HIGGINS Exam

The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

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

The basic lesson of the M&M theory is that the value of a firm is dependent upon: A. the firm's capital structure. B. the total cash flow of the firm. C. minimizing the marketed claims. D. the amount of marketed claims to that firm. E. the size of the stockholders' claims. F. None of the above.

B. the total cash flow of the firm.

In venture capital valuation, the post-money valuation is equal to the pre-money valuation plus the amount of the venture capitalist's investment.

True

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows

True

When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.

True

When projected cash flows are in nominal dollars, they should be discounted with a nominal discount rate.

True

A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.

false

An annual financial forecast for 2013 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2013

false

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices.

false

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

false

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

true

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

true

In some instances, additional debt financing can encourage managers to act more in the interests of owners.

true

Issue costs of equity are high relative to those of debt.

true

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using a warranted price-to-earnings multiple as your estimate? A. $225 million B. $3,833.0 million C. $4,207.5 million D. $4,365.0 million E. $6,788.1 million F. None of the above.

C. $4,207.5 million Terminal value2014 = 18.7 × $225 million = $4,207.5 million.

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's earnings per share if Squamish sells 2 million new shares at $20 a share. A. 1.28 B. 1.39 C. 2.00 D. 2.22 E. 4.00 F. None of the above.

C. 2.00

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent. A. 1.28 B. 2.00 C. 2.12 D. 2.22 E. 3.06 F. None of the above.

C. 2.12

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize? A. 0.48% B. 2.40% C. 4.80% D. 5.10% E. 20.83% F. None of the above.

C. 4.80% r = A/P = $2.40/$50 = 4.80%

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

C. dividend policy

The best financing choice is the one that: A. sets the debt-to-assets ratio equal to 1. B. trades off the tax disadvantage of debt against the signaling effects of equity. C. maximizes expected cash flows. D. ignores the false comfort of financial flexibility. E. results in the lowest possible financial distress costs.

C. maximizes expected cash flows.

In general, the capital structures used by non-financial U.S. firms: A. typically result in debt-to-asset ratios between 60 and 80 percent. B. tend to converge to the same proportions of debt and equity. C. tend to be those that maximize the use of the firm's available tax shelters. D. vary significantly across industries. E. None of the above.

D. vary significantly across industries

Sol's Sporting Goods is expanding, and as a result expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16 percent required rate of return? A. $18,477.29 B. $21,033.33 C. $28,288.70 D. $29,416.08 E. $32,409.57 F. None of the above.

E. $32,409.57 The initial investment consists of the fixed assets and incremental working capital: $39,000 + $3000 = $42,000. The working capital amount is recovered at the end of year 4. Solve for the PV of the cash inflows, and then subtract the initial investment: NPV = 74,409.57 - 42,000 = $32,409.57

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670 F. None of the above.

B. $1,034

Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the above.

B. $1,380

All else equal, a terminal value based on a no-growth perpetuity would be higher than a terminal value based on a perpetuity with 2 percent growth.

False

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 A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, II, and IV only F. None of the above.

B. I and III only

Asset betas measure financial risk and business risk.

False

Failing to include real options in a project valuation could cause the NPV of the project to be overestimated.

False

In reality, the cost of equity is always less than the cost of debt because firms are not obligated to pay out cash to shareholders.

False

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments. A. I and II only B. I and III only C. II and III only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

B. I and III only

The adjusted present value (APV) method of valuation is superior to the standard WACC method of valuation because the WACC method makes no adjustment for interest tax shields

False

When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the project's cash flows.

False

As a noncash expense, depreciation is irrelevant in the determination of a project's cash flows.

False

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

true

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

true

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

A. $14,700 Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700

What is the difference in the value of a $5,000 annual perpetuity and an annuity of $5,000 for 100 years? Assume that the discount rate is 8% and that cash flows are received at the end of the year. A. $28 B. $656 C. $1,656 D. $5,000

A. $28 The present value of the perpetuity is 5,000/0.08 = $62,500. For the annuity: The difference = 62,500 - 62,472 = $28

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

A. $3.50

Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? A. $400 B. $600 C. $1,800 D. $2,200 E. $2,600 F. None of the above.

A. $400 The NPV of the merger is the market value of the target firm, plus the value of the enhancements, minus the acquisition costs: NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014? A. $5,349 B. $5,436 C. $5,451 D. $5,536

A. $5,349

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance? A. $560,000 B. $1,400,000 C. $8,000,000 D. $20,000,000

A. $560,000 Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same? A. $750,000 B. $1,250,000 C. $1,000,000 D. $1,400,000 E. $4,000,000 F. None of the above.

A. $750,000

EAC Nutrition offers a 9.5 percent coupon bond with annual payments, maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000? A. $895.43 B. $896.67 C. $941.20 D. $946.18 E. $953.30 F. None of the above.

A. $895.43 Price = present value of coupons and face value Coupon payment = 0.095 × 1000 = $95 per year

Please refer to the information for FM Foods above. Estimate the appropriate weight of debt to be used when calculating FM's weighted-average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above.

A. 11.5% Market value of equity = $40 × 240 million = $9,600 million. Weight of debt = 1,250/(9,600 + 1,250) = 0.1152 or 11.5%.

Which of the following statements are correct? I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors. II. When an acquiring firm purchases a target firm's equity, the acquirer need not assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only F. None of the above.

A. I and III only

Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. The risk premium increases as unsystematic risk increases. III. Systematic risk is the only part of total risk that should affect asset prices and returns. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only F. None of the above.

A. I and III only

Which of the following should be included in the cash flow projections for a new product? I. Money already spent for research and development of the new product II. Capital expenditures for equipment to produce the new product III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch A. II and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

A. II and III only

Which of the following would not be considered a cost of financial distress? Which of the following would not be considered a cost of financial distress? A. Lack of interest tax shields B. Bankruptcy costs C. Excessive risk-taking by shareholders D. Loss of customers or suppliers

A. Lack of interest tax shields

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,421.40 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the above.

B. $1,421.40

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent? A. -$311.02 B. $2,168.02 C. $4,650.11 D. $9,188.98 E. $21,168.02 F. None of the above.

B. $2,168.02 Solve for the PV of the cash inflows, and then subtract the initial investment: NPV = 11668.02 - 9,500 = $2,168.02

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity at the end of 2010? A. $1,976.49 B. $2,501.49 C. $2,877.49 D. $4,195.49 E. $4,571.49 F. None of the above.

B. $2,501.49

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the above.

B. $20 million

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014? A. $4,453 B. $4,563 C. $4,663 D. $5,663

B. $4,563

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

A. $169,000 158,000 + 23,400 - 12,400 = $169,000

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.? A. $2.21 billion B. $2.71 billion C. $4.17 billion D. $6.38 billion E. None of the above.

A. $2.21 billion Ginormous paid $60 per share for a firm that minority shareholders valued at $33 per share, so they placed a value of 60 - 33 = $27 per share on control of Slick. $27 × 82 million = $2.21 billion

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

A. $20 million

Honest Abe's is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe's. Honest Abe's has a beta of 1.38 as compared to Integral Designs' beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Honest Abe's use if it considers a project that involves the manufacturing of furniture? A. 12.46% B. 12.92% C. 13.50% D. 14.08% E. 14.54% F. None of the above.

A. 12.46% KE = gov't borrowing rate + equity beta × market risk premium = 0.035 + 1.12(0.08) = 0.1246 or 12.46%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the appropriate debt ratio (D/(D+E)) to use for calculating Company X's weighted-average cost of capital? A. 23.1% B. 25.0% C. 31.0% D. 33.3%

A. 23.1% D = 0.9 × $2 million = $1.8 million E = $3 × 2 million = $6 million D/(D+E) = 1.8/(1.8 + 6) = 0.231

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)? A. ABC's cash flows from operations are less volatile than XYZ's. B. ABC is a computer software firm, and XYZ is an electric utility. C. ABC operates in a more competitive industry than XYZ. D. ABC's assets have lower resale values than XYZ's assets.

A. ABC's cash flows from operations are less volatile than XYZ's.

Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period

A. An increase in the dividend payout ratio

Which of the following is NOT a major category on the cash flow statement? A. Cash flows from selling activities B. Cash flows from operating activities C. Cash flows from financing activities D. Cash flows from investing activities

A. Cash flows from selling activities

Which of the following is NOT a typical reason for differences between profits and cash flow? A. Goodwill B. Depreciation expense C. Changes in accounts receivable D. Accrual accounting practices

A. Goodwill

Which one of the following is an example of systematic risk? A. The Federal Reserve unexpectedly announces an increase in target interest rates. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels. F. None of the above.

A. The Federal Reserve unexpectedly announces an increase in target interest rates.

Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy. F. None of the above.

A. can be effectively eliminated by portfolio diversification.

Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

A. decrease in accounts receivable

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

A. income statement

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will: A. increase the variability in earnings per share. B. reduce the operating risk of the firm. C. increase the value of the firm. D. decrease the value of the firm.

A. increase the variability in earnings per share.

The pre-tax cost of debt: A. is based on the current yield to maturity of the firm's outstanding bonds. B. is equal to the coupon rate on the latest bonds issued by a firm. C. is equivalent to the average current yield on all of a firm's outstanding bonds. D. is based on the original yield to maturity on the latest bonds issued by a firm. E. has to be estimated as it cannot be directly observed in the market. F. None of the above.

A. is based on the current yield to maturity of the firm's outstanding bonds

Depreciation expense: A. reduces both taxes and net income. B. increases net fixed assets as shown on the balance sheet. C. is a noncash item that increases net income. D. decreases current assets, net income, and operating cash flows.

A. reduces both taxes and net income.

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume BSL is worth the book value of its assets at the end of 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity? A. $1,702.80 B. $2,227.80 C. $2,342.94 D. $2,383.94 E. $2,603.80 F. $4,297.80 G. None of the above.

B. $2,227.80

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year? A. -$410 B. -$260 C. $235 D. $1,320 E. $7,240 F. None of the above.

B. -$260

Gujarat Corporation doubled its shareholders' equity during the year 2014. 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 2014? A. 50% B. 100% C. 150% D. 200%

B. 100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of debt capital. A. 2.21% B. 4.10% C. 4.55% D. 6.30% E. 7.00% F. None of the above.

B. 4.10% The correct approach is to use the YTM on the firm's bonds for the before-tax cost. Thus, after-tax cost = 6.3% × (1 - 0.35) = 4.10%.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8? A. =B8*B2 B. =B8 + B8*B2 C. =(1 + B8)*B2 D. =(1/B2)*B8 E. None of the above.

B. =B8 + B8*B2

Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Which of the following is NOT an important step in the financial evaluation of an investment opportunity? A. Calculate a figure of merit for the investment. B. Estimate the accounting rate of return for the investment. C. Estimate the relevant cash flows. D. Compare the figure of merit to an acceptance criterion. E. All of the above are important steps.

B. Estimate the accounting rate of return for the investment.

Pro forma free cash flows for a proposed project should: I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets. A. I and II only B. II and III only C. II and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

B. II and III only

The after-tax cost of debt generally increases when: I. a firm's bond rating improves. II. the market-required rate of interest for the company's bonds increases. III. tax rates decrease. IV. bond prices rise. A. I and III only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

B. II and III only

Which of the following statements is/are correct? I. Going-concern value of a firm is equal to the present value of expected net income. II. When a buyer values a target firm, the appropriate discount rate is the buyer's weighted-average cost of capital. III. The liquidation value estimate of terminal value usually vastly understates a healthy company's terminal value. IV. The value of a firm's equity equals the discounted cash flow value of the firm minus all liabilities. A. II only B. III only C. I and II only D. II and III only E. II, III, and IV only F. None of the above.

B. III only

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future? A. Inflation reduces the purchasing power of future dollars. B. The value of a dollar in the future will be compounded more than the value of a dollar today. C. There is more uncertainty of receiving dollars further into the future. D. A dollar today can be productively invested in the time before receiving a dollar in the future.

B. The value of a dollar in the future will be compounded more than the value of a dollar today.

Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

B. additions to retained earnings divided by net income

The capital structure weights used in computing the weighted-average cost of capital: A. are based on the book values of total debt and total equity. B. are based on the market value of the firm's debt and equity securities. C. are computed using the book value of the long-term debt and the book value of equity. D. remain constant over time unless the firm issues new securities. E. are restricted to the firm's debt and common stock. F. None of the above.

B. are based on the market value of the firm's debt and equity securities.

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

C. $10

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the above.

C. $11,663.75

Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be? A. $0 B. $75 million C. $150 million D. $710 million E. $860 million F. None of the above.

C. $150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million

Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45 F. None of the above.

C. $17,444.86 Present value = $51,480.79/(1 + 0.0425)26 = $17,444.86

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming it is worth the book value of its assets at the end of 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $628.24 B. $3,669.01 C. $4,297.80 D. $4,412.94 E. $4,984.28 F. $6,951.24 G. None of the above.

C. $4,297.80

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it? A. $98,340.00 B. $98,666.67 C. $99,517.41 D. $99,818.02 E. $100,023.16 F. None of the above.

C. $99,517.41 Future value = $82,500 × (1 + 0.048)4 = $99,517.41

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014? A. - 11.40% B. - 7.09% C. - 3.04% D. 5.47% E. 13.98% F. 21.40%

C. - 3.04%

Giant Corp. is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule. The project will require a one-time increase in the level of net working capital of $300. The project will generate an additional $1,600 in revenues and $700 in operating expenses each year. The project will end at the end of year 2, at which time the machinery is expected to be sold for $800. Giant's tax rate is 50%. In a discounted cash flow analysis of this project, what would be the projected Year 0 free cash flow? A. -$1,200 B. -$1,500 C. -$1,800 D. -$2,100

C. -$1,800

Use BSL's actual financial data for 2010 and its projections for 2011 as shown above. What is BSL's projected free cash flow (in $ millions) for 2011? A. -$938 B. -$792 C. -$7 D. $122 E. $1,091 F. None of the above.

C. -$7

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

C. 60 percent of March sales.

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013? A. - 17.6% B. - 7.9% C. 9.97% D. 10.27% E. 12.23% F. 21.40%

C. 9.97%

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders' equity in cell G19? A. =F19*B2 B. =F19*(1 + B2) C. =F19 + (1 - B4)*C16 D. =F19 + B4*C16 E. None of the above.

C. =F19 + (1 - B4)*C16

Which of the following would NOT be considered a use of cash? A. Dividends paid B. A decrease in accounts payable C. Depreciation D. An increase in the cash and marketable securities account

C. Depreciation

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk A. I only B. III only C. I and III only D. II and III only E. IV only F. None of the above.

C. I and III only

The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. IV. no leverage. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, and IV only F. None of the above.

C. I, III, and IV only

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100 percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend A. I and II only B. I and IV only C. II and III only D. I, II, and III only E. I, III, and IV only F. None of the above.

C. II and III only

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7 percent discount rate. F. None of the above.

C. In today's dollars, Ian's money is worth more than Sunny's.

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? A. Milano's leverage has decreased. B. Milano's leverage has remained constant. C. Milano's leverage has increased. D. None of the above.

C. Milano's leverage has increased. Note first that g > g* because g = 20% and g*<15%. With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following is NOT an implication of the pecking order theory of capital structure? A. On average, a firm's stock price drops when it announces an equity issue. B. Firms may want to maintain a reserve of cash or unused borrowing capacity. C. More-profitable firms (all else equal) should have higher debt ratios. D. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

C. More-profitable firms (all else equal) should have higher debt ratios.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.

C. Retained earnings cannot grow by more than $12,000.

The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the above.

C. assumes the debt-equity ratio is constant.

A balance sheet reports the value of a firm's assets, liabilities, and equity: A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 2 free cash flow? A. $1,300 B. $1,450 C. $1,700 D. $1,750

D. $1,750

Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years? A. $1,806,429 B. $1,838,369 C. $2,211,407 D. $2,333,572 E. $2,508,316 F. None of the above.

D. $2,333,572

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014? A. $2,206 B. $2,363 C. $2,455 D. $2,847

D. $2,847

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? A. $1.46 billion B. $3.46 billion C. $4.92 billion D. $6.38 billion E. $8.38 billion F. None of the above.

D. $6.38 billion The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($60 × 82 million shares) + $1.46 billion = 6.38 billion.

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-burden-covered ratio for the next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent and that annual sinking fund payments on the new debt will equal $8 million. A. 1.01 B. 1.08 C. 1.38 D. 1.49 E. 1.95 F. None of the above.

D. 1.49

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? A. 3.79% B. 5.69% C. 6.75% D. 10.13% E. 18.24%

D. 10.13% 0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80 profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of equity capital. A. 4.50% B. 6.92% C. 7.93% D. 12.20% E. 17.48% F. None of the above.

D. 12.20% KE = gov't borrowing rate + equity beta × market risk premium = 0.044 + 1.2 × 0.065 = 0.122

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013? A. - 17.6% B. - 7.9% C. 8.51% D. 21.4% E. None of the above.

D. 21.4%

Please refer to the financial information for Foodtek, Inc. above. During 2014, how much cash (in $ millions) did Foodtek collect from sales? A. 364 B. 277 C. 404 D. 324 E. 451 F. None of the above.

D. 324

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-interest-earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent. A. 2.00 B. 3.09 C. 3.66 D. 4.35 E. None of the above.

D. 4.35

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance.

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

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? A. A stock repurchase B. A decrease in accounts payable C. An increase in cash and marketable securities D. An increase in the retention ratio

D. An increase in the retention ratio

According to the pecking order theory of capital structure, why do firms avoid issuing equity? A. Because fees associated with issuing new equity are so high B. Because they want to avoid dilution of earnings per share C. Because they don't want to commit to paying dividends on the new equity D. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

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

Which of the following are examples of diversifiable risk? I. An earthquake damages Oakland, California. II. The federal government imposes an additional $1,000 fee on all business entities. III. Employment taxes increase nationally. IV. Toymakers are required to improve their safety standards. A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only F. None of the above.

D. I and IV only

Which of the following statements are correct? I. Using the same risk-adjusted discount rate to discount all future cash flows adjusts for the fact that the more distant cash flows are often more risky than cash flows occurring sooner. II. If you can borrow all of the money you need for a project at 5%, the cost of capital for this project is 5%. III. The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds. IV. A firm's weighted-average cost of capital is NOT the correct discount rate to use for all projects undertaken by the firm. A. I and III only B. II and IV only C. I and II only D. I and IV only E. I, II, and III only F. None of the above

D. I and IV only

Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Benefit-cost ratio A. III only B. I & III only C. II & III only D. I only E. III & IV only F. I, II, III, and IV

D. I only

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. 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. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

D. I, II, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

D. I, III, and IV only

Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners. A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

D. II, III, and IV only

A company purchases a new $10 million building, financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet? A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million. B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million. C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million. D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron's typical projects. Unitron's company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z? A. Yes, because the NPV of the project is positive. B. Yes, because a zero-NPV project is marginally acceptable. C. No, because a zero-NPV project is a waste of resources. D. No, because the NPV of the project is negative.

D. No, because the NPV of the project is negative. Use the equation for a perpetuity to solve for the IRR: 7.5/IRR = 50 IRR = 15% Since the IRR is 15%, it would have an NPV of zero at a WACC of 15%. However, this project is riskier than the firm's average projects, so the WACC would be higher than 15%, which would make the NPV negative.

Which of the following statements regarding interest tax shields is correct? A. Taxes are reduced by the amount of a firm's interest-bearing debt. B. Taxable income is reduced by the amount of a firm's interest-bearing debt. C. Taxes are reduced by the amount of the interest on a firm's debt. D. Taxable income is reduced by the amount of the interest on a firm's debt.

D. Taxable income is reduced by the amount of the interest on a firm's debt.

Which of the following statements concerning the cash flow-production cycle is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligations.

D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following is a reason why a company's market value of equity differs from its book value of equity? A. Shareholders are keenly aware of book values, but have little interest in market values. B. Accountants' charges for the cost of equity are often higher than they should be. C. Fair value accounting is becoming more widely used. D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

D. cash flow statement.

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the above.

D. decrease in the dividend payout ratio

The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

D. percent-of-sales method.

A firm is considering an average-risk project with an IRR of 6%. The firm's cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should: A. accept the project only if it can be completely financed with equity B. accept the project only if it can be completely financed with debt C. accept the project regardless of the financing method D. reject the project regardless of the financing method

D. reject the project regardless of the financing method The project should be rejected because the IRR of 6% does not meet the hurdle of 8%.

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6 percent annual interest rate, compounded monthly. What is the amount of each payment? A. $287.71 B. $296.67 C. $301.12 D. $342.76 E. $366.05 F. None of the above.

E. $366.05 The number of monthly periods = 5 × 12 = 60 The monthly interest rate = 8.6%/12 = 0.71667%

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643

E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

E. I, III, and IV only

Please refer to the information for FM Foods above. FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity. Which of the following statements is/are correct? I. FM should reject the project because the IRR is greater than the firm's WACC. II. FM should accept the project because the IRR is greater than the firm's WACC. III. FM should accept the project because the NPV is greater than zero. IV. FM should reject the project because the NPV is less than zero. A. I only B. II only C. IV only D. I and IV only E. II and III only F. None of the above

E. II and III only The IRR of the investment is 15/100 = 15%. FM's WACC of 11.27% is shown in the calculations below. The NPV of the investment at the WACC = -100 + 15/0.1127 = $33.1 million.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why? A. You should accept the monthly payments because they are worth $209,414 to you. B. You should accept the $200,000 lump sum because the monthly payments are only worth $16,057 to you today. C. You should accept the monthly payments because they are worth $336,000 to you. D. You should accept the $200,000 lump sum because the monthly payments are only worth $189,311 to you today. E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today. F. None of the above.

E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today. The number of monthly periods = 20 × 12 = 240 The monthly interest rate = 6%/12 = 0.5%

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in inventory E. increase in accounts payable

E. increase in accounts payable

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that: A. making an investment in two or three large stocks will eliminate all of the unsystematic risk. B. making an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk. F. None of the above.

E. spreading an investment across many diverse assets will eliminate some of the total risk.

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using the perpetual-growth equation as your estimate? A. $161 million B. $363 million C. $3,690 million D. $3,888 million E. $5,357 million F. None of the above.

F. None of the above. FCF2015 = 155 × (1 + 0.04) = $161 million. Terminal value2014 = FCF2015/(KW - g) = $161 million/(0.082 - 0.04) = $3,833 million.

A beta greater than 1 is indicative of an above-average level of diversifiable (unsystematic) risk.

False

Acquisitions create shareholder value, on average.

True

An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company.

True

An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders.

True

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $4,297.25 B. $4,571.49 C. $4,686.78 D. $6,181.49 E. $5,351.19 F. $7,423.16 G. None of the above.

B. $4,571.49

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity at the end of 2010? A. $3,484.68 B. $4,723.81 C. $4,938.06 D. $5,554.68 E. $6,343.81 F. None of the above.

B. $4,723.81

You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity? A. $5,078.15 B. $5,585.97 C. $6,144.57 D. $6,759.03

B. $5,585.97 The PV = $6,144.57. But the first payment is received in two years, not one year, so discount the PV by one more year: 6,144.57/1.1 = $5,585.97

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014? A. $55,000 B. $56,000 C. $60,000 D. Insufficient information is provided to project equity in 2014.

B. $56,000 All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow? A. $300 B. $600 C. $750 D. $900

B. $600

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate the present value of BSL's free cash flow (in $ millions) for the years 2011 to 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. -$1.29 B. $628.79 C. $720.58 D. $726.68 E. $743.94 F. None of the above.

B. $628.79

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2014? A. $61 million B. $63 million C. $65 million D. $67 million E. $69 million

B. $63 million

Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%. A. $666 million B. $675 million C. $950 million D. $965 million

B. $675 million FMV = PV{FCF, 1-5} + PV{Terminal value}. Terminal value = FCF(1 + g)/(KW - g) = $61.2/0.08 = $765 million. PV of Terminal value = $765 million/1.115 = $475 million. FMV = 200 million + 475 million = $675 million.

Which of the following is NOT a likely financing policy for a rapidly growing business? A. Adopt a modest dividend payout policy that enables the company to finance most of its growth externally. B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort. C. Maintain a conservative leverage ratio to ensure continuous access to financial markets. D. If external financing is necessary, use debt to the point it does not affect financial flexibility. E. None of the above.

B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet? A. Equity rises $250,000; net plant and equipment falls $250,000. B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000. C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000. D. Cash rises $250,000; net plant and equipment falls $250,000.

B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, II, and IV only F. None of the above.

B. I and III only

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. based on historical cost.

Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock

B. increase in inventory

The weighted-average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. coupon rate the firm should expect to pay on its next bond issue. D. minimum discount rate the firm should require on any new project. E. rate of return shareholders should expect to earn on their investment in this firm. F. None of the above.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.

The excess return earned by a risky asset, for example with a beta of 1.4, over that earned by a risk-free asset is referred to as a: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return. F. None of the above.

B. risk premium.

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265

C. $205 Cash balance = $175 - $110 - $290 + $430 = $205

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using a warranted multiple of free cash flow as your estimate? A. $155 million B. $2,898.5 million C. $3,007.0 million D. $4,365.0 million E. $7,042.2 million F. None of the above.

C. $3,007.0 million Terminal value2014 = 19.4 × $155 million = $3,007.0 million

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013? A. 0.32 B. 0.68 C. 0.97 D. 1.00 E. None of the above.

C. 0.97

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return? YEAR CASH FLOW 0 $(46,500) 1 $12,200 2 $38,400 3 $11,300 A. 0.94 B. 0.98 C. 1.02 D. 1.06 E. 1.11 F. None of the above.

C. 1.02 PVinflows = (12,200/1.145) + (38,400/1.1452) + (11,300/1.1453) = $47,472.78 BCR = $47,472.78/$46,500 = 1.02

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? A. 1.91% B. 6.12% C. 10.83% D. 11.26% E. 12.74% F. None of the above.

C. 10.83% Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

Please refer to the information for FM Foods above. Estimate FM's weighted-average cost of capital. A. 6.46% B. 6.58% C. 11.27% D. 11.32% E. 11.52% F. None of the above.

C. 11.27%

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida's target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida's tax rate is 40%. What discount rate should Florida use? A. 7.66% B. 11.02% C. 11.72% D. 18.44%

C. 11.72% βA = (E/V)βE = (0.6)1.4 = 0.84 KE = 5% + 0.84(8%) = 11.72%

JKL Corporation, a company devoted primarily to paper products, is estimating the cost of equity appropriate for a vegetable processing plant it is planning to build. JKL Corp. has an equity beta of 1.0 and a debt ratio (D/(D+E)) of 0.3. A comparable (vegetable processing) firm has an equity beta of 0.8 and a debt ratio of 0.2. Assume a risk-free rate of 5% and a market risk premium of 8%. What cost of equity should JKL use in this situation? A. 7.7% B. 11.4% C. 12.3% D. 13.0%

C. 12.3% Unlever the comparable firm's beta: βA = (E/V)βE = (0.8)0.8 = 0.64 Then relever at JKL's debt ratio: βE = βA/(E/V) = 0.64/(0.7) = 0.91 Cost of Equity: KE = 5% + 0.91(8%) = 12.3%

Which of the following statements are correct? I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities. II. When an acquiring firm purchases a target firm's equity, the acquirer must assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only F. None of the above.

C. II and III only

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, and IV only F. None of the above.

C. II and IV only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow. II. The risk of a cash flow. III. The accounting earnings from a cash flow. IV. The timing of a cash flow. A. I only B. II only C. III only D. II and III only E. III and IV only F. They are all relevant.

C. III only

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

C. balance sheet

The cost of equity for a firm: A. tends to remain static for firms with increasing levels of risk. B. increases as the unsystematic risk of the firm increases. C. can be estimated from the capital asset pricing model or the dividend growth model. D. equals the risk-free rate plus the market risk premium. E. equals the firm's pre-tax weighted-average cost of capital. F. None of the above.

C. can be estimated from the capital asset pricing model or the dividend growth model.

The sustainable growth rate: A. is the highest growth rate attainable for a firm that pays no dividends. B. is the highest growth rate attainable for a firm without issuing new stock. C. can never be greater than the return on equity. D. can be increased by decreasing leverage.

C. can never be greater than the return on equity.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

C. cash budget.

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? A. income statement B. balance sheet C. cash flow statement D. shareholders' equity statement E. market value statement

C. cash flow statement

Homemade leverage is: A. the incurrence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm. F. None of the above.

C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase? A. $1,000,000 B. $1,750,000 C. $3,250,000 D. $4,000,000 E. $5,000,000 F. None of the above.

D. $4,000,000

STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) A. $33.43 B. $36.00 C. $39.00 D. $40.00

D. $40.00 Comp. 1 P/E = 10, Comp. 2 P/E = 14, Avg. P/E = 12 STU = 12 × $3.00 (EPS) = $36.00

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $628.24 B. $3,669.01 C. $7,429.74 D. $6,343.81 E. $6,755.83 F. $7,008.06 G. None of the above.

D. $6,343.81

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? A. 3% B. 4% C. 5% D. 6%

D. 6% ROEbop × Retention ratio = (5/50) × 0.6 = 6%

Please refer to the financial information for Foodtek, Inc. above. Assuming that there were no financing cash flows during 2014 and basing your answer solely on the information provided, what were Foodtek's cash flows from operations (in $ millions) for 2014? A. 45 B. 110 C. 70 D. 80 E. 35 F. None of the above.

D. 80

Please refer to the information for FM Foods above. Estimate the appropriate weight of equity to be used when calculating FM's weighted-average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above

D. 88.5% Market value of equity = $40 × 240 million = $9,600 million. Weight of equity = 9,600/(9,600 + 1,250) = 0.8848 or 88.5%.

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only B. II and IV only C. I and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

D. I, II, and III only

Total risk is measured by _____ and systematic risk is measured by ____. A. beta; alpha B. beta; standard deviation C. WACC; beta D. standard deviation; beta E. standard deviation; variance F. None of the above.

D. standard deviation; beta

Please refer to the financial information for Foodtek, Inc. above. Assuming the company neither sold nor salvaged any assets during the year, what were Foodtek's capital expenditures (in $ millions) during 2014? A. 415 B. 105 C. 310 D. 40 E. 170 F. None of the above.

E. 170

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? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

E. 18.24 percent Change in Equity = Retained earnings = $72,000 - $44,640 = $27,360 Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24% Alternative: g* = R × ROEbop = (72,000 - 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share. A. 1.03 B. 1.38 C. 1.60 D. 1.89 E. 2.10 F. None of the above.

E. 2.10

Please refer to the financial information for Foodtek, Inc. above. During 2014, what was the cost of merchandise (in $ millions) produced by Foodtek? A. 223 B. 194 C. 252 D. 228 E. 218 F. None of the above.

E. 218

Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

E. February, March, and April

Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return A. IV only B. I & III only C. II & III only D. I & II only E. I & IV only F. I, II, III, and IV

E. I & IV only

The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt A. I only B. III only C. I and II only D. III and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and 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 A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

E. 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? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

E. 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 A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

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? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9? A. =B9*B3 B. =B9 + B9*B3 C. =B8*B3 D. =B9*B2 E. None of the above.

E. None of the above.

A divisional manager submitted a project proposal to the chief financial officer, complete with a calculated NPV for the project. The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project. Assuming the full value of net working capital will be recovered at the end of the project, how will the project's NPV change after making the chief financial officer's adjustment? Assume a discount rate of 9%. A. The NPV will decrease by $16,411. B. The NPV will decrease by $32,822. C. The NPV will decrease by $60,000. D. The NPV will not be affected. E. None of the above.

E. None of the above. In Year 0 there is a $60,000 outflow. In Year 5 there is a $60,000 inflow, which has a present value of 60,000/1.097 = $32,822. The decrease in NPV is 60,000 - 32,822 = $27,178.

The discount rate assigned to an individual project should be based on: A. the firm's weighted-average cost of capital. B. the actual sources of funding used for the project. C. an average of the firm's overall cost of capital for the past five years. D. the current risk level of the overall firm. E. the risks associated with the use of the funds required by the project. F. None of the above.

E. the risks associated with the use of the funds required by the project.

All else equal, if two competing firms in industry X are valuing the same plant in industry Y for a potential acquisition, the firm with the more volatile stock should arrive at a lower valuation for the plant.

False

An acquirer should never consider a target that would reduce the acquirer's earnings per share.

False

In business valuation, a typical discount for lack of marketability is about 10 percent.

False

The IRR and NPV always yield the same investment recommendations

False

The IRR is the discount rate at which an investment's NPV equals its initial cost.

False

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

false

Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

false

Share repurchases usually decrease earnings per share.

false

The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.

false

All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.

true

Cash budgets are less informative than pro forma financial statements.

true

Debt financing results in lower after-tax earnings relative to equity financing.

true

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

true