Financial Management
Which of the following is NOT one of the steps taken in the financial planning process?
Answer
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
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.
4.167 points
Question 2
Scott Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s expected NPV is negative, it should be rejected.
WACC:
11.00%
Year
0
1
2
3
4
Cash flows
?$1,000
$350
$350
$350
$350
Answer
$81.56
$85.86
$90.15
$94.66
4.167 points
Question 3
With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
Answer
Increase the percentage of debt in the target capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in order to increase the current ratio.
Reduce the percentage of debt in the target capital structure.
4.167 points
Question 4
Jill’s Wigs, inc. had the following balance sheet last year:
Cash $800
Accounts payable $350
Accounts receivable 450
Accrued wages 150
Inventory 950
Notes payable 2,000
Net fixed assets 34,000
Mortgage 26,500
Common stock 3,200
Retained earnings 4,000
Total assets $36,200
Total liabilities & equity $36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) WIll Jill need any outside capital if she pays no dividends? (2) If so, how much?
Answer
No; zero
Yes; $7,700
Yes; $1,700
Yes; $700
4.167 points
Question 5
If the expected rate of return on a stock exceeds the required rate,
Answer
The stock should be sold
The company is probably not trying to maximize price per share.
The stock is a good buy.
Dividends are not being declared.
4.167 points
Question 6
Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?
Answer
Project B, which has below-average risk and an IRR = 8.5%.
Project C, which has above-average risk and an IRR = 11%.
All of these projects should be accepted.
Project A, which has average risk and an IRR = 9%.
4.167 points
Question 7
Based on the corporate valuation model, the value of Weidner Co.’s operations is $1,200 million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If Weidner has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share?
Answer
$24.90
$27.67
$30.43
$33.48
4.167 points
Question 8
Which of the following actions DO NOT reduce agency cost of debt?
Answer
Adding new projects that require funding beyond the current assets of your company.
Securing a loan with your companys assets.
Placing restrictive covenants in debt agreements.
Placing restrictions on issuing more debt within the corporate structure.
4.167 points
Question 9
Young & Liu Inc.’s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions?
Answer
$948
$998
$1,050
$1,103
4.167 points
Question 10
Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected life. What is the Year 1 cash flow?
Equipment cost (depreciable basis)
$65,000
Sales revenues, each year
$60,000
Operating costs (excl. deprec.)
$25,000
Tax rate
35.0%
Answer
$30,333
$33,442
$35,114
$36,869
4.167 points
Question 11
If you own 100% of a company and the only money invested is your own, describe the degree to which there is an agency conflict.
Answer
20% agency conflict
50% agency conflict
there is no agency conflict
75% agency conflict
4.167 points
Question 12
Spence Company is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the WACC or negative, in both cases it will be rejected.
Year
0
1
2
3
4
Cash flows
?$1,050
$400
$400
$400
$400
Answer
15.61%
17.34%
19.27%
21.20%
4.167 points
Question 13
Which of these items will not generally be affected by an increase in the debt ratio?
Answer
Financial risk.
Market risk.
The firm’s beta.
Business risk.
4.167 points
Question 14
Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
Answer
155.5 yen
144.0 yen
133.5 yen
78.0 yen
4.167 points
Question 15
The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors’ royalties are reduced, the variable cost per book will drop by $1. Assume authors’ royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
Answer
$600,000
$466,667
$333,333
$200,000
4.167 points
Question 16
A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
Answer
Increase the estimated NPV of the project to reflect its greater risk.
Reject the project, since its acceptance would increase the firm’s risk.
Ignore the risk differential if the project would amount to only a small fraction of the firm’s total assets.
Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
4.167 points
Question 17
If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian dollar?
Answer
0.37
0.61
1.64
3.28
4.167 points
Question 18
Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
Answer
An increase in the personal tax rate.
An increase in the company’s operating leverage.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company’s stock price hits a new high.
An increase in the corporate tax rate.
4.167 points
Question 19
Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?
Answer
8.72%
9.08%
9.44%
10.22%
4.167 points
Question 20
In an organization that has outside shareholders, who would bear the cost of managerial perks?
Answer
Only the managers
Only the employees
No one would bear the costs
Outside shareholders would bear some of the costs
4.167 points
Question 21
Taylor Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
Answer
Project C, which is of above-average risk and has a return of 11%.
Project A, which is of average risk and has a return of 9%.
None of the projects should be accepted.
Project B, which is of below-average risk and has a return of 8.5%.
4.167 points
Question 22
$35.50 per share is the current price for Foster Farms’ stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock’s expected price 3 years from today?
Answer
$38.83
$39.83
$40.85
$41.69
4.167 points
Question 23
Which of the following is NOT a reason why companies move into international operations?
Answer
To develop new markets for the firm’s products.
Because important raw materials are located abroad.
To achieve political favors.
To take advantage of lower production costs in regions where labor costs are relatively low.
4.167 points
Question 24
The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
Answer
$312.5
$328.1
$344.5
$379.8