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Course: FIN 3310, Spring 2009
School: Baylor
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Word Count: 104

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13 CHAPTER CAPITAL STRUCTURE POLICY: FOUNDATION CONCEPTS SOLUTIONS TO PROBLEMS: 2. a. Fixed costs = \$2,625,000 Variable operating costs = \$9,375,000 Variable cost ratio = 0.625 b. i. DOL = 1.875 ii. DFL = 1.333 iii. DCL = 2.499 c. DCL = \$5.50 3. a. DCL = 5.0 b. DCL = 5.41 c. \$212,000 in order to maintain a DCL equal to 5.0 in 2006 (same as in 2005). 6. a. EBIT = \$80,000,000 - .65(\$80,000,000) - \$10,000,000 = DOL...

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13 CHAPTER CAPITAL STRUCTURE POLICY: FOUNDATION CONCEPTS SOLUTIONS TO PROBLEMS: 2. a. Fixed costs = \$2,625,000 Variable operating costs = \$9,375,000 Variable cost ratio = 0.625 b. i. DOL = 1.875 ii. DFL = 1.333 iii. DCL = 2.499 c. DCL = \$5.50 3. a. DCL = 5.0 b. DCL = 5.41 c. \$212,000 in order to maintain a DCL equal to 5.0 in 2006 (same as in 2005). 6. a. EBIT = \$80,000,000 - .65(\$80,000,000) - \$10,000,000 = DOL \$18,000,000 at sales level of \$80 million = 1.56 b. DFL at EBIT level of \$18 million = 1.178 c. Forecast EPS = \$4.16 94 95 Chapter 13 Capital Structure Policy: Foundation Concepts 12. a. i. Qb = 5,000 copies ii. Sb = \$150,000 c. d. Q = 6,500 copies Qb = 8,750 copies 16. Check your answers to these theory questions with the Supplemental Instructor or you can come by my office during my office hours
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Baylor - FIN - 3310
CHAPTER 162. a) 73 days b) 51 days c) 124 days d) 55 days e) 69 days
Baylor - FIN - 3310
CORPORATE SECURITIES OFFERED BY NON-FINANCIAL CORPORATIONS FOR CASH (3-Year Cash Weighted Average for 20012003)14.30% Equities Percentage Bonds and Notes Percentage 85.70%Source: Statistical Supplement to the &quot;Federal Reserve Bulletin,&quot; Table 1.46, Octo
Baylor - FIN - 3310
Combined Leverage EXAMPLEAssume: Technology 1 (from earlier example of Operating Leverage, T1) High Debt ( from earlier example of Financial Leverage, HD) \$60 debt @ 10% \$40 equity in \$2/shares =&gt; 20 shares outstanding Expected 20XX Sales VC CM FC EBIT I
Baylor - FIN - 3310
Financial Leverage EXAMPLEAssume: Low Debt: (LD) High Debt: (HD) Technology 1 (T1) Expected 20XX EBIT = \$12 (from example of Operating Leverage, T1) \$20 debt @ 10% \$80 equity in \$2 shares =&gt; 40 shares outstanding \$60 debt @ 10% \$40 equity in \$2 shares =&gt;
Baylor - FIN - 3310
Operating Leverage EXAMPLEAssume:^ P = \$2.00/unit, Q = 50 unitsAlternative levels of Q: Q' = 40 units (20% decrease) Q' = 60 units (20% increase) Technology 1(T1) V = \$1.20/unit F = \$28 28 Qb1 = = 35 units 2.00 - 1.20 Expected 20XX T1: Sales VC CM FC E
Baylor - FIN - 3310
Derivation of the Statement of Cash Flows from the Cash Flow Identity(1) (2) (3) Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Operating cash flow - Net cap. spending - NWC = (Int. paid - Net new borrowing) + (Div. paid - Net
Baylor - FIN - 3310
DERIVATIONS OF THE DUPONT METHODROE =Net Income Stockholders' Equity(1) ROE =ROA Equity Ratiowhich is the same asROA /Stockholders' Equity Total AssetsROA Stockholders' Equity Total Assets Financial LeverageROE = ( Net Profit Margin * Total Asset
Baylor - FIN - 3310
12/31/05 (BB) (2) (3) 12/31/06 (EB)Cash 50,000 10,000 200,000 260,00012/31/05 (BB) (1) 12/31/06 (EB)Accounts Receivable 400,000 200,000 300,000 500,000(3)Sales 0 12/31/05 (BB) 300,000 (1) 10,000 (2) 310,000 12/31/06 (EB)Reconciliation of Cash Genera
Baylor - FIN - 3310
FIN 3310 PREREQUISITE COURSES AND RELATED CHAPTERSACC 2303 (Financial Accounting) Chapter 1 - Introduction Chapter 3 - Review of Financial Statements Chapter 13 - Capital Structure Policy Chapter 5 - Long-Term and Short-Term Planning Chapter 10 - Capital
Baylor - FIN - 3310
Ernest Fletcher, Jr. Chapter 2 = Pt - Pt-1 + C Pt-1 Formula SheetFIN 3310Chapter 3= = = = = = Liabilities + Shareholder's Equity Revenues Expenses Net Income Cash Dividends Earnings before interest and taxes + depreciation + amortization expense cash
Baylor - FIN - 3310
Sales \$2,447,430 Minus: Cost of Goods Sold \$1,781,037 Minus: Op. Expenses (Including Depr.) \$510,737 INCOME STATEMENT Minus: Interest Expense \$15,314 Minus: Federal Income Taxes \$51,073 Minus: Other Income (2,298) Sales \$2,447,430 Net Income (Earnings Ava
Baylor - FIN - 3310
FUTURE VALUE OF AN ORDINARY ANNUITY \$500 Payments Compounded at 6%Period 0End of Period 1 500.00End of Period 2 500.00End of Period 3 500.00End of Period 4 500.00End of Period 5 500.00 530.00 561.80 595.51 631.24 2,818.552,818.55 x 1.06 = 2,987.66
Baylor - FIN - 3310
FUTURE VALUE OF AN ANNUITY DUE \$500 Payments Compounded at 6%(Beg. of Period 1) Period 0 500.00 Beg. of Period 2 500.00 Beg. of Period 3 500.00 Beg. of Period 4 500.00 Beg. of Period 5 500.00 End of Period 5 530.00 561.80 595.51 631.24 669.11 2,987.66
Baylor - FIN - 3310
INCOME STATEMENT Sales - Cost of Goods Sold = Gross Profit - Selling, General and Administrative Expenses (Operating Expenses) (1) - Provision for Uncollectible Accounts - Depreciation Expense - Amorization Expense = Operating Income (EBIT) - Interest Exp
Baylor - FIN - 3310
6.) OrdinaryAnnuity - eachpayment occursat the endofthe periodwhichis the sameas the beqinnino ofthe nextperiod. PVAN (Endof 4) FVAN(End of 14)I+n=4c c c c c c cI15n= 101 . ) PVAN= 30,722.84 = 10 n = 10 i = PMT 5.0002.)FV n | PV= 30,722.84 =
Baylor - FIN - 3310
KEY TOPICS IN FINANCE 33l0I. OBJECTIVE OF THE FINANCIAL MANAGER 1. Goal of the Firm 2. Agency Problem FINANCIAL MARKETS AND INSTITUTIONS 1. Role of Financial Intermediaries 2. Role of Investment Bankers 3. Efficient Markets Hypothesis FINANCIAL STATEMENT
Baylor - FIN - 3310
LETTER OF CREDIT FLOWCHARTDefinition: Letters of Credit have been the cornerstone of international trade since the early 1900s. It is a written instrument provided by a bank (Issuing Bank) at the request of its customer (Applicant/Importer) whereby the I
Baylor - FIN - 3310
Limitations of Ratio Analysis1. Accounting practices between firms vary and can lead to differences in computed ratios a. Inventory methods b. Depreciation methods Accounting data easy to manipulate It is sometimes difficult to identify the industry cate
Baylor - FIN - 3310
Limitations of the Percent of Sales Forecasting Method:1. Works only when asset requirements and spontaneous financing sources can be accurately forecast as a CONSTANT percentage of sales.Not all assets can be accurately forecasted as a percentage of sa
Baylor - FIN - 3310
CALCULATION OF ACTUAL INCOME TAXES PAIDMcDonald's Corporation FYE 2000 (\$ Millions) Sales Cost of Goods Sold Gross Profits Marketing, General and Administrative Depreciation Total Operating Expenses Operating Profits (EBIT) Interest Expense Earnings Befo
Baylor - FIN - 3310
Indirect Transfer of Funds from Savers to BorrowersPrimary Claims from Borrowers to Savers
Baylor - FIN - 3310
Operating Leverage versus Financial LeverageOperating Leverage In studying business risk, we saw that for a large enough level of expected sales (actual Q &gt; expected Q), EBIT can be increased by taking on greater fixed operating costs (F). This opportuni
Baylor - FIN - 3310
PRIVATE vs. PUBLIC OFFERINGS AND TYPES OF DISTRIBUTIONSI. Private Placements A. B. C. Are directly placed with the final investors who purchase the entire offering at one time (limited number of investors) Most private placements involve debt instruments
Baylor - FIN - 3310
PRESENT VALUE OF AN ORDINARY ANNUITY \$500 Payments Discounted at 6%Period 0 471.70 445.00 419.81 396.05 373.63 2,106.19End of Period 1 500.00End of Period 2 500.00End of Period 3 500.00End of Period 4 500.00End of Period 5 500.002,106.19 x 1.06 = 2
Baylor - FIN - 3310
PRESENT VALUE OF AN ANNUITY DUE \$500 Payments Discounted at 6%(Beg. of Period 1) Period 0 500.00 471.70 445.00 419.81 396.05 2,232.56 Beg. of Period 2 500.00 Beg. of Period 3 500.00 Beg. of Period 4 500.00 Beg. of Period 5 500.00
Baylor - FIN - 3310
Risks, As Presented in a Firm's Income Statement, Facing the Firm and Its Stockholders Business Risk = The variability or uncertainty in a firm's operating income (EBIT) resulting from any one or a combination of the following:1. 2. Uncertainty about de
Baylor - FIN - 3310
1 Sample Questions from Previous FIN 3310 Departmental Final Exams Printed below is a sampling of questions from previous FIN 3310 Departmental Final Exams. The questions are grouped by major topic and include both theory and problem questions. (A complet
Baylor - FIN - 3310
1Sample Questions from Previous FIN 3310 Departmental Final Exams(Revised January 2006)Printed below is a sampling of questions from previous FIN 3310 Departmental Final Exams. The questions are grouped by major topic and include both theory and proble
Baylor - FIN - 3310
Chapter 6 Supplemental ProblemsSP 6.1 In 20 years you plan to retire and buy a house in the South Pacific. The house you are looking at currently costs \$200,000 and is expected to increase in value each year at a rate of 10 percent. Assuming you can earn
Baylor - FIN - 3310
Old Assets Old SL (New Sales - Old Sales) - (New Sales - Old Sales) - Old Sales Old Sales New Net Income New Cash Dividend Old 1 Sales(1+ g) New Net Income New Sales
Baylor - FIN - 3310
MCDONALD'S CORPORATION FYE 2000 (\$ Millions) Sales Cost of Goods Sold Gross Profits Marketing, General and Administrative Depreciation Total Operating Expenses Operating Profits (EBIT) Interest Expense Earnings Before Taxes (EBT) Income Taxes Net ProfitI
Baylor - FIN - 3310
CHAPTER 3 - Cash Flows Supplemental ProblemsSP3.1. Based only on the following information for AgraVate Corp., did cash go up or down? If so, by how much? Classify each event as a source or use of cash.Source/Use? Decrease in inventory Decrease in accou
Baylor - FIN - 3310
Table 13.1 Business Risk, Financial Risk and Total RiskSales - Variable costs - Fixed operating costs = Earnings before interest and taxes - Interest expense = Earnings before tax - Corporate income tax = Net income after tax / # Common shares of stock o
Baylor - FIN - 3310
TEN AXIOMS OF FINANCE1. Time Value of Money (Chapters 6, 8, 9, and 11) A dollar received today is worth more than a dollar received in the future. Cash, Not Accounting Profits, is King (Chapters 1, 3, 4, and 10) The value of an asset equals the present v
Baylor - FIN - 3310
THE IMPORTANCE OF MAGNITUDE, TIMING AND RISK OF CASH FLOWS WHEN VALUING AN ASSETThe intrinsic (economic) value of an asset (real or financial) is the sum of its future cash flows discounted back to period 0 by an appropriate interest rate. This present v
Baylor - FIN - 3310
T18Figure 3-1 The Income Statement: An OverviewLess: of producingacquiring product service Cost or our 0r0perating activities Less: Operating expenses: Marketing selling and expenses, general administrative and expenses,depreciation and expense[ess: C
Baylor - FIN - 3310
TVM CONCEPT QUESTIONS WHAT IS THE RELATIONSHIP BETWEEN THE FUTURE VALUE OF A LUMP SUM AND THE COMPOUND RATE?WHAT IS THE RELATIONSHIP BETWEEN THE FUTURE VALUE OF A LUMP SUM AND THE NUMBER OF COMPOUNDING PERIODS?WHAT IS THE RELATIONSHIP BETWEEN THE PRES
Baylor - FIN - 3310
What affect does debt have on shareholder returns?Example: Imagine two firms, one that uses debt and one that finances its fixed asset purchases with equity. Firm #1 \$1000 0 1000 \$1000 \$200 0 \$200 20% Firm #2 \$1000 500 500 \$1000 \$200 50 \$150 30%Total as
Baylor - HIS - 1307
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Baylor - HIS - 1307
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Baylor - HIS - 1307
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Baylor - HIS - 1307
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Baylor - HIS - 1307
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Baylor - HIS - 1307
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Baylor - HIS - 1307
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