follows. On January 20, 2011, Wenger, Inc. sold security A for $15,300.

The sale proceeds are

net of brokerage fees. (a) Prepare the adjusting entry at December

Equity Securities the Financial Accounting Standards Board issued accounting guidance to
clarify accounting methods and procedures with respect to certain debt and all equity securities.
An important part of the statement concerns the distinction between held-to-maturity, available-
for-sale, and trading securities. (a)

Equity Securities Entries Capriati Corporation made the following cash purchases of securities
during 2010, which is the first year in which Capriati invested in securities. 1. On January 15,
purchased 9,000 shares of Gonzalez Company’s common stock at $33.50 per share plus
commission $1,980. 2. On April 1, purchased

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Refinancing of Short-Term Debt Andretti Inc. issued $10,000,000 of short-term commercial

paper during the year 2010 to finance construction of a plant. At December 31, 2010, the
corporation’s year-end, Andretti intends to refinance the commercial paper by issuing long-
term debt. However, because the corporation tempo

Entries for Available-for-Sale Securities assume the same information as in E17-3 except that the
securities are classified as available-for-sale. The fair value of the bonds at December 31 of each
yearend is as follows. 2009 $534,200 2012 $517,000 2010 $515,000 2013 $500,000 2011
$513,000 (a) Prepare the journa

What is the purpose of a cash flow hedge?

What are hybrid securities? Give an example of a hybrid security.

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Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with
respect to the accounting for investments.

Refinancing of Short-Term Debt Dumars Corporation reports in the current liability section of its
balance sheet at December 31, 2010 (its year-end), short-term obligations of $15,000,000, which
includes the current portion of 12% long-term debt in the amount of $10,000,000 (matures in
March 2011). Management has stated

In what situation will the unrealized holding gain or loss on an available-for-sale security be
reported in income?

What are the main distinctions between a traditional financial instrument and a derivative
financial instrument?
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When the equity method is applied, what disclosures should be made in the investor’s
financial statements?

Entries for Held-to-Maturity Securities on January 1, 2010, Jennings Company purchased at par
10% bonds having a maturity value of $300,000. They are dated January 1, 2010, and mature
January 1, 2015, with interest receivable December 31 of each year. The bonds are classified in
the held-to-maturity category. (a) Prepa

Trading Securities Entries on December 21, 2010, Zurich Company provided you with the
following information regarding its trading securities. During 2011, Carolina Company stock
was sold for $9,500. The fair value of the stock on December 31, 2011, was: Star gate Corp.
stock—$19,300; Vector man Co. stock—$20,500. (

Equity Investments—Trading Swanson Company has the following securities in its trading
portfolio of securities on December 31, 2010. (a) How much was Gator Co.’s share of Demo
Co.’s net income for the year? (b) How much was Gator Co.’s share of Demo Co.’s
dividends for the year? (c) What was Demo Co.’s tota

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Investment Accounted for under the Equity Method on July 1, 2011, Fontaine Company
purchased for cash 40% of the outstanding capital stock of Knoblett Company. Both Fontaine
Company and Knoblett Company have a December 31 year-end. Knoblett Company, whose
common stock is actively traded in the over-the-counter market,

What are the major advantages of notes to the financial statements? What types of items are
usually reported in notes?

Equity Securities Lexington Co. has the following available-for-sale securities outstanding on
December 31, 2010 (its first year of operations). During 2011 Summerset Company stock was
sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800 being
recorded as a “Gain on Sale of Securities

Impairment of Debt Securities Cairo Corporation has municipal bonds classified as available for-
sale at December 31, 2010. These bonds have a par value of $800,000, an amortized cost of
$800,000, and a fair value of $740,000. The unrealized loss of $60,000 previously recognized as
other comprehensive income and as a se

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Fair Value and Equity Method Compared) Gregory Inc. acquired 20% of the outstanding
common stock of Henderson Inc. on December 31, 2010. The purchase price was $1,250,000 for
50,000 shares. Henderson Inc. declared and paid an $0.80 per share cash dividend on June 30
and on December 31, 2011. Henderson reported net inco

Explain how trading securities are accounted for and reported.

What is the fair value option?

Where are gains and losses related to cash flow hedges involving anticipated transactions
reported?

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Hillsborough Co. has an available-for-sale investment in the bonds of Schuyler Corp. with a
carrying (and fair) value of $70,000. Hillsborough determined that due to poor economic
prospects for Schuyler, the bonds have decreased in value to $60,000. It is determined that this
loss in value is other than-temporary. Prep

Where can authoritative iGAAP be found related to investments?

What are the major types of subsequent events? Indicate how each of the following
“subsequent events” would be reported. (a) Collection of a note written off in a prior
period. (b) Issuance of a large preferred stock offering. (c) Acquisition of a company in a
different industry. (d) Destruction of a major plant in

Briefly discuss how a transfer of securities from the available-for-sale category to the trading
category affects stockholders’ equity and income.

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What is a variable-interest entity?

Indicate how unrealized holding gains and losses should be reported for investment securities
classified as trading, available-for-sale, and held-to-maturity.

Financial Statement Effect of Equity Securities Presented below are three unrelated situations
involving equity securities. Situation 1 An equity security, whose market value is currently less
than cost, is classified as available-for-sale but is to be reclassified as trading. Situation 2 A
noncurrent portfolio with an

Franklin Corp. has an investment that it has held for several years. When it purchased the
investment, Franklin classified and accounted for it as available-for-sale. Can Franklin use the
fair value option for this investment? Explain.

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Call Option on August 15, 2010. Outkast Co. invested idle cash by purchasing a call option on
Counting Crows Inc. common shares for $360. The notional value of the call option is 400
shares, and the option price is $40. (Market price of an Outkast share is $40.) The option expires
on January 31, 2011. The following dat

Issues raised about Investment Securities you have just started work for Warren Co. as part of
the controller’s group involved in current financial reporting problems. Jane Hens haw,
controller for Warren, is interested in your accounting background because the company has
experienced a series of financial reporting

What constitutes “significant influence” when an investor’s financial interest is below

the 50% level?

The following information relates to Starbucks for 2007: net income $672.638 million;
unrealized holding loss of $20.380 million related to available-for-sale securities during the year;
accumulated other comprehensive income of $37.273 million on October 1, 2006. Assuming no
other changes in accumulated other comprehe

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If the bonds in question 8 are classified as available-for sale and they have a fair value at
December 31, 2010, of $3,604,000, prepare the journal entry (if any) at December 31, 2010, to
record this transaction.

When should a debt security be classified as held-to maturity?

At what amount should trading, available-for-sale, and held-to-maturity securities be reported on

the balance sheet

Distinguish between a debt security and an equity security.

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Use the information from BE17-1, but assume the bonds are purchased as an available-for-sale
security. Prepare Garfield’s journal entries for (a) The purchase of the investment, (b) The
receipt of annual interest and discount amortization, and (c) The year-end fair value adjustment.
The bonds have a yearend fair v

Cash Flow Hedge on January 2, 2010, Parton Company issues a 5-year, $10,000,000 note at
LIBOR, with interest paid annually. The variable rate is reset at the end of each year. The
LIBOR rate for the first year is 5.8%. Parton Company decides it prefers fixed-rate financing and
wants to lock in a rate of 6%. As a result

Fair Value Measurement Presented below is information related to the purchases of common
stock by Lilly Company during 2010. (a) What entry would Lilly make at December 31, 2010, to
record the investment in Arroyo Company stock if it chooses to report this security using the fair
value option? (b) What entry would Lil

What is the cost of a long-term investment in bonds?

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Carow Corporation purchased, as a held-to-maturity investment, $60,000 of the 8%, 5-year

bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest
semiannually. Prepare Carow’s journal entries for (a) The purchase of the investment, and
(b) The receipt of semiannual interest and premiu

Why might a company become involved in an interest rate swap contract to receive fixed interest
payments and pay variable?

What quantitative materiality test is applied to determine whether a segment is significant

enough to warrant separate disclosure?

Available-for-Sale Securities Entries and Reporting Player Corporation purchases equity

securities costing $73,000 and classifies them as available-for-sale securities. At December 31,
the fair value of the portfolio is $67,000. Prepare the adjusting entry to report the securities
properly. Indicate the statement prese

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Loss Contingency Presented below is a note disclosure for Matsui Corporation. Litigation and
Environmental: The Company has been notified, or is a named or a potentially responsible party
in a number of governmental (federal, state and local) and private actions associated with
environmental matters, such as those rela

(a) Assuming no Securities Fair Value Adjustment (Available- for-Sale) account balance at the
beginning of the year, prepare the adjusting entry at the end of the year if Laura Company’s
available-for-sale securities have a market value $60,000 below cost. (b) Assume the same
information as part (a), except that Lau

Fair Value Hedge) On January 2, 2010, Mac Cloud Co. issued a 4-year, $100,000 note at 6%
fixed interest, interest payable semiannually. Mac Cloud now wants to change the note to a
variable-rate note. As a result, on January 2, 2010, Mac Cloud Co. enters into an interest rate
swap where it agrees to receive 6% fixed and

The following information was described in a note of Canon Packing Co. “During August,
Holland Products Corporation purchased 311,003 shares of the Company’s common stock
which constitutes approximately 35% of the stock outstanding. Holland has since obtained
representation on the Board of Directors.” “An affil
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Investment Classifications For the following investments identify whether they are: 1. Trading
Securities 2. Available-for-Sale Securities 3. Held-to-Maturity Securities Each case is
independent of the other. (a) A bond that will mature in 4 years was bought 1 month ago when
the price dropped. As soon as the value incr

Distinguish between the accounting treatment for available- for-sale equity securities and trading
equity securities.

Identify and explain the different types of classifications for investment in equity securities.

What purpose does the variety in bond features (types and characteristics) serve?

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Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31,
Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400.
Prepare Hendricks’ journal entries for (a) The purchase of the investment, (b) The interest
received, and (c) The fair value adjustm

Warranties the Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental
fee of $600 per month plus 5% of yearly profits over $500,000. Matt Rich, the owner of the
store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and
warranty costs in order to keep profits at

Equity Investment on July 1, 2010, Selig Company purchased for cash 40% of the outstanding
capital stock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor
Corporation, whose common stock is actively traded on the American Stock Exchange, paid a
cash dividend on November 15, 2010, to Selig Co

Journal Entries for Fair Value and Equity Methods Presented below are two independent
situations. Situation 1 Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock
of Ramirez Fashion at a total cost of $14 per share on March 18, 2010. On June 30, Ramirez
declared and paid a $75,000 cash dividend. On Dece

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What is the GAAP definition of fair value?

Fair Value Addison Manufacturing holds a large portfolio of debt and equity securities as an
investment. The fair value of the portfolio is greater than its original cost, even though some
securities have decreased in value. Sam Beresford, the financial vice president, and Angie
Nielson, the controller, are near year-e
What is the full disclosure principle in accounting? Why has disclosure increased substantially in
the last 10 years?

Identify and explain the three types of classifications for investments in debt securities.

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Entries for Held-to-Maturity Securities on January 1, 2009, Roosevelt Company purchased 12%
bonds, having a maturity value of $500,000, for $537,907.40. The bonds provide the
bondholders with a 10% yield. They are dated January 1, 2009, and mature January 1, 2014, with
interest receivable December 31 of each year. Roos

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock as an available-for
sale investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share.
At yearend, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’s journal
entries to record (a) The purchase of the

Current versus Noncurrent Classification Rodriguez Corporation includes the following items in
its liabilities at December 31, 2010. 1. Notes payable, $25,000,000, due June 30, 2011. 2.
Deposits from customers on equipment ordered by them from Rodriguez, $6,250,000. 3. Salaries
payable, $3,750,000, due January 14, 2011

Use the information from BE17-5 but assume the stock was purchased as a trading security.
Prepare Fairbanks’s journal entries to record (a) The purchase of the investment, (b) The
dividends received, and (c) The fair value adjustment.

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Elizabeth Corp. has an investment with a carrying value (equity method) on its books of
$170,000 representing a 30% interest in Borg Company, which suffered a $620,000 loss this
year. How should Raleigh Corp. handle its Portionate share of Borg’s loss?

Equity Investments—Trading Swanson Company has the following securities in its trading
portfolio of securities on December 31, 2010. All of the securities were purchased in 2010. In
2011, Swanson completed the following securities transactions. March 1 sold the 1,500 shares of
Parker, Inc., Common, @ $45 less fees o

When is a debt security considered impaired? Explain how to account for the impairment of an
available-for sale debt security.

What are diversified companies? What accounting problems are related to diversified
companies?

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Why are held-to-maturity investments applicable only to debt securities?

Comprehensive Income Disclosure assume the same information as E17-9 and that Wenger, Inc.
reports net income in 2010 of $120,000 and in 2011 of $140,000. Total holding gains (including
any realized holding gain or loss) arising during 2011 total $30,000. (a) Prepare a statement of
comprehensive income for 2010 startin

Fair Value Hedge Sarazan Company issues a 4-year, 7.5% fixed-rate interest only, non-
prepayable $1,000,000 note payable on December 31, 2010. It decides to change the interest rate
from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap
agreement specifies that Sarazan will receive a

Hatch Co. uses the equity method to account for investments in common stock. What accounting
should be made for dividends received in excess of Hatch’s share of investee’s earnings
subsequent to the date of investment?

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Nature of Liabilities Presented below is the current liabilities section of Micro Corporation.
Answer the following questions. (a) What are the essential characteristics that make an item a
liability? (b) How does one distinguish between a current liability and a long-term liability? (c)
What are accrued liabilities? G

The FASB requires a reconciliation between the effective tax rate and the federal
government’s statutory rate. Of what benefit is such a disclosure requirement?

Ramirez Company has an available-for-sale investment in the 6%, 20-year bonds of Soto
Company. The investment was originally purchased for $1,200,000 in 2009. Early in 2010,
Ramirez recorded an impairment of $300,000 on the Soto investment, due to Soto’s financial
distress. In 2011, Soto returned to profitability and

Cash Flow Hedge Hart Golf Co. uses titanium in the production of its specialty drivers. Hart
anticipates that it will need to purchase 200 ounces of titanium in October 2010, for clubs that
will be shipped in the holiday shopping season. However, if the price of titanium increases, this
will increase the cost to produc

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What is meant by the term underlying as it relates to derivative financial instruments?

On July 1, 2010, Wheeler Company purchased $4,000,000 of Duggan Company’s 8% bonds,

due on July 1, 2017. The bonds, which pay interest semiannually on January 1 and July 1, were
purchased for $3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler
should report on its income statement for year ended
Explain why reclassification adjustments are necessary.

Equity Investment—Trading Feiner Co. had purchased 300 shares of Guttman Co. for $40 each
this year and classified the investment as a trading security. Feiner Co. sold 100 shares of the
stock for $43 each. At year end the price per share of the Guttman Co. stock had dropped to $35.
Prepare the journal entries for th

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Garfield Company purchased, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds
of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield’s
journal entries for (a) The purchase of the investment, and (b) The receipt of annual interest and
discount amortization. Assume effective

Zoop Corporation purchased for $300,000 a 30% interest in Murphy, Inc. This investment
enables Zoop to exert significant influence over Murphy. During the year Murphy earned net
income of $180,000 and paid dividends of $60,000. Prepare Zoop’s journal entries related to
this investment.

Explain the difference between the voting-interest model and the risk-and-reward model used for
consolidation.

Where on the asset side of the balance sheet are trading securities, available-for-sale securities,
and held-to maturity securities reported? Explain.

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BCC has bonds that trade frequently, pay a 7.75 percent coupon rate, and mature in 2019. The
bonds mature on March 1 in the maturity year. Suppose an investor bought this bond on March
1, 2014, and assume interest is paid annually on March 1. Calculate the yield-to-maturity
assuming the investor bought the bond at the

The Bouchard Company's EPS was $6.50 in 2012, up from $4.42 in 2007. The company pays
out 40% of its earnings as dividends, and its common stock sells for $36.00. a. Calculate the past
growth rate in earnings. (This is a 5-year growth period.) b. The last dividend was D0 =
0.4($6.50) = $2.60. Calculate the next expec

Suppose today is July 1, 2014, and you deposit $2,000 into an account today. Then you deposit
$1,000 into the same account on each July 1, beginning in 2015 and continuing until the last
$1,000 deposit is made on July 1, 2020. Also, assume that you withdraw $3,000 on July 1, 2022.
Assuming a 7 percent annual compound i

An investment promises to pay $6,000 at the end of each year for the next five years and $4,000
at the end of each year for years 6 through 10. a. If you require a 12 percent rate of return on an
investment of this sort, what is the maximum amount you would pay for this investment? b.
Assuming that the payments are r

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Equity Method On January 1, 2010, Meredith Corporation purchased 25% of the common shares
of Pirates Company for $200,000. During the year, Pirates earned net income of $80,000 and
paid dividends of $20,000. Prepare the entries for Meredith to record the purchase and any
additional entries related to this investment in

Pepperton's annual income statement and balance sheet for December 31, 2011, appear next.
Additional information about the company's accounting methods and the treasurer's expectations
for the first quarter of 2012 can be seen in the footnotes. Pepperton Annual Income Statement
December 31, 2011 ($ thousands) Net sa

In the summer of 2012, the Hadaway Company was planning to finance an expansion with a
convertible security. They considered a convertible debenture but feared the burden of fixed
interest charges if the common stock price did not rise enough to make conversion attractive.
They decided on an issue of convertible prefer

The Zinn Company plans to issue $20,000,000 of 10-year bonds in June 2012 to help finance a
new research and development laboratory. It is now early September, and the current cost of debt
to the high-risk biotech company is 11%. However, the firm's financial manager is concerned
that interest rates will climb even hig

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Adams Food Service has issued 73/8 percent bonds that mature on July 15, 2046. The bonds are
callable at $1,037.08 on July 15, 2021. Assume that interest is paid and compounded annually.
Determine the yield-to-maturity (to the nearest 10th of 1 percent) if an investor purchased a
$1,000 denomination bond for $900 on Ju

Which would you prefer to invest in: a savings account paying 6 percent compounded annually
or a savings account paying 6 percent compounded daily? Why?

A company wants to raise $500 million in a new stock issue. Its investment banker indicates that
the sale of new stock will require 8 percent under pricing and a 7 percent spread. (Hint: the
underpricing is 8 percent of the current stock price, and the spread is 7 percent of the issue price.)
a. Assuming the company's

A developer offers lots for sale at $60,000, $10,000 to be paid down and $10,000 to be paid at
the end of each of the next five years with "no interest to be charged." In discussing a possible
purchase, you find that you can get the same lot for $48,959 cash. You also find that on a time
purchase there will be a servic
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Visit the Bloomberg Web site (www.bloomberg.com) to assess the best performing mutual funds
in recent periods. Is the ranking based on the last month somewhat consistent with the ranking of
funds on the last year?

A wealthy graduate of a local university wants to establish a scholarship to cover the full cost of
one student each year in perpetuity at her university. To adequately prepare for the
administration of the scholarship, the university will begin awarding it starting in three years.
The estimated full cost of one studen

Prepare a statement of cash flows (using the indirect method) for the Midland Manufacturing
Corporation for the year ending December 2013, based on the following comparative balance
sheets. *Net income for the year ended December 31, 2013, totaled $8.3 million; dividends paid
during the same period totaled $3.5 millio

The bonds of Columbia Gas paid no interest in 1993 because the firm had declared bankruptcy.
One issue of these bonds, the 8¼ percent coupon bonds due in 1996, was selling at 109 percent
of par value, or for approximately $1,090. Why would someone pay $1,090 for the bonds of a
bankrupt firm?

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Austin Grocers recently reported the following 2012 income statement (in millions of dollars):
Sales...................................................................................700 Operating costs including
depreciation.............................................500 EBIT.......................................

Refer to Problem 11-1. What is the project's MIRR? In problem 11-1 Project K costs $52,125, its
expected cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

Laiho Industries' 2011 and 2012 balance sheets (in thousands of dollars) are shown.
_______________________________________________________2012_____________2011
Cash........................................................................$102,850...............$ 89,725 Accounts
receivable.............................

W.C. Cycling had $55,000 in cash at year-end 2011 and $25,000 in cash at year-end 2012. The
firm invested in property, plant, and equipment totaling $250,000. Cash flow from financing
activities totaled + $170,000. a. What was the cash flow from operating activities? b. If accruals
increased by $25,000, receivables a

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The Alexander Company reported the following income statement for 2013: Assume that all
depreciation and 75 percent of the firm's selling, general, and administrative expenses are fixed
costs and that the remainder of the firm's operating expenses are variable costs. a. Determine
Alexander's fixed costs, variable cos

A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for
3.50 Israeli shekels or for 77 Japanese yen. What is the cross-exchange rate between the yen and
the shekel; that is, how many yen would you receive for every shekel exchanged?

In the Industrial Supply Company example (Table 4.4) it was assumed that the company's fixed
assets were being used at nearly full capacity and that net fixed assets would have to increase
proportionately as sales increased. Alternatively, suppose that the company has excess fixed
assets and that no increase in net fix

Try using one of the many Internet calculators, such as the one at Salem Five, to calculate your
time-value problems. a. Suppose you wanted to borrow $100,000 for 25 years at 8 percent. Using
Salem Five's calculator, find your monthly payment. b. Using Salem Five's "Savings and
Investment Planner," find how much $2,0

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Bostonmarket.com stock has an estimated beta of 1.5. The stock pays no dividend and is not
expected to pay one for the foreseeable future. The current price of the stock is $50. You expect
this price to rise to $60 by the end of the coming year. You believe that the distribution of
possible year-end prices is approxima

Consider again the BCC 8 percent debentures that mature on July 15, 2034 (see problem 6).
Determine the yield to call if the bonds are called on July 15, 2020, at $1,016.55.

Shalit Corporation's 2011 sales were $12 million. Its 2006 sales were $6 million. a. At what rate
have sales been growing? b. Suppose someone made this statement: "Sales doubled in 5 years.
This represents a growth of 100% in 5 years; so dividing 100% by 5, we find the growth rate to
be 20% per year." Is that stateme

Some refer to common stock in a company with debt outstanding as an option on a company's
assets. Do you see any logic to this statement? What is the logic, if any?

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Krogh Lumber's 2012 financial statements are shown here. a. Assume that the company was
operating at full capacity in 2012 with regard to all items except fixed assets; fixed assets in 2012
were being utilized to only 75% of capacity. By what percentage could 2013 sales increase over
2012 sales without the need for an

In 2012, Kodak declared bankruptcy. How can you reconcile a bankruptcy declaration with a
management pledged to maximize shareholder wealth?
The Davidson Corporation's balance sheet and income statement are provided here. Davidson
Corporation: Income Statement for Year Ending December 31, 2012 (Millions of Dollars)
Sales....................................................................................................$6,250 Operating costs
excluding de

The Severn Company plans to raise a net amount of $270 million to finance new equipment in
early 2013. Two alternatives are being considered: Common stock may be sold to net $60 per
share, or bonds yielding 12% may be issued. The balance sheet and income statement of the
Severn Company prior to financing are as follows

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Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following
list of figures is a quarterly pro forma forecast indicating external financing needs for 2012.
Assumptions are in parentheses. a. How do you interpret the negative numbers for income taxes
in the first two quarters? b. Why

Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 28 years later, in August
2011, that exchange rate had fallen to 77 yen to $1. Assume that the price of a Japanese-
manufactured automobile was $9,000 in September 1983 and that its price changes were in direct
relation to exchange rates. a. Has the

You see an article in the newspaper that details the performance of mutual funds over the last
five years. Out of 5,600 actively managed mutual funds in the study, 104 outperformed the
market in each of the last five years. The author of the article argues that these mutual funds are
examples of market inefficiency. "I

Assume that the risk-free rate increases but the market risk premium remains constant. What
impact would this have on the cost of debt? What impact would it have on the cost of equity?

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In 2011, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million.
Note that 2011 was a normal year and that for the past 10 years, earnings have grown at a
constant rate of 10%. However, in 2012, earnings are expected to jump to $14.4 million and the
firm expects to have profitable investment o

Prepare a cash budget for Atlas Products, Inc., for the first quarter of 2014, based on the
following information. The budgeting section of the corporate finance department of Atlas
Products has received the following sales estimates from the marketing department: The
company has found that, on average, about 25 perc

One recommendation in the chapter is that companies with promising investment opportunities
should strive to maintain a conservative capital structure. Yet many promising small businesses
are heavily indebted. a. Why should most companies with promising investment opportunities
strive to maintain conservative capital

One year ago, Caffe Vita Coffee Roasting Co. purchased three small batch coffee roasters for
$3.3 million. Now in 2010, the company finds that new roasters are available that offers
significant advantages. The new roasters can be purchased for $4.5 million, and have no salvage
value. Both the new and the old roasters a

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Assume that it is now January 1, 2013. Wayne-Martin Electric Inc. (WME) has developed a solar
panel capable of generating 200% more electricity than any other solar panel currently on the
market. As a result, WME is expected to experience a 15% annual growth rate for the next 5
years. Other firms will have developed co

For 2012, Everyday Electronics reported $22.5 million of sales and $18 million of operating
costs (including depreciation). The company has $15 million of investor-supplied operating
capital. Its weighted average cost of capital is 9% and its federal-plus-state income tax rate was
35%. What was the firm's Economic Valu

If inflation expectations increase, what would you expect to happen to the returns required by
investors in bonds? What would happen to bond prices?

Suppose you constructed a pro forma balance sheet and a cash budget for a company for the
same time period and the external financing required from the pro forma forecast exceeded the
cash deficit estimated on the cash budget. How would you interpret this result?

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Financial information for Powell Panther Corporation is shown here. Powell Panther
Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
__________________________________________________2012________________2011
Sales.................................................................$1,200.

Consider the Industrial Supply Company example (Table 4.4) again. Assume that the company
plans to maintain its dividend payments at the same level in 2014 as in 2013. Also assume that
all of the additional financing needed is in the form of short-term notes payable. Determine the
amount of additional financing needed

Look back at Table 7.5 and examine the Anadarko Petroleum and Clear Channel bonds that
mature in 2017. a. If these companies were to sell new $1,000 par value long-term bonds,
approximately what coupon interest rate would they have to set if they wanted to bring them out
at par? b. If you had $10,000 and wanted to in
The return an investor earns on a bond over a period of time is known as the holding period
return, defined as interest income plus or minus the change in the bond's price, all divided by the
beginning bond price. a. What is the holding period return on a bond with a par value of $1,000,
and a coupon rate of 6 percen

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Looking at Figure, describe the trend in net equity financing in the U.S. during the last 30 years.
What does this say about the use of equity financing in U.S. corporations?

Rework Problem 16-10 using a spreadsheet model. After completing Parts a through d, respond
to the following: If Bowers' customers began to pay late, collections would slow down, thus
increasing the required loan amount. If sales declined, this also would have an effect on the
required loan. Do a sensitivity analysis t

Donna Jamison, a 2007 graduate of the University of Florida with 4 years of banking experience,
was recently brought in as assistant to the chairperson of the board of D'Leon Inc., a small food
producer that operates in north Florida and whose specialty is high-quality pecan and other nut
products sold in the snack foo

Zip Boys has outstanding zero coupon bonds maturing in 2016. a. How would you compute the
yield-to-maturity on bonds like these? b. How do bondholders get a return when they buy these
bonds?

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Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the required
return for the overall stock market? What is the required rate of return on a stock with a beta of
1.2?

You are trying to prepare financial statements for Bartlett Pickle Company, but seem to be
missing its balance sheet. You have Bartlett's income statement, which shows sales last year
were $420 million with a gross profit margin of 40 percent. You also know that credit sales
equaled three-quarters of Bartlett's total r

BCC has issued 8 1/8 percent debentures that will mature on July 15, 2034. Assume that interest
is paid and compounded annually. If an investor purchased a $1,000 denomination bond for
$1,025 on July 15, 2014, determine the bond's yield-to maturity. Explain why an investor would
be willing to pay $1,025 for a bond that

Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her
bank. She has estimated the following sales forecasts for the firm for parts of 2012 and 2013:
May 2012..............................................$180,000 June......................................................180,0

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Do a Google search for "Preparing a Cash Flow Forecast?" Choose a site that provides cash flow
forecasting tools and templates. Prepare a 1-page memo to your instructor summarizing what you
found and compare it to the cash flow forecasting discussion in this chapter.

Looking at Table, why do electric utilities have such a low times interest- earned ratio? Why is
the ratio for information technology companies so high?

a. Suppose that Liquid Force's stock price consistently falls by an amount equal to one-half the
dividend it pays on the payment date. Ignoring taxes, can you think of an investment strategy to
take advantage of this information? b. If you and many others pursued this strategy, predict what
would happen to Liquid Forc

Prepare a cash budget for Elmwood Manufacturing Company for the first three months of 2014
based on the following information: The company has found that approximately 40 percent of
sales are collected during the month the sale is made and the remaining 60 percent are collected
during the month following the sale. Mat

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How much would you have to pay for a U.S. government bond ($1,000 maturity value)
scheduled to mature in November 2015 and quoted at 147:27 "asked"? The coupon rate on the
bond is 9 percent.

Stocks A and B have the following historical returns: a. Calculate the average rate of return for
each stock during the period 2007 through 2011. b. Assume that someone held a portfolio
consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the
portfolio have been each year? What w

It is now December 31, 2011 (t = 0), and a jury just found in favor of a woman who sued the city
for injuries sustained in a January 2010 accident. She requested recovery of lost wages plus
$100,000 for pain and suffering plus $20,000 for legal expenses. Her doctor testified that she has
been unable to work since the a

Refer to Problem 11-1. What is the project's discounted payback? Problem 11-1 Project K costs
$52,125, its expected cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

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Determine the present value, discounted at 6 percent per year of $50,000 to be received 5 years
from today if the interest rate is compounded a. Semiannually b. Quarterly

Explain why increasing financial leverage increases the risk borne by shareholders.
Suppose a U.S. Treasury bill, maturing in 30 days, can be purchased today for $99,500.
Assuming that the security is held until maturity, the investor will receive $100,000 (face
amount). Determine the percentage holding period return on this investment.

This is a more difficult but informative problem. James Brodrick & Sons, Inc. is growing rapidly
and, if at all possible, would like to finance its growth without selling new equity. Selected
information from the company's five-year financial forecast follows. a. According to this
forecast, what dividends will the com

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Suppose you constructed a pro forma balance sheet for a company and the estimate for external
financing required was negative. How would you interpret this result?

What's Wrong with this Picture? In the following discussion, see how many errors you can spot
and explain briefly why each is an error. You do not need to correct the error. "Loretta, I think
we've got a winner here. Take a look at these numbers! "Now, Loretta, here's how I figure it: The
boss says our corporate goal

Explain how each of the following changes will affect a company's range of earnings chart such
as that shown in Figure. Which changes would make increased financial leverage more
attractive? Which would make it less attractive? a. An increase in the interest rate on the new
debt to be raised. b. An increase in the co

An Excel spreadsheet containing R&E Supplies' 2012 pro forma financial forecast as shown in
Table 3.5 is available for download at www.mhhe.com/higgins10e. Using this spreadsheet, the
information presented in the following list of figures, and the modified equations determined
earlier in question 6, extend the forecast

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Bailey Corporation's financial statements (dollars and shares are in millions) are provided here.
Income Statement for Year Ending December 31, 2012
Sales..............................................................................................$214,000 Operating costs
excluding depreciation and amortization.....

The Corrigan Corporation's 2011 and 2012 financial statements follow, along with some industry
average ratios. a. Assess Corrigan's liquidity position and determine how it compares with peers
and how the liquidity position has changed over time. b. Assess Corrigan's asset management
position and determine how it compar

The balance sheet and income statement of Eastland Products, Inc., are as follows: Income
Statement for Year Ended December 31, 2013 (in Millions of Dollars)
Sales.......................................................$120 Cost of sales..................................................80
EBIT.....................

Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The
company expects earnings after taxes during the next year to equal $400,000. During the past
several years, the company has been paying $50,000 in dividends to its stockholders. The
company expects to continue this policy for at

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Visit Yahoo! Finance (finance.yahoo.com) and calculate the debt ratio of an industrial equipment
manufacturer, such as Illinois Tool Works, Inc. Then calculate the debt ratio of a service-
oriented company, such as Cognizant Technology Solutions. Based on what you learned about
leverage in this chapter, what would accou

To what extent do you agree or disagree with the following statement? "An important top-
management job is to make certain their company's actual growth rate and sustainable growth
rate are as close together as possible."

Table shows the December 31, 2012, pro forma balance sheet and income statements for R&E
Supplies, Inc. The pro forma balance sheet shows that R&E Supplies will need external funding
from the bank of $1.4 million. However, they show almost $1.3 million in cash and short-term
securities. Why are they talking to the bank

Table 19.1 lists foreign exchange rates for August 3, 2011. On that day, how many dollars would
be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars,
EMU euros, Japanese yen, Mexican pesos, and Swedish kronas?

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Table indicates that the average annual rate of return on common stocks over many years has
exceeded the return on government bonds in the United States. Why do we observe this pattern?
Security .............................. Return* Common stocks .................... 11.4% Long-term corporate
bonds ....... 5.7

Compare the debt outstanding for Delta Airlines and Southwest Airlines. Use the S&P Bond
Guide from your library to determine the bond rating of each of these firms. What reasons can
you cite for the differences in bond ratings between the firms?

As the financial vice president of Progressive Media, you have the following information: Next
year's expected net income after tax but before new financing ........ $50 million Sinking-fund
payments due next year on existing debt ....................... $17 million Interest due next year on
existing debt ..........
Morrissey Technologies Inc.'s 2012 financial statements are shown here. Suppose that in 2013,
sales increase by 10% over 2012 sales. The firm currently has 100,000 shares outstanding. It
expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the
same rate as sales. The firm has

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Your division is considering two projects with the following cash flows (in millions): a. What are
the projects' NPVs assuming the WACC is 5%? 10%? 15%? b. What are