Question: Sheldon Corporation projects the following free

> The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury secur

> Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?

> Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?

> Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk p

> “Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

> Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14% annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return fo

> Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.

> Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

> If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.

> The rate of return on a bond held to its maturity date is called the bond’s yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? Does the length of time to maturity af

> a. Bond; Treasury bond; corporate bond; municipal bond; foreign bond b. Par value; maturity date; coupon payment; coupon interest rate c. Floating-rate bond; zero coupon bond; original issue discount bond (OID) d. Call provision; redeemable bond; sink

> A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

> Define each of the following terms: a. Option; call option; put option b. Exercise value; strike price c. Black-Scholes option pricing model

> Describe the effect on a call option’s price that results from an increase in each of the following factors: (1) stock price, (2) strike price, (3) time to expiration, (4) risk-free rate, and (5) standard deviation of stock return.

> Why do options sell at prices higher than their exercise values?

> Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of −0.25, and a beta coefficient of −0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%,

> A call option on the stock of Bedrock Boulders has a market price of $7. The stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call option? What is the option’s time value?

> Why do U.S. corporations build manufacturing plants abroad when they could build them at home?

> The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson’s short-term deb

> Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.2 Return on assets (ROA) 4% Return on equity (ROE) 7% Calculate Haslam’s profit margin and l

> Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inventories?

> Gardial & Son has an ROA of 12%, a 5% profit margin, and a return on equity equal to 20%. What is the company’s total assets turnover? What is the firm’s equity multiplier?

> Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50 million. What is its ROE?

> Reno Revolvers has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio?

> Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock o

> Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25 million in long-term debt. What is the debt ratio?

> What is free cash flow? Why is it the most important measure of cash flow?

> Explain the difference between NOPAT and net income. Which is a better measure of the performance of a company’s operations?

> a. Multinational corporation b. Exchange rate; fixed exchange rate system; floating exchange rate c. Trade deficit; devaluation; revaluation d. Exchange rate risk; convertible currency; pegged exchange rate e. Interest rate parity; purchasing power parit

> If a “typical” firm reports $20 million of retained earnings on its balance sheet, can the firm definitely pay a $20 million cash dividend?

> Define each of the following terms: a. Annual report; balance sheet; income statement b. Common stockholders’ equity, or net worth; retained earnings c. Statement of stockholders’ equity; statement of cash flows d. Depreciation; amortization; EBITDA e

> If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation?

> Define each of the following terms: a. Proprietorship; partnership; corporation b. Limited partnership; limited liability partnership; Professional Corporation c. Stockholder wealth maximization d. Production opportunities; time preferences for consumpti

> How do you think each of the following items would affect a company’s ability to attract new capital and the flotation costs involved in doing so? a. A decision of a privately held company to go public b. The increasing institutionalization of the “buy s

> The SEC attempts to protect investors who are purchasing newly issued securities by making sure that the information put out by a company and its investment banks is correct and is not misleading. However, the SEC does not provide an opinion about the re

> Define each of the following terms: a. Going public; new issue market; initial public offering (IPO) b. Public offering; private placement c. Venture capitalists; roadshow; spread d. Securities and Exchange Commission (SEC); registration statement; shelf

> Before entering a formal agreement, investment banks carefully investigate the companies whose securities they underwrite; this is especially true of the issues of firms going public for the first time. Because the banks do not themselves plan to hold th

> Define each of the following terms: a. Proxy; proxy fight; preemptive right; classified stock; founders’ shares b. Estimated value / market price / c. Required rate of return, / expected rate of return, / actual, or realized, rate of return, / d. Ca

> A bond that pays interest forever and has no maturity date is a perpetual bond, also called a perpetuity or a consol. In what respect is a perpetual bond similar to: (1) a no-growth common stock and (2) a share of preferred stock?

> Why might purchasing power parity fail to hold?

> A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe’s current value of operations, which is also its value of debt plus equity, is estimated to be $5 million. Fethe

> International Associates (IA) is about to commence operations as an international trading company. The firm will have book assets of $10 million, and it expects to earn a 16% return on these assets before taxes. However, because of certain tax arrangemen

> Schwarzentraub Industries’ expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%. (Hint: Use Equations 17

> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumptions are met. a. Suppose that both firms are subject to

> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) all of the MM assumptions are met, (2) both firms are subject to a 40% federal-plus-state corporate tax rate,

> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $2 million,

> Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller surrounding cities. Jaxair has been around for a few

> An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expect

> An unlevered firm has a value of $600 million. An otherwise identical but levered firm has $240 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate is 34%, the personal tax rate on equity is 10%, and t

> Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?

> What is an exchange rate? What is the difference between direct and indirect rates? What is a cross rate?

> On October 1, 2017, Harvey Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s $10 par value common stock. The options were granted on January 2, 2018, and were exercisable 2 years after t

> The following information is available for the Albany Corporation for the year 2017: Actual and expected return on plan assets ……………………. $12,000 Benefits paid to retirees ……………………………………………… $40,000 Contributions to the fund ……………………………………………. $95,000In

> George Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down, and before the new building’s foundation could be constructed, a substantial amount of rock had to be blasted a

> A company may acquire plant assets (among other ways) for cash, on a deferred payment plan, by exchanging other assets, or by a combination of these ways. Required: a. Identify six costs that should be capitalized as the cost of the land. For your answer

> Property, plant, and equipment (plant assets) generally represent a material portion of the total assets of most companies. Accounting for the acquisition and use of such assets is therefore an important part of the financial reporting process. Required:

> Your client found three suitable sites, each having certain unique advantages, for a new plant. To thoroughly investigate the advantages and disadvantages of each site, one‐year options were purchased for an amount equal to 5 percent of the contract pric

> Jay Manufacturing, Inc., began operations five years ago producing the probo, a new type of instrument it hoped to sell to doctors, dentists, and hospitals. The demand for probos far exceeded initial expectations, and the company was unable to produce en

> Depreciation continues to be one of the most controversial, difficult, and important problem areas in accounting. Required: a. Explain the conventional accounting concept of depreciation accounting. b. Discuss its conceptual merit with respect to i. The

> On October 10, 2016, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment. Under the terms of the agreement, the equipment may be purchased now or Mason may wait until January 10, 2017, to make the purchase. Th

> The City of Martinsville donated land to Essex Company. The fair value of the land was $100,000. The land had cost the city $45,000. Required: a. Describe the current accounting treatment for the land. Include in your answer the amount at which the land

> The concept of conservatism has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses, but not gains. For example, when the value of an asset is impaired, it is

> The accounting profession has employed the matching concept to determine what to report in the income statement and to determine how to measure items reported in the income statement. This concept implies that expenses should be measured directly, and th

> Calculating the costs of pension plans, requires the understanding of certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financia

> The FASB has issued SFAC No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.” In general, this statement sets recognition criteria and guidance for what information should be incorporated into financial statements and whe

> In 2013 Airbus announced a contract to deliver 50 A380 airplanes to Emirates for $20 billion to be delivered between 2016 and 2018. Required: Outline the five‐step revenue recognition process for this transaction.

> You are requested to deliver your auditor’s report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, “What are the precise m

> Bonanza Trading Stamps, Inc., was formed early this year to sell trading stamps throughout the Southwest to retailers, who distribute the stamps free to their customers. Books for accumulating the stamps and catalogs illustrating the merchandise for whic

> Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is qua

> Progresso Corporation, one of your new audit clients, has not reported EPS data in its annual reports to stockholders in the past. The president requested that you furnish information about the reporting of EPS data in the current year’s annual report in

> It is important in accounting theory to be able to distinguish the types of accounting changes. Required: a. If a public company desires to change from the sum‐of‐year’s‐ digits depreciation method to the straight‐line method for its fixed assets, what t

> Discuss how a company’s primary financial statements are useful to potential investors who are trying to decide whether to buy stock in the company. Support your discussion by citing objectives outlined in the Conceptual Framework.

> The motion picture industry has undergone significant changes since the 1960s. Originally, companies such as Paramount Pictures had to rely solely on domestic and foreign screenings of their movies for their revenues. The birth of the television industry

> Many business organizations have been concerned with providing for the retirement of employees since the end of WWII. This concern has resulted in the establishment of private pension plans in many companies. The substantial growth of these plans, both

> Earnings as defined in SFAC No. 5 are consistent with the current operating performance concept of income. Comprehensive income is consistent with the all‐inclusive concept of income. Required: a. Discuss the current operating performance concept of inco

> Morgan Company grows various crops and then processes them for sale to retailers. Morgan has changed its depreciation method for its processing equipment from the double‐declining‐balance method to the straight‐line method effective January 1 of this yea

> Sometimes a business entity changes its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Following are three independent, unrelated

> APB Opinion No. 20 was concerned with accounting changes. SFAS No. 154 (see FASB ASC 250) changes the accounting treatment for some accounting changes. Required: a. Define, discuss, and illustrate each of the following in such a way that one can be disti

> Recent pronouncements of the FASB indicate that the FASB is moving away from historical cost accounting toward the use of current, or fair, value. In your debate on this issue, support your position with references to the conceptual framework and to conc

> FASB ASC 320 (generally effective until 2018) requires companies to assign their portfolio of investment securities into 1. Trading securities 2. Securities available for sale 3. Held‐to‐maturity securities Required: a. Define each of these categories of

> Short‐term deferrals (prepaids and unearned revenues) are classified as current assets and current liabilities. As such, they are included in working capital. Required: a. Some argue that prepaids will not generate cash and hence are not liquid assets. i

> The theoretical valuation of receivables is the present value of expected future cash flows. However, trade receivables are not discounted owing to materiality considerations; hence, their net realizable value is the closest practical approximation to th

> Specific identification is sometimes said to be the ideal method for assigning cost to inventory and to cost of goods sold. Required: a. List the arguments for and against the foregoing statement. b. FIFO, weighted average, and LIFO methods are often use

> Duffner Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Caesar has recently been hired as president of Duffner Corp

> At the end of the first year of operations, Key Company had a current equity securities portfolio classified as available‐for‐sale securities with a cost of $500,000 and a fair value of $550,000. At the end of its second year of operations, Key had a cur

> On December 31, 2016, Carme Company had significant amounts of accounts receivables as a result of credit sales to its customers. Carme uses the allowance method based on credit sales to estimate bad debts. Based on experience, 1 percent of credit sales

> Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. Required: a. Define cost as applied to the valuation of inventories. b. Define market as applied to the valuation of inventories. c. Why are inventories valued

> Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible

> Steel Company, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of FIFO cost or market m

> Cost for inventory purposes should be determined by the inventory cost‐flow method most clearly reflecting periodic income. Required: a. Describe the fundamental cost‐flow assumptions of the average cost, FIFO, and LIFO inventory cost‐flow methods. b. Di

> Entre Preneur found a site for his new haute cuisine restaurant. The site has a vacant gasoline station. He purchased the property for $900,000 and had the station demolished at a cost of $30,000. A government regulation required that he spend $40,000 to

> In the following debate, take the position of an investor who wants to evaluate the liquidity of a company. Team Debate: Team 1: Argue for including inventory, pre paids, and deferrals in working capital. Team 2: Argue against including inventory, prepa

> MVP Corp uses LIFO to value its inventory. The 2016 inventory records disclose the following: On December 26, 2016, the company had a special, nonrecurring opportunity to purchase 40,000 units at $17 per unit. The purchase can be made and the units deliv

> The statement of cash flows is intended to provide information about the investing, financing, and operating activities of an enterprise during an accounting period. In a statement of cash flows, cash inflows and outflows for interest expense, interest r

> What is the total cash the Ayer Corporation would receive if it issues 1,000 shares of $.02 par value per share common stock at a $9 market price per share? Issue 2 The Waltham Corporation is authorized to issue a total of 10,000 shares of $.10 par value

> The recent emphasis on capital maintenance concepts of income as seen in the FASB’s support for “comprehensive income” implies that balance sheet measurement should determine measures of income. That is, accrual accounting is to focus on measurements in

> Presenting information on cash flows has become an important part of financial reporting. Required: a. What goals are attempted to be accomplished by the presentation of cash‐flow information to investors? b. Discuss the following terms as they relate t

> The measurement of assets and liabilities on the balance sheet was previously a secondary goal to income determination. As a result, various measurement techniques arose to disclose assets and liabilities. Required: Discuss the various measurement techni

> The argument among accountants and financial statement users over the proper valuation procedures for assets and liabilities resulted in the release of SFAS No. 115 (see FASB ASC 320‐19). The statement requires current‐value disclosures for all investmen

> The following financial statement was prepared by employees of your client, Linus Construction Company. The statement is not accompanied by footnotes, but you have discovered the following: • The average completion period for the compan