Chapter 1
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?
$150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million
Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? Income statement Balance sheet Cash flow statement Shareholders' equity statement Market value statement
Cash flow statement
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? Income statement Creditor's statement Balance sheet Cash flow statement Sources and uses statement
Balance sheet
Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.
I, II and IV
Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient.
I, II, III
Premiums paid by acquirers indicate that the shareholders of target firms benefit
True
Shelf registration is possible for both debt and equity issues
True
The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.
True
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.
A. Can be effectively eliminated by portfolio diversification
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
All Asset to equity ratio Profit margin Retention ratio Asset turnover ratio PRAT
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?
All of them
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 E . None of the above
An increase in the dividend payout ratio
Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets
Asset turnover
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 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.
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
D. Decrease in the dividend payout ratio
Which of the following is NOT an important step in the financial evaluation of an investment opportunity?
Estimate the accounting rate of return for the investment
Leveraged buyouts are the only means to capture tax shields
False
Private equity firms comprise a relatively insignificant portion of the American economy.
False
In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".
False The bake off involves investment bankers trying to get the company to use them. The road show occurs after when top company executives market the issue to investors. They put together a syndicate.
Assume each month has 30 days and AmDent has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDent will collect payment for the sales it made during which of the months listed below?
February, march, April
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.
I and III
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
Market signaling Management incentives
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.
A. The federal reserve unexpectedly announces an increase in target interest rates.
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset turnover and control B. financial leverage C. coverage D. profitability E. None of the above.
Asset turnover and control
Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. I, II, III, and IV C. I, II, and IV only D. I, II, and III only E. I, III, and IV only
C. Profit margin, financial leverage and asset turnover
At the end of 2014, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2014 Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2014?
$3,000,000 Liabilities/Assets = 0.5 = $500,000/$1,000,000 So Assets = $1,000,000 Then, Sales/$1,000,000 = 3 So sales = $3,000,000
What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?
$50 Million
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% E. None of the above
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.
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?
4.8% r = A/P = $2.40/$50 = 4.80%
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?
4.9 million
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.
1 and III
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
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
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.
C. In today's dollars, Ian's money is worth more than Sunny's.
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. E. None of the above
C. Retained earnings cannot grow by more than $12,000. (Homework 3)
What 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 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.
The liquidation value estimate of the terminal value usually vastly understates a healthy company's terminal value
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.
Vary significantly across industries
Comparable trades valuation infers value from the prices at which comparable public firms trade
True
In a strong-form efficient market, insider trading is not profitable.
True
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?
$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.
Dental Corporation's income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, Dental Co'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 Dental Corp's taxes paid in 2014?
$63 million
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.
D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
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".
E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".
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
An acquirer should never consider a target that would reduce the acquirer's earnings per share.
False
An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017. True or False?
False
In business valuation, a typical discount for lack of marketability is about 10 percent.
False
Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the days' sales in inventory E. decrease in the total asset turnover rate
Increase in the inventory turnover rate
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. E. None of the above
Increase the variability in earnings per share
In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.? A. Its current liabilities are too low. B. Its cost of goods sold is too low. C. Its cash and securities balance is too low. D. Its inventory level is too high. E. None of the above
Inventory level is too high
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.
Is based on the current yield to maturity of the firm's outstanding bonds
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. E. None of the above
Milano's leverage 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.
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.
Percent-of-sales method
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.
Risk premium
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
Simulation Scenario analysis Sensitivity analysis
Empirical evidence suggests that leveraged buyouts create value.
True
Incentive effects argue that debt disciplines a firm to generate healthy cash flows or face bankruptcy
True
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.
Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation.
B. Make the markets increasingly more efficient
Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE measures return on accounting book value, and this problem is not solved by using market value. B. ROE is a forward-looking, one-period measure, while business decisions span the past and present. C. ROE measures only return, while financial decisions involve balancing risk against return. D. None of these describe problems with ROE. E. All of these describe problems with ROE.
B. ROE is a forward-looking, one-period measure, while business decisions span the past and present.
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 E. None of the above
Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall
Steve has estimated the cash inflows and outflows for his dental firm for next year. The report that he has prepared summarizing these cash flows is called a:
Cash budget
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. E. None of the above
Cash rises $250,000; net plant and equipment falls$100,000; equity rises $150,000
Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.
Collection period decreased
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 E. None of the above
D. An increase in the retention ratio Retention ratio is the percent of net income available to the firm to fund future growth.
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
D. Total risk - standard deviation Systematic risk - beta
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.
E. Spreading and investment across many diverse assets will eliminate all of the systematic risk
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 following information is available about Chiantivino Corp. (CC): Stock price per share - $8 Common shares outstanding (millions) - 10 Market value of interest-bearing debt (millions) - $75 Weighted average cost of capital - 14% An activist investor is confident that by terminating CC's money-losing fortified wine division, she can increase free cash flow by $4 million annually for the next decade. In addition, she estimates that an immediate, special dividend of $10 million can be financed by the sale of the division. Assuming these actions do not affect CC's cost of capital, what is the fair market value under existing management?
$155 million A plausible estimate of CC's fair market value under existing management is its standalone value = current market value of firm = $8 × 10 million + 75 million = $155 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?
$17,444.86 Present value = $51,480.79/(1 + 0.0425)^26 = $17,444.86
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?
$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
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.?
$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.
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?
$20 Million
You are estimating your firm'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?
$20 Million
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.)
$36.00 Comp. 1 P/E = 10, Comp. 2 P/E = 14, Avg. P/E = 12 STU = 12 × $3.00 (EPS) = $36.00
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?
$560,000 Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000
Aspenn Dental 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?
$643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643
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%.
$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.
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?
$750,000 JM Case will pay $10 per share for the 100,000 shares (= 0.20 × 500,000) it repurchases. This reduces the book value by $1 million. Assuming all else remains the same, the new book value should be $750,000.
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?
$99,517.41 Future value = $82,500 × (1 + 0.048)^4 = $99,517.41
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.
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% =PV(0.005,240,1400)
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.
Equals the risk-free rate plus the market risk premium
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?
How much will our sales grow? Will additional fixed assets be required? Will dividends be paid to shareholders? How much new debt must be obtained?
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
I and III
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.
I and IV
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.
I, II and III
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.
I, II, IV
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.
II and III
Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only
II and IV Current ratio and acid test
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.
II, III, IV
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
II, IV
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. The information has no bearing on the value of the firm. The information was anticipated
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Income statement Balance sheet Cash flow statement Sources and uses statement Market value statement
Income statement
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.
The percentage of net income available to the firm to fund future growth
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. E. None of the above
The value of a dollar in the future will be compounded more than the value of a dollar today.
On a common-size balance sheet, all accounts are expressed as a percentage of: A. sales. B. profits. C. equity. D. total assets. E. None of the above.
Total assets
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.
Total cash flow of the firm
An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company.
True
Because control is valuable, trades of controlling interest shares are typically priced differently from shares of minority interest shares
True