FIN420- Exam 1

Northern Wood Products is an all-equity firm with 21,100 shares of stock outstanding and a total market value of $366,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $33,000 if the economy is normal, $19,600 if the economy is in a recession, and $46,400 if the economy booms. Ignore taxes. Management is considering issuing $92,200 of debt with an interest rate of 8 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?

$.77

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $156,000 per year. The cost of equity is 11.3 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.2 percent. Currently, the firm is considering converting to a debt-equity ratio of .66. What is the firm's levered value?

$1,034,320 VU = $156,000(1 − .34)/.113VU = $911,150VL = $911,150 + .34(.66/1.66)($911,150)VL = $1,034,320

Taunton's is an all-equity firm that has 152,000 shares of stock outstanding. The CFO is considering borrowing $245,000 at 6 percent interest to repurchase 21,000 shares. Ignoring taxes, what is the value of the firm?

$1,773,333 Value per share = $245,000/21,000Value per share = $11.67Firm value = 152,000($11.67)Firm value = $1,773,333

A project has base-case earnings before interest and taxes of $36,408, fixed costs of $42,700, a selling price of $24 a unit, and a sales quantity of 22,000 units. All estimates are accurate within ±2 percent. Depreciation is $16,700. What is the base-case variable cost per unit?

$19.65

Wexford Industrial Supply is considering a new project with estimated depreciation of $38,200, fixed costs of $84,600, and total sales of $211,000 at the accounting break-even level. The variable costs per unit are estimated at $9.64. What is the accounting break-even level of production?

9,149 units QAccounting break-even = ($84,600 + 38,200)/[($211,000/Q) − $9.64]QAccounting break-even = 9,149 units

Which one of the following statements concerning venture capitalists is correct?

Exit strategy is a key consideration when selecting a venture capitalist.

Which one of these actions generally occurs first in a bankruptcy reorganization?

Filing proofs of claim

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and net income

Which one of these combinations must increase the contribution margin?

Increasing the sales price and decreasing the variable cost per unit

Which one of the following types of analysis is the most complex to conduct?

Simulation

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

The stock of Cleaner Homes is currently selling for $15.40 a share. The new rights offering grants one right for each share of stock outstanding. The new shares being offered are priced at $13 plus three rights. What is the value of one right?

$.60 Cost per share = [$13 + 3($15.40)]/(1 + 3)Cost per share = $14.80Value of a right = $15.40 − 14.80Value of a right = $.60

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent?

$18,840

Precise Machinery is analyzing a proposed project that is expected to sell 1,450 units, ±3 percent. The expected variable cost per unit is $139 and the expected fixed costs are $123,000. Cost estimates are considered accurate within a ±1 percent range. The depreciation expense is $39,000. The sales price is estimated at $349 per unit, ±3 percent. What is the contribution margin per unit under the best-case scenario?

$221.86 Contribution margin Best-case = $349 (1.03) − $139( .99) Contribution margin Best-case = $221.86

The Outlet Mall has a cost of equity of 16.8 percent, a pretax cost of debt of 8.1 percent, and a return on assets of 14.5 percent. Ignore taxes. What is the debt-equity ratio?

.36

The Coffee Express has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis?

229,345

The Greenbriar is an all-equity firm with a total market value of $560,000 and 22,000 shares of stock outstanding. Management is considering issuing $165,000 of debt at an interest rate of 7 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?

6,482 shares Shares repurchased = $165,000/($560,000/22,000)Shares repurchased = 6,482 shares

Parodies Corp. has a return on assets of 10.9 percent, a return on equity of 16.7 percent, and a retention ratio of 40 percent. What is its sustainable growth rate?

7.16 percent

Room and Board is considering two capital structures that have a break-even EBIT of $26,400. The all-equity capital structure would have 16,400 shares outstanding. The levered capital structure would have 12,100 shares of stock and $89,000 of debt. What is the interest rate on the debt? Ignore taxes.

7.78% 26,400/16,400 = [$26,400 − 89,000(X)]/12,100X = .0778, or 7.78%

A decrease in which one of the following will increase the accounting break-even quantity?

Assume straight-line depreciation is used and ignore taxes. Sales price per unit

Which one of these is most associated with an IRR of negative 100 percent?

Cash break-even point

Which one of these statements related to Chapter 11 bankruptcy is correct?

Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Degree of operating leverage

Given the following, which feature identifies the most desirable level of output for a project?

Discounted payback period equal to the project's life

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

Dividend policy

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

Ex-rights date

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

Marginal cost

By definition, which one of the following must equal zero at the cash break-even point?

Operating cash flow

Which one of the following is a direct cost of bankruptcy?

Paying an outside accountant to prepare bankruptcy reports

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding

Payment of employees' wages

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation?

Percentage ownership dilution

Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements?

Projected sales

Which one of the following has the least effect on a firm's sustainable rate of growth?

Quick ratio

Which of the following variables will be forecast at their highest expected level under a best-case scenario?

Salvage value and units sold

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

Sensitivity

When selecting a venture capitalist, which one of the following characteristics is probably the least important?

Underwriting experience

Which one of the following statements concerning venture capital financing is correct?

Venture capitalists should have key contacts and financial strength.

Atlas Industries combines the investment proposals from each operational unit into one single project for planning purposes. This process is referred to as:

aggregation.

Fixed costs:

are constant over the short-run regardless of the quantity of output produced.

When the operating cash flow of a project is equal to zero, the project is operating at the:

cash break-even point.

The financial planning process is least apt to:

consider the development of future technologies.

Financial planning:

considers multiple options and scenarios.

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assets

Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights offering by this company. As a result, Roy will most likely be subject to:

dilution.

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs

direct bankruptcy

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:

facing hard rationing.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

financial break-even point.

The financial planning process tends to place the least emphasis on a firm's:

market value.

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

soft rationing.

To purchase a share in a rights offering, an existing shareholder generally just needs to:

submit the required number of rights along with the subscription price.

The external financing need:

will limit growth if unfunded.

Mountain Products has decided to raise $6 million via a rights offering. The company will issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25.20 and there are 1,500,000 shares currently outstanding. What is the value of one right?

$.87 Number of new shares = $6,000,000/$20Number of new shares = 300,000Number of rights needed = 1,500,000/300,000Number of rights needed = 5Cost per share = [$20+ 5($25.20)]/(1 + 5)Cost per share = $24.33Value of a right = $25.20 − 24.33Value of a right = $.87

Ornaments, Inc., is an all-equity firm with a total market value of $674,000 and 33,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $96,800 if the economy is normal. If there is a recession, EBIT will be 30 percent lower, and if there is a boom, EBIT will be 40 percent higher. The tax rate is 35 percent. What is the EPS in a recession?

$1.30 EPS = [$96,800(1 − .30) − $96,800(1 − .30)(.35)]/33,900]EPS = $1.30

Black Top Express has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year?

$12,209

Northern Air would like to sell 4,700 shares of stock using Dutch auction underwriting. The bids received are: Bidder Quantity Price A 1,000 $ 29.55 B 1,100 29.20 C 1,500 29.05 D 1,700 28.70 E 1,900 28.50 How much will the company raise in its offer? Ignore all flotation and transaction costs.

$134,890Shares including Bidder D = 1,000 + 1,100 + 1,500 + 1,700Shares including Bidder D = 5,300Amount raised = $28.70 × 4,700Amount raised = $134,890

Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario?

$136,759

At a production level of 5,280 units, a project has total costs of $150,000. The variable cost per unit is $23.12. Assume the firm can increase production by 750 units without increasing its fixed costs. What will the total costs be if 6,000 units are produced?

$166,646 Total cost6,000 = $150,000 + (6,000 − 5,280) ($23.12)Total cost6,000 = $166,646

Dexter's has annual sales of $53,800, current assets of $18,900, and net working capital of $2,800. Assume this firm is operating at full capacity and that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma current liabilities value for next year if sales are projected to increase by 7.5 percent?

$17,308

The Paper Mill is operating at full capacity. Assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. The firm has sales of $42,700, net income of $5,500, total assets of $48,900, current liabilities of $3,650, long-term debt of $18,100, owners' equity of $27,150, and dividends of $1,925. What is the external financing need if sales increase by 14 percent?

$2,260

Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis?

$2,703,940

Southern Markets has announced a rights offer to raise $3,628,800. The company's stock currently sells for $26.80 per share, there are 675,000 shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $21 per share. What is the ex-rights price per share?

$25.62 Number of new shares = $3,628,800/$21Number of new shares = 172,800Number of rights needed to buy one share = 675,000/172,800Number of rights needed to buy one share = 3.906Ex-rights price per share = [$21 + 3.906($26.80)]/[1 + 3.906]Ex-rights price per share = $25.62

Assume a firm is currently operating at 98 percent of capacity with sales of $28,400. Next year, sales are projected to increase to $35,000. What is the projected addition to fixed assets if the firm currently has fixed assets of $16,900 and total assets of $24,600?

$3,511ExplanationCurrent maximum capacity = $28,400/.98Current maximum capacity = $28,979.59Required addition to fixed assets = ($16,900/$28,979.59) ($35,000) − $16,900Required addition to fixed assets = $3,511

A company is considering a project with a cash break-even point of 26,394 units. The selling price is $19 a unit, the variable cost per unit is $7, and depreciation is $89,800. What is the projected amount of fixed costs?

$316,728

The Timken Company has announced a rights offer to raise $5.1 million. The company's stock currently sells for $34 per share, there are 1.207 million shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $30 per share. What is the ex-rights price per share?

$33.51 Number of new shares = $5,100,000/$30Number of new shares = 170,000Number of rights needed to buy one share = 1,207,000/170,000Number of rights needed to buy one share = 7.1Ex-rights price per share = [$30 + 7.1($34)]/[1 + 7.1]Ex-rights price per share = $33.51

A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

$36.24

Rappaport Industries has 6,100 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.1 percent and a yield to maturity of 6.4 percent. The tax rate is 34 percent. What is the present value of the interest tax shield?

$4,148,000 Interest tax shield = .34 × 6,100 × $2,000Interest tax shield = $4,148,000

Kelso Electric is an all-equity firm with 44,000 shares of stock outstanding. The company is considering the issue of $300,000 in debt at an interest rate of 6 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 27,000 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans?

$46,588 EBIT/44,000 = [EBIT − $300,000(.06)]/27,000EBIT = $46,588

A 7-year project is expected to generate annual sales of 9,800 units at a price of $85 per unit and a variable cost of $56 per unit. The equipment necessary for the project will cost $389,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $235,000 per year and the tax rate is 34 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

$6,468

Stellar Plastics is analyzing a proposed project with annual depreciation of $28,750 and a tax rate of 23 percent. The company expects to sell 16,500 units, ±3 percent. The expected variable cost per unit is $1.87, ±1 percent, and the expected fixed costs are $24,900, ±1 percent. The sales price is estimated at $7.99 a unit, ±2 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $26,000?

$64,347

Robotics desires a sustainable growth rate of 12.7 percent while maintaining a constant dividend payout ratio of 25 percent and a profit margin of 12 percent. The company has a capital intensity ratio of .95. What equity multiplier is required to achieve the company's desired rate of growth?

1.19 Explanation .127 = [ROE (1 − .25)]/{1 − [ROE (1 − .25)]}ROE = .1503, or 15.03%.1503 = .12 (1/.95) EMEM = 1.19

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47?

1.39

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a company firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court?

18 months

Southwest Sands currently has 25,500 shares of stock outstanding. It is considering issuing $149,000 of debt at an interest rate of 8.0 percent. The break-even level of EBIT between these two capital structure options is $81,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes.

3,752.59 shares $81,000/25,500 = [$81,000 − 149,000(.080)]/XX = 21,747.41 sharesShares repurchased = 25,500 − 21,747.41Shares repurchased = 3,752.59 shares

A project has an estimated sales price of $71 per unit, variable costs of $44.03 per unit, fixed costs of $57,000, a required return of 14 percent, an initial investment of $79,500, no salvage value, and a life of four years. Ignore taxes. What is the degree of operating leverage at the financial break-even level of output?

3.09

Steele Insulators is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7-year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project?

3.11 DOL = 1 + ($287,400/$136,300)DOL = 3.11

You are in charge of a project that has a degree of operating leverage of 1.06. What will happen to the operating cash flows if the number of units you sell increase by 3.7 percent?

3.92 percent increase %ΔOCF = 1.06 (3.7%)%ΔOCF = 3.92% increase

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital

40

Christina's has a profit margin of 7.5 percent, a capital intensity ratio of .8, a debt-equity ratio of .6, net income of $31,000, and dividends paid of $15,810. What is the sustainable rate of growth?

7.93 percent ROE = .075 (1/.8) (1.6)ROE = .15 Retention ratio = 1 - ($15,810/$31,000)Retention ratio = .49 Sustainable growth rate = [.15 (.49)/[1 - .15 (.49)]Sustainable growth rate = .0793, or 7.93%

Miller Fruit wants to expand and needs $1.6 million to do so. Currently, the firm has 465,000 shares of stock outstanding at a market price per share of $32.50. The firm decided on a rights offering with one right granted for each share of outstanding stock. The subscription price is $28 a share. How many rights are needed to purchase one new share of stock in this offering?

8.14 Number of new shares = $1,600,000/$28Number of new shares = 57,143Rights needed for each new share = 465,000/57,143Rights needed for each new share = 8.14

Bill's has a profit margin of 5 percent and a dividend payout ratio of 20 percent. The total asset turnover is 1.6 and the debt-equity ratio is .4. What is the sustainable rate of growth?

9.84 percent

Financial planning includes the I. determination of asset requirements II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options.

I, II, III, and IV

When developing a financial plan for a corporation you should consider which of the following? I. How much net working capital will be needed?II. Will additional fixed assets be required?III. Will dividends be paid to shareholders?IV. How much new debt must be obtained?

I, II, III, and IV

Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

Sensitivity analysis; to identify the key variable that affects a project's profitability

Which one of the following is correct in relation to pro forma statements?

The addition to retained earnings is equal to net income less cash dividends.

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:

capital rationing.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at $189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on this analysis, the project is expected to operate at the:

cash break-even point.

Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's:

fixed assets.

As the degree of sensitivity of a project to a single variable rises, the:

greater is the importance of accurately predicting the value of that variable.

Forecasting risk is defined as the possibility that:

incorrect decisions will be made due to erroneous cash flow projections.

The maximum rate of growth a corporation can achieve can be increased by:

increasing the retention ratio.

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

indirect bankruptcy

Bankruptcy:

is a legal proceeding.

A company is technically insolvent when:

it is unable to meet its financial obligations

The base case values used in scenario analysis are the values considered to be the most:

likely to occur.

The change in revenue that occurs when one more unit of output is sold is referred to as:

marginal revenue.

The internal growth rate of a firm is best described as the ____ growth rate achievable _____.

maximum; excluding external financing of any kind

Existing shareholders:

may or may not have a pre-emptive right to newly issued shares.

A project that has a projected IRR of negative 100 percent will also have a(n):

net present value that is negative and equal to the initial investment.

Financial plans:

often contain alternative options based on economic developments.

Equity financing of new, non-public companies is broadly referred to as:

private equity.

Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a:

reorganization

The portion of net income that a firm reinvests in itself is called the:

retention ratio.

Financial plans generally tend to ignore:

risks associated with cash flows.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

sensitivity

The plowback ratio is:

the percentage of net income available to the firm to fund future growth

When constructing a pro forma statement, net working capital generally:

varies proportionally with sales.

Variable costs can be defined as the costs that:

vary directly with sales.

The absolute priority rule determines:

which parties receive payment first in a bankruptcy proceeding.

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

worst-case scenario analysis.

Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 345,000 shares of stock and no debt. The second structure consists of 306,000 shares of stock and $2.14 million of debt. What is the price per share of equity?

$54.87 345,000X = 306,000X + $2,140,000X = $54.87

Brick House Cafe has a tax rate of 35 percent and paid total taxes of $40,700. The company had an interest expense of $18,100. What was the value of the interest tax shield?

$6,335 Interest tax shield = .35($18,100)Interest tax shield = $6,335

A 9-year project is expected to generate annual sales of 9,900 units at a price of $86 per unit and a variable cost of $57 per unit. The equipment necessary for the project will cost $397,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $240,000 per year and the tax rate is 35 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

$6,435 Base OCF = [9,900($86 − 57) − 240,000](1 − .35) + .35($397,000/9) Base OCF = $46,054 New OCF = [9,900($87 − 57) − 240,000](1 − .35) + .35($397,000/9) Base OCF = $52,489 Change in OCF = ($46,054 − 52,489)/(86 − 87) Change in OCF = $6,435

Pawprints Paint recently went public in a best efforts offering. The company offered 180,000 shares of stock for sale at an offer price of $30 per share. The administrative costs associated with the offering were $420,000 and the underwriter's spread was 7 percent. After completing their sales efforts, the underwriters determined that they sold a total of 173,700 shares. What were the net proceeds to the company?

$4,426,230 Net proceeds = [173,700 × $30 × (1 − .07)] − $420,000Net proceeds = $4,426,230

Muder's Market has sales of $28,400, net income of $2,250, and a retention ratio of 60 percent. Assume the profit margin and the payout ratio are constant and sales increase by 6 percent. What is the pro forma retained earnings if the current retained earnings balance is $4,100?

$5,531

New Town Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario?

$984,061

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep these ratios constant?

.95

Northwest Rail wants to raise $27.8 million through a rights offering to upgrade its rail lines. How many shares of stock need to be sold if the current market price is $30.34 a share and the subscription price is $26.50 a share?

1,049,057 Number of new shares = $27,800,000/$26.50Number of new shares = 1,049,057

Jamestowne Boats has a profit margin of 6.2 percent, a payout ratio of 30 percent, an ROA of 14.2 percent, and an ROE of 18.6 percent. This firm maintains a constant payout ratio and is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing?

11.04 percent Retention ratio = (1 − .30)Retention ratio = .70 Internal growth rate = [.142 (.70)]/{1 − [.142 (.70)]}Internal growth rate = .1104, or 11.04%

Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans?

183,333 Number of new shares = $3,300,000/$18Number of new shares = 183,333

Jenny Corp. needs to raise $54 million to fund a new project. The company will sell shares at a price of $29.20 in a general cash offer and the company's underwriters will charge a spread of 6.5 percent. The direct flotation costs associated with the issue are $975,000. How many shares need to be sold?

2,013,589 shares Required proceeds = ($975,000 + 54,000,000)/(1 − .065)Required proceeds = $58,796,791Number of shares offered = $58,796,791/$29.20Number of shares offered = 2,013,589 shares

Cool Shades manufactures biotech sunglasses. The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point?

20,233 units

Simulation analysis is based on assigning a _____ and analyzing the results.

wide range of values to multiple variables simultaneously

LL Companies has sales of $9,800, net income of $1,060, total assets of $8,950, and total debt of $4,760. Assets and costs are proportional to sales. Debt and equity are not. A dividend of $371 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $10,584. What is the amount of the external financing need?

−$28Sales growth rate = ($10,584 − 9,800)/$9,800Sales growth rate = .08, or 8% Projected assets = $8,950 (1.08)Projected assets = $9,666 Projected equity = ($8,950 − 4,760) + ($1,060 − 371) (1.08)Projected equity = $4,934.12 EFN = $9,666 − 4,760 − 4,934.12EFN = −$28

Wilson's is currently operating at maximum capacity. The firm has a net income of $2,250, total assets of $24,600, long-term debt of $9,800, accounts payable of $2,700, dividends of $900, and total equity of $12,100. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent?

−$323