Question and Answer - 49

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How and why has technology impacted data collection from the recent past through the present?
What is the research objective?
"Funny thing, though, it sure does frustrate me when I hear a division general manager's strategy
is to imitate other firms. Now I know that some firms might reasonably use imitation, but none
of my divisions should. Should they?"
What is an "agency of record"?
"We're currently about to market a new type of hair dryer. It's not a blower in the usual sense--
there are no wires that get hot. Instead, we have combined two chemicals that tend to heat up if
they are charged with an electrical current. The air is directed through the wire mesh container in
which these chemicals are
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Define the following terms: Rating. Share of audience People ratings. TVQ ratings. Clutter
How has the fragmentation of media audiences affected media planning?
"I really was confused by something a corporate market researcher said in a seminar we held last
week. It concerned our industrial tubing division, which sells extruded aluminum tubing of
various smaller sizes for encasing wiring in commercial buildings. She was recommending that
they market test their new items by goi
What are the major methods of developing an advertising budget?
In what significant ways has the responsibility of media planners changed during the last decade?
"Tell you another funny thing about evaluation--seems as though the folks involved in it never
use the facts or data that they should and instead use some sort of surrogate data. I don't see why
you have to beat around the bush. Why not just gather the real facts in the first place and not use
those substitutes?"
What are the key elements in the AFG Planning Cycle?
Briefly, identify each stage in the first half of the advertising spiral.
"Thanks for telling me about that launch control idea you were studying. But, look, I'm a bit
mixed up on one thing. You mentioned (1) critical events, (2) control events, and (3) tracking
variables. You say you have to list all three things? Isn't one event likely to be on all three lists?
For example, take awareness
Briefly define reach, frequency, and continuity.
How did the Great Depression support the growth of radio?
Define the following:
Discuss the role of the War Advertising Council.
"Packaging must be terribly important today on lots of products. We spend a fortune on it. I read
recently about a detergent packaging gimmick--an 'overcap.' It goes onto a bottle, over the
regular cap. It can be torn away and sent in for a refund. Less likely to be cheated on than a
coupon. Now that's creative. Are yo
"I really don't think you understand what parallel or concurrent new product development is all
about. You said you had studied in your course that all of the functions get involved. No,
concurrent development means just that--technical development phases--design engineering, etc.
They are all doing work very much alik
"You mentioned culture! Now there's a human relations cult if I ever heard one. Human resource
and organization design people are great, and out of their work have come some of the most
valuable new business methods of the past 15 years. But, culture isn't one of them. It's vague,
never defined, full of soft terms like
Compare and contrast the three types of convergence discussed in this chapter and their effect on
advertising.
What is multicultural marketing?
"We experimented with a numerical scoring model some years back -- it just didn't work.
Brought in all the senior people, sales managers, product managers, you name it. We selected
several dimensions of technical and commercial viability, not too different from the scoring
model you presented. Rated everything on scal
What is a full-service agency?
"Our pharmaceutical division, of course, develops new pharmaceutical products for use by
doctors and hospitals. The technical research department does all the testing (they have different
names for the various tests). The last phase is clinical testing, where the drugs are given to
humans in a manner that will substant
"Actually, I agree with one thing you said a while ago, and that related to the desirability of
making financial analyses on a threshold basis. I realize how many unknowns there are in the
new products business. As a president, I realize too that most of the financial projections I read
are just air. If a new products
"Several of our divisions work in the women's clothing markets. As you know, they are all
specialized these days, this segment or that segment. Getting hard to come up with a new
segment, one that has some size and would be responsive. So, when you were talking about
morphological matrix, which I liked, I thought about
"If it happens that one of our divisions absolutely must use a scoring model, as you call it, I
strongly prefer the one you said that division of AT&T uses. You know, just get answers to the
four questions: Do customers care, Do we care, Can we do it, and Can we stay ahead if we do?
What more is relevant? That list cov
"The worst thing about product liability is what they call strict liability. Now, I know it's hard to
prove negligence against a typical large corporation of today, but that's no reason to go to the
other extreme and say a company is guilty when there is no evidence it did anything wrong. We
market thousands of product
What are some important population trends that marketers should consider?
How does advertising complement other elements of marketing communication?
What effect has unbundling of media departments had on the media planning process?
Discuss the role of value-added options in advertising planning.
"You're still a student, but when you tell me about all the problems new product managers have
putting together financial worksheets you sound like the people we have around here. They
complain that the financial analyses we use call for more data than we have. They say the results
are unreliable and all that, but, wha
"Incidentally, some of the folks in the software division have come up with an idea for a new
service. Seems as though they found that computer people around the world have real trouble
learning about new software--not its existence and its general claims (that's in all the magazines
and direct mail they get, in their
Discuss the primary advantages and disadvantages of brand extension.
"Sampling is another tool we like--you know, like that trial package I just mentioned. Samples
are really effective in getting trial among the people who are somewhat inclined toward a new
product in the first place. But several of our divisions can't use samples per se because of the
nature of their products. Could yo
A product is a bundle of benefits. Discuss.
"Our small electrical engines division recently threw out a screening system that was based on a
fairly complete scoring model, as they called it. Seems the model kept rejecting too many of their
product ideas, some of which looked like sure winners to them--and to me, incidentally. Under
their new system, a top-manage
How has the so-called "interactive era" brought fundamental changes to the advertiser/customer
relationship?
Discuss product differentiation in terms of target market segmentation.
Discuss the applications of the brand development index.
What is a slotting allowance?
What is target marketing?
What information is needed when advertisers profile a market?
Discuss why media planning is becoming more creative.
Discuss price strategy as a means of marketing strategy.
"I heard a funny one two weeks ago that might interest you. Seems one of our R&D people went
to a new products management seminar and heard about a thing called the protocol. They told
him it was the device whereby the overall manager of new products communicated to R&D
exactly what was wanted from the technical group.
"A cosmetics competitor of ours is trying to speed up its new product work on lipsticks by a
system that uses (1) Brainstorming to create ideas (392 in a recent session); (2) Evaluation of
those ideas by the same group of people, down to only the best 50 ideas; (3) Focus group
sessions for concept testing those idea

"Two other firms I know about were less fortunate. Morton-Norwich Products introduced
Encare, a vaginal suppository contraceptive, and American Home Products came out with a
similar product called Semicid at about the same time. Both advertised that the products were
safer than IUDs and that, unlike the "pill," they ha
What factors contributed to the rise of modern advertising during the past 100 years?
What is the major disadvantage of radio for most advertisers?
What is niche marketing and how does it affect advertising strategy?
Compare and contrast business-to-business and consumer advertising in terms of audiences,

media, and promotional techniques.
"One of our divisions makes an electric scooter. Classic case of where a designer, looking for
new modes of ultralight transportation, came across the scooter and electrified it. Boy, people
said he was crazy. Kids begged their parents not to ride one (shame), and a cop said, "It's not a
moped. It's not a motorcycle. I
"When you first told me about those, what do you call them, public policy issues, I was thinking
about our health industry group. It is rapidly developing a line of health maintenance
organizations (HMOs) by acquisition, primarily, and several by invitation of leading hospitals.
They will all be in the service business
"We recently acquired a small toy company, and I'm scheduled to meet with their management
next week. I know they don't do much use testing--I think someone told me they have a bunch of
kids come to their plant and play with proposed toys. Must work for them, we paid a huge
multiple for their stock. What should I tell
"During a recent management meeting, two of my division managers got into quite a tussle over
the programs they use to evaluate new product ideas. One of them said he felt evaluation was
very important; he wanted to do it quite completely, and he certainly didn't want anyone working
to further the development of an ite
"We're in the furniture business, and I'll bet you have used some of our stuff if you spent any
time in your college dorms. But, I'll tell you something, there's not much profit in that business-
too many competitors, too much standardization in products. You know, buying on bids, from
purchasing department product spe
Compare and contrast syndication and spot television buying.

How has the emphasis on return on investment changed the relationship between advertising and
the media?
"I think some research suppliers oversell a bit they want us to do too much market research. For
example, one of the biggest recently published data on a 'blind' versus 'identified' product test.
Here are the results: Branded..........................................Unbranded Prefer A
55.5% ..........................
What societal changes led to passage of the Federal Trade Commission Act and the Pure Food
and Drug Act?
What is the marketing services system?
"One thing I know for certain--I don't want any sales managers or technical research people
making new product forecasts. I've never seen such lousy forecasting as we get from these
people. Sales managers either love a new item so much they think it will outsell everyone, or
they think it is a dud and under forecast eq
What is positioning?
"I've had occasion several times over the past year to see a new product land in trouble--great
expectations and terrible sales. And the saddest part is that so many people try so hard to deny
the inevitable--the product has bombed, and the quicker one gets away from it the better.
Otherwise, it's just sending good mon
"Most of our divisions believe in customer integration -- involving the user in the new product
process. I am a fanatic on it. But some people want us to carry this right into the technical design
phase. This would be dangerous. A lot of what we do must be secret--we can't patent most of our
ideas, and timing is everyt
Briefly trace the development of the advertising agency from Volney Palmer to the early 1900s.
"You know, most of our new products people do a great deal of marketing research--concept
testing, attitude surveys, and the like. But let me read some-thing that one automobile designer
thought about marketing research." (She then read from a yellowed clipping on her desk.)
Market research is probably the greatest si
What is the 80/20 rule as it relates to target marketing?
What is market segmentation?

Discuss some of the factors that caused the emphasis on creativity in advertising during the early
1900s.
"I would be curious to test your personal judgment on some new ideas from one of our recent
idea sessions. What do you think about each of the following? a. A gasoline-powered pogo stick.
b. A combination valet stand and electric pants presser. c. Transistorized golf balls and an
electric finder. d. An Indian arm w
Discuss major changes in network television advertising during the last 20 years.
How has new technology contributed to more personal relationships between advertisers and
customers?
In how many product categories do Procter & Gamble products compete?
Discuss public relations from the standpoint of audience credibility and message control.
Advertising can rarely be successful in an economy in which demand is greater than supply.
Why?
Give an example of a global agency network.
"Several of our divisions say they get tremendous help from their vendors when it comes to
increasing the speed of our new product work. But, to tell you the truth, I think they're just lazy.
They've got good talent in those divisions, or darn well should have, and all they're doing is
letting vendors get a bigger piec
Describe the up-front television buying for prime time.
Discuss the importance of the introduction of national brands to the growth of advertising.
Who in the corporation prepares most of the advertising budgets?
Compare and contrast cable networks with broadcast networks.
What are the elements of the creative brief?
What is the essence of the advertising message in each stage of the spiral?
"About this matter of design, I am stumped. I agree design is critical today, and I always support
it. But, you've got to admit that it costs money, and often conflicts with function (for example, a
beautifully styled computer mouse that won't hold the innards that the tekkies want to use). As a
general executive matte
What determines the stage of a product?
"If I remember right, the whole idea of launch control depends partially on having a track or plan
that each variable should follow if everything is going OK. I believe you showed me some
figures with those plan lines on them. But, it seems to me those plan lines are just pure
conjecture, at least in the case of really
"Actually, I'm not convinced that any particular organization formats are better than others. I've
run into too many exceptions. For example, that great portable tape player, Walkman by Sony,
was conceived and pushed through by Akio Morita, Sony's chairman of the board. He got the
idea from seeing a past chairman weari
Why has integrated marketing communication become even more important in a period of media
fragmentation?
What role does brand equity play in a product's long-term success?
"I don't know what business school professors would say, but it often seems to me that we might
be just as well off if we didn't do any evaluation on new products. Just produce the ones we're
convinced will sell the best and really support those. Let's face it--we never have reliable data
anyway, and everyone is always
"My daughter is a newly appointed assistant professor at a school in North Carolina, and she
recently was joking about how similar the development of courses is to the development of new
products. In fact, she said courses have to be planned for and their marketing has to be just right.
Even to using positioning as a c
"You know, we recently had a soft drink product (an exotic berry seltzer line) go through one of
those simulated test markets, and it was a disaster. The new products people forgot completely
about the possibility that the customers who bought the product in the shopping center pseudo
stores might not actually get arou
"Several of our divisions have lately been using this so-called minimarketÂ¬ testing method. We
had some shaving products use Behavior Scan, and a new upscale bandage line used a somewhat
similar service from A. C. Nielsen. But I am increasingly concerned about the panel members in
those test cities. My concern is not
What do art directors and copywriters do?

In what area have newspapers been most successful in achieving standardization?
"Let's cut right to the quick on this one. I understand the theory of having benefits rather than
features in a statement of requirements that kick off technical development. But, to me it is just
that, theory. I knew one of the top people at that computer company your book talked about--the
one where a corporate new p
What is a category manager?
Discuss the relationship between networks and their affiliates.
Discuss pre-roll.
What is the purpose of a storyboard?
What is continuous-tone copy?
Discuss some of the primary means of entering foreign markets by U.S. firms.
What are the major competitors for business magazines?
What are some of the means of guaranteeing continuity in a campaign?
What are color separations?
Why would an advertiser want to use both television and magazines?
Two of the major concerns of the magazine industry are costs and selectivity. Explain.
What is an in-page video?
Contrast zoned editions and total market coverage programs.
What are vertical and horizontal publications?
What is involved in the situation analysis?
What have been some of the major factors causing the growth of direct-response advertising?
What steps have been taken to improve the image of direct-response advertising?
What are the fastest growing forms of advertising in digital media?
What is the function of TAB?
What are the primary advantages of radio to advertisers?
Discuss the marketing concept in terms of global marketing.
Discuss the role of product development in meeting the demands of both international marketing
and the U.S. ethnic population.
Discuss the importance of cultural considerations in executing international advertising.
What are some qualitative features of importance to magazine advertisers?
What are the primary uses of outdoor for most advertisers?
What is line art?
What is ad continuity?
What are some of the factors that have eroded the local newspaper advertising base?
What are the primary advantages of newspaper magazine supplements?
What is a service mark?
What are the steps to putting a lock on the ownership of a trademark?
What's the purpose of the headline?
When is a laminate/adhesive proof used?
What are the major disadvantages of outdoor posters?
What is the difference between an AQH Rating and a Cume rating?
What is the role of the account planner?
How can you lose a trademark?

What are the two major problems in newspapers gaining national advertising?
Briefly summarize the elements of good radio commercials.
Contrast full-run and partial-run magazine editions.
Why is point-of-purchase advertising so important to many advertisers?
Where do most advertisers obtain radio audience information?
What is a trademark?
What is the executional idea?
What is the primary difference between the short rate and rebate?
What are some of the advantages and disadvantages of the Internet in international marketing?
Why are sociology, psychology, and anthropology important to advertising?
What are some of the potential advantages and disadvantages of free trade agreements?
What are the steps in radio production?
Discuss advertising research as a tool for overcoming ethnic stereotyping.
Who attends the preproduction meeting?
Why has transit advertising grown significantly in recent years?
What kind of research is used in advertising execution development?
What is the role of radio networks?
Who are the listeners of AM radio? What do they listen to?
Why is radio called the theater of the mind?
Contrast circulation and readership in magazines.
What is the key element in direct mail?

What is the primary disadvantage of sales promotion?
What is spot radio?
What are the characteristics of an effective slogan?
What has been a primary method for business magazines to extend their services and increase
profits?
What is the difference between a list broker and a list manager?
What are three major categories of newspaper advertising and how much advertising revenue
does each account for?
What are the basic means of attracting attention?
Why is a diversity of product categories important to the outdoor industry?
What does a "preditor" do?
What is selective binding?
Name several marketing issues involved in packaging.
Compare and contrast the social and economic issues involved in the practice of advertising.
Differentiate among the three basic printing processes.
How do legal restrictions effect the execution of multinational marketing?
What are the three main elements to writing commercial music?
What are the major advantages and disadvantages of event marketing?
What is the primary regulation of co-op?
What is a comp?
What is direct marketing?
How are focus groups used in advertising research?

What are the major advantages of the eight-sheet posters?
What is a major obstacle to mobile advertising?
What is the big idea?
Contrast sales promotion and advertising.
Name four radio station programming formats.
What are stock photos?
What effect has cultural assimilation had on American marketing?
What are the primary categories of out-of-home advertising?
What is meant by "copy style"?
What are the primary purposes of co-op advertising?
What colors are used in four-color printing?
What is neuromarketing and how is it used by some advertisers in advertising development?
In what ways can marketing effectiveness be measured in digital media?
What is white space in radio?
What is time famine?
What is the basic purpose of an ad campaign?
What role does database marketing play in direct-response advertising?
What is the role of negotiation in setting magazine advertising rates?
What is a digital file?
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent
$115 million on equipment with an assumed life of 5 years and an assumed salvage value of $15
million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold
today for $80 million. A new modem p
Using Internet resources such as www.theglobeandmail.com/globe-investor or

ca.finance.yahoo.com, look up the companies listed in Table 12.2. What are the main businesses
of each? On what stock exchanges are they listed? Do their betas make sense?
How can advertisers use psychological appeals?
Why has the term out-of-home replaced outdoor?
What is the purpose of amplification?
Use the monthly returns of the 5 companies you chose in the previous question to look at the
return on an equally weighted portfolio of the 5 stocks (that is, a portfolio with equal investment
in each stock each month). The portfolio rate of return each month is the equal-weighted average
of the stocks' rates of return
A Metallico bond carries a coupon rate of 8%, payable semi-annually, has 9 years until maturity,
and sells at a yield to maturity of 9%. a. What interest payments do bondholders receive each
year? b. At what price does the bond sell? c. What will happen to the bond price if the yield to
maturity falls to 7%?
You are thinking of purchasing a new machine (NEW) for your business operations and
replacing the existing machine (OLD), which you have used for the past 3 years. The new
machine will cost $75,000 and will be useful to your business for 5 years after which it can be
sold to fetch a salvage value of $9,000. The new mac
You are exploring the possibility of starting a project involving production of an assortment of
spicy curried pickles. You had approached a marketing consultant to conduct market research
and do a 1-year feasibility study for $25,000. The recommendations of the study are positive, and
you have decided to begin work on
If the expected market risk premium is 7% and Treasury bills yield 3%, what must be the betas
of a stock that investors expect to return 13.6% and a bond with a 5.5 % expected return?
Repeat the previous problem if the bond makes semi-annual coupon payments. A 30-year
maturity bond with $1,000 face value makes annual coupon payments and has a coupon rate of
8%. What is the bond's yield to maturity if the bond is selling for a. $900? b. $1,000? c. $1,100?
ToyTime's common stock's annual dividend for the next 3 years is expected to be $.50.
Thereafter, the dividend is expected to grow 4% per year. Stocks of ToyTime's risk are expected
to earn 11% per annum. a. Calculate the share price today and at the beginning of each of the
next 4 years. b. Calculate the dividend yi
Rates of return on U.S. stock, bond, and bill indexes are available to download for free at pages.
stern.nyu.edu/-adamodar. Click on "Updated Data" and look for "Historical Returns on Stocks,
Bonds and Bills-US" and download the spreadsheet. Calculate the average market risk premium
for the NYSE stocks, using the Treas
Suppose Cara Operations, www.cara.com, is considering opening a chain of coffee shops. Which
of the betas shown in problem 21 is most relevant in determining the required rate of return for
this venture? Explain why the others are not appropriate.
Using ca.Finance.Yahoo.com, download the monthly prices over a 5-year period for 5 Canadian
companies of your choice. Calculate the monthly rates of return for each stock using "Adj.
Close" (which includes dividends and stock splits). a. Using the Excel functions for average
(AVERAGE) and sample standard deviation (ST
The project in problem 3 will last for 10 years. The discount rate is 12%. A project currently
generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million.
The firm's tax rate is 35%. What are the effects of the following changes on after-tax profits and
cash flows? a. Sales in
Calculate the operating cash flow for the repair shop in the previous problem using all three
methods suggested in the chapter: (a) Net income plus depreciation; (b) Cash inflow/ cash
outflow analysis; (c) The depreciation tax shield approach. Confirm that all three approaches
result in the same value for cash flow.
Suppose that the S&P/ TSX Composite Index, with a beta of 1.0, ha s an expected return of 10%
and Treasury bills provide a risk -free return of 4%. a. Construct a portfolio from these two
assets with an expected return of 8%. What is the beta of this portfolio? b. Construct a portfolio
from these two assets with a be
Talia's Tutus bought some equipment for a data network for $40,000 that will be depreciated in
asset Class 46, which has a CCA rate of 30%. This firm's tax bracket is 35%. a. Find the CCA
amount each year for the next 3 years. b. If the equipment is sold after 3 years for $20,000, what
will be the after-tax proceeds
A project requires an initial investment of $10,000, and over its 5-year life it will generate annual
cash revenues of $5,000 and cash expenses of $2,000. The firm will use straight-line
depreciation, but it does not pay taxes. a. Is t he project worth pursuing if the opportunity cost of
capital is 8%? b. Suppose now
ABC Manufacturing pays dividends annually. Dividends have been growing 4% a year. Today is
May 1, 2014. Its next dividend, to be paid 1 year from today, will be $1.20 per share. The
company is involved in a research and development (R&D) program to develop a new widget.
The results are expected in 1 year. The discount
You have joined the Projects division of GrowMore Inc. Your first job is to analyze two projects,
which you have code-named "alpha" and "beta." Both projects will require the same initial
investment of $100,000 and are expected to generate the following cash flows over an expected
economic life of 4 years. Assuming th
A firm's balance sheets for year-ends 2009 and 2010 contain the following data. What happened
to investment in net working capital during 2010? All items are in millions of dollars.
Reconsider the stock in the preceding problem. Suppose investors actually believe the stock will
sell for $52 at year-end. Is the stock a good or bad buy? What w ill investors do? At what point
will the stock reach an "equilibrium" at which it again is perceived as fairly priced?
Large Industries bonds sell for $1,065.95. The bond life is 9 years, and the yield to maturity is
7%. What must be the coupon rate on the bonds? Coupons are paid semi-annually.
Refer to problem 9. If your marginal tax rate is 30%, and 50% of capital gains are taxable, what
is the after-tax rate of return on your bond investment? In problem 9 You bought a 10-year, 5%
coupon bond for $ 1,000 and sold it 1 year later for $1,100.
Figure 12.9 plots monthly rates of return from 2006 to 2020 for the Snake Oil mutual fund and
the S&P/TSX Composite Total Return Index. Was this fund well diversified? Explain.
Telus, a Canadian wireless communications company, earned $2.38 per share in 2015 and paid
dividends of $156 per share. Analysts fore cast an annual earnings growth rate of 7.63% for the
next 5 years. Based on similar-risk companies, the estimated required rate of return on Telus
stock is 8.9%. It is assumed that after
Now suppose that Hit or Miss Sports from the previous problem can expand production if the
project is successful. By paying its workers overtime, it can increase production by 20,000 units;
the variable cost of each ball will be higher, equal to $35 per unit. By how much does this option
to expand production increase t
An economy has two scenarios: boom or bust. The returns in each scenario for the market
portfolio, an aggressive stock A, and a defensive stock D are in this chart. a. Find the beta of
each stock. In what way is stock D defensive? (L01) b. If each scenario is equally likely,
calculate the expected rate of return on t
You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred
shares of Canada Leasing. The consol has a $ 1,000 par value, an annual coupon rate of 4 %, and
never matures. The preferred share pays fixed dividends of $6 and is expected to continue
indefinitely. Currently, t he co n sol
Currently, Non-Stick Gum Inc. pays no dividend. However, analysts foreÂ• cast that in 4 years
Non-Stick will pay its first annual dividend of $.50 and dividends will grow at 6% per year
thereafter. If stocks with similar risk to the equity of Non-Stick Gum currently earn a return of
12%, estimate the current share pric
Here are annual stock market, Government of Canada bond, and Treasury bill rates of return
from 20 10 to 20 14: a. What were the risk premiums on the TSX and on longÂ•tern1
government bonds in each year? b. What were the average risk premiums for the TSX and long-
term government bonds? c. Calculate the standard dev
Consider the following projects: a. Calculate the profitability index for A and B assuming a 20%
opportunity cost of capita l. b. Use the profitability index rule to determine which project(s) you
should accept (1) if you could under take both and (2) if you could undertake only one.
Return to problem l. Suppose the year-end stock price after the dividend is paid is $36. What are
the dividend yield and capital gains yield in this case? Why is the dividend yield unaffected? In
problem A stock is selling today for $40 per share. At the end of the year, it pays a dividend of
$2 per share and sells f
The common stock of Escapist Films sells for $25 a share and offers the following payoffs next
year: Calculate the expected return and standard deviation of Escapist. Then calculate the
expected return and standard deviation of a portfolio half invested in Escapist and half in
Leaning Tower of Pita. Show that the port
At Green Construction, earnings before interest and taxes (EBIT) for the year just ended were
$70 million and are not expected to grow. The company pays $ 10 million in interest each year
on its perpetual bonds. The expected rate of return on its bonds is 5% and on its stocks is 11%.
Last year, interest rates were high

City Garden Suppliers paid a $1 dividend yesterday. It is expected that the dividend will grow at
10% per year for 4 years, 8% per year for 10 years, and then at 5% per year thereafter. If the
investors' expected rate of return is 12%, what is the stock worth today?
Using the data in problem 7, calculate the average rate of return and standard deviation of return
for each stock as well as for an equal-weighted portfolio of all the stocks using Excel. Do you
observe any benefits from diversification?
Zoom Technologies, Inc., is considering expanding its operations into digital music devices.
Zoom anticipates an initial investment of $1.3 million and, at best, an operational life of 3 years
for the project. Zoom's management team has considered several probable outcomes over the life
of the project, which it has lab
Metatrend's stock will generate earnings of $5 per share this year. The discount rate for the stock
is 15% and the rate of return on reinvested earnings is also 15%. a. Find both the growth rate of
dividends and the price of the stock if the company reinvests the following fraction of its
earnings in the firm: (1) 0%,
Suppose that a company splits its stock two-for-one, meaning it doubles the number of shares
outstanding. Each shareholder is given a new share for each one previously held, so that the
number of shares held doubles. The split is not associated with any change in the firm's
investment policy. a. Has the firm acquired
If you insulate your office for $1,000, you will save $100 a year in heating expenses. These
savings will last forever. a. What is the NPV of the investment when the cost of capital is 8%?
10%? b. What is the IRR of the investment? c. What is the payback period on this investment? d.
What is the discounted payback
Google Inc. has never paid a dividend, but in May 2015 its share price was $556.83. Does this in
valid ate the dividend discount Model?
Fireplaces Etc. is about to launch a new range of wood stoves, priced at $110 per unit. The unit
cost of the wood stoves is $65. The firm expects to sell the wood stoves over the next 5 years.
The venture will require an initial investment in plant and equipment of $25,000. Assume that
the investment will be in an asse
Go to the Canada Revenue Agency Web site at www.cra-arc.gc.ca/menu-eng.html and try to get
to relevant documents describing the Capital Cost Allowance system. One quick way is to do a
search on the site on the keywords Â•capital Cost Allowance." Read the prescribed rules and
regulations that govern capital cost allowan
Visionary Inc. is examining two projects, A and B. Project A has a lower initial investment than
project B and is expected to generate a steady stream of cash flows over its economic life.
Project B is expected to generate lower cash flows in earlier years and higher cash flows in later
years relative to project A. Det
Who would view the stock of Leaning Tower of Pita (see problem 14) as a risk-reducing
investment-the owner of a gambling casino or a successful bankruptcy lawyer? Explain.
A 30-year maturity bond with $1,000 face value makes annual coupon payments and has a
coupon rate of 8%. What is the bond's yield to maturity if the bond is selling for a. $900? b.
$1,000? c. $1,100?
Free online betas are hard to find for Canadian stocks unless they are also listed on a U.S. stock
exchange such as the NYSE, or Nasdaq. To find Canadian stocks listed on the NYSE, go to
www .nyse.com/abou t/listed/lc_all_region_l.html. For Nasdaq-listed companies, go to
www.nasdaq.corn!screening/company-list.aspx. Fo
The major stock exchanges are members of the World Federation of Exchanges, found at
www.world-exchanges.org. Click on "Member Exchanges," tour the world, and select three
stock exchanges by clicking on their pins. Note the number of listed companies, the types of
securities traded (click on "View More Information"), a
Go to either www.theglobeandmail.com/globe-investor or ca.finance.yahoo.com and look up the

companies listed in problem 21. Briefly describe the main businesses of each company. Do you
think that beta estimates make sense, given the nature of the businesses? Companies listed in
problem 21
Golddigger, a gold exploration and development company, currently pays no dividends. Using
the company's assay reports, analysts have determined the following possible outcomes of
Goldigger's exploration efforts in one year: If gold is found, the mine is expected to operate for
20 years and then be exhausted. If inves
Reconsider Wimpy's Burgers from problem l. In a slow year, Wimpy's Burgers will produce 1
million hamburgers at a total cost of $1.75 million. In a good year, it can produce 2 million
hamburgers at a total cost of $2.25 million. What are the fixed and variable costs of hamburger
production? a. What is the average cos
The table here shows betas for several Canadian companies from yahoo.finance.com. Calculate
each stock's expected rate of return using the CAPM. Assume the risk-free rate of interest is 2%.
Use a 7% risk premium for the market portfolio.
Go ca.finance.yahoo.com, enter MB.TO, and click "Go." Click on "Company Snapshot" and find
out what the company does and visit its Web site. What type of information is provided to its
investors? Repeat for SRF.TO. Compare and contrast the information provided to shareholders.
A financial analyst based in the United States has computed both accounting and NPV breakeven
sales levels for a project under consideration using straight-line depreciation over a 6-year
period. The project manager wants to know what will happen to these estimates if the firm uses
depreciation calculated on the basis
A firm is considering the following projects. Its opportunity cost of capital is 10%. a. What are
the payback period and discounted payback period on each project? b. Given that you wish to
use the payback rule with a cutoff period of 2 years, which projects would you accept? c. If you
use a cutoff period of 3 years
Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth
rate in earnings and dividends to continue for another 3 years. a. If the last dividend paid was $2,
what will the next dividend be? b. If the discount rate is 15% and the steady growth rate after 3
years is 4%, what should t
Refer back to problem 47. Suppose you bought the shares of Mighty Mixer for $50, received
annual dividends of $2, and sold the shares for $55 three years after you bought them. What are
your before- and after-tax rates of return on your investment? In Problem 47 You live in British
Columbia and your marginal federal
A bond that pays coupons annually is issued with a coupon rate of 4%, maturity of 30 years, and
a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the
bond and holds it for 1 year if the bond's yield to maturity at the end of the year is 8%?
Go to finance.yahoo.com and obtain the price-earnings ratios of Adobe Systems (ADBE) and
American Electric Power (AEP). Which of these two firms seem to more of a "growth stock"?
Now obtain a forecast of each firm's expected earnings per share in the coming year. You can
find earnings forecasts on yahoo.com under "Anal
a. Create a list of preferred shares traded on the TSX using the Globe Investor filter at www.
globeinvestor.com/v5/content/filters. Select "Preferred" from the "Security" menu. Find BCE's
Series T preferred shares, which pays an annual dividend of $.85. Use the current share price to
calculate the expected rate of ret
Start-up Industries is a new firm, which has raised $100 million by selling shares of stock.
Management expects to earn a 24% rate of return on equity, which is more than the 15% rate of
return available on comparable-risk investments. Half of all earnings will be reinvested in the
firm. a. What will be Start-up's rat
You are considering investing in a new line of entertainment products. The project has an
estimated economic life of 5 years. You anticipate some immediate startup costs amounting to
$25,000. In addition, you will be investing $100,000 in new plant and equipment. Assume, for
tax purposes, that the machinery and equipm
Go to the Statistics Canada Web site at www.statcan.gc.ca and click on the "The Daily" (at the
very bottom of the page). You will be able to reach a number of publications providing analyses
and statistics on a wide range of economic, demographic, trade-related, and other issues. From
these publications, can you find t
Earnings per common share of ABC Industries for the current year are expected to be $3 and to
grow 10% per year over the next 4 years. At the end of the 5 years, earnings growth rate is
expected to fall to 5% and continue at that rate for the foreseeable future. ABC's dividend payout
ratio is 40%. If the expected retur
Eastern Electric's recent annual dividend was $164 per share and its stock currently sells for
about $27 per share. a. If investors believe the growth rate of dividends is 3% per year, what rate
of return do they expect to earn on the stock? b. If investors' required rate of return is 10%, what
must be the growth rat
Using the Excel function CORREL, calculate the correlation between the return on San Tome
Mining and each of the other four stocks mentioned in problem 7. Which stock offers the best
diversification benefit? Problem 7
Elm City Electronics is considering two mutually exclusive projects that differ greatly on the
required investment and projected cash flow s. The initial investment required for project II is
$250,000 while for project II it is $25,000. Projected after-tax cash flows are shown below: The
opportunity cost of capital fo
Suppose that the TSX, with a beta of 1.0, ha s an expected return of 13% and Treasury bills
provide a risk-free return of 5%. a. What would be the expected return and beta of portfolios
constructed from these two assets with weights in the TSX of (i) 0; (ii) .25; (iii) .5; (iv) .75; (v)
1.0? b. Based on your answer t
In 1990, the S&P/TSX Composite Index was at a level of about 3,400. In 2014, it was about
13,600. Would you expect the S&P/TSX in 2014 to be more or less likely to move up or down
by more than 40 points in a day than in 1990? Does this mean the market was riskier in 2014
than it was in 1990?
If a project operates at cash-flow break-even for its entire life, what must be true of the project's
NPV? Define the cash-flow break-even point as the sales volume (in dollars) at which cash flow
equals zero. Is the cash-flow break-even level of sales higher or lower than the zero-profit break-
even point?
The inflation rate in Canada between 1926 and 2014 averaged 3.2%. What was the average real
rate of return on Treasury bills, government bonds, and common stocks in that period? Use the
data in Table 11.1.
Favoured stock will pay a dividend this year of $2.40 per share. Its dividend yield is 8%. At what
price is the stock selling?
Repeat problem 31, but for a value-weighted portfolio. Use the data from problem 30 to create a
portfolio in which you invest $100 in each stock. Calculate the value of each stock investment
each month ($100 Ã— [1 + monthly rate of return]) and the value of the portfolio each month
(sum of the value of each stock inves
Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the
dividend will increase by 5% per year indefinitely. a. What price should the stock sell at? The
discount rate is 15%. b. How would your answer change if the discount rate were only 12%?
Why does the answer change? c. What
The July 15, 2015, quoted price of a bond with a coupon rate of 4.5%, payable semiannually,
maturing on March 1, 2019, is $990. If you buy the bond on July 15, 2019, what is the total price
you must pay for the bond?
The Faculty of Business at Old Renowned University wishes to buy new personal computers for
its 20 full-time faculty members. The university is a nonprofit institution and does not pay any
taxes. The Faculty can buy 20 Ultra Fast PCs, each costing $2,500. It is estimated that the annual
cost of each PC will be $150. Th
You wish to start a new line of software. Your initial investment in the project will be $100,000.
You do not expect to generate any cash flows for the first 2 years. However, cash flows in year 3
are expected to be $16,000 and are expected to increase by 15% every year till year 7, after
which time they will decline b
Your firm purchased machinery for $10 million. The machinery falls into an asset class that has
a CCA rate of 25%. The project will end after 5 years. If the equipment can be sold for $4
million at the completion of the project and your firm's tax rate is 35%, what is the after-tax cash
flow from the sale of the machin
The accompanying table shows quarterly stock prices on the Dar es Salaam Stock Exchange for
2010-2014. Construct 2 stock market indexes, one using equal weights, as in the Dow Jones
Industrial Average, the other using market-value weights, as in the S&P/TSX Composite Index.
a. lf the BCE bond in problem 6 has a yield to maturity of 8% 1 year from now, what will its
price be? b. What will be your rate of return if you buy it today and sell it in one year? c. lf the
inflation rate during the year is 3%, what is the real rate of return on the bond?
You buy an 8% coupon, paid annually, 10-year maturity bond for $980. A year later, the bond
price is $1,100. a. What is the yield to maturity on the bond today? What is it in one year? b.
What is your rate of return over the year?
A stock will provide a rate of return of either - 20% or + 30%. a. If both possibilities are equally
likely, calculate the expected return and standard deviation. b. If Treasury bills yield 5%, and
investors believe that the stock offers a satisfactory expected return, what must be the market risk
of the stock?
Virtual Printing Inc. has devised a new technology based on which it plans to launch a new line
of print media products. The firm intends to spend $160,000 in new plant and equipment and
$40,000 in expanding its building facilities to house the project. The project has an estimated
economic life of eight years. Assume,
The expected return on Big Time Toys is 9% and its standard deviation is 20%. The expected
return on Chemical Industries is 8% and its standard deviation is 25%. a. Suppose the correlation
coefficient for the two stocks' returns is .2. What are the expected return and standard deviation
of a portfolio with 30% investe
Consider these data on a proposed project: Original investment = $200 Straight-line depreciation
of $50 a year for 4 years Project life = 4 years a. Fill in the blanks in the table. b. Find project
NPV if the discount rate is 20%.
Fill in the table below for the following zero-coupon bonds. The face value of each bond is
$1,000.
What is the equivalent annual cost of the washer in the previous problem if the firm uses
straight-line depreciation?
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following
payoffs to investors next year: The company goes out of business if a recession hits. Calculate
the expected rate of return and standard deviation of return to Leaning Tower of Pita share-
holders. The stock is selling toda
Using the data in problem 9, a. Calculate the average rate of return and standard deviation of
return for the TSX, government bonds, and Treasury bills between 2010 and 2014. b. Form a
portfolio with one-third in each of the 3 securities and calculate its average rate of return and
standard deviation. Can you see any
Go to the Â•Investor Relations" section of the Rogers Communications site, www.rogers.

com/web/ir. From the annual reports find the net capital expenditures, capital expenditures less
sales of plant and equipment, and total sales for the past 3 years. What were the ratios of net
capital expenditure to sales for the pas
What is the discounted payback for each project if the opportunity cost of capital is 11%?
In a slow year, Wimpy's Burgers will produce 1 million hamburgers at a total cost of $1.75
million. In a good year, it can produce 2 million hamburgers at a total cost of $2.25 million.
What are the fixed and variable costs of hamburger production?
Using ca.Finance.Yahoo.com, download monthly stock prices for Magna International (MGA)
by clicking on historical prices, then on Monthly Data. Find the December closing stock price
the most recent 4 years. Then click on "Dividends Only" button and download the per-share
dividends paid in the same year. Calculate the a
Consider these two projects: a. Which project has the higher NPV if the discount rate is 10%? b.
Which has the higher profitability index? c. Which project is most attractive to a firm that can
raise an unlimited amount of fund s to pay for its investment projects? Which project is most
attractive to a firm that is
lf a bond with par value of $1,000 and a coupon rate of 8% is selling at a price of $970, is the
bond's yield to maturity more or less than 8%? What about the current yield?
A 2-year maturity bond with $1,000 face value makes annual coupon payments of $65 and is
selling at face value. What will be the rate of return on the bond if its yield to maturity at the end
of the year is a. 6%? b. 8%? c. 10%?
You live in British Columbia and your marginal federal tax rate is 22 %, your marginal
provincial tax rate is 11.9%, the dividend gross-up factor is 125%, the federal dividend tax credit
is 13.33% of grossed-up dividends, and the provincial dividend tax credit is 6.6% of grossed-up
dividends. If you bought shares of Mi
Now assume that Paymore can borrow up to $100 from a line of credit at an interest rate of 2%
per quarter. Prepare a short-term financing plan. Use Table 20.7 to guide your answer.
How would Yummy Food's 2015 required external financing change if the 2015 dividend payout
ratio were cut to one-third? Use this revision to the financing model to generate a new financial
plan for 2015 assuming that debt is the balancing item. Show how the financial statement given
in Table 19.6 would change. What wou
You believe that a stock with the same market risk as the S&P ITSX will sell at year-end at a
price of $50. The stock will pay a dividend at year-end of $2. What price will you be willing to
pay for the stock today?
A large variety of mutual funds are available to Canadian investors. Some, called "sector funds,"
specialize in particular industries; others, known as "index funds," simply invest in the market
index. Go to www.theglobeandmail.com/globeinvestor/ funds-and-etfs/fund-lookup, look up
"AGF Canada Class" and click on its n
One year ago you purchased 100 shares of Dog Bites common stock for $25. You received
dividends of $.70 per share and just sold the shares for $26.25 each. What are your before - and
after-tax rates of return? Your marginal personal tax rate is 40%, your dividend tax rate is 30%,
and capital gains are taxed at 50% of y
Risky Business's outstanding debt are 6% bonds, paying interest annually and maturing 1 year
from today. The bonds currently sell for $569 per $1,000 par value. The company is
experiencing severe financial difficulties and analysts predict that there is a 60% probability that
the company will go bankrupt within the yea
Use a spreadsheet like that in Figure 19.2 to answer the following questions about Yummy Food:
a. What would be required external financing each year if the growth rate is 15% and the
dividend payout ratio is 60% in 2015 and 20 I6? b. Given the assumptions in part (a), what
would be the amount of debt and equity iss
Increasing financial leverage can increase both the cost of debt, (rdebt), and the cost of equity,
(requity)Â• How can the overall cost of capital stay constant? (Assume the firm pays no taxes.)
Use Dynastatics' pro forma income statements and balance sheet from problem 32(a) to assess
the cash flows for each forecast year. a. What is the capital expenditure each year? b. Start the
statement of cash flow with net income. Look at Chapter 3 for the structure of the statement of
cash flow. c. Calculate the cas
Food-Galore, Inc., has a $10 million outstanding bond issue, carrying a 12% coupon interest rate
with 20 years remaining to maturity. This issue was sold 5 years ago and can be called by the
company at a premium of 7% over its par value. Currently new 20-year bonds can be floated at a
coupon interest rate of 9%. To ens
Use the required rates of return calculated in Chapter 12, problem 25, to estimate the weighted-
average cost of capital for the five companies. For their capital structures, go to
finance.yahoo.com, enter a publicly traded company in the "Quote LookupÂ• box, and click
"Go." Record the "Market Cap," which is the current
Food Express is a well-established grocery chain. Computer Power is an up-and-coming

computer software developer for business. Bridge Steel is an integrated steel producer, focusing
on steel for buildings and bridges. Some information about the companies was provided by an
investment banking company as follows: a. If
The "Lease vs. Buy Calculator-Canada" at www.helpsme.com shows the cash flows of a lease
versus a loan. This calculator assumes that the asset pool is not closed at the end of the lease. A
neat feature of this calculator is that it allows you to look up the CCA rate for the asset you are
purchasing. Suppose the lease i
ABC Brickworks proposes to lease a $75,000 forklift. Five annual lease payments of $ 15,000
are due in advance. ABC's tax rate is 35%. If it purchases the forklift, it will be in its own 25%
CCA class. The half-year rule applies, the first CCA tax deduction is taken in year 0, and after 5
years the forklift will be wor
In Table 14.1, we showed examples of securities issued by George Weston Ltd. Try to construct
a similar table for another company, say Enbridge Inc., by looking up its annual report on the
Web. An easy way to do this is to go to Enbridge's Web site at www.enbridge.com, click on
"Investor Relations," and see a variety o
Now suppose that the corporate tax rate is Tc = .35. Demonstrate that when River Cruises
borrows the $250,000, the combined after-tax income of its debt-holders and equity-holders
increases (compared to all-equity financing) by 35% of the firm's interest expense regardless of
the state of the economy.
A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a balance of
25% of the amount of the loan, and the balance does not earn any interest. a. What is the
effective rate of interest if the loan is for one year and is paid off in one payment at the end of the
year? b. What is the effective
True or false? a. It makes sense to evaluate the credit managers performance by looking at the
proportion of bad debts. b. When a company becomes bankrupt, it is usually in the interests of
the equity-holders to seek a liquidation rather than a reorganization. c. A reorganization plan
must be presented for approval
You own 1,000 shares of Patriot Corporation, which is about to raise its dividend from $.75 to $
1 per share. The share price is currently $50. You would prefer that the dividend remain at its
current level. What would you do to offset the effects of the increase in the dividend?
Venture capitalists and many angel investors are often actively involved with the ventures in
which they invest. How does this benefit the entrepreneur? Does this benefit the venture
capitalist and angel investor as well?
For each of the following four groups of companies, state whether you would expect them to
distribute a relatively high or low proportion of current earnings and whether you would expect
them to have a relatively high or low price-earnings ratio. a. High-risk companies b. Companies
that have recently experienced a te
If the dividend payout ratio in problem 9 is fixed at 50%, calculate the required total external
financing for growth rates in 2016 of 15%, 20%, and 25%. Income Statement, 2015
Sales................$2,000 Costs.................1.500 Net income.........$ 500
Conglomerated Industries has 4 divisions, each worth about one-quarter of the firm's market
value. The following chart summarizes the possible returns on the divisions as well as on the
market portfolio. a. Calculate the expected rate of return and standard deviation of return for
each division, the firm, and the mark
BigCo has a market value of $1 billion and a beta of .9. It has three divisions: chemical
processing, oil and gas distribution, and plastic products. The company is thinking about buying
another chemical producer, ChemCo. ChemCo is expected to earn cash flows of $9 million this
year and cash flows are expected to grow
Use the information in problem 9 to create a table similar to Table 17.1 and value the lease. Is it
the same value found in problem 9? It should be!
In 2013, Pandora, Inc., makes a rights issue at a subscription price of $S a share. One new share
can be purchased for every 4 shares held. Before the issue there were 10 million shares
outstanding, and the share price was $6. a. What is the total amount of new money raised? b.
What is the expected stock price after
If the risk-free rate is 4% and the expected market risk premium is 7%, is a security with a beta
of 1.25 and an expected rate of return of 11% overpriced or underpriced?

a. Go to finance.yahoo.com and find the profiles for PepsiCo (PEP) and IBM (IBM) and then
look at each firm's annual balance sheet and income statement under "Financials" Calculate the
present value of the interest tax shield contributed by each company's long-term debt. Assume a
34% tax rate for both companies. Now su
Look back at problem l. What would happen to the company's books if instead it bought back
1,000 shares at $5 per share? The average issue price of these shares was $5. Common
stock..................................$60,000 Retained earnings................................30.000 Common
equity.........................
In Figure 14.3, we calculated the book and market long-term debt-to-equity ratios of George
Weston Ltd. Using Enbridge's annual report calculate the company's book long-term debt-to-
equity ratio for 20 11 and 20 12. See if you can use other resources on the Web.
Go to The Globe and Mail's Investors page (www.theglobeandmail.com/globe-investor). Review

the dividend policy of Enbridge (ENB), BCE (BCE), and the Royal Bank of Canada (RY).
Review the dividend yield, dividend payout ratio, and retention rate for each firm. What factors
might explain the differences in dividend polic
Go back to problem 12 and build a financial planning model based on percentage of sales for
Eagle Sports Supply using a spreadsheet similar to Figure 19.2. a. Assume 2013 sales grow at the
sustainable growth rate calculated in problem 13 and produce the pro forma income statement
and balance sheet. Is the forecasted c
True or false? Explain your answers. a. It makes sense to enter into an operating lease if you are
sure that you want to keep the asset for a long time. b. Leasing is advantageous because it
provides a company with off-balance-sheet financing, allowing it to hide its financial obligations.
Universal Heavy Equipment is looking into the possibility of refunding its 30-year $100 million
outstanding bond issue, carrying a 14% coupon rate, which was sold 10 years ago. If the
company goes ahead with the refunding, it can sell a new 20-year issue at a lower coupon rate of
10%, given current low interest rates i
A firm wants to maintain its capital structure and is currently 100% equity-financed. It perceives
its optima l dividend policy to be a 40% payout ratio. Current asset turnover (sales/initial assets)
= .8 and the profit margin (net income/ sales) is 10%. The firm has a target growth rate of 5% for
the next year but wil
Suppose an investor is unhappy with River Cruises' decision to borrow $250,000. What
modifications can she make to her own investment portfolio to offset the effects of the firm's
additional borrowing?
For each of the following pairs of issues stare which of the two you would expect to involve the
lower proportionate underwriting and administrative costs, other things being equal: a. A large
issue/ a small issue b. A bond issue/ a common stock issue c. A small private placement of
bonds/a small general cash offer
Calculate the ratio of price to expected earnings for River Cruises both before and after it
borrows the $250,000. Why does the P /E ratio fall after the increase in leverage?
Here is a forecast of sales by National Bromide for the first 4 months of 2015 (figures in
thousands of dollars): On average, 50% of credit sales are paid for in the current month, 30% in
the next month, and the remainder in the month after that. What are expected cash collections in
months 3 and 4?
Based on your Internet research in problem 1, can you answer the following? a. We described
different types of venture capital funds that exist in Canada. What are the main differences in
investment goals and characteristics between these funds? Do some types of funds appear to
participate more in earlier stage financ
Explain how financial distress can lead to conflicts of interest between debt and equity investors.
Then explain how these conflicts can lead to costs of financial distress.
Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier Pizza,
a frozen pizza manufacturer. Forecasted annual sales for the coming year are $ 10 million, with
operating costs equal to 70% of sales, depreciation is 5% of sales, the tax rate is 35%, and
required annual investment in equip
Look at the illustrative new-issue prospectus in Appendix 158. a. Is this issue a primary offering,
a secondary offering, or both? b. What are the direct costs of the issue as a percentage of the total
proceeds? Are these more than the average for an issue of this size? c. Suppose that on t he first
day of trading t
Suppose all investments offered the same expected return before tax. Consider two equally risky
shares, Hi and Lo. Hi shares pay a generous dividend and offer low expected capital gains. Lo
shares pay low dividends and offer high expected capital gains. Which of the following investors
would prefer the Lo shares? Which
We mentioned that the interest rate on longer-term bank loans is not usually fixed for the term of
the loan, but adjusted up or down as the general level of interest rates changes. Often the interest
rate is linked to the bank's prime rate or to the London Interbank Offered Rate (LIBOR), the
interest rate at which majo
AstraZeneca PLC's finance (interest) expense in 2010 was $1,033 million. If the tax rate is 35%,
what is AstraZeneca' annual interest tax shield? What is the present value of the annual tax shield
if the company plans to maintain its current debt level indefinitely? Assume a discount rate of
8%.
University Products is evaluating a new venture into home computer systems (see problems 16
and 17). The internal rate of return on the new venture is estimated at 13.4%. WACCs of firms in
the personal computer industry tend to average around 14%. Should the new project be pursued?
What assumptions must valid to make d
Recalculate Dynamic Mattress's financing plan (Table 20.7) assuming that the firm wishes to
maintain a minimum cash balance of $10 million instead of $5 million. Assume the firm can
convince the bank to extend its line of credit to $45 million.
If the profit margin of the firm in the previous problem is 6%, what is the maximum payout ratio
that will allow it to grow at 8% without resorting to external financing?
a. Retrieve the annual report of Heineken International by going to the "Investors" section of its
Web site (www.heinekeninternational.com/investors.aspx). Examine Heineken's internal and
external sources of funds and then compare your findings with Figure 14.2 in this chapter. (See
Heineken's annual cash flow statemen
Now suppose that instead of paying a dividend, Good Values (from problem 14) plans to
repurchase $10,000 worth of stock. a. What will be the stock price before and after the
repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm.
If there are no taxes on dividends or capital g
Suppose Micro Spinoffs's cost of equity is 12.5%. What is its WACC if equity is 50%, preferred
stock is 20%, and debt is 30% of total capital?
You need to estimate the value of BCCI. You have the following forecasts (in millions of
dollars) of Buildwell's earnings and of its future investments in new plant and working capital:
From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged
at year-4 levels. Estimate the company's to
To find out what is happening in the venture capital industry in the United States, look at the
National Venture Capital Association site (www.nvca.org). Now find the NVCA's Yearbook
2010 in the & Resources/Publications & Products" section and look at the recent U.S. national
data. How does the level of deals compare w

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What is the research objective?

What is an "agency of record"?

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How has the fragmentation of media audiences affected media planning?

What are the major methods of developing an advertising budget?

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What are the key elements in the AFG Planning Cycle?

Briefly define reach, frequency, and continuity.

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How did the Great Depression support the growth of radio?

Define the following:

Discuss the role of the War Advertising Council.

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What is multicultural marketing?

What is a full-service agency?

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How does advertising complement other elements of marketing communication?

Discuss the role of value-added options in advertising planning.

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A product is a bundle of benefits. Discuss.

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Discuss product differentiation in terms of target market segmentation.

Discuss the applications of the brand development index.

What is a slotting allowance?

What is target marketing?

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What information is needed when advertisers profile a market?

Discuss why media planning is becoming more creative.

Discuss price strategy as a means of marketing strategy.

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What is the major disadvantage of radio for most advertisers?

What is niche marketing and how does it affect advertising strategy?

Compare and contrast business-to-business and consumer advertising in terms of audiences,

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Compare and contrast syndication and spot television buying.

What is the marketing services system?

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What is the 80/20 rule as it relates to target marketing?

What is market segmentation?

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In how many product categories do Procter & Gamble products compete?

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Give an example of a global agency network.

Describe the up-front television buying for prime time.

Who in the corporation prepares most of the advertising budgets?

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Compare and contrast cable networks with broadcast networks.

What are the elements of the creative brief?

What determines the stage of a product?

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What role does brand equity play in a product's long-term success?

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What do art directors and copywriters do?

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What is a category manager?

Discuss the relationship between networks and their affiliates.

What is the purpose of a storyboard?

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What is continuous-tone copy?