财务管理基础答案.docx

Chapter 2Discussion Questions2-1.Discuss some financial variables that affect the price-earnings ratio.The price-earnings ratio will be influenced by the earnings and sales growth of the firm, the risk or volatility in performance, the debt-equity structure of the firm, the dividend payment policy, the quality of management, and a number of other factors. The ratio tends to be future-oriented, and the more positive the outlook, the higher it will be.2-2.What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?Book value per share is arrived at by taking the cost of the assets and subtracting out liabilities and preferred stock and dividing by the number of common shares outstanding. It is based on the historical cost of the assets. Market value per share is based on current assessed value of the firm in the marketplace and may bear little relationship to original cost. Besides the disparity between book and market value caused by the historical cost approach, other contributing factors are the growth prospects for the firm, the quality of management, and the industry outlook. To the extent these are quite negative or positive, market value may differ widely from book value.2-3.Explain how depreciation generates actual cash flows for the company.The only way depreciation generates cash flows for the company is by serving as a tax shield against reported income. This non-cash deduction may provide cash flow equal to the tax rate times the depreciation charged. This much in taxes will be saved, while no cash payments occur.2-4.What is the difference between accumulated depreciation and depreciation expense? How are they related?Accumulated depreciation is the sum of all past and present depreciation charges, while depreciation expense is the current years charge. They are related in that the sum of all prior depreciation expense should be equal to accumulated depreciation (subject to some differential related to asset write-offs).2-5.How is the income statement related to the balance sheet?The earnings (less dividends) reported in the income statement is transferred to the ownership section of the balance sheet as retained earnings. Thus, what we earn in the income statement becomes part of the ownership interest in the balance sheet.2-6.Comment on why inflation may restrict the usefulness of the balance sheet as normally presented.The balance sheet is based on historical costs. When prices are rising rapidly, historical cost data may lose much of their meaningparticularly for plant and equipment and inventory.2-7.Explain why the statement of cash flows provides useful information that goes beyond income statement and balance sheet data.The income statement and balance sheet are based on the accrual method of accounting, which attempts to match revenues and expenses in the period in which they occur. However, accrual accounting does not attempt to properly assess the cash flow position of the firm. The statement of cash flows fulfills this need.2-8.What are the three primary sections of the statement of cash flows? In what section would the payment of a cash dividend be shown?The sections of the statement of cash flows are:Cash flows from operating activitiesCash flows from investing activitiesCash flows from financing activitiesThe payment of cash dividends falls into the financing activities category.2-9.What is free cash flow? Why is it important to leveraged buyouts?Free cash flow is equal to cash flow from operating activities:Minus:Capital expenditures required to maintain the productive capacity of the firm.Minus:Dividends (required to maintain the payout on common stock and to cover any preferred stock obligation).The analyst or banker normally looks at free cash flow to determine whether there are insufficient excess funds to pay back the loan associated with the leveraged buy-out.2-10.Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?Interest expense is a tax deductible item to the corporation, while dividend payments are not. The net cost to the corporation of interest expense is the amount paid multiplied by the difference of one minus the applicable tax rate.For example, $100 of interest expense costs the company $65 after taxes when the corporate tax rate is 35 percent. (e.g. $100 x (1 .35) = $65).Chapter 3Discussion Questions3-1.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?Short-term lendersliquidity because their concern is with the firms ability to pay short-term obligations as they come due.Long-term lendersleverage because they are concerned with the relationship of debt to total assets. They also will examine profitability to insure that interest payments can be made.Stockholdersprofitability, with secondary consideration given to debt utilization, liquidity, and other ratios. Since stockholders are the ultimate owners of the firm, they are primarily concerned with profits or the return on their investment.3-2.Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders equity.The Du Pont system of analysis breaks out the return on assets between the profit margin and asset turnover.Return on Assets=Profit MarginAsset TurnoverIn this fashion, we can assess the joint impact of profitability and asset turnover on the overall return on assets. This is a particularly useful analysis because we can determine the source of strength and weakness for a given firm. For example, a company in the capital goods industry may have a high profit margin and a low asset turnover, while a foodprocessing firm may suffer from low profit margins, but enjoy a rapid turnover of assets.The modified form of the Du Pont formula shows:This indicates that return on stockholders equity may be influenced by return on assets, the debt-to-assets ratio or a combination of both. Analysts or investors should be particularly sensitive to a high return on stockholders equity that is influenced by large amounts of debt.3-3.If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?If the accounts receivable turnover ratio is decreasing, accounts receivable will be on the books for a longer period of time. This means the average collection period will be increasing.3-4.What advantage does the fixed charge coverage ratio offer over simply using times interest earned?The fixed charge coverage ratio measures the firms ability to meet all fixed obligations rather than interest payments alone, on the assumption that failure to meet any financial obligation will endanger the position of the firm.3-5.Is there any validity in rule-of-thumb ratios for all corporations, for example, a current ratio of 2 to 1 or debt to assets of 50 percent?No rule-of-thumb ratio is valid for all corporations. There is simply too much difference between industries or time periods in which ratios are computed. Nevertheless, rules-of-thumb ratios do offer some initial insight into the operations of the firm, and when used with caution by the analyst can provide information.3-6.Why is trend analysis helpful in analyzing ratios?Trend analysis allows us to compare the present with the past and evaluate our progress through time. A profit margin of 5 percent may be particularly impressive if it has been running only 3 percent in the last ten years. Trend analysis must also be compared to industry patterns of change.3-7.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.a.Inflation may cause net income to be overstated and total assets to be understated causing an artificially high ratio that is misleading.b.Inflation may cause sales to be overstated. If the firm uses FIFO accounting, inventory will also reflect inflation-influenced dollars and the net effect will be nil.If the firm uses LIFO accounting, inventory will be stated in old dollars and too high a ratio could be reported.c.Fixed assets will be understated relative to sales and too high a ratio could be reported.d.Since both are based on historical costs, no major inflationary impact will take place in the ratio.3-8.What effect will disinflation following a highly inflationary period have on the reported income of the firm?Disinflation tends to lower reported earnings as inflation-induced income is squeezed out of the firms income statement. This is particularly true for firms in highly cyclical industries where prices tend to rise and fall quickly.3-9.Why might disinflation prove to be favorable to financial assets?Because it is possible that prior inflationary pressures will no longer seriously impair the purchasing power of the dollar, lessening inflation also means that the required return that investors demand on financial assets will be going down, and with this lower demanded return, future earnings or interest should receive a higher current evaluation.3-10.Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?There are many different methods of financial reporting accepted by the accounting profession as promulgated by the Financial Accounting Standards Board. Though the industry has continually tried to provide uniform guidelines and procedures, many options remain open to the reporting firm. Every item on the income statement and balance sheet must be given careful attention. Two apparently similar firms may show different values for sales, research and development, extraordinary losses, and many other items.Chapter 4Discussion Questions4-1.What are the basic benefits and purposes of developing pro forma statements and a cash budget?The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers and other lenders also use these financial statements as a guide in credit decisions.4-2.Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid. To the extent collections do not cover purchasing costs and other financial requirements, the firm must look to borrowing to cover the deficit.4-3.With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO method assigns inventory items that were purchased first to the cost of goods sold. In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars.4-4.Explain the relationship between inventory turnover and purchasing needs.The more rapid the turnover of inventory, the greater the need for purchase and replacement. Rapidly turning inventory makes for somewhat greater ease in foreseeing future requirements and reduces the cost of carrying inventory.4-5.Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement.Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A $100,000 increase in sales may cause a $50,000 increase in assets, with perhaps only $10,000 of the new financing coming from profits. It is very seldom that incremental profits from sales expansion can meet new financing needs.4-6.Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales.Level production in a cyclical industry has the advantage of allowing for the maintenance of a stable work force and reducing inefficiencies caused by shutting down production during slow periods and accelerating work during crash production periods. A major drawback is that a large stock of inventory may be accumulated during the slow sales period. This inventory may be expensive to finance, with an associated danger of obsolescence.4-7.What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?The percent-of-sales forecast is only as good as the functional relationship of assets and liabilities to sales. To the extent that past relationships accurately depict the future, the percent-of-sales method will give values that reasonably represent the values derived through the pro-forma statements and the cash budget.Chapter 5Discussion Questions5-1.Discuss the various uses for break-even analysis.Such analysis allows the firm to determine at what level of operations it will break even and to explore the relationship between volume, costs, and profits.5-2.What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?A utility is in a stable, predictable industry and therefore can afford to use more financial leverage than an automobile company, which is generally subject to the influences of the business cycle. An automobile manufacturer may not be able to service a large amount of debt when there is a downturn in the economy.5-3.Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).A labor-intensive company will have low fixed costs and a correspondingly low break-even point. However, the impact of operating leverage on the firm is small and there will be little magnification of profits as volume increases. A capital-intensive firm, on the other hand, will have a higher break-even point and enjoy the positive influences of operating leverage as volume increases.5-4.What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?For break-even analysis based on accounting flows, depreciation is considered part of fixed costs. For cash flow purposes, it is eliminated from fixed costs.The accounting flows perspective is longer-term in nature because we must consider the problems of equipment replacement.5-5.What does risk taking have to do with the use of operating and financial leverage?Both operating and financial leverage imply that the firm will employ a heavy component of fixed cost resources. This is inherently risky because the obligation to make payments remains regardless of the condition of the company or the economy.5-6.Discuss the limitations of financial leverage.Debt can only be used up to a point. Beyond that, financial leverage tends to increase the overall costs of financing to the firm as well as encourage creditors to place restrictions on the firm. The limitations of using financial leverage tend to be greatest in industries that are highly cyclical in nature.5-7.How does the interest rate on new debt influence the use of financial leverage?The higher the interest rate on new debt, the less attractive financial leverage is to the firm.5-8.Explain how combined leverage brings together operating income and earnings per share.Operating leverage primarily affects the operating income of the firm. At this point, financial leverage takes over and determines the overall impact on earnings per share. A delineation of the combined effect of operating and financial leverage is presented in Table 5-6 and Figure 5-5.5-9.Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.At progressively higher levels of operations than the break-even point, the percentage change in operating income as a result of a percentage change in unit volume diminishes. The reason is primarily mathematical as we move to increasingly higher levels of operating income, the percentage change from the higher base is likely to be less.5-10.When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you are indifferent as to which plan is selected?The point of equality only measures indifference based on earnings per share. Since our ultimate goal is market value maximization, we must also be concerned with how these earnings are valued. Two plans that have the same earnings per share may call for different price-earnings ratios, particularly when there is a differential risk component involved because of debt.Chapter 6Discussion Questions6-1.Explain how rapidly expanding sales can drain the cash resources of a firm.Rapidly expanding sales will require a buildup in assets to support the growth. In particular, more and more of the increase in current assets will be permanent in nature. A nonliquidating aggregate stock of curre