TMP 130 Midterm 1 (Ch. 1-5)

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

$1,050

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share?

$10

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent, and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?

$14,700

To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?

$169,000

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False

The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

The sustainable growth rate is defined as the maximum rate at which company sales can increase.

False

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis

I, III, and IV only

Which one of the following is a source of cash?

decrease in accounts receivable

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

dividend policy

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

false

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

false

A times-interest-earned ratio of 3.5 indicates that the firm

has EBIT equal to 3.5 times its interest expense.

What is the holding period return for the year on a bond with a par value of $1,000 and a coupon rate of 8.5% if its price at the beginning of the year was $1,215 and its price at the end of the year was $1,020? Assume interest is paid annually.

−9.05%

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6, and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth?

10.83%

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2017?

13.43%

Assuming interest and dividends are paid annually, calculate the annual holding period return on each security

14.7 7.6% 6.9

Information about three securities appears next. Beginning-of-Year PriceEnd-of-Year PriceInterest/Dividend PaidStock 1$44.10 $48.35 $3.10 Stock 2$2.85 $3.05 $0 Bond 1$1,180 $1,208 $57.00 a. Assuming interest and dividends are paid annually, calculate the annual holding period return on each security.

16.7 7.0 7.2

Calculate R&E's sustainable growth rate in each year from 2015 through 2018. Assume the dividend payout ratio was the same in 2015-17 as forecasted in 2018

16.7% 13.8% 9.2% 4.5%

Calculate Under Armour's annual sustainable growth rate for the years 2009 through 2013

17.1 19.9 22.8 22.9 22.7

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb's sustainable growth rate?

18.24 percent

Please refer to the financial information for Foodtek, Inc. above. During 2017, what was the cost of merchandise (in millions of dollars) produced by Foodtek?

218

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?

4.9 million

Magenta Corporation wants to raise $51.3 million in a seasoned equity offering, net of all fees. Magenta stock currently sells for $10 per share. The underwriters will require a spread of $0.5 per share, and indicate that the issue must be underpriced by 5 percent. In addition to the underwriter's fee, the firm will incur $2,300,000 in legal, accounting, and other costs. How many shares must Magenta sell?

5.956

You are preparing pro forma financial statements for 2017 using the percent-of-sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2017?

56,000

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate?

6%

What is the length of the cash conversion cycle for a firm with $3 million in inventory, $1.5 million in accounts payable, a collection period of 40 days, and an annual cost of goods sold of $18 million?

70.4 days

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2016?

9.97%

On a common-size balance sheet, all accounts are expressed as a percentage of

total assets.

A reduction in long-term debt is a use of cash

true

Suppose you purchase a put option on XYZ stock when the stock price is $40. The option premium is $2, and the strike price is $39. What is your net profit on the put option if the stock price is $41 at maturity?

−$2

Suppose you purchase a call option on XYZ stock when the stock price is $81. The option premium is $3, and the strike price is $85. What is your net profit on the call option if the stock price is $89 at maturity?

$1

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2017 based on actual financial statements for 2016. Royal Corp. used the percent-of-sales method, assuming a sales growth rate of 10% for 2017. If capital expenditures are planned to be $1,615 in 2017, then what would be the appropriate projection for net fixed assets in 2017?

$4,563

Playdough Products earned net income of $500,000 in 2017. The firm increased its accounts receivable during the year by $220,000. The book value of its assets declined by the year's depreciation charge, which was $140,000, and the market value of its assets increased by $50,000. Based only on this information, how much cash did Playdough Products generate during the year? Please ignore taxes for this problem.

$420,000 of cash during the year

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2017, what should be the projection for shareholders' equity for 2017?

$5,349

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2017. At the end of 2016, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2017, their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2017?

$63 million

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$643

Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in 2017?

$80,000

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year?

-$260

You manage a real estate investment company. One year ago, the company purchased 10 parcels of land distributed throughout the community for $ 11.2 million each. A recent appraisal of the properties indicates that five of the parcels are now worth $9.2 million each, while the other five are worth $17.0 million each. Ignoring any income received from the properties and any taxes paid over the year, calculate the investment company's accounting earnings and its economic earnings in each of the following cases:

Accounting Income (million) / Economic Income (million) 19 / 19 0 / 19 (10) / 19 29 / 19

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?

An increase in the retention ratio

Which one of the following statements is true?

Debt instruments offer residual claims to future cash payouts. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. Bondholders enjoy a direct voice in company decisions. Bonds are low-risk investments that do well in inflationary periods. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. A : None of the options are correct.

Which of the following would NOT be considered a use of cash?

Depreciation

Which of the following statements is true?

Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

Which one of the following statements is false?

Financial executives must design financial securities to meet the needs of the firm and its investors. Financial instruments are subject to full disclosure requirements. A : The design of financial instruments is greatly constrained by law and regulation. Financial instruments are claims against a company's cash flows and assets.

Pro forma financial statements, by definition, are predictions of a company's financial statements at a future point in time. So, why is it important to analyze the historical performance of the company before constructing pro forma financial statements?

Historical data is used in percent of sales forecasting. It allows you to see which values can be forecasted using the percent of sales model.

Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage

I, II, III, and IV

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

I, II, III, and IV

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? 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

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement. II. Investors need time to digest the information prior to reacting. III. The information has no bearing on the value of the firm. IV. The information was anticipated.

III and IV only

Which of the following statements regarding junk bonds is true?

Junk bonds have higher priority in bankruptcy than preferred stock.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years?

Milano's leverage has increased.

ABC Corp. has an outstanding debt of $50 million on which it pays a 4 percent fixed interest rate annually. ABC just made its annual interest payment and has three years remaining until maturity. ABC wants to swap its fixed rate payments for floating rate payments. A bank offers ABC a three-year interest rate swap with annual payments in which ABC will pay LIBOR, currently at 4.2 percent, and receive a 3.8 percent fixed rate on $50 million notional principal. Suppose that LIBOR turns out to be 4.3 percent in one year, 4.4 percent in two years, and 4.5 percent in three years. Including interest payments on ABC's outstanding debt and payments on the swap, what will be ABC's net interest payments for the next three years?

Net payment year 1: -2,200,000 Net payment year 2: -2,250,000 Net payment year 3: -2,300,000

Please refer to the income statement for VGA Associates below. If VGA had a principal repayment of $8,000 due in 2017, what was its times-burden-covered ratio in 2017?

None of the options are correct.

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

ROE is a forward-looking, one-period measure, while business decisions span the past and present.

You are estimating your company's external financing needs for the next year. Your first-pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company's operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements?

Reduce the collection period

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000?

Retained earnings cannot grow by more than $12,000.

Why do financial managers need to understand the implications of the sustainable rate of growth?

Working capital, fixed assets, and external funding must all work together to support a company's sales expansion. If a planned growth in sales, for example, need external finance and no such financing is available, the company will be unable to grow at the required rate. Understanding the consequences of the sustainable growth rate can help managers see the need of growth management so that the company does not try to overrun its resources.

Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5, and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, of which half, is in cash and marketable securities. Assume that Primavera earns a 3 percent after-tax return on cash and securities. What would Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders?

between 40% and 60%

The sustainable growth rate

can never be greater than the return on equity.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

cash budget.

The sources and uses of cash over a stated period of time are reflected in the

cash flow statement.

Which of the following securities has a purely residual claim against a firm's cash flows?

common stock

Which one of the following statements is correct?

The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.

Which of the following statements concerning the cash flow production cycle is true?

The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?

The price of the underlying stoc

The price of a call option tends to be lower when which of the following is higher (all else equal)?

The strike price

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2017?

−3.04%

You are estimating your company's external financing needs for the next year. At the end of next year, you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the next year?

$20 million

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430, and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1?

$205

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2016?

0.97

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2017?

1.79%

Gujarat Corporation doubled its shareholders' equity during the year 2017. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2017?

100%

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. What holding period return, measured in yen, did you earn on the bond?

13%

Please refer to the financial information for Foodtek, Inc. above. Assuming that there were no financing cash flows during 2017 and basing your answer solely on the information provided, what were Foodtek's cash flows from operations (in millions of dollars) for 2017?

80

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Which one of the following statements is correct concerning the cash balance of a firm?

A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

Which of the following is NOT a major category on the cash flow statement?

Cash flows from selling activities

Sequoia Furniture Company's sales over the past three months, half of which are for cash, were as follows:

Cash receipts $498,000 Accounts receivable balance $623,000 Cash receipts $560,500 Accounts receivable balance $451,000

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.

I, II, and IV only

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products

I, III, and IV only

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017

Sources: Cash (10), Inventory (10), Bank loan (60), Equity (30) Uses: Accounts recievable (50), net fixed assets (40), long term debt (20)

Chapter 5 presents evidence that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States, while returns on common stocks have also exhibited more volatility than returns on U.S. government bonds. Suppose that last year, the realized rate of return on government bonds exceeded the return on common stocks. Your colleague suggests that "last year shows us that investors are now willing to settle for lower returns on stocks than on bonds." How would you interpret this result?

My colleague and I do not agree. The fact that government bonds achieved a better rate of return than ordinary stocks in a single year does not mean that investors are suddenly ready to accept lower stock returns. It either suggests that investors' expectations were not satisfied or that they were surprised. Risk-averse investors need a higher expected return to take on more risk. Expected returns, on the other hand, are not the same as actual returns. Because stocks and bonds are both hazardous investments, their returns will vary year to year, with bonds earning better returns than stocks in some years. Common stocks, on the other hand, should always outperform government bonds in terms of projected returns.

Shelf registration is possible for both debt and equity issues.

True

Principal amounts are usually exchanged

in currency swaps

The sustainable growth rate of a firm is best described as the

maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio.

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the

par value

Depreciation expense

reduces both taxes and net income.

The most popular yardstick of financial performance among investors and senior managers is the

return on equity.

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true?

the collection period decreased.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

times-burden-covered ratio