CH 1-4 HW

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 •Your existing business generates $99,000 in EBIT. •The corporate tax rate applicable to your business is 25%. •The depreciation expense reported in the financial statements is $18,857. •You don't need to spend any money for new equipment in your existing cafés; however, you do need $14,850 of additional cash. •You also need to purchase $7,920 in additional supplies—such as tablecloths and napkins, and more formal tableware—on credit. •It is also estimated that your accruals, including taxes and wages payable, will increase by $4,950. Based on your evaluation you have ____ in free cash flow.

$83,207

What is Smith's earnings per share (EPS) for the trailing 12 months?

$2.03

Sheila saves $10,000 and buys a certificate of deposit (CD) that will mature in six months.

money markets

A company records a loss of $70,000 on the sale of its outdated inventory.

operating activity

Which of the following cash outflows cannot be deducted from the operating income to derive the taxable income?

dividends paid

Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations.

false

How heavy was the trading of Smith's stock today relative to the normal level of trading?

relatively heavy trading

Which of the following statements best describes free cash flow?

residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures

A hedge fund purchased credit default swaps on securities it did not own because it believed that the securities were likely to default. In this example, the hedge fund is ____

speculating

Can a company's shares exhibit a negative P/E ratio?

yes

You bought 1,000 shares of Tund Corp. stock for $60.59 per share and sold it for $82.35 per share after a few years. How will your gain or loss be treated when you file your taxes?

as a capital gain taxed at the long-term tax rate

Has three segments that when analyzed together give an idea of what the company owns and what it owes.

balance sheet

A liquid asset can be converted to cash quickly without significantly impacting the asset's value. Which of the following asset classes is generally considered to be the most liquid?

cash

True or False: The efficient markets hypothesis holds only if all investors are rational.

false

Yum Co. uses cash to repurchase 10% of its common stock.

financing activity

With the use of advanced investment techniques, these largely unregulated portfolios are invested in securities. The investment objective is to offset potential losses by investing in counterbalancing securities. They are open to only a select class of investors.

hedge funds

Issued by corporations, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership.

preferred stocks

Aggregates all cash inflows, which the company receives from its ongoing activities and investment sources, and all cash outflows.

statement of cash flows

The bid-ask spread in a dealer market represents the profit that a dealer would make on a transaction involving a security. Which of the following statements best describes the bid-ask spread?

the difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it.

Asset management or activity ratios provide insights into management's efficiency in using a firm's working capital and long-term assets.

true

One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased.

true

One year later, Cute Camel's shares are trading at $54.56 per share, and the company reports the value of its total common equity as $39,228,000. Given this information, Cute Camel's market-to-book (M/B) ratio is

11.68x

Sagar works for a financial advising firm. He must create a financial plan and come up with a list of securities in which his client can invest. Sagar must make decisions regarding the investments that he should recommend to his clients in their portfolio.

Investments Security analysis, portfolio theory, market analysis, and behavioral finance fall under the area of investments. Market analysis for investments includes decisions that depend on the state of stock and bond markets. Here, Sagar must do research and analyze securities to choose investments that will help his client achieve his or her investment objective.

balance sheet

The balance sheet provides a snapshot of the financial condition of a company. Investors and analysts use the information given on the balance sheet and other financial statements to make several interpretations regarding the company's financial condition and performance.

You work for a brokerage firm. Your boss asked you to analyze Blue Parrot Manufacturing's performance for the past three years and to write a report that includes a benchmarking of the company's performance. Which of the following components would be best for you to include in your financial statement analysis?

a comparison of the firm's performance with other firms in the same industry based on their financial ratios

Which of the following characteristics accurately describes the stock market?

an active market that determines the price of a firm's shares

When a company issues stock or shares to the public for the first time, it is referred to as ____

an initial public offering (IPO)

Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a trend analysis, you would:

analyze the firm's financial ratios over time

Is issued once a year by a corporation and contains basic financial statements and an analysis of past performance and future prospects.

annual report

Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk.

commercial paper

Which of the following statements is true about market value ratios?

companies with high research and development (R&D) expenses tend to have high P/E ratios.

A financial instrument whose value is derived from the value of an underlying asset is called a ____

derivative

You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with less competition is considered to be ____ risky than companies with multiple competitors.

less

For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the ____ value of the company's common stock price.

long-term

Vision Tech's stock price is currently trading at $27 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $33 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

more likely A hostile takeover is likely when a firm's stock price is trading below its intrinsic value. If this continues for a long time, outside investor groups start believing that the existing management of the firm is underperforming and new management can boost the firm's long-run stock prospects. If the stock price is greater than the intrinsic value, the stock is considered to be overvalued, and investors would not wat to spend more money than the underlying asset is worth.

What is the most commonly used base item for a common size income statement?

net sales

If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to:

overstate its earnings

If the market maker is willing to purchase the entire block of 1,500 shares from Ally and, from that block, resell 1,000 shares to Fernando, then the market maker's net profit from Fernando's transaction—excluding any inventory effects—will be ____

$550.00

Which of the following is considered a financially leveraged firm?

a company that uses debt to finance some of its assets

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses. Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply.

a firm's ratios can lead to conflicting conclusions - some ratios might be "good" and some "bad" inflation can distort balance sheet data

Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow?

acquiring operating assets

Purple Panda Products Inc. has a total asset turnover ratio of 3.50x, net annual sales of $40 million, and operating expenses of $18 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $2.50 million on which it pays a 7% interest rate. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Purple Panda's debt management ratios?

debt ratio: 21.87% times-interest-earned ratio: 125.71x

Statement #1: Cute Camel's pool of relatively liquid assets, which are available to support the company's current and future sales, decreased from Year 1 to Year 2. This state is _____, because:

false Cute Camel's total current asset balance actually increased from $15,750 million to $19,687 million between Year 1 and Year 2.

Give me a second to think. . . OK, it's better to evaluate the performance of Galaxy's management by using the company's EVA rather than the book value of its shareholders' equity because the better the managerial decisions being made, the ____ the after-tax net operating income earned, the ____ the difference between this net operating income and the cost of capital needed to generate that income, and the ____ the EVA, or true economic profit, earned by the company.

greater greater greater

According to a tax law established in 1969, taxpayers must pay the ____ of the Alternative Minimum Tax (AMT) or regular tax.

higher

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply.

if a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. if a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

These are financial intermediaries that share the financial risk of the untimely demise of their policyholders, who make regular payments to financial intermediaries for taking this risk.

life insurance companies

Depreciation expenses directly affect a company's taxable income. An increase in depreciation expense will lead to a ____ taxable income. It will ____ tax deducted from a company's earnings, thus leading to a ____ operating cash flow.

lower decrease higher

These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

money market mutual funds

If a firm takes steps that increase its expected future ROE, its stock price will ____ increase.

not necessarily

A student sells his old computer at a computer hardware store and gets $150 for it. He uses this cash to buy computer accessories.

physical asset markets

Which of the following is true about the leveraging effect?

using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth

Which of the following statements are true? Check all that apply.

N&B Equipment Company has less liquidity but also a greater reliance on outside case flow to finance its short-term obligations than Scramouche Opera Company. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well.

DuPont Equation

ROE =Profit Margin * Total Assets Turnover * Equity Multiplier = (Net Income/Sales)*(Sales/Total Assets)*(Total Assets/Total Common Equity)

Which of the following instruments are traded in the capital markets? Check all that apply.

common stocks preferred stocks corporate bonds long-term bank loans

If the stock price of Krit Corp. decreases in the next 2 years, Wilson's wealth in Krit Corp will ____.

decrease The primary goal of company management is to maximize shareholder wealth, which implies that managers should make decisions that maximize the long-run value of the company's stock. An investor's wealth in the firm is equal to the number of shares that the investor owns times the stock price. If the stock price decreases, then the investor's wealth also decreases.

Entrepreneurs often start businesses by seeking financial help from family and friends.

direct transfers

If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from ____ in Year 1 to ____ in Year 2.

$8.28 $10.18

The US tax structure influences a firm's willingness to finance with debt. The tax structure ____ more debt

encourages

Businesses can be classified into the following forms: sole proprietorship, partnership, corporation, limited liability company (LLC), and limited liability partnership (LLP). Different forms of businesses have different characteristics. Which of the following characteristics would apply to a limited liability company and a limited liability partnership? Check all that apply. -Have corporate ownership structure -LLPs are not suitable for professional firms such as accounting, law, and architecture -Owners have limited liability and right to vote -Owned by single individual -Limited financial liability -Taxed as a partnership

Have corporate ownership structure Owners have limited liability and right to vote Limited financial liability Taxed as a partnership A limited liability company (LLC) or a limited liability partnership (LLP), as the name suggests, is similar to a partnership, but owners have limited personal liability for the debts and actions of the company. An LLP is similar to an LLC. These firms combine the features of a partnership and a corporation. Owners of an LLC are called members, and they cannot be held personally liable for the company's debts. As in a partnership, income is distributed proportionately among the member, and they are taxed at individual levels, thus avoiding the issue of double taxation. LLPs are used for professional firms such as accounting, law, and architecture, while LLCs are used by other businesses.

Alexander and Akiko equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Alexander is responsible for ANB's back-office activities, and Akiko staffs the store and make deliveries to customers. Both have equal decision-making authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. Alexander, without Akiko's knowledge, used the company's bank account recently to purchase a new sports car. Alexander has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Alexander and Akiko? -No; Since Alexander acknowledged that the car would not be used to support the business, no agency conflict can arise. -Yes; Alexander is misappropriating some of Akiko's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. -No; Alexander and Akiko are both authorized to spend ANB's money, so no conflict of interest can occur. -No; Alexander and Akiko co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist.

Yes; Alexander is misappropriating some of Akiko's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds

Current market prices reflect all relevant publicly available information.

semistrong form efficiency

Cute Camel Woodcraft Company just reported earnings after tax (also called net income) of $9,750,000 and a current stock price of $28.50 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 2,900,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,400,000). If Cute Camel's forecast turns out to be correct and its price/earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Round any P/E ratio calculation to four decimal places.)

$23.35 per share

Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 175 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $25.00 per share. Wilson's total wealth in Krit Corp. is: a) $8,775.00 b) $700.00 c) $4,125.00 d) $4,375.00

$4,375.00 Shareholder wealth is the total number of shares that a company has issued (also known as shares outstanding) times the market price of each share. Here, you have been asked to calculate the wealth that Wilson owns in the company. Wilson's wealth will be the number of shares that Wilson owns times the market price per share: Wilson's wealth = Number of Shares that Wilson Owns * Market Price per Share = 175 shares*$25.00 =$4,375.00

WAC Inc. is going public and issuing 500,000 shares of common stock. The capital raised in the IPO will fund the company's proposed expansion. A Dutch auction is used to allocate shares in the WAC IPO. The following table shows the number of shares requested by potential investors in each row. Bidder #1: 50,000 shares; $62 per share Bidder #2: 100,000 shares; $60 per share Bidder #3: 150,000 shares; $58 per share Bidder #4: 200,000 shares; $56 per share Bidder #5: 250,000 shares; $54 per share Bidder #6: 300,000 shares; $52 per share

$56

Cute Camel's earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from ____ in Year 1 to ____ in Year 2.

$6,000,000 $7,500,000

income statement

3. Income statement The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm's gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company's financial performance and condition.

Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals. Which of the following compensation proposals is most likely to be in the best interest of the company's shareholders? -A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years -A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months -A base salary of $500,000 plus perquisites worth $250,000

A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years An executive's compensation should motivate him or her to maximize long-run shareholder wealth. A compensation package that includes only a salary but no stock options will not motivate an executive to increase the stock price. A stock option plan that matures after just a few months provides little incentive for an executive to make decisions that maximize the long-run value of the stock. A compensation plan that includes a salary plus stock options maturing in phases overs a period of time rewards an executive for consistently maximizing shareholder wealth.

ratio analysis

A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a company's strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a company's performance to that of its competitors or to its past or expected future performance. Such insight helps managers and analysts improve their decision making.

The following graph shows a stock's actual market price (orange) and intrinsic value (blue) over time. The intrinsic value comes from another research analyst. Use the dropdown menus to label the periods in which the stock was undervalued or overvalued. A: Actual Stock Price (orange) is above Intrinsic Value (blue) B: Intrinsic Value (blue) is above Actual Stock Price (orange)

A=overvalued B=undervalued According to the graph, the analyst estimated the intrinsic value of the stock to be more than the market price of the stock between 2014 and 2016. Thus, the stock was considered to be undervalued during that time period. However, according to this analyst, the market stock price exceeded the intrinsic value of the stock after 2016. From then until the end of 2019, the stock was overvalued.

Who creates these financial statements and who uses them?

Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance.

free cash flow

Accounting statements represent a company's earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company's real cash position.

Based on your understanding of the uses and limitations of ROE, which of the following projects should be chosen if they have the same risk and cost of capital?

Project X, with 35% ROE and a large investment, generating high expected cash flows

asset management ratios

Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio.

What happened to assets, earnings, dividends, and cash flows during the financial year?

Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis.

the efficient markets hypothesis

Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to "beat" the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices.

Keanu, a trader at the New York Stock Exchange (NYSE), executes the decisions made by investors and takes action based on requests by different buyers and sellers in the market

Capital Markets The capital market includes the stock market and the bond market. These markets come under the supervision of financial regulators such as the Securities and Exchange Commission (SEC). Capital markets include entities - such as banks, investment banks, stockbrokers, mutual funds, insurance companies, governmental organizations such as the Federal Reserve Bank, and individuals - that deal with capital for different purposes. Keanu is a trader at the New York Stock Exchange (NYSE), which is an equity (stock) exchange - one of the largest stock exchanges in the world - and a part of the capital markets. Executions of investment decisions take place in the capital markets.

Citibank issues a loan to Jennifer for the expansion of her flower delivery business.

indirect transfers through financial intermediaries

A company exhibiting a high liquidity ratio is likely to have enough resources to pay off its short-term obligations.

true

Market value or market based ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance.

true

NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $144 million. Last year, the company reported a retained earnings balance of $425 million, whereas this year it increased to $500 million. How much was paid out in dividends this year?

$69 million

Walker Telecommunications has a quick ratio of 2.00x, $35,550 in cash, $19,750 in accounts receivable, some inventory, total current assets of $79,000, and total current liabilities of $27,650. The company reported annual sales of $200,000 in the most recent annual report. Over the past year, how often did Walker Telecommunications sell and replace its inventory?

8.44x

the DuPont Equation

Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company's financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company's ROE may have changed for better or worse and identify particular company strengths and weaknesses. A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a company's ROE.

Smith Enterprises recently was profiled on a financial information website and touted as a "hot" growth stock. You acquired the stock quote shown here from that website. Smith Enterprises (NYSE:SME) Last Trade: 51.63 Trade Time: 4:00 PM ET One-Day Stock Return: 11.58% Prev. Close: 46.27 Open: 47.25 Bid: N/A Ask: N/A 1y Target Est: 55.40 Day's Range: 47.22 - 51.96 52wk Range: 25.48 - 60.71 Volume: 1,419,317 Avg. Vol. (3m): 629,072 Market Cap: 1.63B P/E (ttm): 25.43 EPS (ttm): Div. & Yield: 0.20 (0.40%) The last trade time is shown to be at 4:00 PM Eastern Time. The abbreviation "ttm" stands for "trailing twelve months," and the number shown reflects data from the previous 12 months. The abbreviation "3m" reflects data from the previous 3 months. What exchange does Smith Enterprises trade on?

NYSE

Northern Services Inc. To date, Northern has been a one-product company. It manufactures, sells, and services only one product, AM-FM radios, and that item is in the market-saturation stage of its product life cycle. As a result, Northern's profits are declining due to increased competition from new products and competing firms. For several reasons, attempts to develop and introduce new products have not been successful. How would you expect this situation to affect the assessment of Northern's financial condition and performance?

Northern's profits will continue to decline, and the company's survival is in jeopardy if it does not create a new product with more potential for market growth.

profitability ratios

Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm.

market value ratios

Ratios are mostly calculated using data drawn from the financial statements of a firm. However, another group of ratios, called market value ratios, relate to a firm's observable market value, stock prices, and book values, integrating information from both the market and the firm's financial statements.

capital allocation process

The capital allocation process involves the transfer of capital among different entities that include individuals, small businesses, banks, financial intermediaries, companies, mutual funds, and other market participants. In a developed market economy, capital flows freely between entities that want to supply capital to those who want it. This flow of capital can be classified in three ways.

True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.

True

The inventory turnover ratio across companies in the telecommunications industry is 9.284x. Based on this information, which of the following statements is true for Walker Telecommunications?

Walker Telecommunications is holding more inventory per dollar of sales compared with the industry average.

financial institutions

4. Financial institutions Several market participants interact in developed markets to organize the exchange of funds from buyers to sellers. Such institutions as investment banks, commercial banks, financial services corporations, credit unions, pension funds, life insurance companies, mutual funds, exchange traded funds, hedge funds, and private equity companies play a key role in facilitating these transfers.

Rock Inc. is a mineral mining company. The CEO of Rock Inc. recently died. The news led to a short-term decline in the company's stock price, but it bounced back after the company announced its quarterly earnings.

Corporation A corporation is registered as an entity separate from its owners. In this case, the CEO's demise had an impact on the company's short-term condition. However, corporations are run by a board of directors and a well-established management team, so the company's life is not limited to the CEO's life.

financial instruments

Financial instruments are assets that have a monetary value or record a monetary transaction. To coordinate the exchange of capital between borrowers and lenders, financial instruments trade in the financial markets. These financial instruments can be categorized on the basis of their issuers, maturity, risk, and other factors.

Which of the following is true for the statement of cash flows?

It reflects cash generated and used during the reporting period.

Agency conflicts between managers and shareholders

Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers ( in the form of money and perquisites or power and prestige) at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management.

Google filed its initial public offering worth $2.7 billion in 2004. Source: CNNmoney.com, Apr. 30, 2004.

primary markets

Corporate finance is concerned with the different aspects of a business's financial management. The chief financial officer (CFO) is the top financial position in the organization and oversees several tasks. The CFO is NOT responsible for which of the following departments? Check all that apply. -Investments -Research and development -Legal issues -Administration -Security analyst relations

research and development administration Most corporations have an organizational structure in which the board of directors elect a chief executive officer (CEO). The chief operating officer (COO) and the CFO report to the CEO. Various department heads report to the COO and the CFO. The CFO is usually in charge of accounting, treasury, credit, legal, capital budgeting, investor relations, security analyst relations, and investment decisions. The COO is in charge of the firm's operations, which include marketing, production, human resources, administration, and research and development. The COO and CFO undertake other responsibilities, and every company has a distinctive organizational structure.

During the last year, Len Corp. generated $1,170.00 million in cash flow from operating activities and had negative cash flow generated from investing activities (-640.00 million). At the end of the first year, Len Corp. had $200 million in cash on its balance sheet, and the firm had $280 million in cash at the end of the second year. What was the firm's cash flow (CF) due to financing activities in the second year?

$-450.00 million

They accept deposits from savers and make loans to people who need it. They provide various services, such as checking accounts and money market transactions, to facilitate capital exchange between savers and people who need it.

commercial banks

Galaxy's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which is expressed in annual dollars. It is computed by subtracting Galaxy's ____ from its ____. In turn, Galaxy's annual cost of capital is calculated by multiplying its total ____ operating capital, which includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital.

annual dollar cost of capital net operating profit after taxes investor-supplied

How much did the price increase today over yesterday's closing price?

$5.36

Can the firm meet all its short-term obligations using its current assets?

balance sheet

Fernando, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Ally, is willing to sell 1,500 shares of the same stock. Unfortunately, Fernando and Ally don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $26.80 per share and purchase additional shares for $26.25 per share. Select the most appropriate values in the following table:

bid price: $26.25 ask price: $26.80 bid-ask spread: $0.55

From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing?

debt financing

Shylock, a moneylender in Shakespeare's play The Merchant of Venice, lends his own money to Antonio, who needs 3,000 ducats to help his friend.

direct transfers

D and W Co. sells its last season's inventory to a discount store.

operating activity

Consider that there is a strong form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report?

the stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.

An analyst with a leading investment back tracks the stock Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $115.24 per share, but Mandalays Inc.'s stock is trading at $89.57 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently: a) undervalued b) in equilibrium c) overvalues

undervalued A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price about its intrinsic value is considered overvalued. Here, stock of Mandalays Inc. is trading at $89.57 per share, which is less than the intrinsic value of $115.24 per share, as determined by the analyst. Thus, according to this analyst's estimates, the stock of Mandalays Inc. is considered to be undervalued.

Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive ____ in annual dividends.

$40.00

Finance professionals make decisions that fall into 3 distinctive areas: corporate finance, capital markets, and investments. Below is a set of decisions made by finance professionals. Categorize the decisions according to the area of finance to which they belong. Radford is a small company that manufactures automobile bearings. Managers at the company must make decisions on the kind and the cost of equipment to buy.

Corporate Finance Corporate finance focuses on financial decisions that corporations need to make to run the firm. The objectives of these decisions is to achieve the primary goal of the corporation: maximize shareholder value. Managers at Radford must make decisions involving the kind and cost of equipment they need to buy. This would be a long-term capital investment decision and would impact the financial condition of the company and thus belongs in the area of corporate finance.

Paradigm media is a company run by a group of new media professionals. The owners of the company do not have any personal liability and file taxes only on their individual tax returns.

LLC/LLP Paradigm Media is an example of a limited liability company (LLC). The LLP combines the benefits of a partnership and a corporation. An LLP protects the owners from personal liability. Profits, losses, deductions, and credits are passed to the members of the firm, and each pays taxes at an individual level.

Rafael and his friend Shirley run a carpet cleaning business. They distribute the profits proportionately and file their individual taxes.

Partnership Rafael and Shirley, owners of a carpet cleaning business, run a partnership business. Income from the business is allocated on a pro rata basis and is taxed at an individual level.

Andrew is self-employed and reports all of his income and expenses in his personal income tax return.

Sole Proprietorship bc Andrew is self-employed, his the the only owner, or the sole proprietor, of the business.

"Cash is King" for all businesses

You can determine a company's cash situation by analyzing the cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets.

That makes sense. So, what makes this value important to investors is that it is ____ value that can change—but only due to a couple of events, including the ____ of Treasury stock, the sale of new common or preferred shares, and the payment of ____ . Equally important, it ____ change in response to changes in the market prices of the firm's shares.

a historical repurchase dividends will not

Well, because Galaxy's book value ____ with changes in the market price of the firm's shares, the firm's book value ____ reflect management's efforts to maximize the shareholder wealth and therefore ____ be used to evaluate management's performance.

does not change cannot should not

The US Securities and Change (exchange?) Commission (SEC), a US federal agency, is considered to be an investor's advocate. Its purpose is to protect investors, maintain market integrity, and facilitate capital formation. Under the Sarbanes-Oxley Act of 2002, the SEC requires CFOs to certify that the firm's: a) shareholders are protected b) earnings numbers are accurate c) financial statements are audited d) growth plans are on track

earnings numbers are accurate As a reaction to several corporate and accounting scandals that resulted in teh failure of companies such as Enron and WorldCom, Congress passed the Sarbanes-Oxley Act of 2002. The act requires the US Securities and Change (exchange?) Commission (SEC) to implement rulings on all public companies. Although the other three aspects are important, the Sarbanes-Oxley Act of 2002 requires that financial statements be accurate and certified by the CEO and CFO.

Which of the following best describes shareholders' equity?

equity is the difference between the company's assets and liabilities

A farmer agrees to sell 10,000 bushels of wheat at the rate of $4.50 per bushel to a buyer in three months. A regulated exchange, such as the Chicago Board of Trade, completes the transaction.

future markets

The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's ____ , adjusted for any accumulated depreciation or amortization expense. The ____ value, or difference between the machine's historical cost and its accumulated depreciation expense, is called its book value. In contrast, when the term refers to the entire company, it means the total value of the company's ____ as reported in the firm's ____.

historical value or original purchase price net shareholders' equity balance sheet

Is divided into two important parts: operating and non-operating sections; also known as the profit and loss statement.

income statement

It is ____ to say that Cute Camel's net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company's annual contribution to retained earnings, $2,257,000 and $2,789,875, respectively. This is because ____ of the items reported in the income statement involve payments and receipts of cash.

incorrect all but one

Statement #3: If Cute Camel ever goes bankrupt, its common stockholders will be paid off first, then its debtholders and preferred stockholders. This statement is ____, because:

incorrect common shareholders are treated as residual investors.

Based on your understanding of the different items reported on the balance sheet and the information they provide, if everything else remains the same, then the cash and equivalents item on the current balance sheet is likely to ____ if the firm issues $3 million of new common stock.

increase

xEdu.com is an early-stage start-up company that plans to issue its first public common stock—called an initial public offering (IPO)—in six months. It hires an investment bank to underwrite the issue.

indirect transfers through investment banks

The intrinsic value of a company's stock, also known as its fundamental value, refers to the stock's "true" value based on accurate risk and return data. The value perceived by stock market investors determines the market price of a stock. A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is considered to be overvalued. The goal of the managers of a publicly owned company should be to maximize the firm's ____

intrinsic value A stock's intrinsic value is an estimate of the stock's "true" value based on accurate risk and return data. Maximizing a firm's intrinsic value will maximize the average stock price over the long run, but not necessarily the current market price at each point in time. The primary goal for managers of publicly owned companies is to maximize the long-run value of the firm's common stock. The best way for managers to achieve this goal is to focus on maximizing the firm's intrinsic value.

DigiInk Printing Co. buys new machinery to ramp up its production capacity.

investing activity

Vision Tech is a software company based out of San Francisco. Its stockholders are mostly individual investors and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Vision Tech's stock, would direct shareholder intervention be more or less likely to motivate the firm's management?

more likely Direct shareholder intervention is strongest when investors are concentrated and organized. Institutional investors, such as pension and mutual funds, concentrate and organize investors, so they are better able to take action and directly intervene in the company's affairs. When a company's investors are predominantly individual investors, they find it difficult to voice their concerns to management, and there is less change that management will heed those concerns.

The primary goal of corporations: The owners of a corporation are the _____. The primary goal of the corporate management team is to ____ the shareholders' wealth by ____ the ____ over the long run.

shareholders of the company, maximize, maximizing, company's stock price The owners of a corporation are the shareholders, or the people who own shares of stock in the company. Shareholders elect the board of directors, who in turn create a management team to run the company and achieve corporate goals, including reducing cost and increasing revenue. However, these goals collectively are meant to achieve one primary goal: maximize shareholder wealth. Management achieves this goal by maximizing the company's stock price over the long run.

Issued by nonfederal government entities, these financial instruments are debt securities that fund their capital expenditures. They are exempt from most taxes imposed in the area where the securities are issued.

state and local government bonds

Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised?

statement of cash flows

Reconciles (1) the amount of stockholders' equity recorded at the beginning of the reporting period, (2) changes during that period, and (3) the amount of stockholders' equity at the end of the reporting period.

statement of stockholders' equity

Statement #2: In Year 2, Cute Camel Woodcraft Company was profitable. This statement is ____, because:

true Cute Camel's retained earnings account increased between the end of Years 1 and 2.

Initial public offering performance When the demand for an initial public offering (IPO) of securities is less than the number of securities issued, the offering is deemed to be:

undersubscribed