Question: The newspaper reported last week that Bennington

> Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your door.” This means you get $3 today and repay $4 when you get your paycheck in one week (or else). What’s the effective annual return Friendly’s earns on this lending business? If

> For the company in the previous problem, suppose fixed assets are $690,000 and sales are projected to grow to $830,000. How much in new fixed assets are required to support this growth in sales?

> In Problem 18, suppose Raines Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the change in the firm’s long-te

> In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same. Problem 15 Current Policy New Policy Price per unit $295 $302 Cost per unit Unit sales per month $230 $234 1,105 1,125

> Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $8 in perpetuity, beginning five years from now. If the market requires a return of 5.6 percent on this investment, how much does a share of preferred stoc

> You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

> Each business day, on average, a company writes checks totaling $17,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $

> You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

> A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analyzing financial ratios for a company: Time trend analysis and peer group analysis. In time trend

> Bridgton Golf Academy is evaluating different golf practice equipment. The “Dimple-Max” equipment costs $94,000, has a three-year life, and costs $8,600 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line deprecia

> Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for Nagano Golf is 15 percent. Project A: Nagano NP-30. Professional clubs that will take an initial investment of $550,000 at time 0.

> One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $700 per month. You will charge 1.3 percent per month interest on the overdue balance. If the current balance is $21,500, how long will

> Thorpe Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $725,000. How much can sales increase before any new fixed assets are needed?

> During 2012, Raines Umbrella Corp. had sales of $630,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $470,000, $95,000, and $140,000, respectively. In addition, the company had an interest expense of $70,000 a

> We know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as follows: 1 + r = (1 + R)y(1 + h) This is the domestic Fisher effect. a. What is the nonapproximate form of the international Fish

> The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined

> In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 3,400 units and all other values remain the same. Problem 14 Current Policy New Policy $108

> Mau Corporation stock currently sells for $58.32 per share. The market requires a return of 11.5 percent on the firm’s stock. If the company maintains a constant 5 percent growth rate in dividends, what was the most recent dividend per share paid on the

> The next dividend payment by ECY, Inc., will be $3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. If ECY stock currently sells for $63.50 per share, what is the required return?

> In Problem 10, are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? Problem 10 Firm B Firm T Shares outstand

> You are evaluating Project A and Project B. Project A has a short period of future cash flows, while Project B has relatively long future cash flows. Which project will be more sensitive to changes in the required return? Why?

> Conoly Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent? Year ………………………Cash Flow 1 ………………………

> Firm A and Firm B have debt–total asset ratios of 35 percent and 55 percent and returns on total assets of 9 percent and 7 percent, respectively. Which firm has a greater return on equity?

> Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why isn’t the goal to maximize the future share price?

> Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.61 and Kr 5.72, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate in Norway is 5 percent. a. Is there an arbitrage opportu

> Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?

> Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500. a. I

> Acquiring firm stockholders seem to benefit little from takeovers. Why is this finding a puzzle? What are some of the reasons offered for it?

> Lealos, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Lealos should proceed or not. Describe the buildup of receivables in this case. The requir

> At least part of Dell’s corporate profits can be traced to its inventory management. Using just-in-time inventory, Dell typically maintains an inventory of three to four days’ sales. Competitors such as Hewlett-Packard and IBM have attempted to match Del

> No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $3.2 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so

> Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?

> The Germinating Flower Co. has earnings of $1.75 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?

> Say you own an asset that had a total return last year of 12.5 percent. If the inflation rate last year was 5.3 percent, what was your real return?

> Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $575,000. The sales price

> You are discussing a project analysis with a coworker. The project involves real options, such as expanding the project if successful, or abandoning the project if it fails. Your coworker makes the following statement: “This analysis is ridiculous. We lo

> You are evaluating two different silicon wafer milling machines. The Techron I costs $215,000, has a three-year life, and has pretax operating costs of $35,000 per year. The Techron II costs $270,000, has a five-year life, and has pretax operating costs

> Suppose you are offered $7,000 today but must make the following payments: Year ………………………Cash Flows ($) 0 ……………………………………………….$ 7,000 1 …………………………………………………−3,700 2 ………………………………………………..−2,400 3 ………………………………………………..−1,500 4 ………………………………………………...−1,200 a.

> Projects A and B have the following cash flows: a. If the cash flows from the projects are identical, which of the two projects would have a higher IRR? Why? b. If C1B = 2C1A, C2B = 2C2A, and C3B = 2C3A, then is IRR A = IRR B ? Year Project A Proje

> Compute the future value of $1,900 continuously compounded for a. 7 years at a stated annual interest rate of 12 percent. b. 5 years at a stated annual interest rate of 10 percent. c. 12 years at a stated annual interest rate of 5 percent. d. 10 years at

> The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $24,099 original price? Why? If you looked in the year 2019, do you think the price would be higher or lower th

> The Steiben Company has an ROE of 13.1 percent and a payout ratio of 40 percent. a. What is the company’s sustainable growth rate? b. Can the company’s actual growth rate be different from its sustainable growth rate? Why or why not? c. How can the compa

> Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

> Given the information for Anna’s Tennis Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2012 was $945,000 and that the firm reduced its net working capital investment by $87,000. What was the firm’

> Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Larry Ellison of Oracle has been one of the best compensated CEOs in the United States, ea

> Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you of 141.30 Singapore dollars each. You will pay for the shipment when it a

> Several firms have entered bankruptcy, or threatened to enter bankruptcy, at least in part as a means of reducing labor costs. Whether this move is ethical, or proper, is hotly debated. Is this an ethical use of bankruptcy?

> Cholern Electric Company (CEC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-High Nuclear Station have been discouraging. Several shareholders have expressed concern over last yearâ€&#153

> Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $2.4 million per

> An investment offers a 14 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan believe the inflation rate will be over the next year?

> You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone…………………………… =$35 Variable costs per abalone……………………. =$6.10 Fixed costs per year………………………. =$375,000

> An option can often have more than one source of value. Consider a logging company. The company can log the timber today or wait another year (or more) to log the timber. What advantages would waiting one year potentially have?

> Take a look back at Figure 31.1 to answer the following questions: a. If you have $100, how many euros can you get? b. How much is one euro worth in dollars? c. If you have 5 million euros, how many dollars do you have? d. Which is worth more, a New Zeal

> Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.8 million. The marketing department predicts that sales related to the project will be $2.5 million per year for the next

> A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play? To a

> A project has an initial cost of I, has a required return of R, and pays C annually for N years. a. Find C in terms of I and N such that the project has a payback period just equal to its life. b. Find C in terms of I, N, and R such that this is a profit

> Consider the following two mutually exclusive projects available to Global Investments, Inc.: The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake Project A. At a luncheon for shareholders, the manager of

> An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $150 annually if the next payment occurs one year from today? The market interest rate is 4.6 perc

> Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $420 million. Current assets, fixed assets, and short-term debt are 20 percent, 75 percent,

> Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it be more useful than ROA in comparing two companies?

> The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2012 balance sheet showed $525,000 and $3.7 million in the same two accounts, respectively. If

> In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this tr

> Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of the following scenarios, evaluate the impact the announcement would have on an Ame

> Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market. a. Is the dollar selling at a premium or a discount relative to the franc? b. Does the financial market expect the franc to st

> Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?

> The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here: Flannery’s shareholders will receive one share of Stultz stock for every three shares they h

> What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their management team? How are the target firm shareholders ha

> The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. If annual credit sales are $9.3 million, what is the company’s balance sheet amount in accounts receivable?

> It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce

> For each of the short-term marketable securities given here, provide an example of the potential disadvantages the investment has for meeting a corporation’s cash management goals: a. U.S. Treasury bills. b. Ordinary preferred stock. c. Negotiable certif

> Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?

> U.S. Treasury bonds are not rated. Why? Often, junk bonds are not rated. Why?

> B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.2 million. By g

> An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salva

> When the Beacon Computer Company filed for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information: Assuming there are no legal fees associated with the bankruptcy, as a trustee, what distribution of liqu

> “When evaluating projects, we’re only concerned with the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.

> Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate discount rate is 10 percent. a. Compute the profitability index for each of the two projects. b. Which project(s) should Greenplain accept

> The investment in Project A is $1 million, and the investment in Project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? For any discount rate from 0 percent to 20 percent, Pro

> Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkies under the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of $1,10

> Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?

> The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7,28

> The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed longterm debt of $1.52 million. The 2012 income statement showed an interest expense of $127,000. What was the firm’s cash flow

> Could a company’s change in net working capital be negative in a given year? Explain how this might come about. What about net capital spending?

> Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most o

> The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .21 percent per month. The interest rate in Great Britain is .57 percent per month. The spot exchange rate is £ .64, and the t

> Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?

> Are the following statements true or false? Explain why. a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to the dollar. b. Suppose you are a German machine tool

> What are DIP loans? Where do DIP loans fall in the APR?

> Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $1.1 million indefinitely. The current market value of Teller is $45 million,

> Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net 40. The discount is taken by 40 percent of the customers. What is the total amount of th

> What are the different inventory types? How do the types differ? Why are some types said to have dependent demand, whereas other types are said to have independent demand?

> Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: The total collection time will be reduced by three days if the lockbox system is adopted. a. What is the PV of adopting the s

> Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?

> If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent, what is the approximate real rate of interest? The exact real rate?

> The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $175,000 the manager can conduct a focus group that will increase the product’s chance of succ

> The Mango Republic has just liberalized its markets and is now permitting foreign investors. Tesla Manufacturing has analyzed starting a project in the country and has determined that the project has a negative NPV. Why might the company go ahead with th

> You place an order for 500 units of inventory at a unit price of $135. The supplier offers terms of 1/10, net 30. a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit? b. What is the discoun

> Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $40,000. The sausage s

> When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain.

> Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $385,000, to be paid immediately. Bill expects aftertax cash inflows of $84,000 annually for seven years, after which he plans to scrap the equipment and re