Fin 415 Final

*During 2016, Acadia, Inc. earned net income of $750,000. The firm increased its accounts receivable during the year by $250,000. The book value of its assets declined by an amount equal to the year's depreciation charge, or $150,000, and the market value of its assets increased by $25,000. Based only on this information, how much cash did Acadia generate during the year?* A. $650,000 B. $850,000 C. $675,000 D. $875,000

A. $650,000

*Which of the following statements is FALSE?* A. All else equal, decreasing the projected amount of accounts receivable in a finical forecast will increase external funding required. B. Estimated of external funding required based on cash flow forecasts should be equal to estimates based on pro forma finical statements. C. An annual financial forecast for 2018 showing no external funding required may still result in cash shortfalls during 2018 due to seasonality. D. Scenario planning and simulation analysis provide valuable improvements over the point estimate forecasts generated by standard pro forma analyses.

A. All else equal, decreasing the projected amount of accounts receivable in a finical forecast will increase external funding required.

*Which of the following formulas correctly defines the cash conversion cycle period (CCC)?* A. CCC = Days inventory outstanding + Collection Period - Payables Period B. CCC = Days inventory outstanding + Collection Period + Payables Period C. CCC = Operating Cycle + Collection Period + Payables Period D. CCC = Asset turnover + Financial leverage

A. CCC = CCC = Days inventory outstanding + Collection Period - Payables Period

*Which of the following financial ratios is NOT a component of the 3-party ROE equation?* A. Cash ratio B. Asset turnover C. Profit margin D. Financial leverage

A. Cash ratio

*Which of the following explanations is NOT one of the reasons why should companies with promising investment opportunities should strive to maintain conservative capital structures?* A. Firms with high growth potential can take advantage of tax shields with more equity financing. B. Companies with promising investment opportunities typically have valuable intangible assets whose value would decline sharply if the company got into financial difficulty. C. Firms with soft assets incur higher financial distress compared to firms with hard assets. D. It is important for such companies to maintain the financial flexibility that comes with a conservative capital structure to assure funding for future investment opportunities.

A. Firms with high growth potential can take advantage of tax shields with more equity financing.

*Which of the following financing strategies would NOT be prudent financial advice for a firm that is facing sustained cash deficits?* A. Increasing dividend payments B. Selling new equity C. Increasing leverage through issuance of new debt D. Pruning unprofitable procedures or operating divisions

A. Increasing dividend payments

*Which of the following statements related to the Sungreen case study assignment is TRUE?* A. The case demonstrated how risk adjusted discount rates could be calculated by finding pure play firms to estimate the basic business risks inherent in the market in which the firm planned to invest. B. Sungreen should have used a payback period analysis as its primary measure of value creation due to the riskiness of the project's pro forma cash flows. C. Sungreen's "twin firm" analysis involved picking two similar firms in its existing product market to bring the firm's debt ratio closer to the industry average. D. The cased used simulation analysis to account for the uncertainty in the project's cash flows by allowing the key model inputs to vary based on various probability distributions.

A. The case demonstrated how risk adjusted discount rates could be calculated by finding pure play firms to estimate the basic business risks inherent in the market in which the firm planned to invest.

*Kahuku Corporation has 100 million shares outstanding trading at $20 per share. The company announces its intention to raise $150 million by selling new shares. At what price should Kahuku expect its existing shares to sell immediately after the announcement? Assume that the MV of the firm drops by 30% of the issue size immediately following the announcement.* A. $20.00 B. $19.50 C. $19.00 D. $18.50

B. 19.50

*A company wants to raise $500 million in a new stock issue. Its investment banker indicates that the sale of new stock will required 8 percent underpricing and a 7 percent spread. (Hint: the underpricing is 8 percent of the current stock price, and the spread is 7 percent of the issue price.) In addition to the underwriters fee, the firm will incur $10,000,000 in legal, accounting, and other costs. Assuming the company's stock price does not change from its current price of $75 per share, how many shares must the company sell?* A. 7.77 million B. 7.95 million C. 8.23 million D. 8.55 million

B. 7.95 million

*When using risk bucket for different project types, which of the following cost of capital rankings would reflect a ballpark estimate of project risks form highest risk to lowest risk?* A. Replacement or repair projects > Expanding existing product lines > Introducing new product lines B. Introducing new product lines > Expanding existing product lines > Replacement or repair projects C. Introducing new product lines = Replacement or repair projects = Expanding existing product lines D. None of the above

B. Introducing new product lines > Expanding existing product lines > Replacement or repair projects

*Which of the following cases we studied demonstrated a firm that financed its global rapid growth strategy through predominantly short-term bank loans with variable interest rates, which compounded the firm's exposure to rising interest rates?* A. PIPES B. Massey Ferguson C. Marriott Corp. D. AT&T

B. Massey Ferguson

*Which of the following statements is FALSE?* A. The cost of capital is the return that "keeps the firm's stock price constant." B. The average cost of capital (WACC) ignores the effects of any tax shields capture by the firm. C. The average cost of capital (WACC) can serve as the discount rate for a project of average risk. D. To incorporate the degree of risk into the evaluation of an investment opportunity, one must use a risk-adjusted discount rate.

B. The average cost of capital (WACC) ignores the effects of any tax shields capture by the firm.

*Homemade leverage is:* A. The incurrence of debt by a corporation in order to pay dividends to shareholders. B. The borrowing or lending of money by individual shareholders as a means to achieve they target financial leverage regardless of the capital structure decision made by the firms. C. The exclusive use of debt to fund a corporate expansion project D. Best defined as an increase in a firm's debt-equity ratio.

B. The borrowing or lending of money by individual shareholders as a means to achieve they target financial leverage regardless of the capital structure decision made by the firms.

*During 2016, Acadia, Inc. earned net income of $500,000. The firm increased its accounts receivable during the year by $150,000. The book value of its assets declined by an amount equal to the year's depreciation charge, or $130,000, and the market value of its assets increased by $25,000. Based only on this information, how much cash did Acadia generate during the year?* A. $500,000 B. $780,000 C. $480,000 D. $805,000

C. $480,000

*Caterpillar Corporation recently had a market value of equity of $70 billion with 500 million shares outstanding. The book value of its equity is $14 billion. If the company repurchases 25 million shares in the stock market at their current price, how will this affect the number of shares and price per share? Assume that there are no taxes or transaction costs, and investors do not change their perception of the firm.* A. 500 shares at $133 B. 475 shares at $133 C. 475 shares at $140 D. 525 shares at $147

C. 475 shares at $140

*Which of the following statements is FALSE?* A. The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity. B. For firm with positive taxable earnings, debt financing results in lower after-tax earnings relative to equity financing. C. A company incurs costs of financial distress only after declaring bankruptcy. D. When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

C. A company incurs costs of financial distress only after declaring bankruptcy.

*Which of the following statements related to the Apple case study assignment is TRUE?* A. As is often the case, Apple's announcement to pay dividends triggered a selloff in the firm's shares due to the negative signaling effects of dividend announcements. B. Shortly after the announcement, Apple quickly repatriated its cash reserves held overseas to help fund its dividend payment obligations. C. Apple's decision to initiate cash dividends signals to the investors that management has confidence in the firm's future ability to generate cash flows from its operations. D. The firm's unreasonably generous payout ratio has made the firm vulnerable to not being able to fund critical R&D expenses in the future.

C. Apple's decision to initiate cash dividends signals to the investors that management has confidence in the firm's future ability to generate cash flows from its operations.

*Which of the following actions by R&E sales was NOT among the changes it made to bring down its external funding needs below $1 million?* A. Tighten up AR, so that receivables period drops from 51 to 47. B. Increase payables period from 59 to 60. C. Increase its sales forecast from 20% to 25% D. Accept a lower net profit margin due to a necessary increase in SG&A expenses.

C. Increase its sales forecast from 20% to 25% More sales means more funding

*Which of the following cases we studied demonstrated a firm responding to a shift in its product market strategy by increasing its financial leverage through a share repurchase program that was financed by long-terms fixed-rate bonds?* A. PIPES B. Massey Ferguson C. Marriott Corp. D. AT&T

C. Marriott Corp.

*Which of the following statements is FALSE?* A. The payback period ignores cash flows after payback, and also ignores the time value of money. B. The payback period is useful as a rough guide to project risk for highly risky investments. C. The accounting rate of return is the primary figure of merit in measuring value creation for equity holders. D. Discounted cash flow analysis, as the backbone of modern finance, relies on the principle of equivalence, which states that two cash flow streams with the same present value can be transformed into each other.

C. The accounting rate of return is the primary figure of merit in measuring value creation for equity holders.

*The Coca-Cola Company's beta is 0.7. The long-term government bond rate is 3%. Assuming 6% for the historical excess return on common stocks, what is Coca-Cola's cost of equity capital?* A. 9.0% B. 8.1% C. 5.2% D. 7.2%

D. 7.2%

*Which of the following statements is TRUE?* A. If a company gets into financial difficulty, it can use some of its shareholders' equity to pay its bills for a time. B. The "goodwill" account on the balance sheet is an attempt by accountants to measure the benefits that result from a company's public relations efforts in the community C. If a company increases its dividend, it's net income will decrease D. A reduction in an asset is a source of cash, while a reduction in a liability account is a use of cash.

D. A reduction in an asset account is a source of cash, while a reduction in a liability account is a use of cash.

*Which of the following cases we studied provided an example of a firm's response to a drastic increase in its basic business risk and a decrease in its annual capital investments needs by using its excess cash flows to reduce its financial leverage?* A. PIPES B. Massey Ferguson C. Marriott Corp. D. AT&T

D. AT&T

*Which of the following formulas can be used to calculate the financial performance measure commonly used to evaluate the working capital needs to a business?* A. Days inventory outstanding + Collection Period + Payables Period B. Operating cycle + Collection Period + Payables Period C. Asset turnover + Financial leverage D. Days inventory outstanding + Collection Period - Payables Period

D. Days inventory outstanding + Collection Period - Payables Period

*Which of the following explanations is NOT among possible reasons to explain why most stock issues are followed by drops in stock price on the announcement date?* A. Managers know more about their company than outsiders do and that the announcement of an equity sale signals they are worried about the company's prospects. B. Managers must believe the company's stock is overvalued at the current price otherwise they would not have sold new equity. C. Fast-growth firms, with considerable private information on their firms' future prospects, can be particularly expose to negative investor reaction following new equity announcements. D. Investors fear that increased share of equity financing would worsen the financial distress costs incurred by the firm.

D. Investors fear that increased share of equity financing would worsen the financial distress costs incurred by the firm.

*Which of the following statements is FALSE?* A. The BCR is also known as the profitability index. B. The decision rule for the Benefit Cost Ratio (BCR) is to accept projects with BCR>1 and to reject projects with BCR<1. C. The internal rate of return (IRR) is "the" discount rate that makes the PV of a stream of cash flows equal to zero. D. The decision rule for the IRR to accept projects with IRR<K and to reject projects with IRR>K (K = cost of capital).

D. The decision rule for the IRR to accept projects with IRR<K and to reject projects with IRR>K (K = cost of capital).

*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

*Financial leverage:* I. increases expected ROE but does not affect its variability II. is a fundamental financial variable affecting sustainable growth III. increases expected return and risk to owners

II and III only

*Which of the following factors favor the issuance of equity in the financing decision?* I. Tax shields II. Distress costs III. Management incentives IV. Financial flexibility

II and IV only Equity - Distress costs - Flexibility Debt - Mgmt inventives - Tax benefits - Market signaling