List and describe the four major financial statements.
> Suppose that federal banking regulators in the United States announced that they are going to allow banks to take on significant equity investments in firms to which they have lent. What would you expect, on average, to happen to those firms’ dividend pa
> Describe the process for using the P/E ratio to estimate a future stock price.
> We talked about how a firm might attract a different clientele by switching dividend payout policies: Might a particular clientele change its preference for dividends versus capital gains through no action of the firm? Explain.
> What condition would have to be necessary in order for the riskiness of the firm’s cash flows to investors to be affected by the firm’s dividend payout policy?
> Why might the government actually want the capital gains tax rate to be lower than the dividend tax rate?
> Explain how an announced increase in a firm’s dividend payout might be perceived as either a good or a bad information signal.
> If a firm announces a dividend decrease, would you expect the stock price to go down more or less than the present value of that decrease? Why?
> What approach should be used to forecast sales if a firm believes that sales will be stable over time?
> JBK, Inc., normally pays an annual dividend. The last such dividend paid was $2.50, all future dividends are expected to grow at 5 percent, and the firm faces a required rate of return on equity of 11 percent. If the firm just announced that the next div
> Kenzie Cos. is expected to pay a dividend of $2.75 per year indefinitely. If the appropriate rate of return on this stock is 16 percent per year, and the stock consistently goes ex-dividend 40 days before dividend payment date, what will be the expected
> Gen Corp. is expected to pay a dividend of $3.50 per year indefinitely. If the appropriate rate of return on this stock is 11 percent per year, and the stock consistently goes ex-dividend 35 days before dividend payment date, what will be the expected mi
> MMK Cos. Normally pays an annual dividend. The last such dividend paid was $2.25, all future dividends are expected to grow at a rate of 7 percent per year, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced
> Spreadsheets are especially useful for computing stock value under different assumptions. Consider a firm that is expected to pay the following dividends: Year 1 2 3 4 5 6 $1.20 $1.20 $1.50 $1.50 $1.75 $1.90 and grow at 5 percent t
> Suppose a firm has a retention ratio of 60 percent, net income of $35 million, and 140 million shares outstanding. What would be the dividend per share paid out on the firm’s stock?
> Suppose a firm has a retention ratio of 40 percent, net income of $17 million, and 10 million shares outstanding. What would be the dividend per share paid out on the firm’s stock?
> Suppose a firm has a retention ratio of 56 percent and net income of $9 million. How much does it pay out in dividends?
> Suppose a firm has a retention ratio of 35 percent and net income of $5 million. How much does it pay out in dividends?
> Suppose a firm pays total dividends of $750,000 out of net income of $5 million. What would the firm’s payout ratio be?
> Suppose a firm pays total dividends of $500,000 out of net income of $2 million. What would the firm’s payout ratio be?
> Explain why we need to use the iterative calculation approach described in the text to get a complete solution for AFN.
> If a firm has retained earnings of $3 million, a common shares account of $5 million, and additional paid-in-capital of $10 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to boo
> If a firm has retained earnings of $23 million, a common shares account of $275 million, and additional paid-in-capital of $100 million, how would these accounts change in response to a 20 percent stock dividend? Assume market value of equity is equal to
> Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such “annual” dividend has been announced as $4, it is exactly one quarter un
> Design a spreadsheet similar to the one below to compute the value of a variable growth rate firm over a five-year horizon. A. What is the value of the stock if the current dividend is $1.30, the first stage growth is 18%, the second stage growth is 9%,
> Annually Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such “annual” dividend has been announced as $6, it is exactly one q
> Everything else held constant, if a firm announces that it will double the length of time between its ex-dividend date and its payment date, what should be the effect on the stock price?
> Show mathematically that, with a tax rate on both dividends and capital gains of 15 percent, it doesn’t matter whether earnings are paid out as dividends or kept in the firm to cause g to grow for a constant-dividend stock.
> Show mathematically that, with a tax rate on both dividends and capital gains of 5 percent, it doesn’t matter whether earnings are paid out as dividends or kept in the firm to cause g to grow for a constant-dividend stock.
> Everything else held constant, if a firm announces that it will halve the length of time between its ex-dividend date and its payment date, what should be the effect on the stock price?
> Which of the following activities result in an increase (decrease) in a firm’s cash?
> What is the difference between current liabilities and long-term debt?
> Which specific item of a pro forma income statement should be most expected to vary proportionately with sales? Why?
> What does the Sarbanes-Oxley Act require of firm managers?
> What is earnings management?
> Carnival Corp. (CCL) provides cruises to major vacation destinations. Carnival operates 99 cruise ships in North America, Europe, Australia, and Asia. The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats. These
> What are free cash flows for a firm? What does it mean when a firm’s free cash flow is negative?
> What is the difference between cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities?
> Why do financial managers and investors find cash flows to be more important than accounting profit?
> The income statement is prepared using GAAP. How does this affect the reported revenue and expense measures listed on the balance sheet?
> How does the payment of interest on debt affect the amount of taxes the firm must pay?
> What is the difference between an average tax rate and a marginal tax rate?
> What do we mean by a progressive tax structure?
> From a firm manager’s or investor’s point of view, which is more important―the book value of a firm or the market value of the firm?
> What does a negative value for AFN mean?
> Why can the book value and market value of a firm differ?
> New York Times Co. (NYT) recently earned a profit of $1.21 per share and has a P/E ratio of 19.59. The dividend has been growing at a 7.25 percent rate over the past six years. If this growth rate continues, what would be the stock price in five years
> What are the costs and benefits of holding liquid securities on a firm’s balance sheet?
> How does the choice of accounting method used to record fixed asset depreciation affect management of the balance sheet?
> On which of the four major financial statements (balance sheet, income statement, statement of cash flows, or statement of retained earnings) would you find the following items?
> You are considering a stock investment in one of two firms (All Debt, Inc., and All Equity, Inc.), both of which operate in the same industry and have identical operating income of $12.5 million. AllDebt, Inc., finances its $25 million in assets with $24
> You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $32.5 million. NoEquity, Inc., finances its $65 million in assets with $64 mi
> Mr. Husker’s Tuxedos, Corp. began the year 2018 with $256 million in retained earnings. The firm earned net income of $33 million in 2018 and paid dividends of $5 million to its preferred stockholders and $10 million to its common stockholders. What is t
> In 2018, Usher Sports Shop had cash flows from investing activities of -$4,364,000 and cash flows from financing activities of -$5,880,000. The balance in the firm’s cash account was $1,615,000 at the beginning of 2018 and $1,742,000 at the end of the ye
> The Fitness Studio, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $773,500, interest expense = $100,000, and taxes = $234,500. The firm has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calc
> Everything else held constant, which will be greater: AFN for a firm with excess fixed- asset capacity, or AFN for a firm with no excess fixed-asset capacity? Why?
> Kellogg Co. (K) recently earned a profit of $2.52 per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues, what would be the stock price in five years if the P/E rati
> The Fitness Studio, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $538,000, interest expense = $63,000, and net income = $435,000. Calculate the 2018 taxes reported on the income statement.
> Rebecky’s Flowers 4U, Inc., had free cash flows during 2018 of $43 million, NOPAT of $85 million, and depreciation of $14 million. Using this information, fill in the blanks on Rebecky’s balance sheet below.
> You have been given the following information for Patty Cake’s Athletic Wear Corp. for the year 2018: a. Net sales = $38,250,000. b. Cost of goods sold = $22,070,000. c. Other operating expenses = $5,300,000. d. Addition to retained earnings = $1,195,500
> Listed below is the 2018 income statement for Tom and Sue Travels, Inc.
> Jamaica Tours, Inc., started the year with a balance of retained earnings of $1,780 million. The company reported net income for the year of $284 million and paid dividends of $17 million to the preferred stockholders and $59 million to common stockholde
> Thelma and Louie, Inc., started the year with a balance of retained earnings of $543 million and ended the year with retained earnings of $589 million. The company paid dividends of $35 million to the preferred stockholders and $88 million to common stoc
> The 2018 income statement for Egyptian Noise Blasters shows that depreciation expense is $85 million, NOPAT is $246 million. At the end of the year, the balance of gross fixed assets was $655 million. The change in net operating working capital during th
> The 2018 income statement for Duffy’s Pest Control shows that depreciation expense was $197 million, EBIT was $494 million, and the tax rate was 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,562 million and net operat
> Dogs 4 U Corporation has net cash flow from financing activities for the last year of $34 million. The company paid $178 million in dividends last year. During the year, the change in notes payable on the balance sheet was $39 million, and change in comm
> Chris’ Outdoor Furniture, Inc., has net cash flows from operating activities for the last year of $340 million. The income statement shows that net income is $315 million and depreciation expense is $46 million. During the year, the change in inventory o
> A firm does not pay a dividend. It is expected to pay its first dividend of $0.25 per share in two years. This dividend will grow at 10 percent indefinitely. Using an 11.5 percent discount rate, compute the value of this stock.
> Can the procedure described in this chapter for adjusting for seasonality apply to periods longer than a year? How?
> Use the balance sheet and income statement below to construct a statement of cash flows for Valium’s Medical Supply Corporation. Valium's Medical Supply Corporation Balance Sheet as of December 31, 2018 and 2017 (in thousands of dol
> Use the balance sheet and income statement below to construct a statement of cash flows for Clancy’s Dog Biscuit Corporation. / Dividends per share (DPS) $0.60 $0.60 Book value per share (BVPS) $13.60 $11.20 Market value (price) pe
> Suppose that in addition to $17.85 million of taxable income, Texas Taco, Inc., received $1,105,000 of interest on state-issued bonds and $760,000 of dividends on common stock it owns in Arizona Taco, Inc. a. Use the tax schedule in Table 2.3 to calcula
> The Dakota Corporation had a 2018 taxable income of $33,365,000 from operations after all operating costs but before (1) interest charges of $8,500,000; (2) dividends received of $750,000; (3) dividends paid of $5,250,000; and (4) income taxes. a. Use t
> Consider a firm with an EBIT of $10,500,000. The firm finances its assets with $50,000,000 debt (costing 6.5 percent) and 10,000,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by $25,000,000, using the procee
> Consider a firm with an EBIT of $1,000,000. The firm finances its assets with $4,500,000 debt (costing 8 percent) and 200,000 shares of stock selling at $16.00 per share. To reduce risk associated with this financial leverage, the firm is considering red
> You have been given the following information for Moore’s HoneyBee Corp.: a. Net sales = $32,000,000. b. Gross profits = $18,700,000. c. Other operating expenses = $2,500,000. d. Addition to retained earnings = $4,700,000. e. Dividends paid to preferred
> You have been given the following information for Corky’s Bedding Corp.: a. Net sales = $11,250,000. b. Cost of goods sold = $7,500,000. c. Other operating expenses = $250,000. d. Addition to retained earnings = $1,000,000. e. Dividends paid to preferred
> Value Ava’s Spin Ball Corp. lists fixed assets of $12 million on its balance sheet. The firm’s fixed assets have recently been appraised at $16 million. Ava’s Spin Ball Corp.’s balance sheet also lists current assets at $5 million. Current assets were ap
> Daddi Mac, Inc., doesn’t face any taxes and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s a
> Muffin’s Masonry, Inc’s balance sheet lists net fixed asset as $14 million. The fixed assets could currently be sold for $19 million. Muffin’s current balance sheet shows current liabilities of $5.5 million and net working capital of $4.5 million. If all
> If a firm needs to keep a minimum cash balance on hand and faces both cash inflows and outflows, which of the cash management models discussed in this chapter would be more appropriate for it to use?
> Glen’s Tobacco Shop has total assets of $91.8 million. Fifty percent of these assets are financed with debt of which $28.9 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $20.4 millio
> Brenda’s Bar and Grill has total assets of $15 million of which $5 million are current assets. Cash makes up 10 percent of the current assets and accounts receivable makes up another 40 percent of current assets. Brenda’s gross plant and equipment has a
> Use the following information to find dividends paid to common stockholders during 2018.
> Tater and Pepper Corp. reported free cash flows for 2018 of $39.1 million and investment in operating capital of $22.1 million. Tater and Pepper incurred $13.6 million in depreciation expense and paid $28.9 million in taxes on EBIT in 2018. Calculate Tat
> You are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm’s free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $62 million, had a tax rate of 30 percent, and its depreciatio
> Ramakrishnan Inc. reported 2018 net income of $15 million and depreciation of $2,650,000. The top part of Ramakrishnan, Inc.’s 2018 and 2017 balance sheets is listed below (in millions of dollars).
> Hunt Taxidermy, Inc., is concerned about the taxes paid by the company in 2018. In addition to $42.4 million of taxable income, the firm received $2,975,000 of interest on state-issued bonds and $1,000,000 of dividends on common stock it owns in Oakdale
> Oakdale Fashions, Inc., had $245,000 in 2018 taxable income. Using the tax schedule in Table 2.3, calculate the company’s 2018 income taxes. What is the average tax rate? What is the marginal tax rate?
> A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 12 percent discount rate, compute the value of this stock.
> What’s the source of firm-specific risk? What’s the source of market risk?
> Consider a firm with an EBIT of $550,000. The firm finances its assets with $1,000,000 debt (costing 5.5 percent) and 200,000 shares of stock selling at $12.00 per share. The firm is considering increasing its debt by $900,000, using the proceeds to buy
> Consider a firm with an EBIT of $850,000. The firm finances its assets with $2,500,000 debt (costing 7.5 percent) and 400,000 shares of stock selling at $5.00 per share. To reduce firm’s risk associated with this financial leverage, the firm is consideri
> What is the theoretical minimum value for MAPE?
> You own $15,000 of Opsware, Inc. stock that has a beta of 3.8. You also own $10,000 of Lowe’s Companies (beta = 1.6) and $10,000 of New York Times (beta = 0.8). Assume that the market return will be 12 percent and the risk-free rate is 6 percent. What is
> Casello Mowing & Landscaping’s year-end 2018 balance sheet lists current assets of $435,200, fixed assets of $550,800, current liabilities of $416,600, and long-term debt of $314,500. Calculate Casello’s total stockholders’ equity.
> You are evaluating the balance sheet for Goodman’s Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000, accounts receivable = $1,200,000, inventory = $2,100,000, accrued wages and taxes = $5
> Vinny’s Overhead Construction had free cash flow during 2018 of $25.4 million. The change in gross fixed assets on Vinny’s balance sheet during 2018 was $7.0 million and the change in net operating working capital was $8.4 million. Using this information
> Shown below are partial financial statements for Garners’ Platoon Mental Health Care, Inc. Fill in the blanks on the four financial statements. Garners’ Platoon Mental Health Care, Inc. Statement of Cash Flows for Yea
> A firm has an ROE of 20 percent. The industry average ROE is 12 percent. Is this a good or poor sign about the management of the firm?
> What is the difference between time series analysis and cross-sectional analysis?
