FIN 3063
A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. The interest rate charged on the bank loan given to this firm is 18.75%. Which of the following is correct? a. The firm should not take the discount. b. The firm should take the discount. c. The firm will be indifferent between taking the discount and not taking the discount. d. not enough information.
b. The firm should take the discount.
Identify whether the following statement is true or false: Flotation costs for short-term loans are relatively lower than long-term loans. a. This statement is false and a disadvantage of short-term financing. b. This statement is true and an advantage of short-term financing.
b. This statement is true and an advantage of short-term financing.
How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company's ______. a. financial policy b. collection policy c. credit policy d. management policy
b. collection policy
Working capital is referred to as a. current assets minus current liabilities b. current assets c. current assets minus the difference of current liabilities and notes payable d. the sum of current assets and current liabilities
b. current assets
A project's IRR will _____ if the project's cash inflows increase, and everything else is unaffected. a. decrease b. increase c. remain the same
b. increase
There are two mutually exclusive projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel uses both NPV and IRR to make accepting/rejecting decisions. NPV and IRR will __________. a. not enough information. b. lead to conflicting accepting/rejecting decisions in this case. c. lead to the same accepting/rejecting decisions in this case.
b. lead to conflicting accepting/rejecting decisions in this case.
There are two independent projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel uses both NPV and IRR to make accepting/rejecting decisions. NPV and IRR will __________. a. not enough information. b. lead to the same accepting/rejecting decisions in this case. c. lead to conflicting accepting/rejecting decisions in this case.
b. lead to the same accepting/rejecting decisions in this case.
Indicate whether the situation would make an investor prefer to receive more or fewer dividends: An investor is on a fixed income and depends upon returns from investment. a. Prefer more dividends b. Prefer fewer dividends
a. Prefer more dividends
Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split? a. $40.00 b. $44.10 c. $42.00 d. $38.00
a. $40.00
Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows −$1,150 $500 $500 $500 a. 2.30 years b. 2.07 years c. 2.78 years d. 2.53 years
a. 2.30 years
Indicate whether the situation would make an investor prefer to receive more or fewer dividends: Dividends are taxed in the year they are received while capital gains are taxed when the stock is sold. a. Prefer fewer dividends b. Prefer more dividends
a. Prefer fewer dividends
A firm carries relatively large amounts of cash, marketable securities, and inventories, and a liberal credit policy results in a high level of receivables. Which of the following current asset investment policies best reflects this firm's policy? a. Relaxed b. Restricted c. Moderate
a. Relaxed
Which of the following is considered as an advantage of stock repurchase? a. Stock repurchase helps avoid setting a high dividend that cannot be maintained by a firm. b. Stockholders have to sell stocks to a firm that conducts stock repurchases. c. Stock repurchase cannot be used to produce changes in capital structure. d. Stock repurchase may be viewed as a negative signal because it implies that a firm has poor investment opportunities.
a. Stock repurchase helps avoid setting a high dividend that cannot be maintained by a firm.
Which of the following factors is NOT considered an advantage of a stock repurchase? a. Stockholders who sell their stock back to the company might claim that they were not made fully aware of all implications of the repurchase. b. When a firm distributes cash by repurchasing stock, shareholders have the option to either sell or not sell stock. c. A repurchase can remove a large block of stock that is overhanging the market and keeping the per-share price depressed.
a. Stockholders who sell their stock back to the company might claim that they were not made fully aware of all implications of the repurchase.
Simms Corp. is considering a project that has the following cash flow data. The WACC of Simms is 14.64%. Using the IRR method, will Simms accept this project? Year 0 1 2 3 Cash flows −$1,000 $425 $425 $425 a. Not enough information. b. No. c. Yes.
b. No
Indicate whether the situation would make an investor prefer to receive more or fewer dividends: The value of a dividends received today is known, but the value of a capital gain received in the future is uncertain. a. Prefer fewer dividends b. Prefer more dividends
b. Prefer more dividends
Purple Hedgehog Forestry Corporation has generated earnings of $240,000,000. Its target capital structure consists of 60% equity and 40% debt. Its plans to spend $83,000,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure The company makes distributions in the form of dividends. Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held constant? a. Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision. b. Purple Hedgehog Forestry will pay a smaller dividend if it goes forward with this decision.
b. Purple Hedgehog Forestry will pay a smaller dividend if it goes forward with this decision.
Which of the following actions will best enable a company to raise additional equity capital, other things held constant? a. Begin an open-market purchase dividend reinvestment plan. b. Initiate a stock repurchase program. c. Begin a new-stock dividend reinvestment plan. d. Declare a stock split.
c. Begin a new-stock dividend reinvestment plan.
Ziff Corp has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Ziff Corp. sells to its customers on credit terms of 3/10, net 30. If a customer bought $200,000 worth of goods and paid the firm cash eight days after the sale, how much cash would Ziff Corp. get from the customer? a. $170,000 b. $175,000 c. $200,000 d. $194,000
d. $194,000
Mainway Toy Company currently has 30,000 shares of common stock outstanding. Its management believes that its current stock price of $95 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1. If Mainway declares a 3-for-1 stock split, what will be the price of the company's stock after the split, assuming that the total value of the firm's stock remains the same after the split, will be _____ a. $29.85 b. $30.42 c. $32.76 d. $31.67
d. $31.67
Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 1.5/20, net 30. The cost per period of the trade credit extended to Green Moose, rounded two decimal places is _____. a. 1.58% b. 1.44% c. 1.49% d. 1.52%
d. 1.52%
A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? a. 36.73% b. 30.35% c. 33.39% d. 25.09% e. 27.59%
d. 25.09%
Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 1.5/20, net 30. Green Moose's trade credit has a nominal annual cost of ______, assuming a 365-day year. a. 55.21% b. 55.37% c. 55.00% d. 55.48%
d. 55.48%
There are two mutually exclusive projects A and B for Decker Corp. The NPV of A is $412 and the NPV of B is $367. The IRR of A is 17.82% and the IRR of B is 16.33%. WACC is 10.78%. Decker uses both NPV and IRR to make accepting/rejecting decisions. NPV and IRR will __________. a. not enough information. b. lead to the same accepting/rejecting decisions in this case. c. lead to conflicting accepting/rejecting decisions in this case.
b. lead to the same accepting/rejecting decisions in this case.
There are two mutually exclusive projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel should accept _______ based on NPV. a. neither X nor Y. b. only Y c. only X d. both X and Y
b. only Y
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings?
0.75%
Alpha Moose Transporters has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of next year. The company's earnings' and dividends' growth rate are expected to grow at a constant rate of 8.70% into the foreseeable future. If Alpha Moose expects to incur flotation costs of 3.750% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be _____.
20.09%
Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC?
8.79%
Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock?
9.84%
A firm's _____ dividend policy determines its current clientèle of investors. a. Past b. Current c. Future
a. Past
_____ is the single best method to use when making capital budgeting decisions. a. IRR b. NPV c. ROI d. MIRR
b. NPV
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. Suppose the firm goes with CFO's suggestion. Which project will the firm choose? Year 0 1 2 3 4 CFS -$1,000 $550 $600 $100 $100 CFL -$2,700 $650 $725 $800 $1,400 a. Project S. b. Project L. c. Neither Project L nor Project S. d. Both Project L and Project S.
Project L.
Sixty-second Avenue Manufacturing Inc. expects to earn $5,700,000 this year. The company currently has 790,000 shares outstanding, and the shares have a per-share market price of $22. Assuming that Sixty-second Avenue's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share--if it repurchases 70,000 shares at the current market price--should be ______. a. $24.16 b. $25.00 c. $23.38 d. $24.90
Selected Answer:a. $24.16
Ziff Corp has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Ziff Corp. sells to its customers on credit terms of 3/10, net 30. Approximately 40% of Ziff Corp.'s customers take advantage of the discount and pay on the 10th day. The remaining 60% take an average of 35 days to pay off their accounts. What is Ziff Corp.'s days sales oustanding (DSO), or the average collection period? a. 25.0 days b. 27.5 days c. 21.3 days d. 30.0 days
a. 25.0 days
Scorecard Athletics Corp. is one of Mainway's leading competitors. Scorecard's market intelligence research team shares Mainway's plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Scorecard decide to offer stock dividends to its shareholders. Scorecard currently has 3,200,000 shares of common stock outstanding. If the firm pays a 3% stock dividend, what will be the total number of shares outstanding after the stock dividend? a. 3,296,000 shares b. 3,955,200 shares c. 3,131,200 shares d. 2,801,600 shares
a. 3,296,000 shares
Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital budget $12,500 % Debt 40% Net income (NI) $11,500 a. 34.78% b. 38.26% c. 31.30% d. 28.17%
a. 34.78%
Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight's WACC is 8%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: YearCash Flow 1 $350,000 2 $475,000 3 $425,000 4 $500,000 Which of the following is the correct calculation of project Sigma's IRR? a. 38.20% b. 32.47% c. 34.38% d. 36.29%
a. 38.20%
Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's NPV increases as the WACC declines. b. A project's regular payback increases as the WACC declines. c. A project's IRR increases as the WACC declines. d. A project's discounted payback increases as the WACC declines.
a. A project's NPV increases as the WACC declines.
Which of the following will cause an increase in the cash conversion cycle (CCC)? a. An increase in average collection period. b. A decrease of profit margin. c. An increase in payables deferral period. d. A decrease in inventory conversion period.
a. An increase in average collection period.
For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? a. Debt b. Preferred stock c. Equity
a. Debt
Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 1.5/20, net 30. If Green Moose Industries's supplier shortens its discount period to five days, this will ______ the cost of trade credit. a. Decrease b. Increase c. Neither increase or decrease
a. Decrease
Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? a. Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold. b. Current assets should be divided by sales, but current liabilities should be divided by COGS.
a. Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.
CCC can be computed by a. Inventory conversion period + Average collection period - Payables deferral period b. Inventory conversion period - Average collection period - Payables deferral period c. Inventory conversion period + Payables deferral period - Average collection period d. Average collection period + Payables deferral period - Inventory conversion period
a. Inventory conversion period + Average collection period - Payables deferral period
Another firm, called Cheatum Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Cheatum also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Cheatum's dividend announcement? a. Investors with low tax rates who depend on current dividend income for living expenses b. Investors with high tax rates who don't depend on current dividend income for living expenses
a. Investors with low tax rates who depend on current dividend income for living expenses
If a firm finances its permanent current assets with long-term debt and equity, and finances its temporary current assets with short-term debt, what type of financing policy would it have? a. Moderate b. Conservative c. Aggressive
a. Moderate
Which of the following statements is CORRECT? a. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. b. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. c. One defect of the IRR method is that it does not take account of the cost of capital.
a. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. b. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. c. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. d. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.
a. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? a. The market risk premium declines. b. The company's beta increases. c. The flotation costs associated with issuing new common stock increase. d. Expected inflation increases. e. The flotation cost associated with issuing preferred stock increase.
a. The market risk premium declines.
Which of the following statements does NOT indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? a. The payback period is calculated using net income instead of cash flows. b. The payback period does not take the time value of money into account. c. The payback period does not take the project's entire life into account.
a. The payback period is calculated using net income instead of cash flows.
Anderson Systems is considering a project that has the following cash flow and WACC data. Using the NPV method, will Anderson accept this project? WACC:9.00% Year 0 1 2 3 Cash flows −$1,000 $500 $500 $500 a. Yes. b. No. c. Not enough information.
a. Yes
Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight's WACC is 8%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: YearCash Flow 1 $350,000 2 $475,000 3 $425,000 4 $500,000 If this is an independent project, the IRR method states that the firm should _____. a. accept project Sigma. b. reject project Sigma.
a. accept project Sigma.
Trade credit is related to a firm's _____ a. account payable b. account receivable c. notes payable d. inventory
a. account payable
According to the clientele effect hypothesis, a change in dividend policy will _______ have a negative effect on stock price. a. have a negative effect on stock price. b. have a positive effect on stock price. c. will not affect stock price.
a. have a negative effect on stock price.
According to Information Content or Signaling hypothesis, a higher-than-expected dividend is a signal that _____ . a. management forecasts good future earnings and stock price tends to increase b. management forecasts good future earnings and stock price tends to decrease c. management forecasts poor future earnings and stock price tends to decrease d. management forecasts poor future earnings and stock price tends to increase
a. management forecasts good future earnings and stock price tends to increase
If a manager leans more toward short-term credit to gain an interest cost advantage, the current assets financing policy will tend to __________. a. more aggressive. b. more conservative c. not enough information d. remain the same
a. more aggressive.
Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: YearCash Flow 1 $375,000 2 $425,000 3 $500,000 4 $400,000 Pheasant Pharmaceuticals's weighted average cost of capital is 8%, and project Beta has the same risk as the firm's average project. Pheasant Pharmaceuticals's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm allows the NPV model, it should _____ project Beta. a. reject b. accept
a. reject
A firm has stated credit terms of 3/10, net 30. Which of the following is correct? a. the firm allows a 3% discount if payment is received within 10 days of the purchase; b. If the discount is not taken by customers of the firm, the full amount is due in 10 days. c. the firm allows a 3% discount if payment is received within 30 days of the purchase; d. the firm allows a 10% discount if payment is received within 30 days of the purchase;
a. the firm allows a 3% discount if payment is received within 10 days of the purchase;
The NPV and IRR methods can lead to conflicting decisions for mutually exclusive projects. a. true b. false
a. true
There are two mutually exclusive projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel should accept _______ based on IRR. a. only Y b. only X c. neither X nor Y. d. both X and Y
b. only X
Ziff Corp has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Ziff Corp. sells to its customers on credit terms of 3/10, net 30. If a customer bought $200,000 worth of goods and paid the account after 15 days, Ziff Corp. would receive ______. a. $215,000 b. $200,000 c. $170,000 d. $174,000
b. $200,000
Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split? a. $24.00 b. $22.86 c. $21.71 d. $25.20
b. $22.86
Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? WACC:9.00% Year 0 1 2 3 Cash flows −$1,000 $500 $500 $500 a. $307.52 b. $265.65 c. $322.90 d. $292.88
b. $265.65
Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend model, how much in dividends, if any, will it pay? a. $47,500 b. $50,000 c. $52,500 d. $55,125
b. $50,000
Purple Hedgehog Forestry Corporation has generated earnings of $240,000,000. Its target capital structure consists of 60% equity and 40% debt. Its plans to spend $83,000,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure The company makes distributions in the form of dividends. What will Purple Hedgehog Forestry's dividend payout ratio be if it follows a residual dividend policy? a. 47.55% b. 79.25% c. 71.33% d. 63.40%
b. 79.25%
There have been huge improvements in transportation services in recent years. What effect have these changes had on firms' inventory holdings as measured by the ratio of inventories to sales? a. Increased inventories relative to sales because customers now expect rapid delivery. b. Decreased inventories relative to sales because firms can receive orders quickly. c. No effect on inventories.
b. Decreased inventories relative to sales because firms can receive orders quickly.
Some analysts have argued that a firm's value should solely be determined by its basic earning power and the business risk of the firm. Which of these concepts would support these analysts' argument? a. The clientèle effect b. Dividend irrelevance theory c. The signaling hypothesis d. The free cash flow hypothesis
b. Dividend irrelevance theory
It is free for a company to raise money through retained earnings because retained earnings represent money that is left over after dividends are paid out to shareholders. a. True b. False
b. False
Which of the following factors is NOT outside of a firm's control? a. Tax rate b. Firms Capital Structure c. The inflation rate d. Both a and c
b. Firm's Capital Structure
Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky. a. If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative. b. If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. c. There is no necessary relationship between a project's IRR, its WACC, and its NPV. d. When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.
b. If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio? a. Its access to the capital markets increases. b. Its research and development efforts pay off, and it now has more high-return investment opportunities. c. Its earnings become more stable. d. Its accounts receivable decrease due to a change in its credit policy.
b. Its research and development efforts pay off, and it now has more high-return investment opportunities.
Marston Manufacturing Company has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Marston Manufacturing Company accept or reject the project? a. accept the project b. reject the project
b. reject the project
If the nominal annual cost of trade credit of a firm is 11.75% and the interests charged on the bank loans the firm borrow is 14.23%, the firm _____ a. should take the discount offered by its suppliers. b. should not take the discount offered by its suppliers. c. not enough information d. will be indifferent between taking the discount offered by its suppliers and not taking the discount offered by its suppliers
b. should not take the discount offered by its suppliers.
Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital? a. $274,360 b. $288,800 c. $320,000 d. $304,000
c. $320,000
Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend model, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance? a. $645,750 b. $711,939 c. $615,000 d. $678,038
c. $615,000
Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: YearCash Flow 1 $375,000 2 $425,000 3 $500,000 4 $400,000 Pheasant Pharmaceuticals's weighted average cost of capital is 8%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? a. -$2,186,977 b. -$1,422,481 c. -$1,822,481 d. -$5,047,481
c. -$1,822,481
Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Year 0 1 2 3 Cash flows −$1,000 $425 $425 $425 a. 15.29% b. 14.56% c. 13.21% d. 13.87%
c. 13.21%
Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days Receivables collection period = 17 days Payables deferral period = 25 days :a. 46 days b. 38 days c. 42 days d. 31 days e. 34 days
c. 42 days
If a firm finances all of its temporary current assets plus some of its permanent current assets with short-term debt, what type of financing policy would it have? a. Conservative b. Maturity matching c. Aggressive d. Moderate
c. Aggressive
Which of the following statements is CORRECT? a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. b. 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. c. 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. d. 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.
c. 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.
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are independent, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. Suppose the firm goes with CFO's suggestion. Which project will the firm choose? WACC:7.50% Year 0 1 2 3 4 CFS −$1,100 $550 $600 $100 $100 CFL −$2,700 $650 $725 $800 $1,400 a. Project S. b. Project L. c. Both Project L and Project S. d. Neither Project L nor Project S.
c. Both Project L and Project S.
Under the residual dividend model, which of the following will cause unstable dividends and dividends payout ratio? a. fluctuating earnings b. available investment opportunities c. Both a and b d. Neither a and b
c. Both a and b
Suppose a firm occasionally faces demand for short-term credit but usually has an excess of short-term capital to finance current assets. Which approach is the firm following? a. Maturity matching approach b. Aggressive approach c. Conservative approach
c. Conservative approach
Suppose Butcher changed its credit terms from 40 days to 2/10, net 40, meaning that it would give a 2% discount to anyone who paid by the 10th day. What would you expect to happen to its DSO? a. Increase b. No change c. Decrease
c. Decrease
Which of the following statements is CORRECT? a. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. b. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. c. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. d. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
c. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split? a. You will have 50 shares of stock, and the stock will trade at or near $600 a share. b. You will have 50 shares of stock, and the stock will trade at or near $120 a share. c. You will have 200 shares of stock, and the stock will trade at or near $60 a share. d. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
According to the dividend irrelevance theory proposed by MM, investors ______ a. prefer capital gains over dividends paid out. b. cannot create their own dividend policy. c. are indifferent between dividends paid out and capital gains. d. prefer dividends paid out over capital gains.
c. are indifferent between dividends paid out and capital gains.
There are two independent projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel should accept _______ based on NPV. a. only X b. neither X nor Y. c. both X and Y d. only Y
c. both X and Y
Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that a. investors require that the dividend yield plus the capital gains yield equal a constant. b. capital gains are taxed at a higher rate than dividends. c. investors view dividends as being less risky than potential future capital gains. d. investors are indifferent between dividends and capital gains.
c. investors view dividends as being less risky than potential future capital gains.
Current assets minus current liabilities is a. net operating working capital b. working capital c. net working capital d. operating working capital
c. net working capital
If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio), then the firm should pay a. dividends only out of funds raised by the sale of new common stock. b. dividends only out of funds raised by borrowing money (i.e., issuing debt). c. no dividends to common stockholders. d. the same dividend as it paid the prior year.
c. no dividends to common stockholders.
There are two mutually exclusive projects A & B. The payback period of A is 4.78 years and the payback period of B is 3.46 years. Which project(s) will be chosen based on the payback period method? a. Both project A and project B. b. project A. c. project B. d. Not enough information.
c. project B.
According to the dividend irrelevance theory proposed by MM, if a company increases its dividend payout and other things remain unchanged, ______ a. the stock price of the company will either increase or decrease. b. the stock price of the company will decrease. c. the stock price of the company will remain the same. d. the stock price of the company will increase.
c. the stock price of the company will remain the same.
Which of the following statements is CORRECT? a. 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. 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. Historically, the tax code has encouraged companies to pay dividends rather than retain earnings. 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.
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.
A firm's credit policy is a primary determinant of ________. a. inventory b. notes payable c. account payable d. account receivable
d. account receivable
In the real world, dividends a. fluctuate more widely than earnings. b. are usually changed every year to reflect earnings changes, and these changes are randomly higher to lower, depending on whether earnings increased or decreased. c. tend to be a lower percentage of earnings for mature firms. d. are usually more stable than earnings.
d. are usually more stable than earnings.
There are two independent projects X and Y for Intel Inc. The NPV of X is $13,496 and the NPV of Y is $14, 968. The IRR of X is 14.96% and the IRR of Y is 13.87%. WACC is 11.37%. Intel should accept _______ based on IRR. a. neither X nor Y. b. only Y c. only X d. both X and Y
d. both X and Y
For the NPV of a project, if WACC increases and other things remain the same, NPV will ______ decrease. increase remain the same. Not enough information.
decrease
Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. b. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. d. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. e. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
e. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
For the IRR of a project, if WACC increases and other things remain the same, IRR will Not enough information. decrease. remain the same. increase
remain the same.
Beta (b) in the CAPM (Capital Asset Pricing Model) is ______.
which measures how sensitive a stock return is to the market return.
