FIN 420 Questions

Which capital intensity ratio indicates the smallest need for fixed assets per dollar of sales? .07 .86 .39 1.00 1.15

.07

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? $303.33 $327.18 $405.60 $438.70 $441.10

6000 * 0.065 * 1.04 = 405.60

Marginal, or incremental revenue is the change in revenue that occurs when there is a small change in output.

True

Cross Corporation has Net Income of $4,095. Their retention ratio is 65%. How much will they payout in dividends this year? $1,000 $1,433 $2,033 $2,662 $4,000

$1,433 4095 * (1 - 65%)

Garner Corporation has total liabilities of $1,750 and equity of $4,450. Sales are $3,300. What is the Capital Intensity Ratio for Garner Corporation? .53 .72 1.25 1.68 1.88

1.88 1750+4450=6200 6200/3300=1.88

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? 28,269 units 24,584 units 29,306 units 31,966 units 25,085 units

487020+38009 / 29.99-9.06 = 25085

The Outlet has a capital intensity ratio of .87 at full capacity. Currently, total assets are $48,900 and current sales are $53,600. At what level of capacity is the firm currently operating? 87.00 percent 91.67 percent 95.36 percent 96.08 percent 98.21 percent

48900 / .87 53600 / 56206.90 = 95.36%

The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio. The total asset turnover is 1.5 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth? 2.40% 26.00% 5.31% 14.40% 8.50%

5.31% .06 * 1.5 * 1.6 = .144 .144 * (1 - 0.65) / (1 - (1 - .65) * .144) = 5.31%

The Mill Press is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed? 4.99 percent 5.78 percent 6.02 percent 6.38 percent 6.79 percent

6.38% 611000/ .94 = 650000 = 650000/611000 - 1 = 6.38%

The Soccer Shoppe has a return on assets of 9 percent, a return on equity of 11.3 percent, and a payout ratio of 22 percent. What is its internal growth rate? 7.72% 5.08% 8.49% 6.23% 7.55%

7.55% 0.09 * (1 - 0.22) / (1 - (0.09(1 - 0.22)

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? 4.94 percent 5.29 percent 7.93 percent 6.42 percent 3.58 percent

7.93% 7.5% * (1/.8) * (1 + .6) = .15 1 - 15810/31000 = .49 .15 * .49 / 1 - (.15*.49) = 7.93%

Jen owns 7,500 of the 480,000 shares of TC Inc. The company has just announced a rights offering whereby 75,000 shares are being offered at a subscription price of $12 a share. The current stock price is $16 a share. Assume she sells her rights and that all rights are exercised. What percentage of the firm will she own after the rights offering?

= 7500/(480000+75000) = 7500/ 555000

Nelson Paints recently went public by offering 50,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $17.50 a share and the gross spread was $2.30. After completing their sales efforts, the underwriters determined that they sold a total of 47,500 shares. How much cash did the company receive from its IPO?

=>47,500 shares*($17.50 - 2.30) =>$722,000.

MHM wants to diversify its operations. The stock price is $22 a share with 225,000 shares outstanding. Total assets are $7.2 million, total liabilities are $3.8 million, and net income is $425,000. The company is considering an investment that has the same PE ratio as the current company. The cost of the investment is $360,000 which will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the stock price to remain constant?

Company's current stock price(P0) = 22 No of share N = 225000 Net income E = 425000$ Earnings per share EPS = 425000/225000= 1.8888... P/E ratio= P0/EPS = 22/1.8888 = 11.6476 Cost of new investment = 360000$ wich will be financed by fresh equity issue since the price would remain unchanged i.e.22 ,the no. Of share to be issued = 360000/22 = 16363.6363$ Now since we want the same PE ratio with same price then our EPS have to be remain unchanged like PE rstio = P0/ EPS 11.6476 = 22/EPS EPS = 1.8888.... So our earnings from new investment = new no. Of share × EPS = 1.8888...× 16363.6363 = 30909.09 ROI = earnings/ total investment =( 30909.09/360000)×100= 8.59%

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? Degree of sensitivity Degree of operating leverage Accounting break-even Cash break-even Contribution margin

Degree of operating leverage

The Accounting Break-Even is the sales level that results in the same project net income as the prior year.

False

The internal growth rate is where the external funds needed (EFN) is equal to 1, also where the required increase in assets is exactly equal to the addition to retained earnings.

False

Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take if he wishes to take Harvest Foods public? Select an underwriter Obtain SEC approval Gain board approval Prepare a registration statement Distribute a prospectus

Gain board approval

What is an issue of securities that is offered for sale to the general public on a direct cash basis called? Best efforts underwriting Firm commitment underwriting General cash offer Rights offer Herring offer

General cash offer

New Town Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario?

In worst case, sales units are expected to be = 1,600 - 1,600 x 3% = 1,600 - 48 = 1,552 units In worst case, selling price is expected to be = 647 - 647 x 2% = 647 - 12.94 = $634.06 sales revenue under the worst-case scenario = Sales units x Selling price per unit = 1,552 x 634.06 = $984,061.12

Which one of the following statements concerning dilution is correct? Dilution of percentage ownership occurs whenever an investor fully participates in a rights offer. Market value dilution increases as the net present value of a project increases. Market value dilution occurs when the net present value of a project is negative. Neither book value dilution nor market value dilution has any direct bearing on individual shareholders. Book value dilution is the cause of market value dilution.

Market value dilution occurs when the net present value of a project is negative.

Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements? Need for additional fixed assets Current fixed costs Projected sales Correct Desired net income Desired dividend payments

Projected sales

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?

Sale price per unit= $349 Variable cost per unit = $139 Contribution margin per unit = sale price - variable cost Sale price in best case scenario= $349*1.03= $359.47 Variable cost in best case scenario = $139*0.99= $137.61 Contribution margin per unit ( in best case scenario) = $359.47 - $137.61= $221.86

A project with a life of 5 years is expected to provide annual sales of $250,000 and costs of $165,000. The project will require an investment in equipment of $475,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 40 percent. What is the annual operating cash flow for the best-case scenario?

Sales 250000*1.1=275000 Less Costs 165000*.9=148500 Less Depreciation 475000/5=95000 EBIT=31500 Less Tax @40% = 31500*.4=12600 OCF = EBIT - Taxes + Depreciation =31500-12600+95000 = 113900

Windows and More is reviewing a project with sales of 6,200 units, ±2 percent, at a sales price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the expected fixed costs are $87,000, ±1 percent. The depreciation expense is $68,000 and the tax rate is 21 percent. What is the net income under the worst-case scenario?

Sales = 6200*(1-2%)*29*(1-1%) = 174442 Less Costs = 6200*(1-2%)*11*(1+3%)+87000*(1+1%) Depreciation 68000 EBIT = -50269 Tax payable @21% = 10556 = -39173

A 9-year project is expected to provide annual sales of $241,000 with costs of $100,000. The equipment necessary for the project will cost $385,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 35 percent. What is the annual operating cash flow for the worst-case scenario?

Sales=$241000×90%=$216900 Costs=$100000×110%=($110000) Depreciation. =($42777.7) Earnings before taxes=$64122.22 Taxes.(64122.22×35%)=($22442.77) Earnings after taxes=$41679.45 Add: Depreciation. =$42777.7 Annual Operating cash flow=$84457.15

Which one of the following statements concerning scenario analysis is correct? The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. Scenario analysis determines which variable has the greatest impact on a project's final outcome. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. Management is guaranteed a positive outcome for a project when the worst-case scenario produces a positive NPV.

Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.

A firm wants a sustainable growth rate of 2.83 percent while maintaining a dividend payout ratio of 21 percent and a profit margin of 5 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable Growth rate(g) = 2.83% Retention ratio(b) = 1 - Dividend payout ratio = 1-0.21 b = 0.79 Calculating Return on equity(ROE):- 0.0283 = .79ROE / (1 -(.79ROE)) .0283 - 0.022357ROE = .79ROE 0.0283 = 0.812357*ROE ROE = 3.4837% As per DuPont naalysis:- ROE = profit margin*(1/capital Intensity ratio)*Equity Multiplier 3.4837% = 5%*(1/2)*Equity Multiplier Equity Multiplier = 1.3935 times - Equity Multiplier = 1 + Debt-Equity ratio 1.3935 = 1 + Debt-Equity ratio Debt-Equity ratio = 0.3935

Which one of the following will be used in the computation of the best-case analysis of a proposed project? Minimal number of units that are expected to be produced and sold The lowest expected salvage value that can be obtained for a project's fixed assets The lowest anticipated sales price per unit The lowest variable cost per unit that can reasonably be expected The highest level of fixed costs that is actually anticipated

The lowest variable cost per unit that can reasonably be expected

When evaluating financial planning steps, we must consider all of the following, except: The planning horizon for the next 2 to 5 years. The project horizon for the next 30 to 90 days. How all small projects are added up for one big project. Identifying the total need investment for the plan. Sets of assumptions for various scenarios.

The project horizon for the next 30 to 90 days.

Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate? Net working capital > $0 Total debt > $0 Dividend ratio = 0 Retention ratio = 0 Sales > Total assets

Total debt > $0

To generate a coherent plan, goals and objectives will have to be modified, and priorities will have to be established.

True

Scenario analysis is defined as the: determination of the initial cash outlay required to implement a project. determination of changes in NPV estimates when what-if questions are posed. isolation of the effect that a single variable has on the NPV of a project. separation of a project's sunk costs from its opportunity costs. analysis of the effects that a project's terminal cash flows has on the project's NPV.

determination of changes in NPV estimates when what-if questions are posed.

Kim placed an order with her broker for 700 shares of each of three IPOs being offered this week. Each of the IPOs has an offer price of $26. The number of shares allocated to Kim along with the closing prices on the first trading day are: Stock Shares Allocated PriceA 700 $25.15 B 360 29.17 C 280 31.19 What is Kim's total profit on these three stocks at the end of the first day of trading? $858.20 $5,257.00 $2,285.00 $1,999.40 $3,628.20

$1,999.40 700*25.15 + 360*29.17 + 280*31.19 = 36839.4 (700+360+280)*26=34840 36839.4-34840=1999.40

Ausel's Cabinets has $27,600 in net fixed assets and is operating at 96 percent of capacity. Sales are $36,200 currently. What is the required increase in fixed assets if sales are projected to increase by 14 percent? $4,205 $3,400 $6,833 $0 $2,605

$2,605 36,200 / .96 = 37708.33 27600/37708.33 * 1.14 * 36200 - 27600 = 2605

Draiman Guitars is offering 165,000 shares of stock in an IPO by a general cash offer. The offer price is $23 per share and the underwriter's spread is 8.5 percent. The administrative costs are $405,000. What are the net proceeds to the company? $2,662,425 $3,067,425 $3,472,425 $3,390,000 $3,795,000

$3,067,425 Net Proceeds = 165,000(23)(1 - 0.085) - 405,000 Net Proceeds = $3,067,425

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? $3,332.25 $3,659.75 $3,987.50 $9,212.50 $6,600.00

$3,987.50 (12-4.75)*550

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep these ratios constant? .05 .40 .55 .60 .95

.95 8% = ROE * (1 - 62%) / 1 - (ROE * (1 - 62%)) 8% = .38ROE / 1 - (.38ROE) 8% - 3.04%ROE = 38%ROE 8% = 41.04%ROE 8/41.04 = roe roe = 19.49% roe = profit margin * asset turnover * equity multiplier 19.49% = 10% * (1/1) * (1+D/E ratio) 19.49%/10% = 1 + d/e 1.949 - 1 = d/e = .949 = .95

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? 916,282 937,856 985,065 1,058,604 1,049,057

1,049,057 27.8 million / 26.50

Gravity, Inc., needs to raise $46 million to fund its expansion plans. The company will sell shares at a price of $27.60 in a general cash offer and the company's underwriters will charge a spread of 6.5 percent. How many shares need to be sold? 1,341,382 shares 1,980,590 shares 1,782,531 shares 1,564,945 shares 1,666,667 shares

1,782,531 shares 46,000,000 / 27.6 = 1,666,667 = 1,666,667 / (1 - 0.065) = 1782531

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 1,805,556 shares 1,884,563 shares 1,695,357 shares 1,750,456 shares

1,963,570 shares 52,000,000+875,000=52,875,000 52,875,000 / (1 - 0.065) = 56,550,802 56,550,802 / 28.8 = 1,963,570

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47? .72 .85 1.75 1.18 1.39

1.39 4.6%/3.3% = 1.39

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What is the total asset turnover (TAT)? 0.87 times 0.90 times 1.01 times 1.15 times 1.86 times

1.86 times 1 - .24 = .76 0.11= (ROA * 0.76) / 1- ( ROA * 0.76) 0.11 - .0836ROA = 0.76ROA 0.11 = .8436ROA 0.11/.8436 = ROA ROA= 0.1304 TAT = ROA/ Profit margin = 0.1304/ 0.07 = 1.86 times

Ranger Corporation is currently selling widgets for $40 at a cost of $20 per unit. Fixed costs are currently $500 and the current production is 100 widgets. What is the Operating Cash Flow at this output level? $1,500 $2,000 $2,500 $3,000 $3,500

2000 (40-20) * 100 = 2000

N Corp has a variable cost per unit of $1.20, and the lease payment on the production facility runs $4,200 per month. N Corp sells the units at $4.60 and has depreciation equal to $225. What is the amount of units that N Corp needs in order to break-even?

4200+225 / 4.6-1.2 = 1301

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider: lowering the degree of operating leverage. lowering the contribution margin per unit. increasing the initial cash outlay. increasing the fixed costs per unit. lowering the operating cash flow.

lowering the degree of operating leverage.

The value of a right depends upon the number of rights required for each new share as well as the: subscription price and book value per share. market and book values per share. market price, book value, and subscription price. market and subscription prices. difference between the market and book values per share.

market and subscription prices

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. auction quiet lockup Green Shoe red

quiet

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a(n) _____ underwriting. standby best efforts firm commitment direct fee oversubscription

standby

To purchase a share in a rights offering, an existing shareholder generally just needs to: pay the subscription amount in cash. 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.

submit the required number of rights along with the subscription price

You currently own 11 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a $3.2 million rights offering with a subscription price of $25 per share with one right issued for each share of stock. Assume that all rights are exercised. What will be your new ownership position if you opt to sell your rights rather than exercise them?

​​​​​​Stock owned = 2.8*11% = .308 Million or 308000 Number of right issue = 3200000/25=128000 Total stock after right issue = 2800000+128000 New percentage =3080000/2928000*100 =10.52%

Smith Corporation has variable costs equal to $5.10 per unit, fixed costs of $11,000, and total output equal to 240 units. What is the total cost? $9,776 $11,000 $12,224 $15,110 $17,224

12224 5.1*240 + 11000

Fix-It Co. wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve? 8.13 percent 13.46 percent 13.73 percent 14.33 percent 14.74 percent

13.73% Retention ratio = 1 - dividend payout Retention ratio = 1 - 0.4 Retention ratio = 0.6 Sustainable growth rate = [(retention * ROE)] / (1 - retention*ROE) 0.0989 = [(0.6 * ROE)] / (1 - 0.6*ROE) 0.0989 - 0.05934ROE = 0.6ROE 0.0989 = 0.65934ROE ROE = 0.15 or 15% Profit margin = ROE*(1 / 1.3)*1.42 0.15 = ROE*1.092308 ROE = 0.1373 or 13.73%

Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to fund its expansion?

Net price after underwriter spread = $43 * (1 - 7.5%) = $39.775 Total capital needed = Fund for growth + Legal and filing fees = $6,800,000 + $352,000 = $7,152,000 Number of shares = $7,152,000/39.775

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?

OCF = [($339 - $168) × 5,700) - $425,000][1 - 0.21] + [$156,000 × 0.21] = $467,023

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?

Payout Ratio = 30% Retention Ratio, b = 1 - Payout RatioRetention Ratio, b = 1 - 0.30Retention Ratio, b = 0.70 Internal Growth Rate = [ROA * b] / [1 - ROA * b]Internal Growth Rate = [0.1420 * 0.70] / [1 - 0.1420 * 0.70]Internal Growth Rate = 0.09940 / 0.90060Internal Growth Rate = 0.1104 or 11.04%

Shoe Supply has decided to produce a new line of shoes that will have a selling price of $68 and a variable cost of $27 per pair. The company spent $187,000 for a marketing study that determined the company should sell 85,000 pairs of the new shoes each year for three years. The marketing study also determined that the company will lose sales of 24,000 pairs of its high-priced shoes that sell for $129 and have variable costs of $63 a pair. The company will also increase sales of its inexpensive shoes by 19,000 pairs. The inexpensive shoes sell for $39 and have variable costs of $15 per pair. The fixed costs each year will be $1.42 million. The company has also spent $1.29 million on research and development for the new shoes. The initial fixed asset requirement is $4.2 million and will be depreciated on a straight-line basis over the life of the project. The new shoes will also require an increase in net working capital of $447,000 that will be returned at the end of the project. Sales and cost projections have a ±2 percent range. The tax rate is 21 percent, and the cost of capital is 12 percent. What is the NPV for the new line of shoes assuming the base-case scenario?

Sales = $68 (85,000) + $129 (−24,000) + $39 (19,000) Sales = $3,425,000 Variable costs = $27 (85,000) + $63 (−24,000) + $15 (19,000) Variable costs = $1,068,000 OCF = ($3,425,000−1,068,000−1,420,000) (1−.21) + ($4,200,000/3) (.21) OCF = $1,034,230 NPV = −$4,200,000 − 447,000 + $1,034,230 {[1 − (1/1.12)]/.12} + $447,000/1.12 NPV = −$1,844,788

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: will never pay back. has a zero net present value. is operating at a higher level than if it were operating at its cash break-even level. is operating at a higher level than if it were operating at its financial break-even level. is lowering the total net income of the firm.

is operating at a higher level than if it were operating at its cash break-even level.