FINAMA

N
Provide a notebook (not less than 80 leaves) for FINAMAN for
the answers and solutions of your designated activities.
Please follow the sequence above (see your TO-DO List) in
writing your answers in the notebook and don’t forget to
indicate what activity you are currently working on. WRITE
CLEARLY AND NEATLY.
Please submit your NOTEBOOK and FINAL OUTPUTS (on a short
bond paper) on/before the date agreed upon with your
respective area coordinators.
FINAMAN

For the 1st Week of Block 3 (UNIT 1)

Answer the following Review Questions (please be concise):

□ 1-1 & 1-2 (page 9)

1–1 What is finance? Explain how this field affects all of the activities in which businesses engage.
1–2 What is the financial services area of finance? Describe the field of managerial finance.

□ 1-3, 1-4, & 1-6 (page 10)

1–3 Which legal form of business organization is most common? Which form is dominant in terms of business
revenues?
1–4 Describe the roles and the basic relationships among the major parties in a corporation—stockholders, board
of directors, and managers. How are corporate owners rewarded for the risks they take?
1–6 Why is the study of managerial finance important to your professional life regardless of the specific area of
responsibility you may have within the business firm? Why is it important to your personal life?

□ 1-7 (page 14)

1–7 What is the goal of the firm and, therefore, of all managers and employees? Discuss how one measures
achievement of this goal.

□ 1-9 (page 15)

1–9 What is risk? Why must risk as well as return be considered by the financial manager who is evaluating a
decision alternative or action?

□ 1-13 & 1-14 (page 19)

1–13 What are the major differences between accounting and finance with respect to emphasis on cash flows and
decision making?
1–14 What are the two primary activities of the financial manager that are related to the firm’s balance sheet?

□ 1-16 (page 24)

1–16 Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate
governance structure can help avoid agency problems.

□ 2-1 & 2-2 (page 40)

2–1 Who are the key participants in the transactions of financial institutions? Who are net suppliers, and who are
net demanders?
2–2 What role do financial markets play in our economy? What are primary and secondary markets? What
relationship exists between financial institutions and financial markets?
FINAMAN

For the 2nd to 3rd Weeks of Block 3 (UNIT 2)

Read Chapter 5 Time Value of Money (pages 161-187)
Answer the following Review Questions (please be concise): starting on page 198

□ P5-1, P5-2, P5-7 & P5-8

P5–1
Using a time line. The financial manager at Starbuck Industries is considering an investment that requires an initial
outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000 at the end of years
2 and 3, $10,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows associated with Starbuck Industries’ proposed
investment.
b. Use arrows to demonstrate, on the time line in part a, how compounding to find future value can be used
to measure all cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how discounting to find present value can be used
to measure all cash flows at time zero.
d. Which of the approaches—future value or present value—do financial managers rely on most often for
decision making? Why?

P5–2
Future value calculation. Without referring to the preprogrammed function on your financial calculator, use the
basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate the
future value of $1 in each of the cases shown in the following table.

P5–7
Time value. You can deposit $10,000 into an account paying 9% annual interest either today or exactly 10 years
from today. How much better off will you be at the end of 40 years if you decide to make the initial deposit today
rather than 10 years from today?

P5–8
Time value. Misty needs to have $15,000 at the end of 5 years to fulfill her goal of purchasing a small sailboat. She
is willing to invest a lump sum today and leave the money untouched for 5 years until it grows to $15,000, but she
wonders what sort of investment return she will need to earn to reach her goal. Use your calculator or spreadsheet
to figure out the approximate annually compounded rate of return needed in each of these cases:

a. Misty can invest $10,200 today.

b. Misty can invest $8,150 today.
c. Misty can invest $7,150 today.
□ P5-10, P5-11, P5-16 & P5-17

P5–10
Present value calculation. Without referring to the preprogrammed function on your financial calculator, use
the basic formula for present value, along with the given opportunity cost, r, and the number of periods, n, to
calculate the present value of $1 in each of the cases shown in the following table

P5–11
Present values. For each of the cases shown in the following table, calculate the present value of the cash flow,
discounting at the rate given and assuming that the cash flow is received at the end of the period noted.

P5–16
Time value comparisons of single amounts. In exchange for a $20,000 payment today, a well-known company
will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.

a. Find the value today of each alternative.

b. Are all the alternatives acceptable—that is, worth $20,000 today?
c. Which alternative, if any, will you take?

P5–17
Cash flow investment decision. Tom Alexander has an opportunity to purchase any of the investments shown in
the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given
for each investment. Which purchase recommendations would you make, assuming that Tom can earn 10% on
his investments?
□ P5-19, P5-20

P5–19
Future value of an annuity. For each case in the accompanying table, answer the questions that follow

a. Calculate the future value of the annuity assuming that it is

(1) An ordinary annuity.
(2) An annuity due.
b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or
annuity due—is preferable? Explain why.

P5-20
Present value of an annuity. Consider the following cases.

a. Calculate the present value of the annuity assuming that it is

(1) An ordinary annuity.
(2) An annuity due.
b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or
annuity due—is preferable? Explain why

□ P5-26
P5–26
Perpetuities. Consider the data in the following table.

Determine the present value of each perpetuity

□ P5-28 & P5-30
P5–28
Value of a mixed stream. For each of the mixed streams of cash flows shown in the following table, determine
the future value at the end of the final year if deposits are made into an account paying annual interest of
12%, assuming that no withdrawals are made during the period and that the deposits are made:
a. At the end of each year.
b. At the beginning of each year.

P5-30
Value of mixed streams. Find the present value of the streams of cash flows shown in the following table.
Assume that the firm’s opportunity cost is 12%.

□ P5-36
P5–36
Changing compounding frequency. Using annual, semiannual, and quarterly compounding periods for each of
the following, (1) calculate the future value if $5,000 is deposited initially, and (2) determine the effective
annual rate (EAR).
a. At 12% annual interest for 5 years.
b. At 16% annual interest for 6 years.
c. At 20% annual interest for 10 years.
FINAMAN

For the 3rd to 4th Weeks of Block 3 (UNIT 3)

Read Chapter 3 Financial Statements and Ratio Analysis (pages 58 – 110)
Answer the following problems (starting on page 93):

□ E3-1, E3-2 & P3-2

E3–1
You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your
manager, who graduated from your alma mater 2 years ago, gives you the following list of accounts and asks you to prepare
a simple income statement using those accounts.

a. Arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit,
operating profit, and net profit before taxes.
b. Using a 35% tax rate, calculate taxes paid and net profit after taxes.
c. Assuming a dividend of $1.10 per share with 4.25 million shares outstanding, calculate EPS and additions to
retained earnings
E3–2
Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance
mean in the title of the balance sheet? Why do we balance the two halves?

P3–2
Financial statement account identification. Mark each of the accounts listed in the following table as follows:
a. In column (1), indicate in which statement—income statement (IS) or balance sheet (BS)—the account belongs.
b. In column (2), indicate whether the account is a current asset (CA), current liability (CL), expense (E), fixed asset (FA), long-
term debt (LTD), revenue (R), or stockholders’ equity (SE).
□ P3-14, P3-17, P3-21 & P3-22 (for P3- 23, answer only requirement “a”)

P3–14
Liquidity ratio. Josh Smith has compiled some of his personal financial data in order to determine his liquidity
position. The data are as follows.

a. Calculate Josh’s liquidity ratio.

b. Several of Josh’s friends have told him that they have liquidity ratios of about 1.8. How would you
analyze Josh’s liquidity relative to his friends?

P3–17
Interpreting liquidity and activity ratios. The new owners of Bluegrass Natural Foods, Inc., have hired you to
help them diagnose and cure problems that the company has had in maintaining adequate liquidity. As a first
step, you perform a liquidity analysis. You then do an analysis of the company’s short-term activity ratios. Your
calculations and appropriate industry norms are listed.

a. What recommendations relative to the amount and the handling of inventory could you make to the
new owners?
b. What recommendations relative to the amount and the handling of accounts receivable could you
make to the new owners?
c. What recommendations relative to the amount and the handling of accounts payable could you
make to the new owners?
d. What results, overall, would you hope your recommendations would achieve? Why might your
recommendations not be effective?

P3–21
Ratio proficiency. McDougal Printing, Inc., had sales totaling $40,000,000 in fiscal year 2012. Some ratios for the
company are listed below. Use this information to determine the dollar values of various income statement and
balance sheet accounts as requested.

Calculate values for the following:

a. Gross profits
b. Cost of goods sold
c. Operating profits
d. Operating expenses
e. Earnings available for
common stockholders
f. Total assets
g. Total common stock equity
h. Accounts receivable
P3–22
Cross-sectional ratio analysis. Use the financial statements below and on page 106 for Fox Manufacturing
Company for the year ended December 31, 2012, along with the industry average ratios below, to:
a. Prepare and interpret a complete ratio analysis of the firm’s 2012 operations.
b. Summarize your findings and make recommendations
P3–23
Financial statement analysis. The financial statements of Zach Industries for the year ended December 31,
2012, follow.

a. Use the preceding financial statements to complete the following table. Assume the industry averages
given in the table are applicable for both 2011 and 2012.
FINAMAN

For the 4th to 5th Weeks of Block 3 (UNIT 4)

Read Part 7 Short-Term Financial Decisions—Chapters 15 & 16 (pages 600- 660)
Answer the following problems—Chapter 15 (starting on page 634):

□ P15-1, P15-3 (except requirement “c and d”)

P15–1
Cash conversion cycle. American Products is concerned about managing cash efficiently. On the average,
inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid
approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no
difference in the investment per dollar of sales in inventory, receivables, and payables and that there is a 365-day
year.
a. Calculate the firm’s operating cycle.
b. Calculate the firm’s cash conversion cycle.
c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.
d. Discuss how management might be able to reduce the cash conversion cycle.

P15–3
Multiple changes in cash conversion cycle. Garrett Industries turns over its inventory six times each year; it has
an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3
million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and
payables; and assume a 365-day year.
a. Calculate the firm’s cash conversion cycle, its daily cash operating expenditure, and the amount of
resources needed to support its cash conversion cycle.
b. Find the firm’s cash conversion cycle and resource investment requirement if it makes the following
changes simultaneously.
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
(3) Extends the average payment period by 10 days.

□ P15-6

P15–6
EOQ, reorder point, and safety stock. Alexis Company uses 800 units of a product per year on a continuous basis.
The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to
receive a shipment after an order is placed, and the firm wishes to hold 10 days’ usage in inventory as a safety
stock.
a. Calculate the EOQ.
b. Determine the average level of inventory. (Note: Use a 365-day year to calculate daily usage.)
c. Determine the reorder point.
d. Indicate which of the following variables change if the firm does not hold the safety stock: (1) order
cost, (2) carrying cost, (3) total inventory cost, (4) reorder point, (5) economic order quantity.
Explain.

□ P15-10, P15-12 & P15-14

P15–10
Relaxation of credit standards. Lewis Enterprises is considering relaxing its credit standards to increase its
currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from
10,000 to 11,000 units during the coming year; the average collection period is expected to increase from 45 to
60 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the
variable cost per unit is $31. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed
relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.
 P15–12
Shortening the credit period. A firm is contemplating shortening its credit period from 40 to 30 days and
believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt
expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but
believes that as a result of the proposed change, sales will decline to 10,000 units. The sale price per unit is $56,
and the variable cost per unit is $45. The firm has a required return on equal-risk investments of 25%. Evaluate
this decision, and make a recommendation to the firm. (Note: Assume a 365-day year.)

P15–14
Float. Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that
customers’ payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5
days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system.
a. How much collection float (in days) does the firm currently have?
b. If the firm’s opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee
of $16,500 to reduce collection float by 3 days? Explain why or why not.

Answer the following problems—Chapter 16 (starting on page 665):

□ P16-1 & P16-2

P16–1
Payment dates. Determine when a firm must pay for purchases made and invoices dated on November 25
under each of the following credit terms:
a. net 30 date of invoice
b. net 30 EOM
c. net 45 date of invoice
d. net 60 EOM

P16–2
Cost of giving up cash discounts. Determine the cost of giving up the cash discount under each of the following
terms of sale. (Note: Assume a 365-day year.)
a. 2/10 net 30
b. 1/10 net 30
c. 2/10 net 45
d. 3/10 net 45
e. 1/10 net 60
f. 3/10 net 30
g. 4/10 net 180

□ P16-9, P16-11, P16-12 & P16-14

P16–9
Cost of bank loan. Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of
15%, payable at maturity. (Note: Assume a 365-day year.)
a. How much interest (in dollars) will the firm pay on the 90-day loan?
b. Find the 90-day rate on the loan.
c. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled
over every 90 days throughout the year under the same terms and circumstances.

P16–11
Effective annual rate. A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a
compensating balance equal to 20% of the face value of the loan. Determine the effective annual rate
associated with this loan. (Note: Assume that the firm currently maintains $0 on deposit in the financial
institution.)

P16–12
Compensating balances and effective annual rates. Lincoln Industries has a line of credit at Bank Two that
requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the
amount borrowed. The firm has borrowed $800,000 during the year under the agreement. Calculate the
effective annual rate on the firm’s borrowing in each of the following circumstances:
a. The firm normally maintains no deposit balances at Bank Two.
b. The firm normally maintains $70,000 in deposit balances at Bank Two.
c. The firm normally maintains $150,000 in deposit balances at Bank Two.
d. Compare, contrast, and discuss your findings in parts a, b, and c.

P16–14
Integrative—Comparison of loan terms. Cumberland Furniture wishes to establish a prearranged borrowing
agreement with a local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate,
and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit
agreement, the rate is 2.80% over prime with a commitment fee of 0.50% on the average unused balance. With
both loans, the required compensating balance is equal to 20% of the amount borrowed. ( Note: Cumberland
currently maintains $0 on deposit at the bank.) The prime rate is currently 8%. Both agreements have $4 million
borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan
agreement it decides to use.
a. What is the effective annual rate under the line of credit?
b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the
dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively
have use of.)
c. If the firm does expect to borrow an average of half the amount available, which arrangement would
you recommend for the borrower? Explain why.
FINAMAN

For the 5th to 6th Weeks of Block 3 (UNIT 5)

Read Chapter 9 The Cost of Capital (pages 358-372)
Answer the following problems (starting on page 375):

□ E9-1, E9-2, E9-3, E9-4 & E9-5

E9–1
A firm raises capital by selling $20,000 worth of debt with flotation costs equal to 2% of its par value. If the debt
matures in 10 years and has a coupon interest rate of 8%, what is the bond’s YTM?

E9–2
Your firm, People’s Consulting Group, has been asked to consult on a potential preferred stock offering by Brave
New World. This 15% preferred stock issue would be sold at its par value of $35 per share. Flotation costs would
total $3 per share. Calculate the cost of this preferred stock.

E9–3
Duke Energy has been paying dividends steadily for 20 years. During that time, dividends have grown at a
compound annual rate of 7%. If Duke Energy’s current stock price is $78 and the firm plans to pay a dividend of
$6.50 next year, what is Duke’s cost of common stock equity?

E9–4
Weekend Warriors, Inc., has 35% debt and 65% equity in its capital structure. The firm’s estimated after-tax cost
of debt is 8% and its estimated cost of equity is 13%. Determine the firm’s weighted average cost of capital
(WACC).

E9–5
Oxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm’s capital structure
targets the following proportions: debt, 55%; preferred stock, 10%; and common stock, 35%. If the cost of debt is
6.7%, preferred stock costs 9.2%, and common stock costs 10.6%, what is Oxy’s weighted average cost of capital
(WACC)?

□ P9-3, P9-6

P9–3
Before-tax cost of debt and after-tax cost of debt. David Abbot is interested in purchasing a bond issued by Sony.
He has obtained the following information on the security:

Answer the following questions.

a. Calculate the before-tax cost of the Sony bond.
b. Calculate the after-tax cost of the Sony bond given David’s tax bracket.

P9–6
After-tax cost of debt. Rick and Stacy Stark, a married couple, are interested in purchasing their first boat. They
have decided to borrow the boat’s purchase price of $100,000. The family is in the 28% federal income tax
 bracket. There are two choices for the Stark family: They can borrow the money from the boat dealer at an
annual interest rate of 8%, or they could take out a $100,000 second mortgage on their home. Currently, home
equity loans are at rates of 9.2%. There is no problem securing either of these two alternative financing choices.
Rick and Stacy learn that if they borrow from the boat dealership, the interest will not be tax deductible.
However, the interest on the second mortgage will qualify as being tax deductible on their federal income tax
return.
a. Calculate the after-tax cost of borrowing from the boat dealership.
b. Calculate the after-tax cost of borrowing through a second mortgage on their home.
c. Which source of borrowing is less costly for the Stark family?

□ P9-7 & P9-8

P9–7
Cost of preferred stock. Taylor Systems has just issued preferred stock. The stock has a 12% annual dividend and a
$100 par value and was sold at $97.50 per share. In addition, flotation costs of $2.50 per share must be paid.
a. Calculate the cost of the preferred stock.
b. If the firm sells the preferred stock with a 10% annual dividend and nets $90.00 after flotation costs,
what is its cost?

P9–8
Cost of preferred stock. Determine the cost for each of the following preferred stocks.

□ P9-13, P9-14 (except requirement “c”) & P9-16

P9–13
WACC—Book weights. Ridge Tool has on its books the amounts and specific (after-tax) costs shown in the
following table for each source of capital.

a. Calculate the firm’s weighted average cost of capital using book value weights.
b. Explain how the firm can use this cost in the investment decision-making process.
P9–14
WACC—Book weights and market weights. Webster Company has compiled the information shown in the
following table.

a. Calculate the weighted average cost of capital using book value weights.
b. Calculate the weighted average cost of capital using market value weights.

P9–16
Cost of capital. Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last
year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares
outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common
stock. It is taxed at a rate of 40%.
a. If the market price of the common stock is $40 and dividends are expected to grow at a rate of 6% per
year for the foreseeable future, what is the company’s cost of retained earnings financing?
b. If underpricing and flotation costs on new shares of common stock amount to $7.00 per share, what is
the company’s cost of new common stock financing?
c. The company can issue $2.00 dividend preferred stock for a market price of $25.00 per share. Flotation
costs would amount to $3.00 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000-par-value, 10% coupon, 5-year bonds that can be sold for $1,200 each.
Flotation costs would amount to $25.00 per bond. Use the estimation formula to figure the approximate
cost of debt financing.
e. What is the WACC?