Using the net income and earnings per common share (EPS) figures from Canadian Pacific ’ s (CP ’ s) income statement (Figure 3‐5), determine how many shares (approximately) the company had outstanding at the end of 2014 .
> 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
> What is the objective behind the stock option plan of executives? In reality, does it achieve this objective?
> Public corporations have no fixed lifespan; as such, they are often viewed as entities that will pay dividends to their shareholders in perpetuity. Suppose a firm pays a dividend of $2 per share every year. If the discount rate is 12 percent, what is the
> If Alysha puts $ 50,000 in a savings account paying 6 percent per year, determine how much money she will have in total at the end of the first year if interest is compounded: a. annually b. monthly c. daily
> Jimmie is buying a new car. His bank quotes a rate of 9.5 percent per year for a car loan. Calculate the effective annual rate if the compounding occurs: a. annually b. quarterly c. monthly
> Bank A pays 7.25 percent interest compounded semi‐annually, Bank B pays 7.2 percent compounded quarterly, and Bank C pays 7.15 percent compounded monthly. Which bank pays the highest effective annual rate?
> A firm had retained earnings of $18,000 at the beginning of the year. Its net income for the year was $14,300, and its dividend payout ratio is 30 percent. What are its retained earnings at the end of the year?
> The balance sheet for a small corporation shows total assets of $525,600, common equity of $136,000, and retained earnings of $75,000. Calculate the total liabilities.
> Mrs. Kwan lives in Ontario. Her annual salary is $225,000. What is the marginal tax on her salary?
> The balance sheet for a small firm shows total assets of $529,500 and total liabilities of $379,000. What is the shareholders ’ equity?
> A firm ’ s net earnings are $85 million and it has 60 million shares outstanding. Determine its earnings per share.
> One key part of ROE in the DuPont system is the return on assets (ROA). Find the ROA for Finns ’ Fridges for both years and determine if it is increasing or decreasing.
> The large competitor firm mentioned in Practice Problem 19 had net operating income of $4.426 million and sales of $30.16 million in its most recent accounting period. Find the operating margin for this competitor. Comment on Finns ’ Fridges ’ level of o
> Use the total “Dividends paid” figure from the firm ’ s cash flow statement (Figure 3‐6) and your answer to Practice Problem 40 to estimate the dividends per common share outstanding for 2014.
> Using the DuPont system, what are Excelsior Inc. ’ s net profit margin, asset turnover, and leverage ratio in year 2? Year 2 Statement of Comprehensive Income (SMillion) Net sales 1,850 Taxable income 985 Less: Cost of goods sold 60
> The firm has 200 million shares outstanding. What is the firm ’ s year 2 earnings per share?
> Calculate the degree of total leverage (DTL) and break‐even point for a company, given the following information: sales are $400,000; variable cost is $130,000; net income is $180,000; tax rate ( T ) is 40 percent; fixed cost is $80,000.
> For GG. Co., calculate the degree of total leverage (DTL) and break‐even point of sales at which the firm covers all its operating and fixed costs, given the following information: sales are $5,050,000; variable cost is $1,850,000; net income is $685,750
> What is the firm’ s net working capital in year 2?
> In 2015, a firm ’ s revenue is $100,000, cost of sales is $40,000, rent is$15,000, depreciation is$3,000, and interest paid is $2,000. Its tax rate is 35 percent. a. Construct an income statement based on this information. b. If the company pays 20 perce
> Suppose that Finns’ Fridges actually pays $270 in dividends in year 3. Determine the value of the retained earnings account at the end of year 3 based on the forecast net income calculated in Practice Problem 29.
> Based on the balance sheet you created, how much working capital does Finns ’ Fridges have?
> What was the growth rate of sales at CP in 2013 and 2014? Did the sales growth rate increase or decrease?
> List the four areas of conflict of interest between shareholders and managers.
> The firm ’ s dividend payout ratio is 30 percent. What was the firm ’ s year 2 net income?
> If Excelsior Inc. ’ s expected sales growth rate is 5 percent, determine the external financing required. Will the corporation have a cash surplus or deficit?
> What sales growth rate must Excelsior Inc. achieve if it is to have a cash surplus? Year 1 Year 2 Year 1 Year 2 Cash 100 112 Accounts payable 400 350 Accounts 330 234 Notes payable 390 370 receivable Year 1 Year 2 Year 1 Year 2 Inventory 410 435 Sub
> What are the firm’ s changes in net working capital in year 2?
> If Excelsior Inc. keeps the same dividend payout ratio, what are the expected total dividends in year 3 if the sales growth rate is 5 percent?
> Determine valuation ratios including book value per share, dividend yield, and dividend payout for year 2.
> David and Douglas invested $500 each to capitalize Finns ’ Fridges. To allow for future flexibility (such as selling shares to other investors), they placed a “par value” of $10 on each share; thus each brother owns 50 shares. Based on the net income fig
> Determine net fixed asset turnover in year 2. Year 2 Statement of Comprehensive Income (SMillion) Net sales 1,850 Taxable income 985 Less: Cost of goods sold 605 Less: Taxes 156 Less: Depreciation 180 Net income 829 Eamings before interest 1,065 Addi
> Determine productivity ratios including inventory turnover and average days revenue in inventory in year 2.
> Suppose Janice obtains only $93,000 when she sells all the assets of the firm described in Practice Problem 18. How much money would the debt holders receive if the business were a corporation? If it were a sole proprietorship? How much would Janice rece
> Describe the main advantages and disadvantages of sole proprietorships and partnerships.
> Determine productivity ratios including receivables turnover and average collection period in year 2.
> Determine the company ’ s efficiency ratios including gross profit margin and operating margin in year 2. Explain the differences.
> Determine Excelsior Inc. ’ s efficiency ratio of times interest earned in year 2.
> The present value of a dollar to be received one year from today is 0.927644. The present value of a dollar to be received two years from today is 0.854172. What is the price of a bond that pays an annual coupon of 7 percent and matures in two years? Fin
> Use two approaches to determine ROE in year 2. (Hint: one approach is from the definition and the other is to use the DuPont system.)
> A bond has a yield to maturity of 8 percent and a current yield of 6 percent. Is the bond trading at par, at a premium, or at a discount? What can you say about the coupon rate?
> Altech Inc. has a convertible bond with a face value of $1,000 and coupon rate of 6 percent. The bond will mature in 10 years, and its current price is $950. The bond can be converted at any time into 25 shares of Altech Inc., whose current share price i
> A 90‐day U.S. T‐bill has a bank discount yield (kBDY) of 4.673 percent. Find the quoted price. Find the bond equivalent yield (kBEY) on a 90‐day Canadian T‐bill with the same quoted price.
> a . What is the value of a 10‐year, zero coupon bond with a face value of $1,000 when the market rate is 8 percent? b . Calculate the YTM of the above zero coupon bond if the current price is $760.
> Calculate the bank discount yield on a 92‐day U.S. T‐bill that is currently quoted at $97.75. Find the bond equivalent yield on a 92‐day Canadian T‐bill with the same quoted price.
> Janice borrowed $100,000 from friends and family to start her company (a sole proprietorship). Business has been poor recently, and Janice has decided to cease operations and liquidate the firm. She expects to obtain $108,000 from selling the assets of t
> Suppose Finns’ Fridges is subject to corporate income tax at a rate of 40 percent. What will the company ’s net income be after tax?
> A company is contemplating issuing new 15‐year bonds at par. The company currently has 5.5 percent coupon bonds on the market selling for $936. The bonds pay semi‐annual interest and have 15 years until maturity. What coupon rate should the company set o
> Corine ’ s Candies Inc. registered a gross profit margin of 75 percent on sales of $16 million in 2016. What would the company ’s income statement show for the cost of goods sold?
> The forecast for retained earnings (Practice Problem 31) changes the year 3 forecast for total liabilities and owners ’ equity to $4,770. With total assets forecast to be $5,177, determine how much external financing will be required in year 3.
> A nine‐year, 6.5‐percent coupon bond is selling for 106.2 percent of par. What is the bond ’ s market yield if it makes semi‐annual coupon payments?
> An 8 percent annual coupon bond with 12 years left to maturity is selling for $928. What is the YTM of the bond?
> Based on the figures in practice problems 17 and 18, how much money did the shareholders actually invest in the firm (i.e., what is the value of the capital stock)? Use the following information to answer practice problems about Finns ’
> Calculate the price change for a 1-percent decrease in market yield for the following bond: par = $1,000; coupon rate = 6 percent, paid semi-annually; market yield = 6 percent; term to maturity = 10 years.
> List the correct bookkeeping entries when a firm sells $50,000 worth of inventories for $80,000 using credit sales. (Ignore the tax effect.)
> List the major jobs available in the financial industry.
> Describe the two major types of secondary markets.
> Grace, a retired librarian, would like to donate some money to her alma mater to endow a $ 5,000 annual scholarship. The university will manage the funds and expects to earn 3 percent per year. How much will Grace have to donate so that the endowment fun
> When Jon graduates in three years, he wants to throw a big party, which will cost $800. To have this amount available, how much does he have to invest today if he can earn a compound return of 5 percent per year?
> On the advice of a friend, Gilda invests $ 20,000 in a mutual fund that has earned 10 percent per year, on average, in recent years. If this rate of return continues, determine how much her investment will be worth in: a. one year b. five years c. 10 yea
> If a bond‐rating agency downgrades the rating of a bond, how will it affect the price of that bond?
> When you hired Dan to manage your business, you agreed to pay him a bonus of 10 percent of profits at the end of each year. The company now has a choice between two projects (it can take on only one of them). Project A will generate profits of $50,000 pe
> A new Internet bank pays compound interest of 0.5 percent per month on deposits. How much interest will Khalil’ s summer savings of $ 1,200 earn in one year with this online bank account?
> Khalil’ s summer job has given him $ 1,200 more than he needs for his tuition this year. The local bank pays simple interest at a rate of 0.5 percent per month. How much interest will he earn in one year?
> Suppose the inflation rate in Canada, as measured by the CPI, has been averaging 3.5 percent in recent years. The most recent Bank of Canada announcement indicates that it expects 3.2‐percent inflation over the next year. If the real rate of return on Ca
> Trustco Income Fund is an income trust whose units trade on the Toronto Stock Exchange. On October 31, 2006, just before the Government of Canada announced new taxes for businesses organized as trusts, the price of each Trustco unit was $15.12. The firm
> A bond is currently trading at $841.70. It has 15 years to maturity. If you require a rate of return of 12 percent, what should be the bond ’ s coupon rate if the bond pays semi‐annual coupons?
> State the statutory responsibilities of directors that are described in the Canada Business Corporations Act.
> Summarize the main characteristics of corporations.
> Describe the relationship between bond interest rate risk and the coupon rate, the market yield, and the term to maturity.
> Calculate the price of the following bond: FV = $1,000; coupon rate = 6 percent, paid semi-annually; market rate = 5 percent; term to maturity = 10 years.
> State the relationship between market rates and bond prices.
> Describe the difference between positive and negative bond covenants.
> Define “perpetuity”.
> What time-value-of-money formula do we need to value a bond?
