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Foundations of Financial Management Canadian 10th Edition Block Solutions Manual
Foundations of Financial Management Canadian 10th Edition Block Solutions Manual
Discussion Questions
6-1. Rapidly expanding sales will require a buildup in assets to support the growth. In
particular, more and more of the increase in current asset will be permanent in nature. A
non-liquidating aggregate stock of current assets will be necessary to allow for floor
displays, multiple items for selection, and other purposes. All of these ‘asset’ investments
can drain the cash resources of the firm.
6-2. If sales and production can be matched, the level of inventory and the amount of current
assets needed can be kept to a minimum; therefore, lower financing costs will be
incurred. Matching sales and production has the advantage of maintaining smaller
amounts of current assets than level production, and therefore less financing costs are
incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining
sales climate and machinery (capital assets) will be idle. Here lies the tradeoff between
level and seasonal production: Full utilization of capital assets with skilled workers and
more financing of current assets versus unused capacity, training and retraining workers,
with lower financing for current assets.
6-3. A cash budget helps minimize current assets by providing a forecast of inflows and
outflows of cash. It also encourages the development of a schedule as to when inventory
is produced and maintained for sales (production schedule), and accounts receivables are
collected. The cash budget allows us to forecast the level of each current asset and the
timing of the buildup and reduction of each.
6-4. Only a financial manager with unusual insight and timing could design a plan in which
asset buildup and the length of financing terms are perfectly matched. One would need to
know exactly what parts of current assets are temporary and what parts are permanent.
Furthermore, one is never quite sure how much short-term or long-term financing is
available at appropriate rates at all times. Even if this were known, it would be difficult to
change the financing mix on a continual basis.
6-5. By establishing a long-term financing arrangement for temporary current assets, a firm is
assured of having necessary funding in good times as well as bad, thus we say there is
low risk. However long-term financing is generally more expensive than short-term
financing and profits may be lower than those which could be achieved with a
synchronized or normal financing arrangement for temporary current assets. This is
demonstrated in Figure 6-12.
6-6. By financing a portion of permanent current assets on a short-term basis, we run the risk
of inadequate financing in tight money periods. However, since short-term financing is
less expensive than long-term funds, a firm tends to increase its profitability over the long
run (assuming it survives). In answer to the preceding question, we stressed less risk and
less return; here the emphasis is on high risk and high return.
6-7. The term structure of interest rates shows the relative level of short-term and long-term
Foundations of Fin. Mgt. 10Ce 6-1 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
6-8. Liquidity premium theory, the segmentation theory, and the expectations theory:
The liquidity premium theory indicates that long-term rates should be higher than short-
term rates. This premium of long-term rates over short-term rates exists because short-
term securities have greater liquidity, and therefore higher rates have to be offered to
potential long-term bond buyer for enticement to hold these less liquid and more price
sensitive securities.
The segmentation theory states that Treasury securities are divided into market segments
by the various financial institutions investing in the market. The changing needs, desires,
and strategies of these investors tend to strongly influence the nature and relationship of
short- and long-term rates.
The expectations hypothesis maintains that the yields on long-term securities are a
function of short-term rates. The result of the hypothesis is that when long-term rates are
much higher than short-term rates, the market is saying that it expects short-term rates to
rise. When long-term rates are lower than short-term rates, the market is expecting short-
term rates to fall.
6-9. An inverted yield curve reflects investor expectations that interest rates will decline in the
future. Furthermore, an inverted yield curve has usually preceded a recession. Lower
interest rates are generally a reflection of lower inflation and lower inflation is usually the
result of an economic slowdown. This information would be valuable for planning
purposes.
6-10. The factors that could be discussed include inflation, inflationary pressures, monetary
policy and the money supply, fiscal policy (including spending, taxation, and
deficits/debt) and the demand for money, and international influences. A supply/demand
diagram is useful for discussing the impacts.
6-11. Before interest rates drop, a bond trader would like to lock into longer term interest rates.
The trader will see the value of longer term bonds appreciate faster than short term bonds
for a given increase in interest rates. The action of the trader of buying longer term bonds,
relative to short term bonds, will drive their price up and their yields down. The yield
curve will become inverted.
6-12. Normally, short-term rates are much more volatile than long-term rates. This is
demonstrated in Figure 6-12 with a long-run view of interest rates.
6-13. Corporate liquidity has been decreasing since the early 1960s because of more
sophisticated, profit-oriented financial management (at times the profit orientation has
been taken too far). The use of the computer has allowed for more volume being
conducted with smaller cash balances. Also, inflation has forced a diversion of funds
away from liquid assets to handle ever-expanding inventory costs. Likewise decreasing
Foundations of Fin. Mgt. 10Ce 6-2 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
Foundations of Fin. Mgt. 10Ce 6-3 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
Problems
$750,000 Sales
.10 Profit margin
75,000 Net income
– 22,500 Dividends (30%)
$ 52,500 Increase in retained earnings
$300,000 Sales
.08 Profit margin
24,000 Net income
– 4,800 Dividends (20%)
$ 19,200 Increase in retained earnings
Foundations of Fin. Mgt. 10Ce 6-4 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
Beginning Ending
Inventory + Production – Sales = Inventory
January 700 + 600 – 500 = 800
February 800 + 600 – 250 = 1,150
March 1,150 + 600 – 1,000 = 750
Foundations of Fin. Mgt. 10Ce 6-5 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
Foundations of Fin. Mgt. 10Ce 6-6 Block, Hirt, Danielsen, Short, Perretta
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Pennsylvania, on the 14th January, 1861, brought in “A bill to
provide for taking the sense of the people of the United States on
certain proposed amendments to the Constitution of the United
States;” but never was he able to induce the Senate even to consider
this bill.
President Buchanan exerted all his influence in favor of these
measures. In his special message to Congress of the 8th of January,
1861, after depicting the consequences which had already resulted to
the country from the bare apprehension of civil war and the
dissolution of the Union, he says:
“Let the question be transferred from political assemblies to the
ballot-box, and the people themselves would speedily redress the
serious grievances which the South have suffered. But, in Heaven’s
name, let the trial be made before we plunge into armed conflict
upon the mere assumption that there is no other alternative. Time is
a great conservative power. Let us pause at this momentous point,
and afford the people, both North and South, an opportunity for
reflection. Would that South Carolina had been convinced of this
truth before her precipitate action! I, therefore, appeal through you
to the people of the country, to declare in their might that the Union
must and shall be preserved by all constitutional means. I most
earnestly recommend that you devote yourselves exclusively to the
question how this can be accomplished in peace. All other questions,
when compared with this, sink into insignificance. The present is no
time for palliatives; action, prompt action is required. A delay in
Congress to prescribe or to recommend a distinct and practical
proposition for conciliation, may drive us to a point from which it
will be almost impossible to recede.
“A common ground on which conciliation and harmony can be
produced is surely not unattainable. The proposition to compromise
by letting the North have exclusive control of the territory above a
certain line, and to give Southern institutions protection below that
line, ought to receive universal approbation. In itself, indeed, it may
not be entirely satisfactory, but when the alternative is between a
reasonable concession on both sides and a dissolution of the Union,
it is an imputation on the patriotism of Congress to assert that its
members will hesitate for a moment.”
This recommendation was totally disregarded. On the 14th
January, 1861, Mr. Crittenden made an unsuccessful attempt to have
it considered, but it was postponed until the day following. On this
day it was again postponed by the vote of every Republican Senator
present, in order to make way for the Pacific Railroad bill. On the
third attempt (January 16,) he succeeded, but by a majority of a
single vote, in bringing his resolution before the body. Every
Republican Senator present voted against its consideration. Mr.
Clark, a Republican Senator from New Hampshire, moved to strike
out the entire preamble and resolution of Mr. Crittenden, and in lieu
thereof insert as a substitute a preamble and resolution in
accordance with the Chicago platform. This motion prevailed by a
vote of 25 to 23, every Republican Senator present having voted in its
favor. Thus Mr. Crittenden’s proposition to refer the question to the
people was buried under the Clark amendment. This continued to be
its position for more than six weeks, until the day before the final
adjournment of Congress, 2d March, when the proposition itself was
defeated by a vote of 19 in the affirmative against 20 in the negative.
The Clark Amendment prevailed only in consequence of the
refusal of six Secession Senators to vote against it. These were
Messrs. Benjamin and Slidell, of Louisiana; Mr. Iverson, of Georgia;
Messrs. Hemphill and Wigfall, of Texas; and Mr. Johnson, of
Arkansas. Had these gentleman voted with the border slaveholding
States and the other Democratic Senators, the Clark Amendment
would have been defeated, and the Senate would then have been
brought to a direct vote on the Crittenden resolution.
It is proper for reference that the names of those Senators who
constituted the majority on this question, should be placed upon
record. Every vote given from the six New England States was in
opposition to Mr. Crittenden’s resolution. These consisted of Mr.
Clark, of New Hampshire; Messrs. Sumner and Wilson, of
Massachusetts; Mr. Anthony, of Rhode Island; Messrs. Dixon and
Foster, of Connecticut; Mr. Foot, of Vermont; and Mr. Fessenden, of
Maine. The remaining twelve votes, in order to make up the 20, were
given by Messrs. Bingham and Wade, of Ohio; Mr. Trumbull, of
Illinois; Messrs. Bingham and Chandler, of Michigan; Messrs.
Grimes and Harlan, of Iowa; Messrs. Doolittle and Durkee, of
Wisconsin; Mr. Wilkinson, of Minnesota; Mr. King, of New York; and
Mr. Ten Eyck, of New Jersey. The Republicans not voting were Hale
of New Hampshire; Simmons of Rhode Island; Collamer of Vermont;
Seward of New York, and Cameron of Pennsylvania. They refrained
from various motives, but in the majority of instances because they
disbelieved in any effort to compromise, for nearly all were
recognized leaders of the more radical sentiment, and in favor of
coercion of the South by energetic use of the war powers of the
government. This was specially true of Hale, Seward, and General
Cameron, shortly after Secretary of War, and the first Cabinet officer
who favored the raising of an immense army and the early liberation
and arming of the slaves.
On December 4th, 1860, on motion of Mr. Boteler of Virginia, so
much of President Buchanan’s message as related to the perilous
condition of the country, was referred to a special committee of one
from each State, as follows:
Corwin of Ohio; Millson of Virginia; Adams of Massachusetts;
Winslow of North Carolina; Humphrey of New York; Boyce of South
Carolina; Campbell of Pennsylvania; Love of Georgia; Ferry of
Connecticut; Davis of Maryland; Robinson of Rhode Island; Whiteley
of Delaware; Tappan of New Hampshire; Stratton of New Jersey;
Bristow of Kentucky; Morrill of Vermont; Nelson of Tennessee;
Dunn of Indiana; Taylor of Louisiana; Davis of Mississippi; Kellogg
of Illinois; Houston of Alabama; Morse of Maine; Phelps of Missouri;
Rust of Arkansas; Howard of Michigan; Hawkins of Florida;
Hamilton of Texas; Washburn of Wisconsin; Curtis of Iowa; Burch of
California; Windom of Minnesota; Stout of Oregon.
Messrs. Hawkins and Boyce asked to be excused from service on
the Committee, but the House refused.
From this Committee Mr. Corwin reported, January 14th, 1861, a
series of propositions with a written statement in advocacy thereof.
Several minority reports were presented, but the following Joint
Resolution is the only one which secured the assent of both Houses.
CONSTITUTIONAL AMENDMENT.
Robert Toombs.
William Ezzard.
Robert W. Sims.
James P. Hambleton.
Thomas S. Powell.
S. G. Howell.
J. A. Hayden.
G. W. Adair.
R. C. Honlester.
J. J. CRITTENDEN.
S. A. DOUGLAS.
All of these arms, except those sent to the North Carolina Arsenal,
[12]
have been seized by the authorities of the several States of South
Carolina, Alabama, Louisiana and Georgia, and are no longer in
possession of the United States.
It will appear by the testimony herewith presented, that on the
20th of October last the Secretary of War ordered forty columbiads
and four thirty-two pounders to be sent from the Arsenal at Pittsburg
to the fort on Ship Island, on the coast of Mississippi, then in an
unfinished condition, and seventy columbiads and seven thirty-two
pounders to be sent from the same Arsenal to the fort at Galveston,
in Texas, the building of which had scarcely been commenced.
This order was given to the Secretary of War, without any report
from the Engineer department showing that said works were ready
for their armament, or that the guns were needed at either of said
points.
It will be seen by the testimony of Captain Wright, of the Engineer
department, that the fort at Galveston cannot be ready for its entire
armament in less than about five years, nor for any part of it in less
than two; and that the fort at Ship Island will require an
appropriation of $85,000 and one year’s time before it can be ready
for any part of its armament. This last named fort has been taken
possession of by the State authorities of Mississippi.
The order of the late Secretary of War (Floyd) was countermanded
by the present Secretary (Holt) before it had been fully executed by
the shipment of said guns from Pittsburg.[13]
It will be seen by a communication from the Ordnance office of the
21st of January last, that by the last returns there were remaining in
the United States arsenals and armories the following small arms,
viz:
Total 541,565
And the department has been unofficially advised that the arsenal
at Chattahoochee, Forts McRea and Barrancas, and Barracks, have
been seized by the authorities of Florida.
To what further extent the small arms in possession of the United
States may have been reduced by these figures, your committee have
not been advised.
The whole number of the seaboard forts in the United States is
fifty-seven; their appropriate garrison in war would require 26,420
men; their actual garrison at this time is 1,334 men, 1,308 of whom
are in the forts at Governor’s Island, New York; Fort McHenry,
Maryland; Fort Monroe, Virginia, and at Alcatraz Island, California,
in the harbor of San Francisco.
From the facts elicited, it is certain that the regular military force
of the United States, is wholly inadequate to the protection of the
forts, arsenals, dock-yards, and other property of the United States in
the present disturbed condition of the country. The regular army
numbers only 18,000 men when recruited to its maximum strength,
and the whole of this force is required for the protection of the
border settlements against Indian depredations. Unless it is the
intention of Congress that the forts, arsenals, dock-yards and other
public property, shall be exposed to capture and spoliation, the
President must be armed with additional force for their protection.
In the opinion of the Committee the law of February 28th, 1795,
confers upon the President ample power to call out the militia,
execute the laws and protect the public property. But as the late
Attorney-General has given a different opinion, the Committee to
remove all doubt upon the subject, report the accompanying bill, etc.
OTHER ITEMS.
Statement of Arms distributed by Sale since the first of January,
1860, to whom sold and the place whence sold.
SENATE.
HOUSE OF REPRESENTATIVES.
The above expressions from Lincoln and Black well state the
position of the Republican and the administration Democrats on the
eve of the rebellion, and they are given for that purpose. The views of
the original secessionists are given in South Carolina’s declaration.
Those of the conservatives of the South who hesitated and leaned
toward the Union, were best expressed before the Convention of
Georgia in the
This step (of secession) once taken can never be recalled; and all
the baleful and withering consequences that must follow, will rest on
the convention for all coming time. When we and our posterity shall
see our lovely South desolated by the demon of war, which this act of
yours will inevitably invite and call forth; when our green fields of
waving harvest shall be trodden down by the murderous soldiery and
fiery car of war sweeping over our land; our temples of justice laid in
ashes; all the horrors and desolations of war upon us; who but this
Convention will be held responsible for it? and who but him who
shall have given his vote for this unwise and ill-timed measure, as I
honestly think and believe, shall be held to strict account for this
suicidal act by the present generation, and probably cursed and
execrated by posterity for all coming time, for the wide and
desolating ruin that will inevitably follow this act you now propose to
perpetrate? Pause, I entreat you, and consider for a moment what
reasons you can give that will even satisfy yourselves in calmer
moments—what reason you can give to your fellow sufferers in the
calamity that it will bring upon us. What reasons can you give to the
nations of the earth to justify it? They will be the calm and deliberate
judges in the case; and what cause or one overt act can you name or
point, on which to rest the plea of justification? What right has the
North assailed? What interest of the South has been invaded? What
justice has been denied? and what claim founded in justice and right
has been withheld? Can either of you to-day name one governmental
act of wrong, deliberately and purposely done by the government of
Washington, of which the South has a right to complain? I challenge
the answer. While on the other hand, let me show the facts (and
believe me, gentlemen, I am not here the advocate of the North; but I
am here the friend, the firm friend, and lover of the South and her
institutions, and for this reason I speak thus plainly and faithfully for
yours, mine, and every other man’s interest, the words of truth and
soberness), of which I wish you to judge, and I will only state facts
which are clear and undeniable, and which now stand as records
authentic in the history of our country. When we of the South
demanded the slave-trade, or the importation of Africans for the
cultivation of our lands, did they not yield the right for twenty years?
When we asked a three-fifths representation in Congress for our
slaves, was it not granted? When we asked and demanded the return
of any fugitive from justice, or the recovery of those persons owing
labor or allegiance, was it not incorporated in the Constitution, and
again ratified and strengthened by the Fugitive Slave Law of 1850?
But do you reply that in many instances they have violated this
compact, and have not been faithful to their engagements? As
individual and local communities, they may have done so; but not by
the sanction of Government; for that has always been true to
Southern interests. Again, gentlemen, look at another act: when we
have asked that more territory should be added, that we might
spread the institution of slavery, have they not yielded to our
demands in giving us Louisiana, Florida and Texas, out of which four
States have been carved, and ample territory for four more to be
added in due time, if you by this unwise and impolitic act do not
destroy this hope, and perhaps, by it lose all, and have your last slave
wrenched from you by stern military rule, as South America and
Mexico were; or by the vindictive decree of a universal
emancipation, which may reasonably be expected to follow?
But, again, gentlemen, what have we to gain by this proposed
change of our relation to the General Government? We have always
had the control of it, and can yet, if we remain in it, and are as united
as we have been. We have had a majority of the Presidents chosen
from the South; as well as the control and management of most of
those chosen from the North. We have had sixty years of Southern
Presidents to their twenty-four, thus controlling the Executive
department. So of the Judges of the Supreme Court, we have had