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Management
how management information system in business can help to attain and retain competitive edge over rivals in today's globalize economy?
Management
discuss how instances of corporate mismanagement or fraud should be taken into account when assessing the risks associated with certain types of investments.
Management
Your boss Sally Maloney, treasuer of Fred Clark Enterprises aske you to help her estimate the intrinsic value of the company's stock.
Management
Below is the common equity section (in millions) of Teweles Technology’s last two year-end balance sheets:
2009
2008
Common stock
$2,000
$1,000
Retained earnings
2,000
2,340
Total common equity
$4,000
$3,340
Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
Answer The company’s net income in 2009 was higher than in 2008.
Teweles issued common stock in 2009.
The market price of Teweles' stock doubled in 2009.
Teweles had positive net income in both 2008 and 2009, but the company’s net income in 2009 was lower than it was in 2008.
The company has more equity than debt on its balance sheet.
2009
2008
Common stock
$2,000
$1,000
Retained earnings
2,000
2,340
Total common equity
$4,000
$3,340
Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
Answer The company’s net income in 2009 was higher than in 2008.
Teweles issued common stock in 2009.
The market price of Teweles' stock doubled in 2009.
Teweles had positive net income in both 2008 and 2009, but the company’s net income in 2009 was lower than it was in 2008.
The company has more equity than debt on its balance sheet.
Management
Which of the following statements is CORRECT?
Answer In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
In the statement of cash flows, depreciation charges are reported as a use of cash.
In the statement of cash flows, a decrease in inventories is reported as a use
of cash.
Answer In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
In the statement of cash flows, depreciation charges are reported as a use of cash.
In the statement of cash flows, a decrease in inventories is reported as a use
of cash.
Management
Which of the following statements is CORRECT?
Answer The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
MVA gives us an idea about how much value a firm’s management has added during the last year.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1-T) – (Investor-supplied op. capital) x (A-T cost of capital).
EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
Answer The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
MVA gives us an idea about how much value a firm’s management has added during the last year.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1-T) – (Investor-supplied op. capital) x (A-T cost of capital).
EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
Management
5. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold
at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original
Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its
semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same
effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard
flotation costs, and round your final answer up to a whole number of bonds.
a. 4,228
b. 4,337
c. 4,448
d. 4,562
e. 4,676
at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original
Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its
semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same
effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard
flotation costs, and round your final answer up to a whole number of bonds.
a. 4,228
b. 4,337
c. 4,448
d. 4,562
e. 4,676
Management
4. Suppose a new company decides to raise a total of $200 million, with $100 million as common
equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but
by an iron-clad provision in its charter, the company can never raise any additional debt beyond
the original $100 million. Given these conditions, which of the following statements is
CORRECT?
a. The higher the percentage of debt represented by mortgage bonds, the riskier both types of
bonds will be and, consequently, the higher the firm’s total dollar interest charges will be.
b. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage
bonds, we could be certain that the firm’s total interest expense would be lower than if the
debt were raised by issuing $100 million of debentures.
c. In this situation, we cannot tell for sure how, or whether, the firm’s total interest expense on
the $100 million of debt would be affected by the mix of debentures versus first mortgage
bonds. The interest rate on each of the two types of bonds would increase as the percentage
of mortgage bonds used was increased, but the result might well be such that the firm’s total
interest charges would not be affected materially by the mix between the two.
d. The higher the percentage of debentures, the greater the risk borne by each debenture, and
thus the higher the required rate of return on the debentures.
e. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage
bonds, we could be certain that the firm’s total interest expense would be lower than if the
debt were raised by issuing $100 million of first mortgage bonds.
equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but
by an iron-clad provision in its charter, the company can never raise any additional debt beyond
the original $100 million. Given these conditions, which of the following statements is
CORRECT?
a. The higher the percentage of debt represented by mortgage bonds, the riskier both types of
bonds will be and, consequently, the higher the firm’s total dollar interest charges will be.
b. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage
bonds, we could be certain that the firm’s total interest expense would be lower than if the
debt were raised by issuing $100 million of debentures.
c. In this situation, we cannot tell for sure how, or whether, the firm’s total interest expense on
the $100 million of debt would be affected by the mix of debentures versus first mortgage
bonds. The interest rate on each of the two types of bonds would increase as the percentage
of mortgage bonds used was increased, but the result might well be such that the firm’s total
interest charges would not be affected materially by the mix between the two.
d. The higher the percentage of debentures, the greater the risk borne by each debenture, and
thus the higher the required rate of return on the debentures.
e. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage
bonds, we could be certain that the firm’s total interest expense would be lower than if the
debt were raised by issuing $100 million of first mortgage bonds.
Management
3. Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
b. A bond’s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
c. If a bond sells at par, then its current yield will be less than its yield to maturity.
d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
e. A discount bond’s price declines each year until it matures, when its value equals its par value.
a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
b. A bond’s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
c. If a bond sells at par, then its current yield will be less than its yield to maturity.
d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
e. A discount bond’s price declines each year until it matures, when its value equals its par value.
Management
2. Which of the following statements is CORRECT?
a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
