1. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
a. All common stocks fall into one of three classes: A, B, and C.
b. All common stocks, regardless of class, must have the same voting rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same dividend.
e. Some class or classes of common stock can be entitled to more votes per share than other classes.
2. Company Z has the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Please reference the given general Dividend Growth Model formulas:
Stock Price per share, P0 = Dividend per share (DPS) expected for Year 1 .
(Required Return less Dividend Growth rate, g)
Required Return = DPS + g = Dividend Yield + Capital Gains Yield
P0
Dividends per share for Year 1 $2.75
Required Return 20%
Market Price $35.50
What is the expected Capital Gains Yield for Company Z?
a. 15.50%
b. 7.85%
c. 12.25%
d. 10.50%
3. You must estimate the intrinsic value of MacGregor Apparel Inc.'s common stock. The end-of-year free cash flow (FCF1) is expected to be $56.75 million, and it is expected to grow at a constant rate of 3.0% a year thereafter. The company's WACC is 19.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 7.5 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
a. $ 8.34
b. $10.17
c. $22.98
d. $30.63
e. $37.08
4. Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
d. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
Use the following described situation to answer questions numbered 5 and 6.
Germania Instruments Corp. ("GIC") manufactures precision equipment for cameras. The company's Total Debt is comprised of senior notes outstanding with 8 years to maturity that are trading at $1,043.50 per bond with a $1,000 face value, and the company has 55,000 of these bonds outstanding. The bonds pay interest annually based on a 7.75% coupon interest rate. GIC is planning to issue $25 million of new preferred stock, which will have a par value of $50.00 per share, dividends per share of $5.50, and per-share flotation costs of $3.75 per share. The company has a marginal income tax rate of 29.50%.
5. What is GIC's Pre-Tax Cost of Debt? After-Tax Cost of Debt?
a. 7.7236% and 4.5048%
b. 7.7236% and 2.2188%
c. 7.0209% and 4.9497%
d. 6.6124% and 4.4303%
6. What is GIC's Pre-Tax Cost of Preferred Stock? After-Tax Cost of Preferred Stock?
a. 5.4348% and 3.6413%
b. 11.8919% and 11.8919%
c. 11.000% and 11.0000%
d. 10.8696% and 7.2826%
7. Elanico LLC's capital structure is briefly described below. Compute the company's weighted average cost of capital ("WACC"). The company's marginal income tax rate is 41%.
Capital Percent of Capital Structure Pre-Tax Cost
Bonds 30 % 7.52 %
Preferred Stock 15 % 10.50 %
Common Stock 55 % 24.00 %
a. 16.11 %
b. 15.08 %
c. 14.40%
d. 13.59%
8. The instructor said reasons why a company's Weighted Average Cost of Capital ("WACC") is critically important include:______.
a. The WACC is the minimum rate of return to be earned on Common Stock.
b. The WACC is the rate of return which must be earned by the Common and Preferred
Stockholders.
c. The WACC is the minimum rate of Free Cash Flow return to be earned on Total Assets.
d. The WACC is the maximum amount of financial costs a company can support.
9. Which business project investment evaluation method is described by the following characteristics: incorporates time value of money principles and assumes annual project cash flows are re-invested at the investor's required rate of return?
a. Internal Rate of Return Method
b. Average Annual Accounting Return
c. Payback Period Method
d. Net Present Value Method
10. Karla is looking at two investment opportunities which have the following expected cash flows. If her minimum required return is 22%, which proposal would be the best based on what the instructor indicated was the more appropriate evaluation method?
Investment A Investment B
Year 0 $( 1,400,000) $( 1,400,000)
Year 1 $ 454,000 $ 456,000
Year 2 $ 887,000 $ 891,000
Year 3 $ 760,000 $ 750,000
Year 4 $ 155,000 $ 145,000
a. Neither proposal would add value.
b. Choose Proposal A because it has the highest IRR.
c. Choose Proposal A because it has the highest NPV.
d. Choose Proposal B because it has the highest IRR.
e. Choose Proposal B because it has the highest NPV.
11. Consider the following categories of Capital Expenditure Proposals and choose which list correctly ranks their general risk profile from lowest to highest risk.
Acquisition of anothercompany A
Replacement: current operations B
Expansion: existing products/markets C
Expansion: new products/markets D
a. D, A, B, C
b. C, D, A, B
c. C, B, A, D
d. B, C, D, A
e. B, D, C, A
12. Ken is evaluating a proposed business project and he wants to know what is the Internal Rate of Return. Based on the following estimated Free Cash Flows and the IRR method, would this project be accepted? Ken's required return is 12%.
Year 0 1 2 3 4
Cash Flow $(2,976) $3,310 $4,510 $1,212 $445
a. Yes, because the IRR is higher than 12%, it's 17.63%.
b. Yes, because the NPV is greater than $2,976.
c. No, because the IRR is lower than 12%, it's 10.61%
d. Yes, because the IRR is higher than 12%, it's 99.37%
e. No, because the IRR is lower than 12%, it's -8.30%.
For questions 13 through 16 please use the Business Investment proposal described below.
Irmanente Automotive Inc. manufactures custom electric vehicles and is evaluating the economics of expanding its production facility to enable it to increase sales for the next 4 years. Last year, the company paid the Ardmore Economic Development Authority $250,000 to do an extensive marketing analysis for the proposed expansion. The current expansion scenario would have total construction costs of $1.6 million and it would take about 90 days to complete (i.e., essentially up-front). The Company would also put in $400 thousand of new machinery. Inventory (raw materials, work-in-process, finished goods) investment needed for the expansion would be $347 thousand. Annual depreciation associated with the expansion would be $400 thousand per year for the next four years. The company expects to borrow 100% of the upfront costs and thereby incur $704 thousand in total interest expense over the life of the project. Incremental sales for this project are estimated to be $850 thousand for Year 1; $1.9 million for Year 2; $2.1 million for Year 3; and $1.0 million for Year 4. Cost of goods sold is estimated to be approximately 50% of total sales, and additional fixed costs are estimated to be $150 thousand per year. At the end of the project's estimated life in Year 4, the company estimates it will be able to sell excess capital assets for $575,000 and the expected the book value for these items would be $400,000. Also at the end of the project, $65,000 of remaining inventory could be liquidated at cost. The weighted average cost of capital is 18%, its ordinary income tax rate is 40%, and its capital gains tax rate is 15%.
13. What is the Total Upfront Cash Flow for this proposed project?
a. $ 2,347,000
b. $(2,585,000)
c. $(1,285,000)
d. $(2,347,000)
e. $(3,605,,000)
14. What is the Total Annual Cash Flow for Year 3?
a. $ 640,000
b. $ 935,500
c. $ 700,000
d. $ 648,500
e. $(590,500)
15. What is Terminal Year-specific Cash Flow (i.e., excluding the Annual Operating Cash Flow portion)?
a. $ 174,250
b. $ 613,750
c. $ 589,100
d. $ 548,750
e. $ 892,850
a. $ 174,250
b. $ 613,750
c. $ 589,100
d. $ 548,750
e. $ 892,850
16. Is(Are) there any irrelevant cash flow(s) mentioned in this problem? If so, what is(are) it(they)?
a. No. There are none.
b. Yes; the marketing study.
c. Yes; the interest expense.
d. Yes; the interest expense and the marketing study.
e. Yes; the interest expense, the dividends, and the marketing study.
a. No. There are none.
b. Yes; the marketing study.
c. Yes; the interest expense.
d. Yes; the interest expense and the marketing study.
e. Yes; the interest expense, the dividends, and the marketing study.
17. Golf Accessories Ltd. manufactures golf gloves which sell for an average price of $16.00. Currently, the company employs a number of workers to make the leather gloves, such that variable costs are $12.50 per glove, and the company's total fixed costs are $350,000 per year. Derry Cale, the owner, is evaluating the acquisition of a new machine which will sew the leather gloves on an automated basis. If the owner acquires the machine, total fixed costs per year will increase to $575,000 but variable costs per glove will be reduced to $11.25 per unit. The owner is interested in the new machine but not if the Break-Even point for the company's sales for this particular glove would be increased by more than 25%. If the estimates are accurate about total fixed costs and variable costs per unit, What would be the Break-Even point with the new machine? Would it make sense to acquire the new machine if the owner's company can easily sell at least 150,000 gloves per year?
A) 116,842 units; Yes, because the Break-Even point would be increased by less than 25%.
B) 121,053 units; No, because the Break-Even point would be lower.
C) 121,053 units; Yes, because EBIT would be higher if sales keep growing.
D) 125,876 units; No, because the new machine would reduce the Break-Even point.
E) 275,921 units; Yes, because machine-made gloves are significantly superior to hand-sewn gloves, so sales would probably increase not decrease.
A) 116,842 units; Yes, because the Break-Even point would be increased by less than 25%.
B) 121,053 units; No, because the Break-Even point would be lower.
C) 121,053 units; Yes, because EBIT would be higher if sales keep growing.
D) 125,876 units; No, because the new machine would reduce the Break-Even point.
E) 275,921 units; Yes, because machine-made gloves are significantly superior to hand-sewn gloves, so sales would probably increase not decrease.
18. Business risk is affected by a firm's operations. Which of the following is NOT directly associated with (or does not directly contribute to) business risk?
a. Demand variability.
b. Sales price variability.
c. The extent to which operating costs are fixed.
d. The extent to which interest rates on the firm's debt fluctuate.
e. Input price variability.
19. Which of the following statements is CORRECT?
a. The capital structure that maximizes expected EPS also maximizes the price per share of common stock.
b. The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
c. The capital structure that minimizes the required return on equity also maximizes the stock price.
d. The capital structure that minimizes the WACC also maximizes the price per share of common stock.
e. The capital structure that gives the firm the best bond rating also maximizes the stock price.
20. Stephenson Co. currently uses no debt, but its new CFO is considering changing the capital structure to 30.0% debt by issuing bonds and using the proceeds to repurchase and retire some common stock at Book Value. Given the data shown below, what would be the levered beta?
Risk-free rate, rRF 5.00%
Tax rate, T 35%
Tax rate, T 35%
Market risk premium, RPM 8.00%
Current debt ratio 0%
Current debt ratio 0%
Current beta, bU 2.25
Target debt ratio 30%
Target debt ratio 30%
a. 3.61
b. 2.99
c. 2.88
d. 2.53
e. 2.45
21. Which of the following does NOT normally influence a firm's dividend policy decision?
a. The firm's ability to accelerate or delay investment projects without adverse consequences.
b. A strong preference by most of its shareholders for current cash income versus potential future capital gains.
c. Constraints imposed by the firm's bond indenture.
d. The fact that much of the firm's equipment is leased rather than bought and owned.
e. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
22. If on October 15, 2009, a company declared a dividend of $2.00 per share, payable on November 15, 2009, to holders of record on November 10, then would it have made sense for the price of the stock to have dropped by more than $2.00 on November 8 (the ex-dividend date) as a result of the declared dividend?
a. Yes
b. No
23. Some investors and theorists believe that the required return on equity increases as the dividend payout ratio is lowered, and that the required return on equity declines as the dividend payout is increased. Their argument is based on the assumption that ____.
a. investors are indifferent between dividends and capital gains.
b. investors require that the dividend yield plus the capital gains yield equal a constant.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential future capital gains.
e. investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.
24. Which of the following statements is CORRECT?
a. Before 2003, the tax code has encouraged companies to pay dividends rather than retain earnings.
b. If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly.
c. The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model.
d. Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk.
25. The effective annual cost of not taking advantage of "3/15, net 60" credit terms offered by a vendor/supplier is (use a 360-day fiscal year) __________ .
a. 39.76 %
b. 33.84 %
c. 27.50 %
d. 24.74 %
26. Factors that impact the size of a company's investment in Accounts Receivable include ____.
a. the percentage of debit sales; the level of sales returns; and credit and collection policies.
b. the percentage of out-of-town sales, the level of sales; and credit and collections policies.
c. the number of customer accounts which are past-due; and the level of accounts payable; and credit and collections policies.
d. the percentage of debit sales; the volatility of sales; and disbursement policies.
e. the percentage of sales on credit to total sales; the level of sales; and credit and collection
policies.
27. Josephson Corp.'s average age of accounts receivable is 38 days, the average age of accounts payable is 24 days, and the average age of inventory is 44 days. What is the length of its cash conversion cycle, and what does this mean?
a. 64 days; the Days' Sales Outstanding
b. 58 days; the length of short-term loans
c. 44 days; the number of days it takes to sell its inventory
d. 38 days; the average length of short-term loans
e. 24 days; the length of the Fixed Asset Turnover
28. Which of the following statements is CORRECT?
a. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
c. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
d. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
e. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.
29. As described in class, a Short-Term Financial Plan focuses on forecasting ____.
a. external financing requirements.
b. department-by-department operating and capital budgets.
c. financial items for up to one year.
d. All of the above
30. Which of the following is NOT one of the steps taken in the financial planning process?
a. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast.
b. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results.
c. Projected ratios are calculated and analyzed.
d. Develop a set of projected financial statements.
e. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
31. Which of the following statements is CORRECT?
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.
b. A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
d. A firm's mission statement defines its lines of business and geographic area of operations.
e. The corporate scope is a condensed version of the entire set of strategic plans.
32. As described by the instructor, a Long-Term Financial Plan focuses on forecasting ____.
a. demand for the company's products.
b. external financing requirements.
c. comprehensive financial statements.
d. All of the above.
e. Only (b) and (c)
For instant quote, please mail us at mailurhomework@gmail.com
No comments:
Post a Comment
Note: only a member of this blog may post a comment.