why does this make sense?
> Distinguish among the various types of financial assets.
> List the basic questions related to corporate financing.
> What are the two key topics covered in the study of corporate finance?
> Describe the two key decision areas with respect to the financial management of assets?
> Suppose that GG Co. would like to grow its sales by 25 percent, which is greater than its sustainable growth rate (see Practice Problem 56). If all the other financial information remains unchanged, how much external financing will the company require?
> Why does compound interest result in higher future values than simple interest?
> Explain how timelines can be used to break a complicated time value of money problem into manageable components.
> Veda has to choose between two investments that have the same cost today. Both investments will ultimately pay $ 1,300 but at different times, as shown in the table below. If Veda does not choose one of these investments, she could leave the funds in a b
> Explain how to compute future values and present values when using compound interest.
> If market interest rates go up, what happens to bond prices?
> When bonds sell above their par value, is the yield to maturity greater or less than the coupon rate?
> David has been awarded a scholarship that will pay $ 5,000 one year from now. However, he really needs the money today and has decided to take out a loan. If the interest rate is 6 percent, how much can he borrow so that the scholarship will just pay off
> List the basic areas of financial management.
> History tells us that a group of Dutch colonists purchased the island of Manhattan from the Native American residents in 1626. Payment was made with wampum (likely glass beads and trinkets), which had an estimated value of $24. Suppose the Dutch had inve
> Your sister has been forced to borrow money to pay her tuition this year. If she makes annual interest payments on the loan at year end for the next three years, and the loan is for $ 2,500 at a simple interest rate of 6 percent, how much will she pay ea
> After a summer of travelling (and not working), a student finds himself $ 1,500 short for this year’ s tuition fees. His parents have agreed to lend him the money for three years at a simple interest rate of 6 percent, with interest due at the end of eac
> Dmitri Chekov has made an investment of $25,000 that promises to pay him 8 percent simple interest per year for 10 years. Determine how much interest he will earn in the: a. first year b. ninth year
> An investment promises to pay you $100 per year starting immediately. The cash flow from the investment is expected to increase by 3 percent per year forever. If alternative investments of similar risk earn a return of 9 percent per year, determine the m
> Shirley has been offered two perpetuities: Grow and Shrink. Grow promises her $100 in one year and an annual cash flow that will increase by 4 percent per year forever. Shrink, in contrast, promises her $ 1,000 in one year but the annual cash flow will d
> The firm in Practice Problem 17 had retained earnings of $15,000 at the beginning of the year. Its net income for the year was $7,500, and it paid out $4,000 in dividends. What are its retained earnings at the end of the year?
> GG Inc. just bought a computer for $4,000. It belongs to asset class 45 and has a CCA rate of 45 percent. Calculate the first‐year and second‐year CCA expenses. (Assume this computer is the only asset in this asset class.)
> Jane’s parents save $ 1,000 per year for 17 years to pay for her university tuition costs. They deposit the money into a Registered Education Savings Plan (RESP) account so that no tax is payable on the interest income. This RESP account provides a retur
> Calculate the effective annual rates for the following: a. 24%, compounded daily b. 24%, compounded quarterly c. 24%, compounded every four months d. 24%, compounded semi‐annually e. 24%, compounded continuously f. Calculate the effective monthly rate fo
> List the basic areas of capital budgeting.
> A bank is currently offering a savings account paying an interest rate of 9 percent compounded quarterly. It would like to offer another account, with the same effective annual rate, but compounded monthly. What is the equivalent rate compounded monthly?
> At the end of 2015, Corine ’ s Candies Inc. had total shareholders ’ equity of $13.8 million. In 2016, the company had net income of $5.2 million and paid out half this amount in dividends, resulting in shareholders ’ equity at the end of 2016 of $16.4 m
> The most recent financial statements for a large Canadian furniture and appliance rental chain show that its debt ratio was 0.256 and its debt‐to‐equity ratio (D/E) was 0.073. At the end of year 2, was Finns ’ Fridges more or less leveraged than this maj
> Grace, a retired librarian, would like to donate some money to her alma mater to endow a $ 5,000 annual scholarship. The first scholarship will be awarded in five years. The university will manage the funds and expects to earn 3 percent per year. How muc
> Use the definition of the leverage ratio in the DuPont system to determine if Finns ’ Fridges has become more or less leveraged between year 1 and year 2.
> Tommy has a goal of amassing $1 million by the time he retires. However, there always seems to be a reason not to save money, so he put it off for many years. Finally, with just 15 years before his retirement, he begins to save. Fortunately, Tommy ’ s ex
> Jack is 28 years old now and plans to retire in 35 years. He works in a local bank and has an annual after‐tax income of $ 45,000. His expected annual expenditure is $36,000, and the rest of his income will be invested at the beginning of each of the nex
> An investment promises to pay you $100 per year starting in one year. The cash flow from the investment is expected to increase by 3 percent per year forever. If alternative investments of similar risk earn a return of 9 percent per year, determine the m
> At the age of 10, Felix decided that he wanted to attend a very prestigious (and expensive) university. How much will his parents have to save each year to accumulate $ 40,000 by the time Felix needs the funds in eight years? Assume Felix ’ s parents can
> Mary‐Beth is planning to live in a university residence for three years while completing her degree. The annual cost for food and lodging is $ 6,500 and must be paid at the start of each school year. What is the total present value of Mary‐Beth ’ s resid
