Risk management controls

What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?

-What is the difference between accumulated depreciation and depreciation expense? How are they related?

-Comment on why inflation may restrict the usefulness of the balance sheet as normally presented

-what are the three primary sections of the statement of cash flows? In what section would the payment of a cash dividend be shown

-Bettis Bus Company had earnings after taxes of $600,000 in the year 2009 with 300,000 shares of stock outstanding. On January 1, 2010, the firm issued 40,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 25 percent.

a .  Compute earnings per share for the year 2009.

b.Compute earnings per share for the year 2010.

Chapt 3

-If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be  most  interested in, and for what reasons?

-If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?

– Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

a . Return on investment

b. Inventory turnover

c. Fixed asset turnover

d.Debt-to-assets ratio

-Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?

-Low Carb Diet Supplement, Inc., has two divisions. Division A has a profit of $100,000 on sales of $2,000,000. Division B is only able to make $25,000 on sales of $300,000. Based on the profit margins (returns on sales), which division is superior?

-Polly Esther Dress Shops, Inc., can open a new store that will do an annual sales volume of $960,000. It will turn over its assets 2.4 times per year. The profit margin on sales will be 7 percent. What would net income and return on assets (investment) be for the year?

Chapt 4

-What are the basic benefits and purposes of developing pro forma statements and a cash budget?

-Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement.

-What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

-Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets  −  Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $100,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take. Does his optimistic outlook for his cash position appear to be correct?

Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.

Chapt 5

-Discuss the various uses for break-even analysis.

-What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?

-What does risk taking have to do with the use of operating and financial  leverage?

-Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit.

a. Compute the break-even point.

b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new break-even point?

c.Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

Chapt 6

-Explain how rapidly expanding sales can drain the cash resources of a firm.

-What is the significance to working capital management of matching sales and production?

-A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

-Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?

 

-Austin Electronics expects sales next year to be $900,000 if the economy is strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The firm believes there is a 15 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 25 percent probability of a weak economy.

What is the expected level of sales for next year?

-Axle Supply Co. expects sales next year to be $300,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Chapt 7

-In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

-Why would a financial manager want to slow down disbursements?

-Why are Treasury bills a favorite place for financial managers to invest excess cash?

-What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

-Beth’s Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6 percent per annum.

a. If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?

-Orbital Communications has operating plants in over 100 countries. It also keeps funds for transaction purposes in many foreign countries. Assume that in 2010 it held 100,000 kronas in Norway worth $35,000. The funds drew 12 percent interest, and the krona increased 6 percent against the dollar.

What was the value of the holdings based on U.S. dollars, at year-end? ( Hint:  Multiply $35,000 times 1.12 and then multiply the resulting value by 106 percent.)

-Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume that in 2010 it held 200,000 reals in Brazil worth 130,000 dollars. It drew 10 percent interest, but the Brazilian real declined 20 percent against the dollar.

a . What is the value of the holdings, based on U.S. dollars, at year-end? ( Hint:  Multiply $130,000 times 1.10 and then multiply the resulting value by 80 percent.)

b. What is the value of its holdings, based on U.S. dollars, at year-end if instead it drew 8 percent interest and the real went up by 12 percent against the dollar?

-Eco-Friendly Products has annual credit sales of $900,000 and an average collection period of 30 days. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Chapt 8

-Under what circumstances would it be advisable to borrow money to take a cash discount?

-How have new banking laws influenced competition?

-What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?

-Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.

-Simmons Corp. can borrow from its bank at 12 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 60. Should the firm borrow the funds?

-Mary Ott is going to borrow $5,000 for 90 days and pay $140 interest. What is the effective rate of interest if the loan is discounted?

Chapt 9

– Why does money have a time value?

-What is a deferred annuity?

-List five different financial applications of the time value of money.

 

-What is the present value of?

$8,000 in 10 years at 6 percent?

$16,000 in 5 years at 12 percent?

$25,000 in 15 years at 8 percent?

-If you invest $12,000 today, how much will you have:

In 6 years at 7 percent?

In 15 years at 12 percent?

In 25 years at 10 percent?

In 25 years at 10 percent (compounded semiannually)?

-How much would you have to invest today to receive:

$12,000 in 6 years at 12 percent?

$15,000 in 15 years at 8 percent?

$5,000 each year for 10 years at 8 percent?

$40,000 each year for 40 years at 5 percent?

Chapt 10

-How is valuation of any financial asset related to future cash flows?

If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?

– What type of dividend pattern for common stock is similar to the dividend payment for preferred stock?

-What factors might influence a firm’s price-earnings ratio?

Chapt 11

-Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)?

– In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?

– What are the two sources of equity (ownership) capital for the firm?

– Why is the cost of retained earnings the equivalent of the firm’s own required rate of return on common stock (Ke )?

-In March 2010 Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August 2010, Mr. Hertz came up with a heating compound that would have a return of 14  percent. The Chief Financial Officer, Mr. Smith, told him it was impractical because it would require the issuance of common stock at a cost of 16 percent to finance the purchase. Is the company following a logical approach to using cost of capital?


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