FIN 42O Chapters 4 , 11, 15, 16

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 Chapter 15

Brick House Cafe has a tax rate of 35 percent and paid total taxes of $35,280. The company had an interest expense of $16,700. What was the value of the interest tax shield?

$5,845 Chapter 16

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 Chapter 11

Which one of the following statements concerning venture capitalists is correct? Venture capitalists always assume management responsibility for the companies they finance. Most venture capitalists are long-term investors in the companies they finance. A venture capitalist normally invests in a new idea from conception through the IPO. Exit strategy is a key consideration when selecting a venture capitalist. Venture capitalists limit their services to providing money to start-up firms.

Exit strategy is a key consideration when selecting a venture capitalist. Chapter 15

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 Chapter 4

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 Chapter 4

Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

I, II, III, and IV Chapter 4

Which one of the following is a direct cost of bankruptcy? Investing in cash reserves Bypassing a positive NPV project to avoid additional debt Maintaining a debt-equity ratio that is lower than the optimal ratio Losing a key company employee Paying an outside accountant to prepare bankruptcy reports

Paying an outside accountant to prepare bankruptcy reports Chapter 16

Which of the following variables will be forecast at their highest expected level under a best-case scenario? Fixed costs and units value Initial cost and variable costs Variable costs and sales price Fixed costs and sales price Salvage value and units sold

Salvage value and units sold Chapter 11

Which one of the following is correct in relation to pro forma statements? Fixed assets must increase if sales are projected to increase. The addition to retained earnings is equal to net income less cash dividends. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. Inventory changes are not proportional to sales changes. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity.

The addition to retained earnings is equal to net income less cash dividends. Chapter 4

When selecting a venture capitalist, which one of the following characteristics is probably the least important? Contacts Exit strategy Financial strength Underwriting experience Level of involvement

Underwriting experience Chapter 15

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

aggregation Chapter 4

Simulation analysis is based on assigning a _____ and analyzing the results. wide range of values to a single variable narrow range of values to multiple variables simultaneously wide range of values to multiple variables simultaneously single value to each of the variables narrow range of values to a single variable

wide range of values to multiple variables simultaneously Chapter 11

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 Chapter 15

BK Metals is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. The company currently has current liabilities of $3,950, long-term debt of $14,700, net working capital of $7,850, net fixed assets of $27,600, owners' equity of $20,750, net income of $2,900, and dividends paid of $870. What is the external financing need if sales increase by 11 percent?

$1,646 Chapter 4

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.

$134,890 Chapter 15

Kline Construction is an all-equity firm that has projected perpetual EBIT of $324,000. The current cost of equity is 12.4 percent and the tax rate is 34 percent. The company is in the process of issuing $940,000 worth of perpetual bonds with an annual coupon rate of 6.6 percent at par. What is the value of the levered firm?

$2,044,116 Chapter 16

At the accounting break-even point, Swiss Mountain Gear sells 22,940 ski masks at a price of $19 each. At this level of production, the depreciation is $67,000 and the variable cost per unit is $6. What is the amount of the fixed costs at this production level?

$231,220 Chapter 11

The Creamery is analyzing a project with expected sales of 5,700 units, ±5 percent. The expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this analysis?

$467,023 Chapter 11

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 Chapter 4

A 7-year project is expected to generate annual sales of 9,000 units at a price of $77 per unit and a variable cost of $48 per unit. The equipment necessary for the project will cost $325,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $195,000 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?

$5,850 Chapter 11

Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 355,000 shares of stock and no debt. The second structure consists of 318,000 shares of stock and $2.22 million of debt. What is the price per share of equity?

$60.00 Chapter 16

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 Chapter 11

Sensitivity analysis determines the: degree to which the net present value reacts to changes in a single variable. ideal ratio of variable costs to fixed costs for profit maximization. net present value range that can be realized from a proposed project. range of possible outcomes given that most variables are reliable only within a stated range. degree to which a project relies on its initial costs.

degree to which the net present value reacts to changes in a single variable. Chapter 11

A Procrustes approach to financial planning is based on: a policy of producing a financial plan once every five years. a flexible capital budget. developing a plan around the goals of senior managers. a flexible capital structure. a proactive approach to the economic outlook.

developing a plan around the goals of senior managers. Chapter 4

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. direct bankruptcy issue unlevered flotation indirect bankruptcy

direct bankruptcy Chapter 16

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the _______method. sales reconciliation percentage of sales common-size trend sales dilution

percentage of sales Chapter 4

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: prevents creditors from submitting any reorganization plans. permits creditors to file a prepack immediately after a firm files for bankruptcy protection. allows the payment of bonuses to all key employees to entice those employees to remain in the company's employ. permits key employee retention plans only if the affected employee(s) has another job offer. prevents companies from filing for bankruptcy protection more than once.

permits key employee retention plans only if the affected employee(s) has another job offer. Chapter 16

Equity financing of new, non-public companies is broadly referred to as: mezzanine-level stock. exit funding. singular-risk financing. stylized financing. private equity.

private equity. Chapter 15

If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the: maximum capacity level will have to increase at the same rate as sales growth. total assets will have to increase at the same rate as sales growth. retained earnings will increase. number of common shares outstanding will increase debt-equity ratio will increase.

retained earnings will increase. Chapter 4

Northern Wood Products is an all-equity firm with 25,100 shares of stock outstanding and a total market value of $376,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $38,000 if the economy is normal, $23,600 if the economy is in a recession, and $52,400 if the economy booms. Ignore taxes. Management is considering issuing $95,200 of debt with an interest rate of 6 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?

$.95 Chapter 16

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 Chapter 11

A firm is considering two different capital structures. The first option is an all-equity firm with 37,000 shares of stock. The levered option is 25,000 shares of stock plus some debt. Ignoring taxes, the break-even EBIT between these two options is $52,000. How much money is the firm considering borrowing if the interest rate is 7.1 percent?

$237,533 CHapter 16

Baked at Home Cookies expects sales of $672,500 next year. The profit margin is 4.6 percent and the firm has a dividend payout ratio of 15 percent. What is the projected increase in retained earnings?

$26,294.75 Chapter 4

Pawprints Paint recently went public in a best efforts offering. The company offered 155,000 shares of stock for sale at an offer price of $25 per share. The administrative costs associated with the offering were $395,000 and the underwriter's spread was 7 percent. After completing their sales efforts, the underwriters determined that they sold a total of 148,700 shares. What were the net proceeds to the company?

$3,062,275 Chapter 15

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 Chapter 15

The accounting break-even production quantity for a project is 18,311 units. The fixed costs are $148,400 and the contribution margin per unit is $13.10. The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 4-year life. What is the amount of fixed assets required for this project?

$365,869 Chapter 11

Northeast Lobster currently has 18,800 shares of stock outstanding. It is considering issuing $118,000 of debt at an interest rate of 6.6 percent. The break-even level of EBIT between these two capital structure options is $89,000. For this to be true, what is the current stock price? Ignore taxes.

$71.73 Chapter 16

Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are accurate within a range of ±3 percent. What are the total variable costs for the best-case scenario?

$913,421 Chapter 11

LM Products has total assets of $48,900, total debt of $21,750, long-term debt of $18,100, owners' equity of $27,150, dividends paid of $1,925, and net income of $5,500. Assume net working capital and all company costs increase directly with sales. Also assume the tax rate and the dividend payout ratio are constant and the company is currently operating at full capacity. What is the external financing need if sales increase by 4 percent?

-$1,908 Chapter 4

Rural Markets has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity?

.97 Chapter 4

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 Chapter 15

Jenny Corp. needs to raise $52 million to fund a new project. The company will sell shares at a price of $28.80 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 $875,000. How many shares need to be sold?

1,963,570 shares Chapter 15

S&S wants to raise $11.3 million through a rights offering with a subscription price of $15 a share. The company has 1.24 million shares outstanding and a market price of $17.50 a share. Each shareholder will receive one right for each share of stock owned. How many rights will be needed to purchase one new share of stock in this offering?

1.65 Chapter 15

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 Chapter 4

Roy's Welding has annual sales of $96,700, a profit margin of 7.45 percent, and a payout ratio of 40 percent. The firm has $11,500 of debt and owners' equity of $31,200. What is the internal growth rate for this firm assuming the payout ratio remains constant?

11.26 percent Chapter 4

At an output level of 22,500 units, you calculate that the degree of operating leverage is 1.37. What will be the percentage change in operating cash flow if the new output level is 25,000 units?

15.22 percent Chapter 11

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 Chapter 15

A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity?

25,085 units Chapter 11

Debbie's Cookies has a return on assets of 8.7 percent and a cost of equity of 13.1 percent. What is the pretax cost of debt if the debt-equity ratio is .81? Ignore taxes.

3.27% Chapter 16

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital. 30 10 15 40 20

40 Chapter 15

The Greenbriar is an all-equity firm with a total market value of $548,000 and 21,600 shares of stock outstanding. Management is considering issuing $149,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?

5,873 shares Chapter 16

P&T wants to raise $2.8 million through a rights offering with a subscription price of $20 a share. Currently, the company has 750,000 shares of stock outstanding at a market price of $24.50 a share. One right will be granted for each share of stock outstanding. How many rights are required to purchase one new share of stock in this offering?

5.36 Chapter 15

Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .55, a total asset turnover ratio of 1.30, and a profit margin of 9 percent. What must the dividend payout ratio be?

73.74 percent Chapter 4

Which one of these combinations must increase the contribution margin? Decreasing the sales price and increasing the sales quantity Increasing the sales price and decreasing the variable cost per unit Decreasing both fixed costs and depreciation expense Increasing the sales quantity and increasing the variable cost per unit Increasing both the sales price and the variable cost per unit

Increasing the sales price and decreasing the variable cost per unit Chapter 11

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? Average total revenue Marginal cost Average total cost Marginal revenue Average variable cost

Marginal cost Chapter 11

By definition, which one of the following must equal zero at the accounting break-even point? Net present value Operating cash flow Depreciation Contribution margin Net income

Net income Chapter 11

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? Buying equipment rather than leasing it short-term Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house Lowering the projected selling price per unit Hiring additional employees rather than using temporary outside contractors Changing the proposed labor-intensive production method to a more capital intensive method

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house Chapter 11

Which one of the following statements related to Chapter 7 bankruptcy is correct? Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated. Chapter 7 bankruptcies are always involuntary on the part of the firm. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock can be issued. A company in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern.

Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated. Chapter 16

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called? Red herring funding Tombstone underwriting Green shoe funding Life cycle capital Venture capital

Venture capital Chapter 15

Pro forma statements: must assume that no dividends will be paid. are limited to a balance sheet and income statement. exclude net working capital needs. must assume that no new equity is issued. are projections, not guarantees.

are projections, not guarantees. Chapter 4

When the operating cash flow of a project is equal to zero, the project is operating at the: cash break-even point. minimum possible level of production. maximum possible level of production. accounting break-even point. financial break-even point.

cash break-even point. Chapter 11

Financial planning: is a process that firms undergo once every five years. provides minimal benefits for firms that are highly responsive to economic changes. focuses solely on the short-term outlook for a firm. considers multiple options and scenarios. is a process that firms employ only when major changes to a firm's operations are anticipated

considers multiple options and scenarios. Chapter 4

A firm's external financing need is met by: net working capital and retained earnings. net income and retained earnings. debt or equity. owners' equity, including retained earnings. retained earnings.

debt or equity Chapter 4

Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's: fixed assets. inventory. long-term debt. net working capital. debt-equity ratio.

fixed assets Chapter 4

As the degree of sensitivity of a project to a single variable rises, the: less volatile the project's net present value is to that variable. greater is the sensitivity of the project to the other variable inputs. less volatile is the project's outcome. less important the variable is to the final outcome of the project. greater is the importance of accurately predicting the value of that variable.

greater is the importance of accurately predicting the value of that variable. Chapter 11

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: financial allocation. marginal rationing. financial deferral. hard rationing. capital allocation.

hard rationing. Chapter 11

The date on which a shareholder is officially listed as the recipient of stock rights is called the: declaration date. holder-of-record date. issue date. offer date. ex-rights date.

holder-of-record date. Chapter 15

The key means of defending against forecasting risk is to: shorten the life of a project. increase the discount rate assigned to a project. ignore any potential salvage value that might be realized. identify sources of value within a project. rely primarily on the net present value method of analysis.

identify sources of value within a project. Chapter 11

The maximum rate of growth a corporation can achieve can be increased by: increasing the retention ratio. increasing the corporate tax rate. increasing the sales forecast. increasing the dividend payout ratio. avoiding new external equity financing.

increasing the retention ratio. Chapter 4

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. flotation direct bankruptcy financial solvency indirect bankruptcy capital structure

indirect bankruptcy Chapter 16

A company is technically insolvent when: the market value of its stock is less than its book value. it files for bankruptcy protection. its total debt exceeds its total equity. it has a negative book value. it is unable to meet its financial obligations.

it is unable to meet its financial obligations. Chapter 16

The base case values used in scenario analysis are the values considered to be the most: pessimistic. optimistic. desired by management. likely to create a positive net present value. likely to occur.

likely to occur. Chapter 11

The change in variable costs that occurs when production is increased by one unit is referred to as the: net cost. marginal cost. scenario cost. average cost. total cost.

marginal cost. Chapter 11

The change in revenue that occurs when one more unit of output is sold is referred to as: average revenue. erosion. total revenue. marginal revenue. scenario revenue.

marginal revenue. Chapter 11

The internal growth rate of a firm is best described as the ____ growth rate achievable _____. minimum; assuming a retention ratio of 100 percent maximum; excluding any external equity financing while maintaining a constant debt-equity ratio maximum; excluding external financing of any kind minimum; if the firm maintains a constant equity multiplier maximum; with unlimited debt financing

maximum; excluding external financing of any kind Chapter 4

Existing shareholders: may or may not have a pre-emptive right to newly issued shares. are prohibited from selling their rights. are generally well advised to let the rights they receive expire. must purchase new shares whenever rights are issued. can maintain their proportional ownership positions without exercising their rights.

may or may not have a pre-emptive right to newly issued shares. Chapter 15

A project that has a projected IRR of negative 100 percent will also have a(n): payback period that is exactly equal to the life of the project. operating cash flow that is positive and equal to the depreciation. discounted payback period equal to the life of the project. net present value that is equal to zero. net present value that is negative and equal to the initial investment.

net present value that is negative and equal to the initial investment. Chapter 11

The portion of net income that a firm reinvests in itself is called the: internal growth rate. dividend yield. dividend payout ratio. retention ratio. cash influx ratio.

retention ratio Chapter 4

Financial plans generally tend to ignore: risks associated with cash flows. dividend policy. manager's goals and objectives. capital structure policy. operating capacity levels.

risks associated with cash flows. Chapter 4

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of: scenario analysis. soft rationing. an operating leverage application. sensitivity analysis. hard rationing

soft rationing. Chapter 11

To purchase a share in a rights offering, an existing shareholder generally just needs to: pay the subscription amount in cash. submit the required number of rights along with the subscription price. submit the required form along with the required number of rights. pay the difference between the market price of the stock and the subscription price. submit the required number of rights along with a payment for the underwriting fee.

submit the required number of rights along with the subscription price. Chapter 15

A project that has a payback period exactly equal to the project's life is operating at: the cash break-even point. a zero level of output. the accounting break-even point. the financial break-even point. its maximum capacity.

the accounting break-even point. Chapter 11

When constructing a pro forma statement, net working capital generally: varies only if the firm is producing at less than full capacity. remains fixed. varies only if the firm maintains a fixed debt-equity ratio. varies proportionally with sales. varies only if the firm is currently producing at full capacity.

varies proportionally with sales. Chapter 4

The absolute priority rule determines: how a distressed firm is reorganized. when a firm must be declared officially bankrupt. which parties receive payment first in a bankruptcy proceeding. which judge is assigned to a particular bankruptcy case. how long a reorganized firm is allowed to remain under bankruptcy protection.

which parties receive payment first in a bankruptcy proceeding. Chapter 16