FIN 431 Test #2

Ole Miss Inc is a start-up company and is not expected to pay any dividends for 4 years. Beginning in Year 5, earnings are expected to stabilize and grow at a sustainable rate of 6% indefinitely and the firm is expected to payout 40% of its earnings in dividends. Analysts estimate that the firm's earnings in Year 5 are going to be $2.95 per share. GIven a required rate of return of 11% the value of the stock today is closest to

$15.55

Alabama Inc. has $100 in inventories, a current ratio equal to 1.2 and a quick ratio equal to 1.1. What is Alabama Inc.'s Net Working Capital

$200

Oxford Inc has a net profit margin of 12% a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. Oxford's ROE is

17.3%

Ole Miss Inc has a 5% cost of debt capital a 20% cost of equity capital;, and a weighted average cost of capital of 10% . What is the D/E ratio? Assume there are no taxes.

2

A firm that is worth $1 million and is financed with 30% risk-free debt and 70% equity, grows in value to $1.5 million. What is its new debt/equity ratio?

25%

MS Inc, has 5 million shares outstanding. The stock is currently trading for $40 with an EPS of $1.60 and a P/E Multiple of 25. The company's directors announce a 10% stock dividend. The company' stock price after the stock dividend will be closest to:

36.36

The least likely common dividend policy practice is for managers to:

Aim for a target payout ratio relying on forecasts of short term earnings

Which of the following usually occur with a stock dividend?

Both B and C the price per share falls no cash leaves the firm

Following are the most reliable factors that can explain a firm's leverage, except

CEO of the firm

Investors are most likely to be indifferent between share repurchases and cash dividends when the

Capital gains tax rate equals tax rate on a dividend income

Under MM-Proposition 1 with no taxes, an increase in the proportion of debt in the capital structure results in

No impact on future cash flows and no impact on the cost of capital

The following are the limitations of ratio analysis, except:

Ratios cannot be used for comparisons across time for the same firm

Given that there are no taxes and no costs of financial distress, as the proportion of debt in a company's capital structure increases:

The cost of equity increases, but the WACC remains the same

Which of the following statements about the Internal Rate of Return is not true?

Using IRR to measure return assumes that all income earned over the investment horizon is reinvested at the cost of capital

If you are thinking of debt in terms of a constant fraction of firm value, would you prefer WACC or APV? If you are thinking of debt in terms of a dollar amount that will vary predictably in the future, would you prefer WACC or APV

WACC; APV

Which of the following companies has the lowest creditworthiness?

a company with a higher number of days receivables

Agency costs of equity are most likely to be higher for a company relative to its peers if it has:

a lower debt-to-equity ratio

Which of the following statements is most accurate?

a price-to-book ratio is higher than the industry average suggests that investors believe that the company has more significant future growth opportunities than its industry peer

Financial ratios that indicate the efficiency of a firm in utilizing its various assets are commonly known as

activity ratios

Which of the following statements regarding a firm's return on equity is least accurate?

an increase in ROE is always a positive sign for the firm

Consider the following statements: Statement 1: A higher degree of info asymmetry generally tends to encourage greater use of debt financing to equity financing. Statement 2: companies in countries with lower tax on dividends generally have relatively lower debt in their capital structures

both statements are correct

The cost of a firm's equity

can be substantially higher than the firm's weighted average cost of capital

A manager should attempt to maximize the value of the firm by changing the capital structure if and only in the value of the firm increases to the benefit of the stockholder

change the capital structure if and only if the value of the firm increases to the benefit of the stockholders

Ratios must be compared to a benchmark. Comparing firms to other firms or to its industry is known as

cross-sectional analysis

Which of the following is not a step in comparable company analysis?

discount future cash flows using the weighted average cost of capital

The Modigliani Miller theorem says that in a frictionless world, it does not matter whether you finance your firm with debt or equity, because in such a world, the expected rate of equity is equal to the expected rate of return on debt. Is this statement true or false?

first half of the statement is true, but the second half of the statement is false

Which of the following statements is FALSE?

free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered

Which of the following is a key financial characteristic to examine when screening for financial ratios for comparable companies?

growth profile

Which of the following statements about stock valuation is FALSE?

if estimated value<the market price, buy the stock; it's underpriced.

Given that there are taxes but no bankruptcy, agency, and lost tax shield costs, as the proportion of debt in a company's capital structure increases, the value of the company

increases

Which of the following is a FALSE statement?

interest payments are obligations only after the Board of Directors declare them.

Which of the following predicts the existence of an optimum capital structure for an individual firm that is financed with both debt and equity

none of the above

24. Consider the following statements: Statement 1: According to Jensen's free cash flow hypothesis, higher debt levels increase agency costs Statement 2: The cost associated with asymmetric information decrease as more debt is issued

only statement 2 is correct

Among the answer options, select the most secure, cheapest security,

senior debt

The CFO of Ole Miss Business Inc informs the company's CEO that the value of the firm will be maximized when the weighted average cost of capital is minimized and that this minimization occurs when the compan;s debt to equity ratio is at a level where the marginal benefits of debt financing are exactly offset by the marginal costs of debt financing. The CFO most likely

static tradeoff theory

Which of the following is most accurate?

taxes matter in capital budgeting analysis

Which of the following statements is true regarding NPV Profiles?

the point of intersection between the NPV profile and the X-axis is the IRR of the project

A stock split increases the number of outstanding shares while

the total owner's equity remains constant