## Float And Cash Management

The need to hold cash to take advantage of additional investment opportunities, such as bargain purchases. The need to hold cash as a safely margin to act as a financial reserve The need to hold cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations. We begin our analysis of working capital management by looking at how firms manage cash. The basic objective in cash management is to keep the investment in cash as low as possible while still...

## Dividend Payout and Earnings Retention

As we have seen in various places, a firm's net income gets divided into two pieces. The first piece is cash dividends paid to stockholders. Whatever is left over is the addition to retained earnings. For example, from Table 3.3, Prafrock's net income was 363, of which 121 was paid out in dividends. If we express dividends paid as a percentage of net income, the result is the dividend payout ratio Dividend payout ratio Cash dividends Net income 121 363 33Va Retention ratio Addition to retained...

## Info

Aggregate growth estimates can be found at www.zacks.com research earnings. Notice that we calculated the change in the dividend on a year-to-year basis and then expressed the change as a percentage. Thus, in 2005, for example, the dividend rose from S 1. 10 to S1.20, for an increase of .10. This represents a .10 1.10 9.09 increase. If we average the four growth rates, the result is (9.09 + 12.50 + 3.70 + 10.71 ) 4 9 , so we could use this as an estimate for the expected growth rate, g. Notice...

## Whats in a Ratio

Abraham Briloff, a well-known financial commentator, famously remarked that financial statements are like fine perfume to be sniffed but not swallowed. As you have probably figured out by now, his point is that information gleaned from financial statements and ratios and growth rates computed from that information should be taken with a grain of salt. For example, looking back at the beginning of the chapter, investors must really think that Ciena Corporation will have extraordinary growth....

## [Residual Dividend Approach

Earlier, we noted that firms with higher dividend payouts will have to sell stock more often. As we have seen, such sales are not very common and they can be very expensive. Consistent with this, we will assume that the firm wishes to minimize the need to sell new equity. We will also assume that the firm wishes to maintain its current capital structure. If a firm wishes to avoid new equity sales, then it will have to rely on internally generated cash flow to finance new, positive NPV...

## Glossary

Absolute priority rule (APR) The rule establishing priority of claims in liquidation. Accelerated Cost Recovery System (ACRS) Depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications, accounts payable period The time between receipt of inventory and payment for it. accounts receivable financing A secured short-term loan that involves either the assignment or factoring of receivables. accounts receivable period The time between sale...

## Standard Method of Cash Dividend Payment

Date on which the board of directors passes a resolution to pay a dividend Date two business days before the date of record, establishing hose individuals entitled to a dividend The decision to pay a dividend rests in the hands of the board of directors of the corporation. When a dividend has been declared, it becomes a liability of the firm and cannot be rescinded easily. Sometime after it has been declared, a dividend is distributed to all shareholders as of some specific date. Commonly, the...

## Summary Amp Gincliujsems

This chapter has introduced you to some of the basics of financial statements, taxes, and cash flow. In it we saw that 1. The book values on an accounting balance sheet can be very different from market values. The goal of financial management is to maximize the market value of the stock, not its book value. 2. Net income as it is computed on the income statement is not cash flow. A primary reason is that depreciation, a noncash expense, is deducted when net income is computed. 3. Marginal and...

## Example 122

Suppose the General Tool Company issued a 30-year, 7 percent bond eight years ago The bond Is currently selling for 96 percent of its face value, or 960 What is General Tool's cosl of debt Going back to Chapter 6, we need to calculate the yield to maturity on this bond. Since the bond is selling at a discount, the yield is apparently greater than 7 percent, but not much greater, because the discount is fairly smalt You can verify that the yield to maturity is about 7.37 percent, assuming annual...

## An Illustration of the Drre Oevance of Dividend Policy

A powerful argument can be made that dividend policy does not matter. We illustrate this by considering the simple case of Wharton Corporation. Wharton is an all-equity firm that has existed for 10 years. The current financial managers plan to dissolve the firm in two years. 'Ihe total cash flows the firm will generate, including the proceeds from liquidation, are SI0.000 in each of the next two years. Current Policy Dividends Set Equai to Cash Flow At the present time, dividends at each date...

## Cash Flow to Creditors and Stockholders

The cash flows to creditors and stockholders represent the net payments to creditors and owners during the year. They are calculated in a similar way. Cash flow to creditors is interest paid less net new borrowing cash flow to stockholders is dividends paid less net new equity raised. Cash Flow to Creditors Looking at the income statement in Table 2,2, we see that U.S. paid 70 in interest to creditors. From the balance sheets in Table 2. i. long-term debt Another name for cash (low from assets...

## Piepkorn Manufacturing Working Capital Management Part I

You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and. that's what you've been brought in to do....

## Chapter

14.1 Cash Dividends and Dividend Payment 435 Standard Method of Cash Dividend Payment 436 Dividend Payment A Chronology 436 More on Ihe Ex-Dividend Date 437 14.2 Does Dividend Policy Matter 439 An Illustration of he Irrelevance of Dividend Policy 439 Current Policy Dividends Set Equal to Cash Flow 439 Alternative Policy Initial Dividend Greater Than Cash Flow 440 A Test- 440 Some Real-World Factors Favoring a Low Payout 441 Taxes 441 Flotation Costs 441 Dividend Restrictions 442 Some Real-World...

## EtMiptfeir Edew Amp S El [Fittest Ptoblem

The L5 Corporation is considering an equity issue to finance a new space station. Atotal of 10 million in new equity is needed. If the direct costs are estimated at 6 percent of the amount raised, how large docs the issue need to be What is the dollar amount of the flotation cost Answer to Chapter Review and SeHF-Test Ps-o amp Benni 15.1 The firm needs to net 10 million after paying the 6 percent flotation costs. So the amount raised is given by Amount raised X .06 10...

## Table

The way in which the yearly interest on a zero coupon bond is calculated is governed by tax law. Before 1982. corporations could calculate the interest deduction on a straight-line basis. For EIN, the annual interest deduction would have been S491.65 5 S98.33 per year. Undercurrent tax law. the implicit interest is determined by amortizing the loan. We do this by first calculating the bond's value at the beginning of each year. For example, after one year, the bond will have four years until...

## Dsgbtal Study Tools

N Self-study software 13 Multiple-choice quizzes a Ftashcards for testing and learning ith the S amp P 500 index up about 14 percent and the NASDAQ stock market index up about 10 percent in 2006, stock market performance overall was neither particularly good nor bad. However, it was a great year for investors in the stock of real estate developer Amrep Corporation, which gained a whopping 369 percent, and investors in Advanced Magnetics, maker of magnetic nanoparticles, had to be attracted by...

## Ss Air Goes Public

ark Sexton and Todd Story have been discussing 1 the future of S amp S Air The company has been experiencing fast growth, and the two see only clear skies in the company's future. However, the fast growth can no longer be funded by internal sources, so Mark and Todcl have decided the time is right to take the company public, To this end, they have entered into 2. discussions with the investment bank of Crowe amp Mallard. The company has a working relationship with Kim McKenzie, the underwriter...

## The Beta For American Standard

Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking to Joey about the firm's investment portfolio, As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company...

## CROY0Cal Tiktoecokks Amd Concepts iFSEEEW

How is it possible that dividends are so important, but, aL the same time, dividend policy is irrelevant 14.2 Stock Repurchases. What is the impact of a stock repurchase on a company's debt ratio Does this suggest another use for excess cash 14.3 Dividend Policy. What is the chief drawback to a strict residual dividend policy Why is this a problem How does a compromise policy work How does it differ from a strict residual policy 14.4 Dividend Chronology. On...

## Questions

What advantages disadvantages do the mutual funds offer compared to company stock for your retirement investing Notice that, for every dollar you invest, S amp S Air also invests a dollar What return on your investment does this represent What does your answer suggest about matching programs Assume you decide you should invest at least part of your money in large capitalization stocks of companies based in the United States. What are the advantages and disadvantages of choosing the Arias...

## Risk and Return

AFTER STUDYING THIS CHAPTER, YOU SHOULD HAVE A GOOD UNDERSTANDING OF n May 2007, California Pizza Kitchen. PG amp E, and Sara Lee I joined a host of other companies in announcing operating results. As you might expect, news such as this tends to move stock prices. California Pizza's reported net income was in line with expectations, and sales increased by 15 percent. Investors ate up the news, and the stock price jumped up 7.4 percent on the day. PG amp E, the parent company of Pacific Gas and...

## Cost Of Capital For Hubbard Computer

You have recently been hired by Hubbard Computer, Inc. HCI , In Its relatively new treasury management department. HCI was founded eight years ago by Bob Hubbard and currently operates 74 stores in the Southeast, HCI is privately owned by Bob and his family, and had sales of 97 million last year. HCI primarily sells to in-store customers who come to the store and talk with a sales representative. The sales representative assists the customer in determining the type of computer and peripherals...

## Chapter Review Am Selftest Problems

Suppose the GNR Corporation has decided in favor of a capital restructuring that involves increasing its existing S5 million in debt to S25 million. The interest rate on the debt is 12 percent and is not expected to change. The firm currently has one million shares outstanding, and the price per share is 40. If the restructuring is expected to increase the ROE. what is the minimum level for EBIT that GNR's management must be expecting Ignore taxes in your answer. 13.2 M amp M...

## Ceotdgal ThdimlQm Amb Concepts Irevoew

On the most basic level, if a firm's WACC is 12 percent, what does this mean 12.2 Book Values versus Market Values. In calculating the WACC, if you had to use book values for either debt or equity, which would you choose Why 12.3 Project Risk. If you can borrow all the money you need for a project at 6 percent, doesn't it follow that 6 percent is your cost of capital for the project 12.4 WACC and Taxes. Why do we use an aftertax ligure for cost of debt but not for cost of equity 12.5...

## Z

Repeat parts a and b in Problem 1 assuming Kaelea has a tax rate of 35 percent. 3. ROE and Leverage. Suppose the company in Problem 1 has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming no taxes. b. Repeat part a assuming the firm goes through with the proposed recapitalization. c....

## Can the Pros Beat the Market

006 was a great year for investors in the ING Russia mutual fund, which gained over 65 percent for the year. And investors iri the Profunds Telecom Ultrasector were calling relatives to brag about that fund's nearly 50 percent return. But the question remains Can professional investors consistently beat the market In 2006, the Legg Mason Value Trust trailed the market by about 10 percent, the first time the fund had underperforrned in 16 years, the longest such active streak. The fund with the...

## The Historical Record

Com where you can download free sample data. Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.2 They presented year-to-year historical rates of return on five important types of financial investments. The returns can be interpreted as what you would have earned if you had held portfolios of ihe following 1. Large-company stocks. The large-company stock portfolio is based on the Standard amp Poor's 500 index, which...

## The Cost Of Equity

The return that equity investors require on their investment in the firm We begin with the most difficult question on the subject of cost of capital What is the firm's overall cost of equity The reason this is a difficult question is that there is no way of directly observing the return that the firm's equity investors require on their investment. Instead, we must somehow estimate it. This section discusses two approaches to determining the cost of equity the dividend growth model approach and...

## Problems with Financial Statement Analysis

We close out our chapter on working with financial statements by discussing some additional problems that can arise in using financial statements. In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which items or ratios to look at and to guide us in establishing benchmarks. As we discuss in other chapters, there are many cases where financial theory and economic logic provide guidance in making judgments about...

## Organization of the NYSE

The New York Stock Exchange, or NYSE, popularly known as the Big Board, recently celebrated its bicentennial. It has occupied its current location on Wall Street since the turn of the twentieth century. Measured in terms of dollar volume of activity and the total value of shares listed, it is the largest stock market in the world. Members Historically, the NYSE had 1,366 exchange members. Prior to 2006, the exchange members were said to own seats on the exchange, and, collectively, the members...

## Job At Ss

You recently graduated from college, and your job search led you to S amp S Air. Since you felt the company's business was headed skyward, you accepted their job offer. As you are finishing your employment paperwork, Chris Guthrie, who works in the Finance Department, stops by to inform you about the company's new 401 k plan. A 401 k is a type of retirement plan offered by many companies. A 401 k is tax deferred, which means that any deposits you make into the plan are deducted from your...

## Bonds and bond valuation

When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing, or selling, debt securities that are genetically called bonds. In this section, we describe the various features of corporate bonds and some of the terminology associated with bonds. We then discuss the cash flows associated with a bond and how bonds can be valued using our discounted cash flow procedure. As we mentioned in our previous chapter, a bond is normally an...

## If A Portfolio Of The Two Assets Has A Beta Of 1.84 What Are The Portfolio Weights

Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio b. What is the variance of this portfolio The standard deviation i 1. Calculating Portfolio Betas. You own a stock portfolio invested 25 percent in Slock Q, 20 percent in Stock R, 45 percent in Stock S, and 10 percent in Stock T. The betas for these four stocks are .73, .86, 1.25, and 1.84, respectively. What is the portfolio beta 12. Calculating Portfolio Betas. You own a...

## Crtocil TqewqiMq Amid Concepts Revdew

11.1 Diversifiable and Nondiversifiable Risks. In broad terms, why is some risk diversifiable Why are some risks nondiversifiable Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk 11.2 Information and Market Returns. Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely H K. A LE R,, - R,i X , 20 - 8 14 - 8 X , i 12 6 2.0 to be 2 percent in the coming year,...

## Uestgms Mp Problems

What are the portfolio weights for a portfolio that has Basic 90 shares of Stock A that sell for 84 per share and 50 shares of Stock B that sell for 58 Questions 1-26 per share 2. Portfolio Expected Return. You own a portfolio that has 700 invested in Stock A and 2,500 invested in Stock B. If the expected returns on these stocks are 10 percent and 16 percent, respectively, what is the expected return on the portfolio 3. Portfolio Expected Return. You own a...

## Accounting Numbers Are Often Just Pale Reflections Of Economic Reality

Position, In addition to discussing financial ratios and what they mean, we will have quite a bit to say about who uses this information and why. Everybody needs to understand ratios. Managers will find that almost every business characteristic, from profitability to employee productivity, is summarized in some kind of ratio. Marketers examine ratios dealing with costs, markups, and margins. Production personnel focus on ratios dealing with issues such as operating efficiency. Accountants need...

## Edo Fv

Now you can write down this answer to save it, but hat's inefficient All calculators have a memory where you can store numbers. Why not just save it there Doing so cuts way down on mistakes because you don't have to write down and or rekey numbers,, and it's much faster. Next we value the second cash Row We need to change N to 2 and FV to 400. As long as we haven't changed anything else, we don't have to reenter l Y or clear out the calculator, so we have You save ttus number by adding it to...

## Fv

Nonce that we put a negative sign on the payment why7 . W th a spreadsheet, use the function FV rate.nper,pmt.pv be sure to put in a zero for pv and to enter -2.000 as the payment. So far, we have only discussed ordinary annuities. These are the most important, but there is a variation that is fairly common. Remember that with an ordinary annuity, the cash flows occur at the end of each period. When you take out a loan with monthly payments, for example, the first loan payment normally occurs...

## 6 Percent Preferred Stock For 95.12

Refer to Table 10.1 in the text and look at the period from 1973 a. Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. c. Calculate the observed risk premium in each year for the large-company stocks versus the T-bi 11 gt . What was the arithmetic average risk premium over this period1.' What was the standard deviation...

## Chapter Revoew Amid Selftest Problems

Assume you deposit SI,000 today in an account that pays 8 percent interest. How much will you have in tour years 4.2 Calculating Present Values. Suppose you have just celebrated your 19th birthday. A rich uncle set up a trust fund for you that will pay you S 100.000 when you turn 25. If the relevant discount rate is 11 percent, how much is this fund worth today 4.3 Calculating Rates of Return. You've been offered an investment that will double your money in 12...

## Cqtgcal Thinking Am Coimcepts Review

Why does the value of a share of stock depend on dividends Stock Valuation. A substantial percentage of the companies listed on the NYSE and the NASDAQ don't pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question Dividend Policy. Referring to the previous questions, under what circumstances might a company choose not to pay dividends'.' Dividend Growth Model. Under what two assumptions can wc...

## Bullock Gold Mining

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on...

## Conch Republic Electronics

Conch Republic Electronics is a mid-sized electronics manufacturer located in Key West, Florida, The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items Jay McCanless, a recent MBA graduate, has been hired by the company in its finance department. One of the...

## Ss Airs Mortgage

Mark Sexton and Todd Story, the owners of S amp S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris's analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility- Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about 25 million. Mark, Todd, and Chris...

## The Tax Shield Approach

The tax saving thai results from the depreciation deduction, calcuiated as depreciation multiplied by the corporate tax rate. A useful variation on our basic definition of operating cash flow OCF is the tax shield approach. The tax shield definition of OCF is OCF Sales - Costs x 1 - T Depreciation x T where T is the coiporate tax rate. Assuming that T 34 . the OCF works out to be OCF 200,000 - 137,000 x .66 30,000 x .34 41,580 10,200 51,780 This approach views OCF as having two components. The...

## Calculate The Real Return For Each Year What Is The Average Real Return For Treasury Bills

What are the arithmetic and geometric returns for the stock 22. Calculating Returns. Refer to Table lO.l in the. text and look at the period from 1973 through 1980. a. Calculate the average return for Treasury bills and the average annual inflation rate consumer price index for this period. b. Calculate the standard deviation of Treasury bill returns and inflation over this time period. c. Calculate the real return for each year. What is the average real return for Treasury bills d. Many people...

## Chapter Kevdew Amp Selftest Ptoiblems

7.1 Dividend Growth and Stock Valuation. The Brigapenski Co. has just paid a cash dividend of 2 per share. Investors require a 16 percent return from investments such as this. If the dividend is expected to grow al a steady 8 perccnl per year, what is the current value of the stock'.' What will the stock be worth in live years 7.2 Required Returns. Suppose we observe a stock selling for 40 per share. The next dividend will be 1 per share, and you think the dividend will grow at 12 percent per...

## Why Evaluate Financial Statements

As we have discussed, the primary reason for looking at accounting information is that we don't have, and can't reasonably expect to get, market value information. It is important to emphasize that, whenever we have market information, we will use it instead of accounting data. Also, if there is a conflict between accounting and market data, market data should be given precedence. Financial statement analysis is essentially an application of management by exception. In many cases, such analysis...

## Stock Valuation At Rag An

Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling HVAC units. Ragan, Inc., has experienced rapid growth because of a proprietary technology thai increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to...

## Common Size Balance Sheets

For easy reference, Prufrock Corporation's 2007 and 2008 balance sheets are provided in Table 3.1. Using these, we construct common-size balance sheets by expressing each item as a percentage of total assets. Prufrock's 2007 and 2008 common-size balance sheets are shown in Table 3.2. Notice that some of the totals don't check exactly because of rounding errors. Also notice that the total change has to be zero since the beginning and ending numbers must add up to 100 percent. In this form,...

## You Are Serving On A Jury. A Plaintiff Is Suing The City For Injuries Sustained After A Freak Street Sweeper Accident.

Simple Interest versus Compound Interest. First Simple Bank pays 7 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bunk over an investment horizon of 10 years 30. Calculating Annuities Due. You want to buy a new sports car from Muscle Motors for 48,000. The contract is in the form of a 60-month annuity due at a 7.45 percent APR. What will your monthly...

## Uestdms Am Problems

Kenny, Inc., is looking at setting up a new manufacturing Basic plant in South Park. The company bought some land six years ago for 8 million Questions 1-20 in anticipation of using it as a warehouse and distribution site, but the Company has since decided to rent facilities elsewhere. The land would net 10.2 million if it w ere sold today. The company now wants to build its new manufacturing plant on this land the plant will cost 24 million to build, and the site...

## SOIV1E Features Of ComiviOm Amb PrefemE STOeiC

Equity without priority for dividends or in bankruptcy A procedure in which a shareholder may cast all votes for one member of ihe board of directors. A procedure in which a shareholder may casl all votes for each member of the board of directors In discussing common stock features, we focus on shareholder rights and dividend payments. For preferred stock, we explain what preferred'' means, and we also debate whether preferred stock is really debt or equity. The term common stock means...

## CmTbcal Thomgomg And Concepts Evdew

8.1 Payback Period and Net Present Value. If a project with conventional cash flows has a payback period less than its life, can you definitively state the algebraic sign of the NPV Why or why not Net Present Value. Suppose it project has conventional cash flows and a posilive NPV. What do you know about its payback its profitability index Its IRR Explain. Payback Period. Concerning payback a. Describe how the payback period is calculated and describe the information this measure provides about...

## More on bond features

In this section, we continue our discussion of corporate debt by describing in some detail the basic terms and features that make up a typical long-term corporate bond. We discuss additional issues associated with long-term debt in subsequent sections. Securities issued by corporations may be classified roughly as equity securities and debt securities. At the crudest level, a debt represents something that must be repaid it is the result of borrowing money. When corporations borrow, they...

## What Price Would You Expect To Pay For The Kenny Corp. Bond What Is The Bond S Current Yield

What is the yield to maturity for the bond issued by Xenon Inc. 29. Bond Prices. What price would you expect to pay for the Kenny Corp. bond What is the bond's current yield 30. Coupon Rates. What is the coupon rate for the Williams Co. bond 31. Components of Bond Returns, Bond P is a premium bond with a 9 percent CHALLENGE coupon. Bond D is a 5 percent coupon bond currently selling at a discount. Both Questions 31-32 bonds make annual payments, have a YTM of 7 percent, and...

## Night Hawk Co. Issued 15 Year Bond

Is the yield to maturity on a bond the same thing as Questions 1-14 J the required return Is YTM the same thing as the coupon rate Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond now The YTM 2. interpreting Bond Yields. Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what...

## Questiioims And Problems

Banya, Inc., just paid a dividend of 2.20 per share on its stock. The dividends ate expected lo grow at a constant rate of 4 percent per year, indefinitely. If investors require an 11 percent return on Banya stock, what is the current price What will the price be in three years In 15 years 2. Stock Values. The next dividend payment by Carroll, Inc., will be 1.90 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells...

## Curly S Life Insurance Co. Is Trying To Sell You An Investment Policy That Will Pay You And Your Heirs 20 000 Per Year

Present Value and Multiple Cash Flows. Investment X offers to pay you 5,500 per year for 9 years, whereas Investment Y offers to pay you 8,000 per year for 5 years. Which of these cash flow streams has the higher present value if the discount rate is 6 percent If the discount rate is 22 percent 3. Future Value and Multiple Cash Flows. Rally. Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash...

## Reality Bytes

11 you, or someone you know, is a regular lottery player, you probably already understand that you are 20 times more likely to be killed by a lightning bolt than to win a big lottery jackpot. How bad are the odds Nearby you will find a table comparing your chances ot winning the Mega Millions Lottery to other events. Odds of winning Mega Millions jackpot 1 135,145,920 Odds of being killed by a venomous spider 1 57,018,763 Odds of being killed by a dog bite 1 11,403,753 Odds of being killed by...

## Concept Questions

3.2a What are the five groups of ratios Give two or three examples of each kind, 3.2b Turnover ratios all have one of two figures as numerators. What are these two figures What do these ratios measure How do you interpret the results 3.2c Profitability ratios all have the same figure in the numerator. What is it What do these ratios measure How do you interpret the results 3.2 1 Given the total debt ratio, what other two ratios can be computed Explain how.

## Critical tihidmkiing aim02 concepts ikeiew

Is it true that a U.S. Treasury security is risk-free 6.2 Interest Rate Risk. Which has greater interest rate risk, a 30-year Treasury bond or a 30-year BB corporate bond 6.3 Treasury Pricing. With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher Why or why not 6.4 Yield to Maturity. Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be...

## Piepkorn Manufacturing Working Capital Management

16,1 Tracing Cash and Net Working Capital 488 16.2 The Operating Cycle and the Cash Cycle 490 Defining Ihe Operating and Cash Cycles 490 The Operating Cycle 491 The Cash Cycle 491 The Operating Cycle and Ihe Firm's Organizational Chart 492 Calculating the Operating and Cash Cycles 493 The Operating Cycle 493 The Cash Cycle 494 Inlerpreting Ihe Cash Cycle 495 16.3 Some Aspects of Short-Term Financial Policy 497 The Size of ihe Firm's Investment in Current Assets 497 Alternative Financing...

## CiFSflTOGAL TiHlOfNIilDmg Ahb Coimce1PTS IF8EWBEW

As you increase the length of time involved, what happens to the present value of an annuity What happens to the future value 5.2 Interest Rates. What happens to the future value of an annuity if you increase the rate r What happens to the present value 1 - l l .0125'- .0125 1 - 1 2.4459 . 125 1 - .4088 ,0125 47.2925 5.3 Annuity Present Values. Tri-State Megabucks Lottery advertises a 10 million grand prize. The winner receives 500,000 today and 19 annual payments of...

## Loan Types And Loan Amortization

Whenever a lender extends a loan, some provision will be made for repayment of the principal the original loan amount . A loan might be repaid in equal installments, for example, or it might be repaid in a single lump sum. Because the way that the principal and interest are paid is up to the parties involved, there are actually an unlimited number of possibilities. In this section, we describe a few forms of repayment that come up quite often more complicated forms can usually be built up from...

## Although Appealing To More Refined Tastes Art As A Collectible Has Not Always Performed So Profitably. During 2003

In 2006, a 50-cent piece issued in 1904 sold for 1,300. What was the rate of return on this investment 9. Calculating the Number of Periods. You're trying to save to buy a new 160,000 Ferrari. You have 530,000 today that can be invested at your bank. The bank pays 4.7 percent annual interest on its accounts. How long will it be before you have enough to buy the car 10. Calculating Present Values, imprudential. Inc has an unfunded pension liability of 800 million...

## Ratios And Financial Planning At Ss Air

Chris Guthrie was recently hired by S amp S Air, Inc., to assist the company with its financial planning, and to evaluate the company's performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then. S amp S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company's products have received high...

## Sdj Removal Has A Profit Margin

SDJ, Inc., has net working capital of 1,350, Basic current liabilities of 4,290, and inventory of 1,820. What is the current ratio What Questions 1-25 is the quick ratio 2. Calculating Profitability Ratios. Tinker's Bells has sales of 27 million, total assets of 19 million, and total debt of 6.4 million. If the profit margin is 8 percent, what is net income What is ROA What is ROE 3. Calculating the Average Collection Period. Pujols Lumber Yard has a current...

## The Rainbow Company Has Net Income Of 132500.

What is the basis for the statement Is this claim misleading Why or why not 29. Using the Du Pont Identity. The Rainbow Company has net income of 132,500. There are currently 29.70 days' sales in receivables. Total assets are 820,000. total receivables arc 138,600, and the debt-equity ratio is 0.60. What is the company's prolit margin Its total asset turnover Its ROE 30. Calculating the Cash Coverage Ratio. Delectable Turnip Inc.'s net income for the most...

## Long Term Solvency Measures

Long-term solvency ratios are intended to address the firm's long-run ability to meet its obligations, or, more generally, its financial leverage. These ratios are sometimes called financial leverage ratios or just leverage ratios. We consider three commonly used measures and some variations. fotaI 3 el The total debt ratio takes into account all debts of all maturities to all creditors. It can be defined in several ways, the easiest of which is Total assets - Total equity Total debt ratio - -...

## An Expanded Du Poni Analysis

So far, we've seen how the Du Pont equation lets us break down ROE into its basic three components profit margin, total asset turnover, and financial leverage. We now extend this analysis to take a closer look at how key parts of a firm's operations feed into ROE. To get going, we went to the SEC Web site www.sec.gov and found the 10-K for chemical products giant Du Pont. In the 10-K, we located the financial statements for 2006. What we found is summarized in Table 3.6. The regulatory filings...

## Based On The Balance Sheets Given For Bethesda Mining Calculate The Following Financial Ratios For Each Year

Total liabilities and owners' equity 15. Preparing Standardized Financial Statements. Prepare the 2007 and 2008 common-size balance sheets for Bethesda Mining. 16. Calculating Financial Ratios. Based on the balance sheets given for Bethesda Mining, calculate the following financial ratios for each year d. Debt-equity ratio and equity multiplier 17. Du Pont Identity. Suppose that the Bethesda Mining Company had sales of 52.678,461 and net income of 132,186 for the year ending December 31, 2008....

## Conclusion

The last thing that we need to do is to verify that the cash flow identity holds to be sure that we didn't make any mistakes. From above, cash flow from assets is 87. Cash flow to creditors and stockholders is 24 63 S87, so everything checks out. Table 2.5 contains a summary of the various cash flow calculations for future reference. As our discussion indicates, it is essential that a firm keep an eye on its cash flow. The following serves as an excellent reminder of why doing so is a good...

## Chapter Review And Selftest Problems

Below are the most recent financial statements for Wildhack. Prep ire a common-size income statement based on this information. How do you interpret the standardized net income What percentage of sales goes to cost of goods sold WILDHACK CORPORATION 2008 Income Statement In millions WILDHACK CORPORATION 2008 Income Statement In millions

## The Income Statement

The income statement measures performance over some period of time, usually a quarter or a year. The income statement equation is If you think of the balance sheet as a snapshot, then you can think of the income statement as a video recording covering the period between a before and an after picture. Table 2.2 gives a simplified income statement for U.S. Corporation. The first thing reported on an income statement would usually be revenue and expenses from the firm's principal operations....

## Summary Amd Conclusions

This chapter has discussed aspects of financial statement analysis, including 1. Standardized financial statements. We explained that differences in iinn size make it difficult to compare financial statements, and we discussed how to form common-sizc statements to make comparisons easier. 2. Ratio analysis. Evaluating ratios of accounting numbers is another way of comparing financial statement information. We therefore deiined and discussed a number of the most commonly reported and used...

## Chapter Case

CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC, Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of he design and sale of the surfboards, but his background is In surfing, not business. As a result, the company's financial records are not well maintained. The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and...

## Otestboems Aim Id Ipiroislems

Romo, lnc has current assets of 1,850, net fixed Basic assets of 8,600, current liabilities of 1,600. and long-term debt of 6,100. What is Questions 1-13 the value of the shareholders' equity account for this firm How much is net working 2. Building an Income Statement. Fyre, Inc., has sales of 625,000, costs of 260,000, depreciation expense of 79,000, interest expense of 43,000, and a tax rate of 35 percent. What is the net income for this firm 3. Dividends and...

## How Much In Fixed Assets Did Cabo Wabo Sell

Net fixed assets 9,504 9,936 Long-term debt 5,184 6,048 CABO WABO, INC. 2008 income Statement a. What is owners' equity for 2007 and 2008 b. What is the change in net working capital for 2008 c. In 2008, Cabo Wabo purchased 4,320 in new fixed assets. How much in fixed assets did Cabo Wabo sell What is the cash flow from assets for the year The tax rate is 35 percent. d. During 2008, Cabo Wabo raised 1,300 in new long-term debt. How much long-term debt must Cabo Wabo have paid off during the...

## Why Do You Think The Marginal Tax Rate Jumps From 34 To 39 At A Taxable Income Of 100 001 And Then Falls Back To A 34

Net Fixed Assets and Depreciation. On the balance sheet, the net fixed assets NPA account is equal to the gross fixed assets FA account which records the acquisition cost of fixed assets minus the accumulated depreciation AD account which records the total depreciation taken by the firm against its fixed assets . Using the fact that NFA FA AD, show that the expression given in the chapter for net capital spending. NFAcaJ NFAh f. D where D is the depreciation expense during the year , is...

## Could A Company S Change In Nwc Be Negative In A Given Year Hint Yes. Explain How This Might Come About. What About Net

What does liquidity measure Explain the trade-off a firm faces between high-liquidity and low-liquidity levels. 2.2 Accounting and Cash Flows. Why is it that the revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during a period 2.3 Book Values versus Market Values. In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market...

## Critical Thdnking Aim Concepts Review

The Financial Management Decision Process. What are the three types of financial management decisions For each type of decision, give an example if a business transaction that would be relevant. Sole Proprietorships and Partnerships. What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization What benefits are there to these types of business organization as opposed to the corporate form Corporations. What is the primary disadvantage of the...

## Part Four

First oi two chapters on time value of money. Second of two chapters on time value of money. Bond valuation. Interest rates and inflation. Clean vs. dirty bond prices and accrued interest. NASD's TRACE system and transparency in the corporate bond market. Make-whole call provisions Stock valuation. NYSE and Nasdaq Market operations. New chapter case Stock Valuation at Ragan, Inc. Chapter 8 First of two chapters on capital budgeting. NPV, IRR, payback, discounted payback, accounting rate of...

## H

The McGraw-Hill lrwin Series in Finance, Insurance, and Real Estate Franco Modigliani Professor tit-Finance and Economics Sloan School of Managemen , Massa huselis Inslitule . ftechnolggy n el Applications for Corporate finance First Edition Block and Hirt Foundations of Financial Miimifcvnmi Twelfth Edition Brealey, Myers, and Allen Princijiles t gt Corporate h unities Ninth Edition ijuponm Finance. Btitf Edition First Edition Case Studies in Finance Managing for Corporate Value Creation Fifth...