Rockville Corporation is going to borrow $250,000 from its bank at an APR of 8.5 percent. The bank requires its customers to maintain a 10 percent compensating balance. What is the effective interest rate on this bank loan?
> Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company’s financial statements for the year ended December 31, 20X1. Audit risk at the financial stateme
> Select the best answer for each of the following. Explain the reasons for your selection. a. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriati
> Listed below are controls that have been developed by the management of Cirus Manufacturing Co. 1. Management surveys customers about their satisfaction with the company’s service. 2. The human resources department investigates the educational background
> You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive (P), detective (D), or corrective (C). Explain your answers. a. Annual physical inventory. b. Monthly reconci
> Select the best answer for each of the following questions. Explain the reason for your selection. a. Which of the following would be least likely to be considered an objective of internal control? (1) Checking the accuracy and reliability of accounting
> Mary Deming has been asked to accept an engagement to audit a small financial institution. Deming has not previously audited a financial institution. Required: a. Describe the types of knowledge about the prospective client and its environment that Demi
> Can a standard audit plan be used for most engagements?
> In the overall audit strategy for the audit of Keystone Computers & Networks, Inc., in this appendix, there is a section on significant risks. For each of the risks, identify the implications and potential responses.
> Options can be combined to create more complicated payoff structures. Consider the combination of one put option and one call option with the same expiration date and the same strike price. Draw the payoff diagram and describe what the purchaser of such
> Define internal growth rate (IGR). Identify the characteristics of a high-growth firm that has no external funds needed?
> How does the dividend payout ratio affect the amount of funds needed to finance growth?
> Explain why the fixed asset account may or may not vary with sales?
> Why is sales not always a good measure to use in forecasting fixed assets?
> Explain how sales can be used to develop pro forma financial statements?
> What is the sustainable growth rate? Why is it important?
> What is financial planning? What four types of plans/budgets are involved in financial planning?
> Identify whether each of the following factors implies a lower or higher price for a bond? a. Low marketability of the security. b. Short term to maturity. c. Low credit rating of the issuer. d. No call provision.
> Discuss the advantages of shelf registration. What kinds of securities are most likely to be registered this way?
> How can capital structure decisions affect the control of a firm?
> What are the characteristics of a public bond? (Think in terms of comparing it to private placement and bank term loans.)
> Identify the three cost components that make up the total cost of issuing securities for a company. Briefly describe each?
> Explain why the owners of a company might choose to keep it private?
> Define underpricing, and explain why the majority of IPOs are underpriced. What role do investment banks play in the price-setting process?
> Identify the three basic services investment bankers provide to help firms bring new security issues to the market. During which stage of the typical IPO does the investment banker take on the risk of the offering? Is there an alternative in which the ri
> Managers at a large firm are looking for a medium-size loan with a long term to maturity and low liquidity. Which of the following types of debt would be the most appropriate? a. Public bond. b. Private placement. c. Bank term loan.
> Assume you work for a venture capital firm and have been approached by a couple of recent college graduates with a request to fund their new business. If you are interested in the idea, what process will you follow?
> Explain what a negative cash conversion cycle means?
> Why is the commercial paper market available only to the most creditworthy companies?
> Suppose you are a financial manager at a big firm and you expect interest rates to decline in the near future. What current asset investment strategy would you recommend that the company pursue?
> Why is financial flexibility important in the choice of a capital structure?
> What are some industries in which the use of lockboxes would especially benefit companies? Explain.
> How do the following circumstances affect the cash conversion cycle: (a) favorable credit terms allow the firm to pay its accounts payable slower, (b) inventory turnover increases, (c) accounts receivable turnover decreases?
> A beverage bottling company in Vermont has days’ sales outstanding of 23.7 days. Is this good? Explain?
> How are customers and suppliers affected by a firm’s working capital management decisions?
> If the value of the firm remains constant as a function of its capital structure and the three Modigliani and Miller assumptions apply, why might the overall cost of capital change or not change as capital structure changes?
> Evaluate the statement that the weighted average cost of capital (WACC) for a firm (assuming that all three assumptions of Modigliani and Miller’s propositions hold) is always less than or equal to the cost of equity for the firm?
> List and briefly describe the three key assumptions in Modigliani and Miller’s Proposition 1 that are required for total firm value to be independent of capital structure?
> When we observe the capital structure of many firms, we find that they tend to utilize lower levels of debt than that predicted by the trade-off theory. Offer an explanation for this?
> Using the Modigliani and Miller framework but excluding the assumptions that there are no taxes and no information or transaction costs, describe the value of the firm as a function of the proportion of debt in its capital structure?
> If a firm increases its debt to a very high level, then the positive effect of debt in aligning the interests of management with those of stockholders tends to become negative? Explain why this occurs.
> What does the empirical evidence tell us about the two theories?
> Agency problems occur because the nonowner managers and stockholders of a firm have different interests. Propose a capital structure change that might help better align these different interests?
> Crossler Automobiles sells autos in a market where the standard auto comes with a 10-year/100,000-mile warranty on all parts and labor. Describe how an increased probability of bankruptcy could affect sales of autos by Crossler?
> The Modigliani and Miller propositions, when the no-tax assumption is relaxed, suggest that the firm should finance itself with as much debt as possible. Taking this suggestion to the extreme, is it even possible to finance a firm with 100 percent debt a
> Consider the WACC for a firm that pays taxes. Explain what a firm’s best course of action would be to minimize its WACC and thereby maximize the firm value. Use the WACC formula for your explanation?
> The Starlight, Inc. financial statements for the fiscal year ended June 30, 2017, are presented below. The firm’s sales are projected to grow at a rate of 20 percent next year, and all financial statement accounts will vary directly wit
> You are valuing two otherwise identical firms in the same industry. One firm has a corporate jet for every executive at the vice president level and above, while the other does not have a single corporate jet. More than likely, which firm has the greates
> You are offered jobs with identical responsibilities by two different firms in the same industry. One has no debt in its capital structure, and the other has 99 percent debt in its capital structure. Will you require a higher level of compensation from o
> Are taxes necessary for the cost of debt financing to be less than the cost of equity financing?
> By obtaining a lockbox, Nizam’s Manufacturing was able to reduce its total cash collection time by two days. The firm has annual sales of $570,000 and can earn 4.75 percent annual interest. Assuming that the lockbox costs $50 per year, calculate the savi
> What is the pecking order theory of capital structure?
> Below is a partial aging of accounts receivable for Bitar Roofing Services. Fill in the rest of the information and determine Bitar’s days’ sales outstanding. How does it compare to the industry average of 40 days?
> Merrifield Cosmetics calculates that its operating cycle for last year was 76 days. The company had $230,000 in its accounts receivable account and had sales of $1.92 million. Approximately how many days does it take from the time the raw materials are
> You are provided the following working capital information for the Blue Ridge Company: If all sales are made on credit, what are the firm’s operating and cash conversion cycles? Account Beginning Balance Ending Balance Inventory $
> Digital, Inc., an electronic games manufacturer, is planning to purchase flash memory from one of two sources. Kyoto, Inc., quotes a price of ¥6,800 per gigabyte. The current exchange rate is ¥102.30/$. Another Japanese manufacture offers to supply the s
> Your firm, which uses oil as an input to its production processes, hedges its exposure to changes in the price of oil by buying call options on oil at today’s price. If the price of oil goes down by the time the contract expires, what effect will that ha
> Your company is considering opening a new factory in Europe to serve the growing demand for your product there. What real options might you want to consider in your capital budgeting analysis of the factory?
> ADCAP International is a U.S.-based company which sells its products primarily in overseas markets. The company’s stock is currently trading at $50 per share. Depending on the outcome of U.S. trade negotiations with the countries to which ADCAP exports i
> The stock of Augusta Light and Power is currently selling at $12 per share. Over the next year the company is undertaking a new electricity production project. If the project is successful, the company’s stock is expected to rise to $24 per share. If the
> Use the financial statements from Problem 16.1 and the information from Problem 16.2 to calculate the company’s retention(plowback) ratio, external funds needed (EFN), internal growth rate (IGR) and sustainable growth rate (SGR)? Refer
> Use the financial information for Starlight from Problem 19.1. Assume now that equity accounts do not vary directly with sales but change when retained earning change or new equity is issued. The company pays 45 percent of its income as dividends every y
> What are agency costs, and how are they related to the use of debt financing?
> List the inputs that are used in calculating a Eurocredit price?
> Why is credit risk higher in international markets?
> Which currency is the preferred currency of exchange in global financial markets? Why?
> What is the difference between foreign bonds and Eurobonds?
> What difficulties do firms face in estimating cash flows from an overseas project?
> Why is the repatriation of cash flows from an overseas project considered critical to the project’s value?
> What is hedging?
> Refer to Exhibits 19.10 and 19.11 in the text. The EFN for several growth rates for Empire Enterprises are as follows: Growth Rate (%) ………….. EFN ($ millions) 0% ……………………………………….….. -$4.8 5 ……………………………………...……….. -2.3 9.6
> If a Dell Studio laptop sells for $999 in Austin, Texas and £689 in London, what is the implied exchange rate between the U.S. dollar and the euro?
> The market value of Whole Foods stock is currently $53.73 per share, and the annual risk-free rate is 3 percent. A three-month call option on the stock with a strike price of $55 sells for $2.15. What is the value of a put option on Whole Foods stock tha
> What does the payoff function for a typical manager look like?
> Rosemary Corporation has daily sales of $139,000. The financial manager at the firm has determined that a lockbox would reduce collection time by 2.2 days. Assuming the company can earn 5.5 percent interest per year, what are the potential annual savings
> The required rate of return on the assets of a firm is 12 percent, the firm has a debt-to-common-stock ratio of 40 percent, and the cost of debt is 6 percent. If the firm has no preferred stock and the three conditions specified by M&M hold, what is the
> Your boss at Box and Freight Company asks you how much additional debt the company would have to add through a capital restructuring in order to create $9 million in present value from the resulting interest tax shields. What would you tell him if the de
> A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment for 500,000 shares that would be priced to the public at $36 a share. The underwriter’s spread is 7 percent. What were the proceeds for the issuer
> What are six factors that cause international transactions to differ from domestic transactions?
> FAJ, Inc. has $500 million of debt outstanding at an interest rate of 9 percent. What is the present value of the tax shield on that debt if it has no maturity and if FAJ is subject to a 30 percent marginal tax rate?
> Briefly describe the IPO process?
> You finally decide to act on your brilliant idea and start an online textbook rental company. You develop a detailed business plan and calculate that you will need about $350,000 of initial funding to get the business going. Luckily for you, you have lin
> Devlin Construction Inc., reported the following balance sheet information for the last fiscal year. Devlin also reported net sales of $980,770 and days sales in inventory of 48.90 days. Devlin Construction Inc. Assets Cash and marketable securities
> What are the five variables that affect the value of an option, and how do changes in each of these variables affect the value of a call option?
> What do the payoff functions for stockholders and lenders look like?
> What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?
> The payoff function for the holder of straight debt looks like that for the seller of a put option. Convertible debt is straight debt plus a call option on a firm’s stock. How does the addition of a call option to straight debt affect the concern that le
> Again assume that the price of Socrates Motors stock will either rise to $50 or fall to $35 in one month and that the risk-free rate for one month is 1.5 percent. How much is an option with a strike price of $40 worth if the current stock price is $45 in
> The seller of an option can never make any money from a change in the value of the underlying asset; he or she can only hope that the option will not be exercised and that he or she will not lose any money. Given that this is the case, why do people sell
> A callable bond is a bond that can be bought back by the bond issuer before maturity for some pre-specified price (normally a small amount above face value) at the discretion of the bond issuer. How would you go about finding the value of such a bond? Wo
> What is the difference between a financial option and a real option?
> You hold an American option to sell one share of Zyther Co. stock. The option expires tomorrow. The strike price of the option is $50, and the current stock price is $49. What is the value of exercising the option today? If you wanted to sell the option
> NetSpeed Technologies is a telecom component manufacturer. The firm typically has a collection period of 44 days and days’ sales in inventory of 29 days. What is the operating cycle for NetSpeed?
> Suppose you have an option to buy a share of ABC Corp. stock for $100. The option expires tomorrow, and the current price of ABC Corp. is $95. How much is your option worth?
> What is an option?
> Is it always possible to estimate the value of a real option? Why or why not?
> What are bankruptcy costs, and what are the two types of bankruptcy costs?
> Cattail Corporation’s financial statements for the fiscal year just ended are shown below: Cattail management expects sales to increase by 14 percent next year. Assume that the financial statement accounts vary directly with changes i
> Northwood, Inc., has revenue of $455,316, costs of $316,487, and a tax rate of 31 percent. If the firm pays out 45 percent of its earnings as dividends every year, how much earnings are retained and what is the firm’s retention ratio?
> The industry average receivables collection period: a. Increased from 2016 to 2017. b. Decreased from 2016 to 2017. c. Did not change from 2016 to 2017. d. Increased along with the increase in the industry accounts receivable turnover.
> Which of the companies has the lowest accounts receivable turnover in 2017? a. Company A. b. Company B. c. Company C. d. Company D.
