What information should a lessee disclose about its capital leases in its financial statements and

footnotes?

Daniel Hardware Co. is considering alternative financing arrangements for equipment used in its
warehouses. Besides purchasing the equipment outright, Daniel is also considering a lease.
Accounting for the outright purchase is fairly straightforward, but because Daniel has not used
equipment leases in the past, the acc

Jennifer Brent Corporation owns equipment that cost $80,000 and has a useful life of 8 years
with no salvage value. On January 1, 2011, Jennifer Brent leases the equipment to Donna Havaci
Inc. for one year with one rental payment of $15,000 on January 1. Prepare Jennifer Brent
Corporation’s 2011 journal entries.

Both iGAAP and U.S. GAAP require footnote disclosure of operating lease payments. Are there
any differences in the information provided to statement readers in these disclosures? Explain.

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Describe the effect of a “bargain-purchase option” on accounting for a capital-lease

transaction by a lessee.

Identify the lease classifications for lessors and the criteria that must be met for each
classification.

Of what use is the statement of cash flows?

What disclosures should be made by lessees and lessors related to future lease payments?

On January 1, 2011, Palmer Company leased equipment to Woods Corporation. The following
information pertains to this lease. 1. The term of the non-cancelable lease is 6 years, with no
renewal option. The equipment reverts to the lessor at the termination of the lease. 2. Equal
rental payments are due on January 1 of ea

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Access the glossary (“Master Glossary”) to answer the following. (a) What is a bargain-
purchase option? (b) What is the definition of “incremental borrowing rate”? (c) What is
the definition of “estimated residual value”? (d) What is an unguaranteed residual value?

(Non-vested Employees—An Ethical Dilemma) Thinken Technology recently merged with

College Electronic (CE), a computer graphics manufacturing firm. In performing a
comprehensive audit of CE’s accounting system, Gerald Ott, internal audit manager for
Thinken Technology, discovered that the new subsidiary did not reco
On January 1, 2011, Perriman Company sold equipment for cash and leased it back. As seller-
lessee, Perriman retained the right to substantially all of the remaining use of the equipment. The
term of the lease is 8 years. There is a gain on the sale portion of the transaction. The lease
portion of the transaction is cla

On January 1, 2011, a machine was purchased for $900,000 by Floyd Co. The machine is
expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line
basis. The machine was leased to Crampton Inc. on January 1, 2011, at an annual rental of
$180,000. Other relevant information is as foll

(Postretirement Benefit Worksheet) Hollenbeck Foods Inc. sponsors a postretirement medical

and dental benefit plan for its employees. The following balances relate to this plan on January 1,
2010. Plan assets $200,000 Expected postretirement benefit obligation 820,000 Accumulated
postretirement benefit obli

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Presented in Illustration 21-31 are the financial statement disclosures from the 2007 annual
report of Tasty Baking Company. Answer the following questions related to these disclosures.
(a) What is the total obligation under capital leases at December 29, 2007, for Tasty Baking
Company? (b) What is the book value of th

Presented below are four independent situations. (a) On December 31, 2011, Beard Inc. sold
computer equipment to Barber Co. and immediately leased it back for 10 years. The sales price
of the equipment was $560,000, its carrying amount is $400,000, and its estimated remaining
economic life is 12 years. Determine the am

(Implications of GAAP Rules on Pensions) Jill Vogel and Pete Dell have to do a class
presentation on GAAP rules for reporting pension information. In developing the class
presentation, they decided to provide the class with a series of questions related to pensions and
then discuss the answers in class. Given that the

Ballard Company rents a warehouse on a month-to-month basis for the storage of its excess
inventory. The company periodically must rent space whenever its production greatly exceeds
actual sales. For several years the company officials have discussed building their own storage
facility, but this enthusiasm wavers when

Outline the accounting procedures involved in applying the operating method by a lessee.

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Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander
Company. The term of the lease is 6 years beginning January 1, 2011, with equal rental
payments of $30,044 at the beginning of each year. All executory costs are paid by Swander
directly to third parties. The fair value of the equ

(Pension Worksheet - Missing Amounts) Kramer Co. has prepared the following pension
worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company
has asked your assistance in completing the worksheet and completing the accounting tasks
related to the pension plan for 2010. (a) Determine

Grady Leasing Company signs an agreement on January 1, 2010, to lease equipment to Azure
Company. The following information relates to this agreement. 1. The term of the non-
cancelable lease is 5 years with no renewal option. The equipment has an estimated economic
life of 5 years. 2. The fair value of the asset at Jan

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2011, which
requires 6 annual payments of $40,000 each, beginning January 1, 2011. In addition, Indiana
Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful
life of 6 years. Prepare Indiana Jonesâ

Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010.
The following information relates to the lease agreement. 1. The term of the lease is 7 years with
no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of
the machinery is $525,000, and the

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(Major Pension Concepts) Davis Corporation is a medium-sized manufacturer of paperboard

containers and boxes. The corporation sponsors a noncontributory, defined-benefit pension plan
that covers its 250 employees. Sid Cole has recently been hired as president of Davis
Corporation. While reviewing last year’s financia

Briefly discuss the IASB and FASB efforts to converge their accounting guidelines for leases.

(Postretirement Benefit Worksheet—2 Years) Elton Co. has the following postretirement
benefit plan balances on January 1, 2010. Accumulated postretirement benefit obligation
$2,250,000 Fair value of plan assets 2,250,000 The interest (settlement) rate applicable to the
plan is 10%. On January 1, 2011, the co

Bradley Co. is expanding its operations and is in the process of selecting the method of financing
this program. After some investigation, the company determines that it may (1) issue bonds and
with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without
knowing the comparative cos

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing
Company and Vance Company, a lessee. The lessee assumes responsibility for all executory
costs, which are expected to amount to $5,000 per year. The asset will revert to the lessor at the
end of the lease term. The lessee has guarante

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Lessor Entries, Sales-Type Lease Watkins Company, a machinery dealer, leased a machine to
Romero Corporation on January 1, 2011. The lease is for an 8-year period and requires equal
annual payments of $38,514 at the beginning of each year. The first payment is received on
January 1, 2011. Watkins had purchased the mach

On December 31, 2010, Shell hammer Co. sold 6-month old equipment at fair value and leased it
back. There was a loss on the sale. Shell hammer pays all insurance, maintenance, and taxes on
the equipment. The lease provides for eight equal annual payments, beginning December 31,
2011, with a present value equal to 85% o

Metheny Corporation’s lease arrangements qualify as sales-type leases at the time of entering
into the transactions how should the corporation recognize revenues and costs in these
situations?

Callaway Golf Co. leases telecommunication equipment. Assume the following data for
equipment leased from Photon Company. The lease term is 5 years and requires equal rental
payments of $31,000 at the beginning of each year. The equipment has a fair value at the
inception of the lease of $138,000, an estimated useful l

How should changes in the estimated unguaranteed residual value be handled by the lessor?

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(Pension Worksheet) Larson Corp. sponsors a defined-benefit pension plan for its employees. On
January 1, 2011, the following balances related to this plan. Plan assets (market-related value)
$270,000 Projected benefit obligation 340,000 Pension asset/liability 70,000 Cr. Prior service
cost 90,00

Krauss Leasing Company signs a lease agreement on January 1, 2011, to lease electronic
equipment to Stewart Company. The term of the non-cancelable lease is 2 years, and payments
are required at the end of each year. The following information relates to this agreement: 1.
Stewart has the option to purchase the equipmen

On January 1, 2011, Evans Company entered into a non-cancelable lease for a machine to be
used in its manufacturing operations. The lease transfers ownership of the machine to Evans by
the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by
Evans on January 1, 2011, was one of eig

Baden Corporation entered into a lease agreement for 10 photocopy machines for its corporate
headquarters. The lease agreement qualifies as an operating lease in all terms except there is a
bargain-purchase option. After the 5-year lease term, the corporation can purchase each copier
for $1,000, when the anticipated ma

Distinguish between minimum rental payments and minimum lease payments, and indicate what
is included in minimum lease payments.

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Outline the accounting procedures involved in applying the capital-lease method by a lessee.

The following facts pertain to a non-cancelable lease agreement between Lennox Leasing
Company and Gill Company, a lessee. The Collectibility of the lease payments is reasonably
predictable, and there are no important uncertainties surrounding the costs yet to be incurred by
the lessor. The lessee assumes responsibilit

Jana Kingston Corporation enters into a lease on January 1, 2011, that does not transfer
ownership or contain a bargain-purchase option. It covers 3 years of the equipment’s 8-year
useful life, and the present value of the minimum lease payments is less than 90% of the fair
market value of the asset leased. Prepare J

(Gains and Losses, Corridor Amortization) Vickie Plato, accounting clerk in the personnel office
of Streisand Corp., has begun to compute pension expense for 2012 but is not sure whether or
not she should include the amortization of unrecognized gains/losses. She is currently working
with the following beginning-of-the

Goring Dairy leases its milking equipment from King Finance Company under the following
lease terms. 1. The lease term is 10 years, non-cancelable, and requires equal rental payments of
$30,300 due at the beginning of each year starting January 1, 2011. 2. The equipment has a fair
value and cost at the inception of the

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Go to the book’s companion website or the company websites and use information found
there to answer the following questions related to UAL, Inc. and Southwest Airlines. (a) What
types of leases are used by Southwest and on what assets are these leases primarily used? (b)
How long-term are some of Southwest’s lease

Assume that on January 1, 2011, Kimberly-Clark Corp. signs a 10-year non-cancelable lease
agreement to lease a storage building from Trevino Storage Company. The following
information pertains to this lease agreement. 1. The agreement requires equal rental payments of
$90,000 beginning on January 1, 2011. 2. The fair v

George Company manufactures a computer with an estimated economic life of 12 years and
leases it to National Airlines for a period of 10 years. The normal selling price of the equipment
is $278,072, and its unguaranteed residual value at the end of the lease term is estimated to be
$20,000. National will pay annual pay

Brecker Company leases an automobile with a fair value of $10,906 from Emporia Motors, Inc.,
on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $250 per month (at
end of each month). (The present value at 1% per month is $9,800.) 3. Estimated residual value
after 50 months is $1,180. (The present

(Basic Terminology) In examining the costs of pension plans, Helen Kaufman, CPA, encounters
certain terms. The components of pension costs that the terms represent must be dealt with
appropriately if generally accepted accounting principles are to be reflected in the financial
statements of entities with pension plans.

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On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine. The
terms of the lease called for Adams to make annual payments of $9,968 at the beginning of each
year, starting January 1, 2011. The machine has an estimated useful life of 6 years and a $5,000
unguaranteed residual value. The m

A lease agreement between Lennox Leasing Company and Gill Company is described in E21-8.
(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the
lessor. (a) Compute the amount of the lease receivable at the inception of the lease. (b) Prepare a
lease amortization schedule for Le

Walker Company is a manufacturer and lessor of computer equipment. What should be the
nature of its lease arrangements with lessees if the company wishes to account for its lease
transactions as sales-type leases?

Amir ante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to
Chambers Medical Center for a period of 10 years. The normal selling price of the machine is
$411,324, and its guaranteed residual value at the end of the non-cancelable lease term is
estimated to be $15,000. The hospital w

The residual value is the estimated fair value of the leased property at the end of the lease term.
(a) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the
lessee’s accounting for a capitalized-lease transaction? (b) Of what significance is (1) an
unguaranteed and (2) a guaranteed r

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Albertson Corporation is a diversified company with nationwide interests in commercial real

estate developments, banking, copper mining, and metal fabrication. The company has offices
and operating locations in major cities throughout the United States. Corporate headquarters for
Albertson Corporation is located in a m

Go to the book’s companion website, at www.wiley.com/college/kieso, to find interactive

problems that simulate the computerized CPA exam. The professional simulations for this
chapter ask you to address questions related to the accounting forleases.

On January 1, 2011, Irwin Animation sold a truck to Peete Finance for $33,000 and immediately
leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 5
years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of
$8,705 at the end of each year.

(Lessee Capitalization Criteria) On January 1, Santiago Company, a lessee, entered into three
non-cancelable leases for brand-new equipment, Lease L, Lease M, and Lease N. None of the
three leases transfers ownership of the equipment to Santiago at the end of the lease term. For
each of the three leases, the present va

Outline the accounting procedures involved in applying the operating method by a lessor.

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Fieval Leasing Company signs an agreement on January 1, 2010, to lease equipment to Reid
Company. The following information relates to this agreement. 1. The term of the non-
cancelable lease is 6 years with no renewal option. The equipment has an estimated economic
life of 6 years. 2. The cost of the asset to the lesso

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build
three diesel-electric engines to Winston’s specifications. Upon completion of the engines,
Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of
ownership. The lease is non-cancelable,

(Type of Lease, Amortization Schedule) Jacobsen Leasing Company leases a new machine that
has a cost and fair value of $75,000 to Stadler Corporation on a 3-year non-cancelable contract.
Stadler Corporation agrees to assume all risks of normal ownership including such costs as
insurance, taxes, and maintenance. The mac

Identify the two recognized lease-accounting methods for lessees and distinguish between them.

Assume the same data as in P21-13 and that Chambers Medical Center has an incremental
borrowing rate of 10%. (Round all numbers to the nearest dollar.) (a) Discuss the nature of this
lease in relation to the lessee, and compute the amount of the initial obligation under capital
leases. (b) Prepare a 10-year lease amort

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Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year non-cancelable
contract starting January 1, 2011. Terms of the lease require payments of $33,000 each January
1, starting January 1, 2011. Cleveland will pay insurance, taxes, and maintenance charges on the
crane, which has an estimated life of 1

Outline the accounting procedures involved in applying the direct-financing method.

You are auditing the December 31, 2011, financial statements of Hackney, Inc., manufacturer of
novelties and party favors. During your inspection of the company garage, you discovered that a
2010 Shirk automobile not listed in the equipment subsidiary ledger is parked in the company
garage. You ask Stacy Reeder, plant

Assume the same information as in P21-4. (Round all numbers to the nearest cent.) (a) Assuming
the lessor’s accounting period ends on September 30, answer the following questions with
respect to this lease agreement. (1) What items and amounts will appear on the lessor’s
income statement for the year ending Septemb

Alice Foyle, M.D. (lessee) has a non-cancelable 20-year lease with Brownback Realty, Inc.
(lessor) for the use of a medical building. Taxes, insurance, and maintenance are paid by the
lessee in addition to the fixed annual payments, of which the present value is equal to the fair
market value of the leased property. At

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Use the information for Indiana Jones Corporation from BE21-9. Assume that for Lost Ark
Company, the lessor, Collectibility is reasonably predictable, there are no important uncertainties
concerning costs, and the carrying amount of the machinery is $202,921. Prepare Lost Ark’s
January 1, 2011, journal entries.

What comprises a lessee’s minimum lease payments? What is excluded?

On February 20, 2011, Hooke Inc., purchased a machine for $1,200,000 for the purpose of
leasing it. The machine is expected to have a 10-year life, no residual value, and will be
depreciated on the straight-line basis. The machine was leased to Sage Company on March 1,
2011, for a 4-year period at a monthly rental of $

(Basic Lessee Accounting with Difficult PV Calculation) In 2009 Gris hell Trucking Company
negotiated and closed a long-term lease contract for newly constructed truck terminals and
freight storage facilities. The buildings were erected to the company’s specifications on land
owned by the company. On January 1, 2010,

What is the nature of a “sale-leaseback” transaction?

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How should a less or measure its initial gross investment in either a sales-type lease or a direct-
financing lease?

Rick Kleckner Corporation recorded a capital lease at $300,000 on January 1, 2011. The interest
rate is 12%. Kleckner Corporation made the first lease payment of $53,920 on January 1, 2011.
The lease requires eight annual payments. The equipment has a useful life of 8 years with no
salvage value. Prepare Kleckner Corpo

Use the information for Rick Kleckner Corporation from BE21-3. Assume that at December 31,
2011, Kleckner made an adjusting entry to accrue interest expense of $29,530 on the lease.
Prepare Kleckner’s January 1, 2012, journal entry to record the second lease payment of
$53,920.

What are the MIRR's advantages and disadvantages vis-Ã -vis the regular IRR? What are the
MIRR's advantages and disadvantages vis-Ã -vis the NPV?

What impact does the inability to issue common stock have on a not-for-profit business's capital
structure and capital budgeting decisions? Why is corporate finance important to all managers?
MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling
her placement

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Draw a graph which shows roughly the shape of the probability distributions for Alta Inds, Am
Foam, and T-bills.

You are also considering another project which has a physical life of 3 years; that is, the
machinery will be totally worn out after 3 years. However, if the project were terminated prior to
the end of 3 years, the machinery would have a positive salvage value. Here are the project’s
estimated cash flows: Using

What is the difference between independent and mutually exclusive projects?

In general, how is project risk actually measured within not-for-profit businesses? How is project
risk incorporated into the decision process? Why is corporate finance important to all managers?
MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling
her placem

Briefly explain the difference between the CAPM and the arbitrage pricing theory (APT).

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Calculate the expected rate of return on each alternative and fill in the blanks on the row for in
the table above.
Now add a set of indifference curves to the graph created for part B. What do these curves
represent? What is the optimal portfolio for this investor? Finally, add a second set of
indifference curves which leads to the selection of a different optimal portfolio. Why do the two
investors choose different portfolios?

Describe three ways that pro forma statements are used in financial planning.

You should recognize that basing a decision solely on expected returns is only appropriate for
risk neutral individuals. Since your client, like virtually everyone, is risk averse, the riskiness of
each alternative is an important aspect of the decision. One possible measure of risk is the
standard deviation of retur

Define the term Modified IRR (MIRR). Find the MIRRs for franchises L and S.

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How would the existence of excess capacity in fixed assets affect the additional funds needed
during 2005?

What are some potential problems and limitations of financial ratio analysis?

Define the term net present value (NPV). What is each franchise's NPV?

How does the riskiness of this 2-stock portfolio compare with the riskiness of the individual
stocks if they were held in isolation?

Calculate the 2005 profit margin, basic earning power (BEP), return on assets (ROA), and return
on equity (ROE). What can you say about these ratios?

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Suppose asset A has an expected return of 10 percent and a standard deviation of 20 percent.
Asset B has an expected return of 16 percent and a standard deviation of 40 percent. If the
correlation between A and B is 0.4, what are the expected return and standard deviation for a
portfolio comprised of 30 percent asset

The relationship between sales and the various types of assets is important in financial
forecasting. The percent of sales approach, under the assumption that each asset item grows at
the same rate as sales, leads to an AFN forecast that is reasonably close to the forecast using the
AFN equation. Explain how each of

Do the expected returns appear to be related to each alternative’s market risk? (2) Is it
possible to choose among the alternatives on the basis of the information developed thus far?

Calculate the resulting price per share, the number of shares repurchased, and the remaining
shares.
Perform a common size analysis and percent change analysis. What do these analyses tell you
about Computron?

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Calculate the 2005 debt, times-interest-earned, and EBITDA coverage ratios. How does
Computron compare with the industry with respect to financial leverage? What can you conclude
from these ratios?

What are normal and non-normal cash flows?

Calculate the 2005 current and quick ratios based on the projected balance sheet and income
statement data. What can you say about the company’s liquidity position in 2003, 2004, and
as projected for 2005? We often think of ratios as being useful (1) to managers to help run the
business, (2) to bankers for credit an

What is operating leverage, and how does it affect a firm's business risk? Show the operating
break even point if a company has fixed costs of $200, a sales price of $15, and variables costs of
$10.

Why is the t-bill’s return independent of the state of the economy? Do t-bills promise a
completely risk-free return?

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What is each project's initial npv without replication?

Write out the security market line (SML) equation, use it to calculate the required rate of return
on each alternative, and then graph the relationship between the expected and required rates of
return.

What are two potential tests that can be conducted to verify the CAPM? What are the results of
such tests? What is roll’s critique of CAPM tests?

Now calculate the corporate value, the value of the debt that will be issued, and the resulting
market value of equity.

Now assume that the cost to replicate project S in 2 years will increase to $105,000 because of
inflationary pressures. How should the analysis be handled now, and which project should be
chosen? What is each project's initial npv without replication?

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What is the rationale for the payback method? According to the payback criterion, which
franchise or franchises should be accepted if the firm's maximum acceptable payback is 2 years,
and if franchises L and S are independent if they are mutually exclusive?
Draw project P's NPV profile. Does project P have normal or non-normal cash flows? Should
this project be accepted?

What are a not-for-profit business's sources of fund capital? Why is corporate finance important
to all managers? MINI CASE Sandra McCloud a finance major in her last term of college is
currently scheduling her placement interviews through the university's career resource center.
Her list of compan

Now consider the fact that EBIT is not known with certainty, but rather has the following
probability distribution: Economic State Probability EBIT Bad 0.25 $2,000 Average 0.50 3,000
Good 0.25

Construct a reasonable, but hypothetical, graph which shows risk, as measured by portfolio
standard deviation, on the x axis and expected rate of return on the y axis. Now add an
illustrative feasible (or attainable) set of portfolios, and show what portion of the feasible set is
efficient. What makes a particular po

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Would the franchises' IRRs change if the cost of capital changed?

Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise
or franchises should be accepted if they are independent mutually exclusive? Explain. Are your
answers correct at any cost of capital less than 23.6 percent?

What is the capital asset pricing model (CAPM)? What are the assumptions that underlie the
model?

What is project Ps NPV? What is its IRR Its MIRR?

What are investment returns? What is the return on an investment that costs $1,000 and is sold
after one year for $1,100? See

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Financial managers are more concerned with investment decisions relating to real assets such as
plant and equipment than with investments in financial assets such as securities. How does the
analysis that we have gone through relate to real asset investment decisions, especially corporate
capital budgeting decisions?

Briefly explain how to forecast financial statements using the percent of sales approach. Be sure
to explain how to forecast interest expenses.

What is credit enhancement, and what effect does it have on debt costs? Why is corporate
finance important to all managers? MINI CASE Sandra McCloud a finance major in her last
term of college is currently scheduling her placement interviews through the university's career
resource center. Her list

Explain the steps in financial forecasting.

Which method is the best? Why?

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Suppose an investor starts with a portfolio consisting of one randomly selected stock. What
would happen (1) to the riskiness and (2) to the expected return of the portfolio as more and
more randomly selected stocks were added to the portfolio? What is the implication for
investors? Draw a graph of the two portfolio

What are municipal bonds? How do not-for-profit health care businesses access the municipal
bond market? Why is corporate finance important to all managers? MINI CASE Sandra
McCloud a finance major in her last term of college is currently scheduling her placement
interviews through the university's

Now add the risk-free asset. What impact does this have on the efficient frontier?

Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded as
being a better measure of stand-alone risk than the standard deviation when the alternatives being
considered have widely differing expected returns. Calculate the missing CVs, and fill in the
blanks on the row for CV in th

How would changes in these items affect the AFN? (1) sales increase, (2) the dividend payout
ratio increases, (3) the profit margin increases, (4) the capital intensity ratio increases, and (5)
SEC begins paying its suppliers sooner. (Consider each item separately and hold all other things
constant.)

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Calculate the 2005 price/earnings ratio, price/cash flow ratios, and market/book ratio. Do these
ratios indicate that investors are expected to have a high or low opinion of the company?

Calculate SEC's forecasted ratios, and compare them with the company's 2004 ratios and with
the industry averages. Calculate SEC’s forecasted free cash flow and return on invested
capital (ROIC).

Why are Alta Ind.’s returns expected to move with the economy whereas Repo Men’s
are expected to move counter to the economy?

Suppose investors raised their inflation expectations by 3 percentage points over current
estimates as reflected in the 8 percent t-bill rate. What effect would higher inflation have on the
SML and on the returns required on high- and low-risk securities?

What is the difference between the regular and discounted payback periods?

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Should portfolio effects impact the way investors think about the riskiness of individual stocks?

Now apply the replacement chain approach to determine the projects’ extended NPVs.
Which project should be chosen? What is each project's initial npv without replication?

What type of risk is measured by the standard deviation?

Suppose you are given the following information. The beta of company, bi, is 0.9, the risk free
rate, rRF, is 6.8%, and the expected market premium, rM-rRF, is 6.3%. Because your company
is larger than average and more successful than average (i.e., it has a lower book-to-market
ratio), you think the Fama-French 3-fa

What is a characteristic line? How is this line used to estimate a stock’s beta coefficient?
Write out and explain the formula that relates total risk, market risk, and diversifiable risk.

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What is the rationale behind the NPV method? According to NPV, which franchise or franchises
should be accepted if they are independent mutually exclusive?

What does this example illustrate about the impact of financial leverage on ROE?

Why does the percent of sales approach produce a somewhat different AFN than the equation
approach? Which method provides the more accurate forecast?

Explain the difference between financial risk and business risk.

Write out the equation for the capital market line (CML) and draw it on the graph. Interpret the
CML. Now add a set of indifference curves, and illustrate how an investor's optimal portfolio is
some combination of the risky portfolio and the risk-free asset. What is the composition of the
risky portfolio?

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Now calculate roe for both firms.

What level of sales could have existed in 2004 with the available fixed assets?
Suppose you created a 2-stock portfolio by investing $50,000 in Alta Inds and $50,000 in Repo
Men. Calculate the expected return ( p), the standard deviation (σp), and the coefficient of
variation (cvp) for this portfolio and fill in the appropriate blanks in the table above.

What is the logic behind the IRR method? According to IRR, which franchises should be
accepted if they are independent mutually exclusive?

Use the extended Du Pont equation to provide a summary and overview of Computron’s
financial condition as projected for 2005. What are the firm’s major strengths and
weaknesses?

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What is the underlying cause of ranking conflicts between NPV and IRR?

Construct partial income statements, which start with EBIT, for the two firms

What would be the market risk and the required return of a 50-50 portfolio of Alta Inds and Repo
Men of Alta Inds and Am. Foam?

What are some qualitative factors analysts should consider when evaluating a company’s
likely future financial performance?

Calculate the 2005 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and
total assets turnover. How does Computron’s utilization of assets stack up against other firms
in its industry?

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How do the expected rates of return compare with the required rates of return?

What is the "reinvestment rate assumption”, and how does it affect the NPV versus IRR
conflict?

Does the fact that Repo Men has an expected return which is less than the t-bill rate make any
sense?

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What is the main disadvantage of discounted payback? Is the payback method of any real
usefulness in capital budgeting decisions?

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Define the term Internal Rate of Return (IRR). What is each franchise's IRR?

Would the NPVs change if the cost of capital changed?

Suppose you have the following historical returns for the stock market and for another company,
P.Q. Unlimited. Explain how to calculate beta, and use the historical stock returns to calculate
the beta for PQU. Interpret your results.

Now estimate the 2005 financial requirements using the percent of sales approach. Assume (1)
that each type of asset, as well as payables, accruals, and fixed and variable costs, will be the
same percent of sales in 2005 as in 2004; (2) that the payout ratio is held constant at 40 percent;
(3) that external funds nee

Why are ratios useful? What are the five major categories of ratios?

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Draw NPV profiles for franchises L and S. At what discount rate do the profiles cross?

Based on comparisons between SEC's days sales outstanding (DSO) and inventory turnover
ratios with the industry average figures, does it appear that SEC is operating efficiently with
respect to its inventory and accounts receivable? Suppose SEC was able to bring these ratios into
line with the industry averages and re

Suppose a risk-free asset has an expected return of 5 percent. By definition, its standard
deviation is zero, and its correlation with any other asset is also zero. Using only asset A and the
risk-free asset, plot the attainable portfolios.

How is market risk measured for individual securities? How are beta coefficients calculated?

Suppose instead that investors’ risk aversion increased enough to cause the market risk
premium to increase by 3 percentage points. (Inflation remains constant.) What effect would this
have on the SML and on returns of high- and low-risk securities?

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Plot the attainable portfolios for a correlation of 0.4. Now plot the attainable portfolios for
correlations of +1.0 and -1.0.

After examining all the potential projects, you discover that there are many more projects this
year with positive NPVs than in a normal year. What two problems might this extra large capital
budget cause? What is each project's initial npv without replication?

What is the payback period? Find the paybacks for franchises L and S.

Assume (1) that SEC was operating at full capacity in 2004 with respect to all assets, (2) that all
assets must grow proportionally with sales (3) that accounts payable and accruals will also grow
in proportion to sales, and (4) that the 2004 profit margin and dividend payout will be
maintained. Under these condition
How is the IRR on a project related to the YTM on a bond?

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If you decided to hold a 1-stock portfolio, and consequently were exposed to more risk than
diversified investors, could you expect to be compensated for all of your risk; that is, could you
earn a risk premium on that part of your risk that you could have eliminated by diversifying?

What is the incremental after-tax profit associated with the change in credit terms? Should the
company make the change? (Assume a tax rate of 40 percent.)

Assume that Lyons’ has 20 million shares outstanding. These shares are traded relatively
infrequently, but the last trade, made several weeks ago, was at a price of $11 per share. Should
Hager’s make an offer for Lyons’? If so, how much should it offer per share?

What is a corporate beta? How does it differ from a market beta? Why is corporate finance
important to all managers? MINI CASE Sandra McCloud a finance major in her last term of
college is currently scheduling her placement interviews through the university's career resource
center. Her list of co

What is capital budgeting?

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What unique problems do not-for-profit businesses encounter in financial analysis and planning?
What about short-term financial management? Why is corporate finance important to all
managers? MINI CASE Sandra McCloud a finance major in her last term of college is currently
scheduling her placement

You are given the price of a nondividend paying stock St and a European call option Ct in a
world where there are only two possible states The true probabilities of the two states are given
by {Pu = .5, Pd = .5}. The current price is St = 280. The annual interest rate is constant at r =
5%. The time is discrete, wit

Is it better for a firm`s actual stock price in the market to be under, over, or equal to its intrinsic
value? Would your answer be the same from the standpoints of stockholders in general and a
CEO who is about to exercise a million dollars in options and then retire? Explain.

Conceptually, what is the appropriate discount rate to apply to the cash flows developed in part
c? What is your actual estimate of this discount rate?

Would it be feasible for SKI to finance with commercial paper?

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Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For
example, if one action increases a firm`s stock price from a current level of $20 to $25 in 6
months and then to $30 in 5 years but another action keeps the stock at $20 for several years but
then increases it to $40 in 5 year

Consider the following investments * An investor short sells a stock at a price S, and writes an
al-the-money call option on the same stock with a strike price of k * An investor buys one put
with a strike price of K1 and one call option at a strike price of K2 with K1 ≤ K2. (a) Plot the
expiration payoff diagrams in

The president of Southern Semiconductor Corporation (SSC) made this statement in the
companys annual report SSCs primary goal is to increase the value of our common stockholders
equity. Later in the report, the following announcements were made: a. The company contributed
$1.5 million to the symphony orchestra in Birm

Suppose you can bet on an American presidential election in which c of the candidates is an
incumbent. The market offers you the following payoffs R You can take either side of the bet
Let the true probability of the incumbent winning be denoted by p. 0 < p < 1. (a) What is the
expected gain if p =0.6? (b) Is the v

Several reasons have been proposed to justify mergers. Among the more prominent are (1) tax
considerations, (2) risk reduction, (3) control, (4) purchase of assets at below-replacement cost,
(5) synergy, and (6) globalization in general, which of the reasons are economically justifiable?
Which are not? Which fit th

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Barnes knows that SKI sells on the same credit terms as other firms in its industry. Use the ratios
presented earlier to explain whether SKI’s customers pay more or less promptly than those of
its competitors. If there are differences, does that suggest that SKI should tighten or loosen its
credit policy? What four v

Does the series Converge as N →∞?

Barnes plans to use the ratios shown below as the starting point for discussions with SKI’s
operating executives. He wants everyone to think about the pros and cons of changing each type
of current asset and how changes would interact to affect profits and EVA. Based on the table
22-1 data, does SKI seem to be foll

What does capital structure theory attempt to do? What lessons can be learned from capital
structure theory? Be sure to address the MM models.

SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt either a
more aggressive or more conservative financing policy.
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Now consider the function f (x) discussed in this chapter: (a) Take the integral and calculate (b)
again, split the interval [0, 1] into 4 pieces, X0 = 0 < x1 < x2 < x3 < x4 = 1, By choosing the xi
numerically. Calculate the following sums: (c) How do these sums approximate the true
integral? (d)Why

What is its expected average accounts receivable level?

What might SKI do to reduce its cash without harming operations?

Show that the partial sum isconvergent.

When is a stock said to be in equilibrium? At any given time, would you guess that most stocks
are in equilibrium as you defined it? Explain.

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Suppose you were a member of Company Xs board of directors and chairperson of the companys
compensation committee. What factors should your committee consider when setting the CEOs
compensation? Should the compensation consist of a dollar salary, stock options that depend on
the firms performance, or a mix of the two?

Assume that it is now July of year 1, and the brothers are developing pro forma financial
statements for the following year. Further, assume that sales and collections in the first half-year
matched the predicted levels. Using the year 2 sales forecasts as shown next, what are next year's
pro forma receivables levels

What is the dollar amount of the firm's current bad debt losses? What losses would be expected
under the new policy?

Assume now that it is several years later. The brothers are concerned about the firm's current
credit terms, which are now net 30, which means that contractors buying building products from
the firm are not offered a discount, and they are supposed to pay the full amount in 30 days.
Gross sales are now running $1,000

Consider the following functions Take the partials with respect to x, y, z,respectively.

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Let the arbitrage-free 3-month futures prices for wheat be denoted by Ft. Suppose it costs c$ to
store 1 ton of wheat for 12 months and s$ per year to insure the same quantity. The (simple)
interest rate applicable to traders of spot wheat is r% finally assume that the wheat has no
convenience yield. (a) Obtain a formu
If most investors expect the same cash flows from Companies A and B but are more confident
that A`s cash flows will be closer to their expected value, which company should have the higher
stock price? Explain.

If the company reduces its inventory without adversely affecting sales, what effect should this
have on the company’s cash position (1) in the short run and (2) in the long run? Explain in
terms of the cash budget and the balance sheet.

Assuming that the monthly sales forecasts given previously are accurate, and that customers pay
exactly as was predicted, what would the receivables level be at the end of each month? To
reduce calculations, assume that 30 percent of the firm's customers pay in the month of sale, 50
percent pay in the month following

What other factors should managers consider when setting the target capital structure?

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Suppose you are a director of an energy company that has three divisions-natural gas, oil, and
retail (gas stations). These divisions operate independently from one another, but all division
managers report to the firms CEO. If you were on the compensation committee as discussed in
Question 1-14 and your committee was

Show that the partial sum Sn defined by the recursion formula: Sn+1 = √38n With S1 = 1,
converges to 3. Use mathematical induction

Construct the uncollected balances schedules for the end of March and the end of June. Use the
format given below. Do these schedules properly measure customers' payment patterns?

If bank loans have a cost of 12 percent, what is the annual dollar cost of carrying the receivables?

Should depreciation expense be explicitly included in the cash budget? Why or why

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Suppose Xn = aXn – 1 + 1 With X0 given. Write Xn as a partial sum. When does this partial
sum converge?

What are holding companies? What are their advantages and disadvantages?

What method is used to account for mergers?

What is a leveraged buyout (LBO)? What are some of the advantages and disadvantages of going
private?

If it exits, find the limit of the following sequences for n = 1, 2, 3. (a) xn = (–1)n (b) xn = sin
(nπ/3) (c) xn = n(–1)n (d) xn = sin (nπ/3) + (–1)n/n Is this sequence bounded?
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An at-the money call written on a stock with current price St = 100 trades at 3. The
corresponding at-the –money put trades at 3.5. There are no transaction costs and the stock
does nor pay any dividends. Traders can borrow and lend at a rate 5% per year and all markets
are liquid. (a) A trader writes a forward contr

What reasons might SKI have for maintaining a relatively high amount of cash?

How can one distinguish between a relaxed but rational working capital policy and a situation in
which a firm simply has a lot of current assets because it is inefficient? Does SKI’s working
capital policy seem appropriate?

Using the data in the previous question, you are now asked to approximate the current value of a
European call option on the stock St. the option has a strike price of 100, and a maturity of 100
days (a) Determine as appropriate time interval Δ, such that the binomial tree has 5 steps (b)
What would be the implied u

There has been considerable research undertaken to determine whether mergers really create
value and, if so, how this value is shared between the parties involved. What are the results of
this research?

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Write the sequences {Xn} for n = 1, 2, 3, where (a) Xn = an, (b) Xn = (1 + 1/n)n, (c) Xn = (–n)
n-1/n!, (d) Are the sequences {Xn}, given above, convergent? Suppose the yearly interest rate is
55. Let Δ be a time interval that repeats n times during 1 year, such that we have: nΔ = 1. (i)
What is the gross return to

Is it likely that SKI could make significantly greater use of accruals?

Suppose the firm makes the change, but its competitors react by making similar changes to their
own credit terms, with the net result being that gross sales remain at the current $1,000,000 level.
What would the impact be on the firm's post-tax profitability?

Suppose three honest individuals gave you their estimates of Stock Xs intrinsic value. One
person is your current roommate, the second person is a professional security analyst with an
excellent reputation on Wall Street, and the third person is Company Xs CFO. If the three
estimates differed, in which one would you ha

Construct aging schedules for the end of March and the end of June (use the format given
below). Do these schedules properly measure customers’ payment patterns? If not, why not?

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Barnes’ cash budget for the entire year, although not given here, is based heavily on his
forecast for monthly sales. Sales are expected to be extremely low between May and September
but then increase dramatically in the fall and winter. November is typically the firm’s best
month, when SKI ships equipment to ret

Determine the following limits:

For each capital structure under consideration, calculate the levered beta, the cost of equity, and
the WACC.

What are the firm’s forecasted average daily sales for the first 3 months? For the entire half-
year the day’s sales outstanding is commonly used to measure receivables performance.
What DSO is expected at the end of March At the end of June? What does the DSO indicate
about customers' payments? Is DSO a good ma

The brothers are considering taking out a 1-year bank loan for $100,000 to finance part of their
working capital needs and have been quoted a rate of 8 percent. What is the effective annual cost
rate assuming (1) simple interest, (2) discount interest, (3) discount interest with a 10 percent
compensating balance, and

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What merger-related activities are undertaken by investment bankers?

SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt either a
more aggressive or more conservative financing policy.

What is the estimated horizon, or continuing, value of the acquisition; that is, what is the
estimated value of the L division's cash flows beyond 2008? What is Lyons’ value to
Hager’s shareholders? Suppose another firm were evaluating Lyons’ as an acquisition
candidate. Would they obtain the same value? Expla

Use the data developed in the table to construct the L division's free cash flows for 2005 through
2008. Why are we identifying interest expense separately since it is not normally included in
calculating free cash flow or in a capital budgeting cash flow analysis? Why are net retentions
deducted in calculating free

Edmund Enterprises recently made a large investment to upgrade its technology. While these
improvements wont have much effect on performance in the short run, they are expected to
reduce future costs significantly. What effect will this investment have on Edmund Enterprises
earnings per share this year? What effect mig

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In an economy there are two states of the world and four assets. You are given the following
prices for three of these securities in different states of the world: “Current” prices for A,
B, C are 100, 70, and 180, respectively. (a) Are the “current” process of the three securities
arbitrage-free? (b) If no

Under the current credit policy, what is the firm's days sales outstanding (DSO)? What would the
expected DSO be if the credit policy change were made?

In his preliminary cash budget, Barnes has assumed that all sales are collected and, thus, that SKI
has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting
sense? (Hint: bad debts will affect collections but not purchases.)

What are some actions that stockholders can take to ensure that managements and stockholders
interests are aligned?

Calculate the resulting price per share, the number of shares repurchased, and the remaining
shares.

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Briefly describe the differences between a hostile merger and a friendly merger.

Assume that the firm’s profit margin is 25 percent. How much of the receivables balance
must be financed? What would the firm’s balance sheet figures for accounts receivable, notes
payable and retained earnings be at the end of one year if notes payable are used to finance the
investment in receivables? Assume t

What are the major types of divestitures? What motivates firms to divest assets?

What are its expected average daily sales (ADS)?

If the company reduces its DSO without seriously affecting sales, what effect would this have on
its cash position (1) in the short run and (2) in the long run? Answer in terms of the cash budget
and the balance sheet. What effect should this have on EVA in the long run?

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Now, calculate the firm’s cash conversion cycle. Assume a 365 day year.

How would the analysis be different if Hager’s intended to recapitalize Lyons’ with 40%
debt costing 10% at the end of four years?

What is the firm’s expected days sales outstanding (DSO)?

Considering only the capital structures under analysis, what is Pizza Palace’s optimal capital
structure?
Consider the function: f (x) = x3 (a) Take the integral and calculate ∫10f(x)dx (b) Now
consider splitting the interval [0, 1] into 4 pieces, x0 = 0 < x1 < x2 < x3 < x4 = 1 Where you
choose the xi. They may or may not be equally spaced. Calculate the following sums
numerically: (c) What are the differences betwee

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Is there any reason to think that SKI may be holding too much inventory? If so, how would that
affect EVA and ROE?

What would be the firm's expected dollar cost of granting discounts under the new policy?

Now place yourself exactly in the same setting as before, where the market quotes the above R.
It just happens that you have a close friend who offers you the following separate bet, R*: Note
that Tue random event behind this bet is the same as in R. Now consider the following: (a) Using
the R and the R*, construct

Consider a stock St and a plain vanilla, at-the-money, put option written on this stock. The
option expires at time t + Δ, where Δ denotes a small interval. At time t, there are only two
possible ways the St can move. It can either go up to Sut+Δ, of go down to Sut+Δ. Also
available to traders is risk-free borrowin

You are given two discrete random variables X. Y that assume the possible values 0, 1 according
to the following joint distribution: (a) What are the marginal distributions of X and Y? (b) Are x
and Y independent? (e) Calculate E[1] and E[Y]. (d) Calculate the conditional distribution P[X|Y
= 1]. (e) Obtain the cond

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What are some factors that influence (1) a firm's receivables level and (2) the dollar cost of
carrying receivables?

A four-step binomial tree for the price of a stock St is to be calculated using the up and sown
ticks given as follows: u = 1.15 d = 1/u These up and down movements apply to one-month
periods denoted by Δ = 1. We have the following dynamics for Sv Where up and down describe
the two states of the world at each node.

You are given the following information concerning a stock denoted by St (1) Current value
=102. (2) Annual volatility = 30%. (3) You are also given the spot rate r = 50%, which is known
to constant during the next 3 months It is hoped that the dynamic behavior of St can be
approximated reasonably well by a binomial pr

If a company`s board of directors wants management to maximize shareholder wealth, should the
CEO`s compensation be set as a fixed dollar amount, or should the compensation depend on how
well the firm performs? If it is to he based on performance, how should performance be
measured? Would it be easier to measure perfor

Assume that SKI buys on terms of 1/10, net 30, but that it can get away with paying on the 40th
day if it chooses not to take discounts. Also, assume that it purchases $506,985 of equipment per
year, net of discounts. How much free trade credit can the company get, how much costly trade
credit can it get, and what is

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What is a firm

If you bought a share of stock, what would you expect to receive, when would you expect to
receive it, and would you be certain that your expectations would be met?

Now calculate the corporate value, the value of the debt that will be issued, and the resulting
market value of equity.

What are the steps in valuing a merger?

Discuss, in general, what it means for the brothers to set a credit and collections policy.

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Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the
largest institutional shareholder in the United States; therefore, it holds many shares and has
mote votes than any other organization. Traditionally, this fund has acted as a passive investor,
just going along with management. Ho

Consider a fixed-payer, plain vanilla, interest rate swap paid in arrears with the following
characteristics: (1) The start date is in 12 months, the maturity is 24 months. (2) Floating rate is 6
month USD Libor. (3) The swap rate is κ = 5% (a) Represent the cash flows generated by this
swap on a graph. (b) Create a s

Suppose you are given the following data: (1) Risk-free yearly interest rate is r = 6%. (2) The
stock price follows: St – St–1 = μSt + σStεt Where the ε is a serially uncorrelated
binomial process assuming the following values: The 0 < p < 1 is a parameter. (1) Volatility is
12% a year. (2) The stock pays no

What are the three categories of inventory costs? If the company takes steps to reduce its
inventory, what effect would this have on the various costs of holding inventory?

What is the firm's current dollar cost of carrying receivables? What would it be after the
proposed change?

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Give three examples of a “personal problem/ decision” that you have experienced: one that
involved the condition of certainty, one that involved risk (subjective probability), and one that
involved uncertainty.

We let the random variable Xn be a binomial process Where each Bi is independent and is
distributed according to (a) Calculate the probabilities P(X4 > k) for k 0, 1, 2, 4 and plot the
distribution function. (b) Calculate the expected value and the variance of Xn for n =3.

What are the four forms of business organization? What are the advantages and disadvantages of
each?

How large would the loan actually be in each of the cases in part f?

Does SKI face any risks if it tightens its credit policy?

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If you take an assignment with an organization in a foreign country, what are some of the
perceptual errors that you should avoid to complete the assignment successfully?

Tony Hsieh, leader of Zappos, has some very strong norms about what behaviors are rewarded
and what are punished. To more fully understand Zappos’ cultural values go to
www.zappos.com and click on “What are Zappos employees doing right now?” at the
bottom of the homepage. Are there any ethical issues here?

Using the Big Five personality factors, describe the personality of (a) A close family member
and (b) A person for whom you have worked. How do these factors affect your behavior toward
them?

What are three differences between evidence-based management and political decision making?

Bella Goren, vice president for Customer Services Planning in Asia for American Airlines, is
transferring a manager from American Airlines based in Dallas to Japan. What cultural issues
might he encounter when rewarding employees in Japan?

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Think of an important decision that you have made during the past year. In what ways did your
decision making match or vary from each factor in the political decision-making process?
Explain.

Describe how you can develop your hope attitude to improve your performance.

Don is a sales representative for a local moving company. His friend Adam works as an auto
salesman. Adam informs Don that people who move are surprisingly likely to buy new cars
shortly thereafter because their commute has now changed. He tells Don, “I’ll tell you
what. Give me the names of people you meet with to

Review the Change Competency feature entitled “St. Clair Hospital Adopts RFID and Related
Technologies.” What specific components and applications of knowledge management are
illustrated in this feature?

What are some ethical problems associated with performance-based reward programs? What
abuses have you seen? How can leaders correct such abuses?

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What are some warning signs that an organization’s design is not working?

Why is organizational diagnosis essential to the success of any change effort?

If you skipped a class or cut out of work to simply take the day off, what were the consequences
of this behavior? How might your teacher or supervisor change your behavior to encourage
attendance?

1. Using the model found on page 194, evaluate Allstate’s goal-setting process. How does it
work? 2. On pages 202–203, we list some of the dimensions of an effective goal-setting
program. Does Allstate meet these criteria? 3. What type of high-performance reward system
should Allstate choose to motivate its employ

1. Using the Big Five personality factors, describe Ellison’s personality characteristics. How
do these affect others? 2. What’s Ellison EQ? Why do individuals work for him? MINI
CASE Larry Ellison, founder and CEO of Oracle Computer whose net worth is in the billions,
has been the driving force at

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In what ways does the model of emotions affect your attitude and performance?

Jose is a general manager of a division of Global Operations. In that capacity, he knows that his
company is planning on making layoffs soon. Juan, a good friend in another division, tells Jose
he is about to buy a new house that is much more expensive, but he’s confident that he can
make the higher payments, because

Assume a leader is lacking in the diversity competency. How does this deficiency link to the
severe workplace stress experienced by some or all employees?

What are some advantages and disadvantages of organizing by product?

The individual forms perceptions of how ethical principles are portrayed in organizations
through the behaviors of leaders, advertisements, news stories, and the like. Go to the Gap’s
website (www.gap.com). What attributions can you make about their ethical principles from
visiting this website?

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What factors influenced your level of goal commitment to this course? Did your level of
commitment change after receiving feedback on an assignment or test? Explain.

What are some issues surrounding the use of punishment?

We discussed many features of Lowe’s organizational design. If Lowe’s continues to

grow, what are some of the possible changes that might be considered in its organization design?
You might want to go to Lowe’s website (www.lowes.com), search for “About
Lowe’s” and then go to “Investors Report” and down

Think of a leader for whom you have worked. Based on the guidelines presented for effective
delegation, did this manager do a good job of delegating? Explain your answer.

What implications for managerial spans of control can be expected as organizations downsize?
What additional managerial competencies might be required of leaders who remain in a
downsized organization?

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Use the goal-setting model found on page 194 to analyze Steve Letarte’s NASCAR team, the
Rainbow Warriors. Why is the team effective?

How might the values of a culture impact the development of a person’s personality? What
cultural dimensions seem to have the most influence on this developmental process?

You’ve been a manager at your company for five years and have developed an excellent
reputation. Your future looks bright, which is a good thing since you have a family to support.
Yesterday a fellow employee, Kim, came to you with a problem. Kim, an African-American
woman who used to report to you, had just been tur

What are some organizational design mistakes you learned from reading the Ethics Competency
feature about Enron?

1. Using the values listed in Table 16.1, describe the culture of Wegmans. We have listed 54
values below. These are divided into two groups of 27 each. Select four values in the YOU ARE
group and four values from the YOUR COMPANY group that you desire. Place these in your
top eight choices. Next, take four values that

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Go to www.petrobras.com, click on “About us,” and read about the oil company. What are
the key pressures for change reported in these statements?

Go to www.zappos.com. How does this website illustrate cultural diversity?

Imagine that you have just been selected to become a new sales manager for Dell Computers in
Mexico. What would you do to motivate employees to become high producers?

1. What kind of reinforcers does Salatino use to motivate his salespeople? 2. What kind of
reinforcement schedule is used by Great Northern American to pay salespeople? 3. If you were
Salatino, how might the concept of self efficacy help you hire successful salespeople? MINI
CASE As president of Great N

Imagine that you have been selected for an office visit at SEI Investments for a financial analyst
position. What are leaders looking for in that interview to decide whether or not to hire you?

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1. Go to Fortune magazine, February 2, 2009, and turn to pages 64–65 or go to www.sas.com

and search under the heading “SAS Family.” Using the criteria on these pages, evaluate the
SAS Institute. Do these criteria reveal why SAS consistently makes the list of “Best
Companies to Work for in America”? 2. What i

Think of an organization that you have worked for. What factors seemed to influence your
commitment to this organization?

Phil Jackson, after winning his tenth NBA title as a coach, said: “I don’t motivate my
players. You cannot motivate someone. All you can do is provide a motivating environment and
the players will motivate themselves.” Do you agree or disagree? What’s the reasoning
behind your answer?

Have you experienced or witnessed workplace bullying? If yes, did the organization’s
leaders deal with it effectively? Explain.

Identify and list some of the stressors in a job that you have had. Which were the most difficult
to deal with? Why?

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What are some problems that employees might face in an organization that has adopted a skill-
based pay program?

How has John Schnatter, CEO of Papa John’s, applied the learned needs model to motivate
his employees?
Have you experienced or observed workplace incivility? If yes, what impacts, if any, did it have
on you or others? Explain.

What are your own assumptions about motivation? How do they reflect the culture in which you
were raised?

What are your scores on the Impression Management Assessment questionnaire in Table 4.2?
Based on these, how might the overuse of any tactic backfire on you and hurt your career
advancement?

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Go to www.starbucks.com, click on “about us,” then click on “business ethics &

compliance.” Click on the link that shows all versions of Starbucks Standard of Business
Conduct on the right-hand side of the screen. Scroll down to resources under which you will find
Ethical Decision- Making Framework. What motiva

To understand what behaviors are rewarded at UPS, visit www.ups.com and in the search bar
(upper right hand corner) enter “careers.” Search under careers. What kinds of rewards are
given to attract and retain people? What criteria are used by UPS to administer these awards?

What impact does the choice of business strategy have on how your organization or university is
organized?

Gambling casino owners in Las Vegas, Reno, and Atlantic City use a variable ratio
reinforcement schedule. Why do people find this schedule so addictive?

Visit Enterprise at www.enterprise.com. Click on “Careers,” on “Our Culture,” then

on “Our Values.” How does Enterprise use goal-setting?

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To explore how Starbucks motivates its partners, go to www.starbucks.com. On that page, look
for “career center.” Click on that. What employee needs is Starbucks attempting to satisfy
for its retail partners?

Sandra Swann, director of human resources at ViewCast, said that many times, leaders commit
the error of measuring the wrong behaviors with excruciating accuracy. What implications does
this pose for leaders using management by objectives?

What are the primary methods that Richard Teerlink used to change the culture of Harley-
Davidson?

1. Use EQ to describe a friend. What are this person’s strengths and weaknesses? 2. Is EQ
genetic or shaped by experience? MINI CASE An individual difference that has recently