FIN 3150 Part 3
Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the company's WACC if the applicable tax rate is 34 percent?
12.45 percent
Precision Cuts has a target debt-equity ratio of .48. Its cost of equity is 16.4 percent, and its pretax cost of debt is 8.2 percent. If the tax rate is 34 percent, what is the company's WACC?
12.84%
Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?
14.52 percent
Tim's Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is the company's cost of equity?
14.81 percent
Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?
5.10 percent
City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share. The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent. There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, and a market price of $989 each, and a pretax yield to maturity of 8.3 percent. The tax rate is 35 percent. What is the firm's weighted average cost of capital?
7.76 percent
You are given the following information concerning Around Town Tours: Debt: 7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and a quoted price of $979.0 These bonds pay interest semiannually. Common stock: 284,000 shares of common stock selling for $68 per share. The stock has a beta of 1.04 and will pay a dividend of $2.62 next year. The dividend is expected to grow by 2.5 percent per year indefinitely. Preferred stock: 9,000 shares of $8-dividend preferred stock selling at $88 per share. Market: 14.6 percent expected return, 4.1 percent risk-free rate Company: 34 percent tax rate Calculate the WACC for this firm.
9.0%
Which one of the following statements is accurate for a levered firm?
A reduction in the risk level of a firm will tend to decrease the firm's WACC
Derek's is a brick-and-mortar toy store. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?
A toy store that sells online only
Kelly just completed compiling a listing of her firm's accounts receivables with each invoice segregated according to the length of time the invoice has been outstanding. What is the name given to this listing?
Aging schedule
Of the following, which is NOT a source of funds for a company?
All are sources of funds for companies. -all of the above
The cost of debt could be which of the following?
All of the choices above could be considered the cost of debt.
A firm has multiple divisions of similar nature, yet varying degrees of risk. Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its numerous proposed investments?
Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment
Which one of the following analytical methods is based on net income?
Average accounting return
Which one of the following methods of analysis ignores cash flows?
Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
Average accounting return
Which one of the following is most commonly used in international trades?
Banker's acceptance
Which of these is a speculative motive for holding cash?
Buying extra inventory because a key supplier offered a special one-time discount
________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
Capital structure
Which one of the following is directly related to increases in a firm's current assets?
Carrying costs
Which one of the following is a graphical representation of the operating and cash cycles?
Cash flow time line
Which of these refers to a customer's willingness to meet his or her credit obligations?
Character
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?
Cost of equity
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?
Current market value of the building
Which one of the following will tend to increase the length of the credit period?
Decrease in consumer demand
Which of these is a use of cash?
Decreasing accounts payable
Which of these activities is a source of cash?
Decreasing accounts receivable
Which one of the following will increase the operating cycle?
Decreasing the accounts receivable turnover rate
Which one of these will increase the operating cycle?
Decreasing the inventory turnover rate
The net present value profile illustrates how the net present value of an investment is affected by which one of the following?
Discount rate
Which of these represents a transaction motive for holding cash?
Distributing the weekly paychecks
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
Diversification
Which one of the following is the primary advantage of payback analysis?
Ease of use
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
Erosion
Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's tore. The cost of the expansion will be $148,000. She can use this additional space to add children's clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing, $178,000 for exclusive gifts, and $145,000 fordecorator items. Which option(s), if any, should she accept?
Exclusive gifts only
Which one of the following will decrease the aftertax cost of debt for a firm?
Increase in tax rates
Which one of the following will increase the cost of equity, all else held constant?
Increase in the dividend growth rate
Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?
Increase in the market value of the firm's common stock
Which of these tends to create an unexpected increase in a firm's average collection period?
Increased customer delinquencies
Which of the following are tax-deductible expenses for corporations?
Interest expenses
Which one of the following is most closely related to the net present value profile?
Internal rate of return
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.
Internal rate of return that exceeds the required return
Which one of the following can occur if the operating cycle decreases while both the accounts receivable and the accounts payable periods remain constant?
Inventory turnover rate increases
In which one of the following situations would the payback method be the preferred method of analysis?
Investment funds available only for a limited period of time
Which one of the following is a system for managing demand-dependent inventories that minimizes the amount of inventory on hand?
Just-in-time inventory system
Kurt, who is a divisional manager, continually brags that his division's required return for its projects is one percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?
Kurt's division is less risky than the other divisions.
Security that on average is riskier than market would have a beat:
Larger than 1
Which one of the following actions will decrease the operating cycle?
Lessening the production time needed to manufacture a good for sale
Generally speaking, payback is best used to evaluate which type of projects?
Low-cost, short-term
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?
Lowest expected value for fixed costs
Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered.
Manager learns the project is riskier than previously believed.
The optimal credit policy of any firm will:
Minimize the total costs of granting credit
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?
Modified internal rate of return
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.
Money spent last month repairing a damaged front fender
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
Mutually exclusive
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
Net present value
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
Net present value
Which one of the following commences on the day inventory is purchased and ends on the day the payment for the sale of that inventory is collected? Assume all sales and purchases are on credit.
Operating cycle
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement?
Option to abandon
Which one of the following methods of analysis ignores the time value of money?
Payback
Which one of the following is a use of cash?
Paying a supplier for inventory you purchased last month
Which of these will tend to decrease the credit period?
Perishable product
Which one of the following indicators offers the best assurance that a project will produce value for its owners?
Positive NPV
Which one of the following indicates that a project is expected to create value for its owners?
Positive net present value
Which of the following would be classified as equity financing for a firm?
Preferred shareholders, common shareholders, and retained earnings
Which of the items below is sometimes termed hybrid equity financing?
Preferred stock
Which one of the following can be defined as a benefit-cost ratio?
Profitability index
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?
Profitability index
Which one of the following indicates that an independent project is definitely acceptable?
Profitability index greater than 1.0
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.
Profitability index less than 1.0
Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?
Pure play approach
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?
Sensitivity analysis
Which of these is the best example of a raw material?
Set of tires for an automaker
When running the regression analysis where independent variable is market returns and dependent variable is returns of the particular security, beta coefficient will be found on teh regression output:
Slope coefficient
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?
Stand-alone principle
Which one of the following refers to the option to expand into related businesses in the future?
Strategic option
Which of the following would be classified as debt lenders for a firm?
Suppliers, nonbank lenders, and commercial banks
Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?
The annual dividend used in the computation must be for Year 1 if you are Time 0’s stock price to compute the return
When calculating the after-tax weighted average cost of capital (WACC), which of the following costs are adjusted for taxes in the equation?
The before-tax cost of debt
A firm's capital structure can be determined by examining which parts of the firm's balance sheet?
The debt and equity
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
The investment is mutually exclusive with another investment of a different size.
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?
The net present value of Project A equals that of Project B, but generally does not equal zero.
Which one of the following statements is correct?
The payback method is biased toward short-term projects.
Which one of the following statements is correct? (multiple questions like this)
The payback period ignores the time value of money.
Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?
The perceived risk level of project
Which one of the following statements concerning capital structure weights is correct?
The repurchase of preferred stock will increase the weight of debt.
The payback method of analysis ignores which one of the following?
Time value of money
Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
Weighted average cost of capital
Which one of the following is used as the pretax cost of debt?
Weighted average yield to maturity on the firm's outstanding deb
Scenario analysis asks questions such as:
What is the best outcome that should reasonably be expected?
A proposed project will increase a firm's accounts payables. This increase is generally:
a cash inflow at Time zero and a cash outflow at the end of the project.
A portfolio is:
a group of assets held by an investor
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of:
a percentage of the current operating overhead.
The length of time a retailer owes its supplier for an inventory purchase is called the:
accounts payable period.
The operating cycle is equal to the:
accounts receivable period plus the inventory period.
Systematic risk is defined as:
any risk that affects a large number of assets.
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm:
automatically gives preferential treatment in the allocation of funds to its riskiest division.
The average net income of a project divided by the project's average book value is referred to as the project's:
average accounting return
The ________ of an asset or liability is its cost carried on the balance sheet.
book value
The pro forma income statements for a proposed investment should include all of the following except:
changes in net working capital
The reinvestment approach to the modified internal rate of return:
compounds all of the cash flows, except for the initial cash flow, to the end of the project.
The terms of sale are best defined as the:
conditions under which a firm sells its goods or services for either cash or credit.
The net present value of an investment represents the difference between the investment's:
cost and its market value
The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount.
cost of capital
Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:
cost of debt
The weighted average cost of capital is defined as the weighted average of a firm's:
cost of equity, cost of preferred, and its aftertax cost of debt
The process of determining the probability that potential customers will not pay is called:
credit analysis.
The graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy is called the:
credit cost curve.
The length of time a firm grants its customers to pay for their purchases is called the:
credit period.
When a company borrows money from a bank or sells bonds, it is called ________.
debt financing
An increase in a levered firm's tax rate will:
decrease the firm's cost of capital.
The operating cycle:
describes how a product moves through the current asset accounts.
The internal rate of return is the:
discount rate that results in a zero net present value for the project
Forecasting risk is best defined as:
estimation risk
The security market line is a linear function that is graphed by plotting data points based on the relationship between the:
expected return and beta
The transaction motive refers to the need to hold cash:
for daily operations.
Net present value involves discounting an investment's:
future cash flows
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with:
hard rationing
Scenario analysis:
helps determine the reasonable range of expectations for a project's anticipated outcome.
Sensitivity analysis:
helps identify the variable within a project that presents the greatest forecasting risk.
The operating cash flows of a project:
include erosion effects.
A firm that uses its weighted average cost of capital as the required return for all of its investments will:
increase the risk level of the firm over time.
In an efficient market, the cost of equity for a highly risky firm:
increases in direct relation to the stock's systematic risk
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:
incremental cash flows
The primary purpose of a cash discount is to:
induce customers to pay promptly.
The amount of time a firm holds inventory in stock is referred to as the:
inventory period.
The profitability index reflects the value created per dollar:
invested
The cost of preferred stock:
is equal to the stock's dividend yield.
When evaluating a project, the dividend growth model:
is relatively simple to use
The cost of retained earnings ________.
is the loss of the dividend option for the owners is the cost of issuing new common stock without the flotation costs is the appropriate cost of capital for the shareholders is all of the above-correct
The ability to delay an investment:
is valuable provided there are conditions under which the investment will have a positive net present value.
Float is defined as the difference between the:
ledger balance and the available balance.
The opportunities that a manager has to modify a project once the project has started are called:
managerial options
Contingency planning focuses on the:
managerial options implicit in a project
Unsystematic risk can be defined by all of the following except:
market risk
Generally speaking, when the information is available, investors prefer to use ________ rather than ________ when evaluating a firm.
market values, book values
The set of procedures used to determine the inventory levels for demand-dependent inventories is called:
materials requirements planning.
Systematic risk is:
measured by beta
The average accounting return:
measures profitability rather than cash flow.
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
multiple rates of return
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:
of the blueprints that have been drawn of the expansion area.
The cash cycle equals the:
operating cycle minus the accounts payable period.
Holding cash simply as a financial reserve is referred to as the ____ motive.
precautionary
Investors ________ for estimating the WACC.
prefer market value to book value
Market values require multiplying the ________ of each component source of capital times the ________.
price, quantity
A pro forma financial statement is a financial statement that:
projects future years' operating results.
Scenario analysis is best described as the determination of the:
reasonable range of project outcomes.
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
recoup its initial cost
The net working capital invested in a project is generally:
recouped at the end of the project
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the:
risk-free rate decreases.
Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:
scenario analysis
Collection policy refers to the:
set of procedures a firm follows in collecting accounts receivable.
Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called:
soft rationing
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):
sunk cost
The analysis of a new project should exclude:
sunk costs
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
tax shield
The weighted average cost of capital is ________.
the average of the cost of each financing component, weighted by the proportion of each component the cost of capital for the firm as a whole made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity All of the above -correct
The cost of capital is ________.
the cost of each financing component multiplied by that component's percent of the total borrowed.
All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:
the firm's bonds start selling at a premium rather than at a discount.
The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of his addition, the company should include all of the following in its analysis with the exception of:
the research and development costs to produce the current winter footwear samples.
Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the:
ticket sales for the new coaster.
The primary goal of inventory management is to minimize the:
total costs of holding inventory
Standard deviation measures ______ risk while beta measures ________ risk.
total; systematic
The modified internal rate of return is specifically designed to address the problems associated with:
unconventional cash flows.
Portfolio diversification eliminates:
unsystematic risk
All else constant, an increase in a firm's cost of debt:
will result in an increase in the firm's cost of capital.
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
zero.