FIN 420 Study set

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

$.77

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

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

A firm has a cost of debt of 6.3 percent and a cost of equity of 11.5 percent. The debt-equity ratio is .69. There are no taxes. What is the firm's weighted average cost of capital?

9.38% WACC = .115(1/1.69) + .063(.69/1.69)WACC = .0938, or 9.38%

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

Discounted payback period equal to the project's life

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

Ex-rights date

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

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

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

Filing proofs of claim

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

IRR and net income

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

Paying an outside accountant to prepare bankruptcy reports

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

Payment of employees' wages

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

Projected sales

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

Simulation

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

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

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

Underwriting experience

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

aggregation.

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

fixed assets.

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

private equity.

The external financing need:

will limit growth if unfunded

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

worst-case scenario analysis.

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

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

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $153,000 per year. The cost of equity is 11.1 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering converting to a debt-equity ratio of .63. What is the firm's levered value?

$1,029,278 VU = $153,000(1 − .34)/.111VU = $909,730VL = $909,730 + .34(.63/1.63)($909,730)VL = $1,029,278

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

$12,209

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

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

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

$64,347

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

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

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

Financial planning:

considers multiple options and scenarios.

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

dilution.

Financial plans:

often contain alternative options based on economic developments.

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

reorganization

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

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

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

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

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

$17,308

Northern Air would like to sell 5,900 shares of stock using Dutch auction underwriting. The bids received are: Bidder Quantity PriceA 1,300 $29.85 B 1,400 29.50 C 1,800 29.35 D 2,000 29.00 E 2,200 28.80 How much will the company raise in its offer? Ignore all flotation and transaction costs.

$171,100

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

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

$2,260 EFN = 1.14 ($48,900) − 1.14($3,650) − $18,100 − 27,150 − ($5,500 − 1,925) (1.14)EFN = $2,260

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

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

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

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

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

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

The Peter Corp. and the Sellers Company have both announced IPOs. You place an order for 550 shares of each IPO. One of the IPOs is underpriced by $12.00 and the other is overpriced by $4.75. If you could get all of the shares you ordered for each IPO, what would your profit be?

$3,987.50

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

$36.24 Contribution margin = ($39,480 + 8,724)/1,330Contribution margin = $36.24

Rappaport Industries has 5,200 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 5.8 percent and a yield to maturity of 6.1 percent. The tax rate is 40 percent. What is the present value of the interest tax shield?

$4,160,000 Interest tax shield = .40 × 5,200 × $2,000Interest tax shield = $4,160,000

Kelso Electric is an all-equity firm with 45,500 shares of stock outstanding. The company is considering the issue of $310,000 in debt at an interest rate of 8 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 28,000 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans?

$64,480 EBIT/45,500 = [EBIT − $310,000(.08)]/28,000EBIT = $64,480

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

.36

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

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

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

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

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? Multiple Choice

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

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

18 months

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? Multiple Choice

183,333

Jenny Corp. needs to raise $55 million to fund a new project. The company will sell shares at a price of $29.40 in a general cash offer and the company's underwriters will charge a spread of 7.5 percent. The direct flotation costs associated with the issue are $1,025,000. How many shares need to be sold?

2,060,121 shares

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

20,233 units

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

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

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

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

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

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

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

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

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

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

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

Which one of these combinations must increase the contribution margin?

Increasing the sales price and decreasing the variable cost per unit

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

Internal growth rate

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

Marginal cost

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

Operating cash flow

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?

Venture capital

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

Venture capitalists should have key contacts and financial strength.

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?

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?

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

capital rationing.

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

cash break-even point.

The financial planning process is least apt to:

consider the development of future technologies.

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

decrease in total assets

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

facing hard rationing.

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

financial break-even point.

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

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

Forecasting risk is defined as the possibility that:

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

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

likely to occur.

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

maximum; excluding external financing of any kind

Existing shareholders:

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

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

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

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

retention ratio.

Financial plans generally tend to ignore:

risks associated with cash flows.

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

sensitivity

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

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

The plowback ratio is:

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

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

varies proportionally with sales.

The absolute priority rule determines:

which parties receive payment first in a bankruptcy proceeding.