Finance 4300 Exam 2

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

decrease in the dividend payout ratio

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.

. Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely

open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded.

Preferred stock differs from common stock in that

preferred stock dividends are fixed

Which of the following is an advantage of using private placements for debt?

reduced costs from the elimination of the registration statement for the SEC, investment banking underwriting fees and distribution costs

General Motors raises money by selling a new issue of equity. This transaction occurs in

the primary market.

Which one of the following statements is f true?

When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

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

common stockholders

The retention ratio is

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

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 rate of return did the common stockholders earn in fiscal year 2017?

5.13 15.22%

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?

4.12 100%

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?

4.13 6%

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

4.14 $14,700

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?

4.16 10.83%

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85, and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin?

4.17 10.13%

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?

4.18 18.24 percent

What is the sustainable growth rate for 2016?

4.19 9.97%

What is the difference between Boss's sustainable growth rate and its actual growth rate for 2017?

4.20 -3.04%

Company XJD have a 6% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 14 years until maturity, and sell for $975. What is the current yield for XJD's bonds?

5.10 6.15%

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?

5.17 4.9 million

Company A issued 20-year $ 1000 par bond 15 years ago. The bond pays 7% interest, semiannually. If the required rate of return equals 8%, what is today's intrinsic value of this bond? (round to the nearest integer)

5.7 $959

Company B issued bonds on January 1, 2000. The bonds had a coupon rate of 11%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2025. What is the yield to maturity for a PBJ Corporation bond on January 1, 2018 if the market price of the bond on that date is $925? (round to the nearest percentage)

5.8 13%

Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for $758.18 and pay interest semiannually. Investors require a rate of 9% on the bonds. What is the bonds' coupon rate?

5.9 6.37%

KL Corporation has a projected times-interest-earned ratio of 4.0 for next year. What percentage could EBIT decline next year before JKL's times-interest-earned ratio would fall below 1.0?

6.19 75%

Consider a firm that borrows at 8% and then deducts its interest expense from its revenues before paying taxes at the rate of 23%. What is the actual cost of borrowing for this firm?

6.2 6.16%

Firm A has an operating profit of $1,500,000. Its interest expense is $800,000. What is the percentage EBIT can fall before times interest earned falls below one?

6.20 46.7%

Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, semi-annual, $1,000 par, 9% coupon bonds. The bond is expected to be sold at $1,020. Crandal's marginal tax rate is 23%. What is the after-tax cost of debt for the newly-issued bonds?

6.3 6.74%

The risk-free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2. Using the capital asset pricing model, what is Rogue Transport's cost of common stock?

6.4 20.1%

The market risk premium is 6.5% and the risk-free rate is 1.5%. What is the required rate of return on common JTI's common stock if its beta is 1.4 and JTI's marginal tax rate is 25%.?

6.5 10.6%

The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the expansion's WACC?

6.6 10.74%

Kokapeli, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If the firm's yield to maturity on bonds is 7.5% and investors require a 15% return on the firm's common stock, what is the firm's weighted average cost of capital?

6.7 10.80%

Blammo, Inc. has estimated its weighted average cost of capital to be 10%. Its cost of equity is 12%, and it's before-tax cost of debt is 10%. The firm has a tax rate of 25%. What is the weight of equity in the firm's capital structure?

6.8 55.50%

Which one of the following statements is true?

After issue, the market price of a fixed-rate bond can differ substantially from its par value

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

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

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 one of the following statements is false?

For equity, cost of equity is always higher than the required rate of return on common stock.

Which one of the following statements is true?

Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds

According to the pecking order theory, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources, such as retained earnings II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. Firms should aim to reach a target debt-ratio in the long-run.

I and II

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Tax benefits IV. Financial flexibility

I and III

Which of the following affect an asset's value to an investor? I. Amount of an asset's expected cash flow II. The riskiness of the cash flows III. Timing of an asset's cash flows IV. Investor's required rate of return

I, II, III, IV

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

Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio

I, II, III, and IV

The term "financial distress costs" includes which of the following? I. Bankruptcy cost II. Indirect cost III. Conflicts of Interest IV. Flotation costs

I, II, and III

Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new public information. II. It is difficult for the typical investor to earn above-average returns without taking aboveaverage risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient

I, II, and III

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Bankruptcy costs IV. Financial flexibility

II, III, and IV

Increase in financial leverage I. increases expected ROE but does not affect its variability. II. increases expected return and risk to owners. III. decreases times interest earned. IV. reduces sustainable growth rate

II, and III

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

Which of the following will cause the value of a bond to increase, other things held the same? I. Required rate of return on the bond increases. II. The company's rating drops from AAA to BBB. III. Interest rates decrease. IV. The company issues new debt

III only

Which one of the following statements is true?

If the operating return on assets is greater than the interest rate on a debt, then a higher debtto-equity ratio increases return on equity.

Which of the following statements regarding junk bonds is true?

In case of bankruptcy, junk bonds have higher priority than preferred stock.

Which one of the following statements is false?

Increased debt amplifies coverage ratios

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

Issuing at a lower market price

Which one of the following statements is true?

Junk bonds are below investment grade.

Which of the following is NOT a reason for why U.S. corporations haven't issued more equity in recent years?

Managers usually believe that their stock is overvalued

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

Which of the following statements is MOST correct?

No matter if a firm pays dividend or not, the cost of common stock is normally bigger than cost of debt

All of the followings are true except for

Share repurchases usually decrease earnings per share.

All of the followings are false except for

The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage