finance ch 11 & 13 & 14 & 15
If Wu's $1,000,000 loan had been 8.5%, add-on, payable in 12 end-of-month installments, what would its APR have been?
15.34%
If Rubash Corporation bought on terms of 1/10, net 30, what would be its nominal annual cost of costly trade credit? Assume a 365-day year.
18.4%
Project X has the following cash flows. If the firm's WACC is 15%, what is Project X's discounted payback? -500, 200, 200, 400
2.66 years
If Rubash were unable to stretch its trade credit and hence had to pay by Day 30 and it did not take discounts, what would be its effective annual cost of costly trade credit? Assume a 365-day year.
20.13%
The cash flows for Project 2 are shown below. One IRR for Project 2 is 81.30%. What is the other IRR? 0 1 2 3 -550 900 1100 -1675
21.08%
Project L has the following cash flows, and its cost of capital is 10%. What is L's MIRR? 0 1 2 -1500 200 2000
21.66%
Suppose you have 200 common shares of Benjamin Industries. The EPS is $2.00, the DPS is $1.00, and the stock sells for $40 per share. Now Benjamin announces a two-for-one split. Immediately after the split, how many shares will you have?
400 shares
Gambona Inc. has sales of $200, net income of $20, total assets of $500, and common equity of $250, all in millions. The new CFO thinks the firm's current asset investment policy is too relaxed, and she proposes to tighten it, reducing inventories and receivables enough to bring total assets down to $300. The total liabilities/assets ratio will be kept at 50%, so common equity will decline from $250 to $150. Assume that this change has no effect on either sales or net income. Using the DuPont equation, by how much would Gambona's ROE increase?
5.33%
Keys International Inc. has the following data: Annual sales = $1,500,000; Cost of goods sold = $1,000,000; Inventories = $250,000; Accounts receivable = $200,000; and Accounts payable = $175,000. Based on a 365-day year, what is Keys' CCC?
76.04 days
Wu Corporation has been offered a loan of $1,000,000 at a rate of 8.5%, simple interest, with monthly interest payments and a 365-day year. What would the effective interest rate be on this loan?
8.84%
if Rubash were able to delay payment until Day 50 rather than pay on Day 30, what would be the new nominal annual cost of its costly trade credit? Assume a 365-day year.
9.2%
Which of the following issues arises when the decision to distribute income is being made?
All of the above are issues that need to be considered when a firm is making its dividend policy decision. (How much should be distributed to stockholders? b. Should the distribution be made as cash dividends or share repurchases? c. Should the funds paid out from year to year be stable and dependable, or be allowed to vary with the firm's cash flows and investment requirements?)
Which of the following is not a reason for investors to prefer capital gains as opposed to dividends?
Capital gains are just as certain as dividends.
Which of the following lists the correct order of the dividend payment process dates?
Declaration date, ex-dividend date, holder-of-record date, and payment date
there have been huge improvements in transportation services in recent years. What effect have these changes had on firms' inventory holdings as measured by the ratio of inventories to sales?
Decreased inventories relative to sales because firms can receive orders quickly.
What effect has the development of credit and debit cards had on firms' cash balances?
Decreased required cash balances
Suppose you have 330 common shares of Carlisle Enterprises. The EPS is $3.30, the DPS is $1.14, and the stock sells for $60 per share. Now Carlisle announces a three-for-one split. Immediately after the split, what will be the adjusted EPS and DPS?
EPS = $1.10; DPS = $0.38
GE is a manufacturing firm that sells on credit, whereas Amazon is an Internet retailer that sells goods manufactured by others and collects (via credit cards) at about the same time it ships goods. Which of the following statements is correct?
GE will have a longer CCC than Amazon.
Which of the following statements is correct?
If a firm is considering 5 independent projects, then as a general rule it should invest in all 5 of them if the analysis shows that each of them has a positive NPV. If it were considering 5 mutually exclusive projects (i.e., 5 ways of performing a given task), then as a general rule it should not invest in all 5 of them even if they all have positive NPVs.
Which of the following statements suggests that assuming reinvestment at the WACC is a more reasonable reinvestment rate assumption?
If firms use internally generated cash flows from past projects rather than external capital, then they will save their costs of capital. Thus, their costs of capital represent the opportunity costs of their cash flows; thus, the effective returns on their reinvested funds.
What are the two main types of assets typically used as collateral for a short-term business loan?
Inventories and accounts receivable
Which of the following is NOT part of the firm's cash conversion cycle?
Issuing common stock to build the factories needed to produce the inventory
In a formal line of credit the lender is:
Legally obligated to lend money to the borrower.
Lines of credit are most often used in:
Meeting the needs of firms to borrow in the future.
Which of the following is not a factor that influences a firm's capital structure decisions?
None of these; all are factors that influence a firm's capital structure decisions.
Butcher Corporation had $4,000,000 of sales during the last 12 months, its latest accounts receivable balance was $500,000, it allows customers 40 days to pay for purchases, and it does not offer discounts. Which of the following statements is correct using a 365-day year?
On average, Butcher's customers do not pay on time. We know this because it allows 40 days for payment yet its DSO is 45.6 days.
When a firm borrows on a short-term basis from a bank, which of the following instruments would be used to state the terms and conditions involved with the debt?
Promissory note
Which of the following statements regarding stock dividends and stock splits is NOT CORRECT?
Stock dividends and stock splits both work the same way. The take all the stock owned by the company's investors, and increase everybody's number of shares. Each share of stock is now worth more, so the total dollar amount that each shareholder owns increases.
Which of the following statements regarding dividends and stock repurchases is NOT CORRECT?
Stock repurchases vary in size and frequency. Thus, they send adverse signals to investors regarding the health of the company, which lowers the company's stock price.
which of the following is not an advantage of a repurchase?
Stockholders are often indifferent between dividends and repurchases, and repurchases are generally just as dependable as dividends.
The crossover rate is an important concept in capital budgeting and provides information when choosing between two mutually exclusive projects. Which of the following statements best represents what the crossover rate is?
The crossover rate is the point or interest rate on the Net Present Value Profile at which the net present values of two projects are equal. To the right of this point, when the cost of capital is greater than the crossover rate, both the net present value and the internal rate of return will give the firm the same decision about the project.
Secured loans are "safer" loans than unsecured loans for who?
The entity making the loan.
Which of the following factors does not influence a firm's times-interest-earned ratio?
a firm's tax rate
Which of the following statements regarding stock dividends and stock splits are CORRECT?
a) The idea behind both stock dividends and stock splits is to make the shares more affordable for investors to trade the stock. b. Stock dividends and stock splits are ways that a company can increase the number of its shares outstanding and reduce its share price. c. With a stock dividend, the company makes some incremental, percentage-based increase in the number of shares each of its shareholders has.
A secured loan is one where:
a. An asset is pledged as collateral.
Which of the following is part of the firm's cash conversion cycle?
a. Purchasing raw materials from suppliers to turn these materials into inventory b. Paying suppliers for the raw materials d. Selling the inventory and collecting the cash
Which of the following statements regarding dividends and stock repurchases are CORRECT?
a. Stock repurchases can be used to shift a firm's capital structure or to provide shares when employees exercise stock options. b. When a company has excess earnings to return to its shareholders, a firm can choose to either pay a dividend or to repurchase its own stock. c. When a company pays a dividend, the firm pays out a set dollar amount per share to every shareholder—whether the investors want it or not. The shareholders then must pay income tax on those dividends they receive. d. With a stock repurchase, the company sets aside money to buy shares back from their investors. However, the investors can choose whether they want to sell their stock back to the company.
Which of the following is an advantage of a repurchase?
a. Stockholders have a choice when the firm distributes cash by repurchasing stock—they can sell or not sell their shares. b. Repurchases can be used to produce large-scale changes in a firm's capital structure. c. A repurchase can remove a large block of stock that is "overhanging" the market and keeping the price per share down. d. A repurchase announcement may be viewed as a positive signal by investors because repurchases are often motivated by managements' belief that their firms' shares are undervalued.
If a firm finances all of its temporary current assets plus some of its permanent current assets with short-term debt, what type of financing policy would it have?
aggressive
The key issue that signaling theory deals with is:
asymmetric information
According to signaling theory, firms that have a bright future are more likely to issue:
bonds
Which of the following factors could lead to a conflict between the NPV and IRR methods for two mutually exclusive projects?
both
which is correct
c. When a company is deciding between two mutually exclusive projects, it's possible that the better decision for the firm is to accept the project that has a higher Net Present Value but a lower Internal Rate of Return rather than the project with a lower Net Present Value but a higher Internal Rate of Return. This is because the Net Present Value shows directly how much dollar value a project adds to the firm.
Suppose Butcher changed its credit terms from 40 days to 2/10, net 40, meaning that it would give a 2% discount to anyone who paid by the 10th day. What would you expect to happen to its DSO?
decrease
Suppose a firm does the following: (1) Switches from manufacturing the goods it sells to buying and then reselling them, (2) changes from giving customers 60 days to pay to 30 days, and (3) begins paying its own suppliers in 60 rather than 30 days. What would happen to its CCC?
decrease
Depreciation is a major source of cash, so it shows up on the cash budget as a cash inflow. True or false? a. True b. False
false
Generally, low-leveraged industries have low coverage ratios, whereas capital-intensive industries that are heavily financed with debt have high coverage ratios. True or false?
false
Suppose a firm's cash flows do not occur uniformly throughout the month—for example, suppose most of the payments must be made early in the month while most customers pay later in the month. This would have no effect on the firm's borrowing requirements as estimated using a monthly cash budget because cash flows would be evened out by the end of the month. True or false?
false
What happened to the commercial paper market in 2007-2008?
it stopped working properly as panic swept through the markets.
If a firm finances its permanent current assets with long-term debt and equity, and finances its temporary current assets with short-term debt, what type of financing policy would it have?
maturity matching
An optimal capital structure is one that:
maximizes the intrinsic value of the firm.
Business risk involves corporations that have a capital structure with:
no debt
suppose Keys implemented a plan to produce and sell goods faster, collect faster, and delay its own payments still more, all without lowering sales or increasing operating costs, which would reduce its CCC. How would you expect these actions to impact its profits and ROE?
raise
A firm carries relatively large amounts of cash, marketable securities, and inventories, and a liberal credit policy results in a high level of receivables. Which of the following current asset investment policies best reflects this firm's policy?
relaxed
Financial risk involves the risks that ________ may suffer loses if the corporations projects do not pay off as planned:
shareholders
Which of the following are characteristics of commercial paper?
short term; unsecured.
Which of the following statements about the modified internal rate of return is CORRECT?
the internal rate of return (IRR) is not a good measure of a project's true return. The IRR overstates a project's true return because it assumes that a project's cash flows can be reinvested at the project's internal rate of return. The Modified Internal Rate of Return, however, is a better measure of a project's return because it assumes that a project's cash flows are reinvested at the firm's weighted average cost of capital.
A UCC-1 is a document filed with a state agency that indicates specific assets, such as inventory, accounts receivable, and equipment, have been pledged as collateral for a loan. This prevents firms from using the same assets as collateral to secure loans from different lenders. It is terribly important that potential lenders check with the state to see if the UCC-1 has already been filed before agreeing to make a secured loan, and then to file the UCC-1 if they do make a loan. True or false?
true
A high participation rate in a DRIP suggests that stockholders might be better served if the firm simply reduced cash dividends, which would save stockholders some personal income taxes. True or false?
true
A leveraged buyout is a good way to reduce excess cash flow. In an LBO, debt is used to finance the purchase of a high percentage of the company's shares. High debt payments after the LBO force managers to conserve cash by eliminating unnecessary expenditures. True or false?
true
A project's payback gives us an idea of the project's liquidity because it indicates how long funds will be tied up in the project. True or false?
true
An NPV profile is a graph that shows a project's NPV on the vertical axis, the cost of capital on the horizontal axis, and a line that shows the project's NPV at each cost of capital. The point on the horizontal axis where the NPV crosses the axis—i.e., where the NPV is zero—is the IRR. True or false?
true
Assume that Project 2's cost of capital is 12% and analyze the following statement: "Even though Project 2's IRRs are both greater than the cost of capital, the project should still be rejected because its NPV is negative at the project's cost of capital, and consequently, the firm's value will be reduced if it is accepted." True or false?
true
Clienteles are different groups of stockholders who prefer different dividend payout policies. True or false?
true
Companies must be large, well-known, and financially strong in order to use commercial paper financing. Because commercial paper borrowers are generally less risky than prime loan borrowers, and because commercial paper is more liquid than a promissory note, we should expect the average rate charged on commercial paper to be below the prime rate. True or false?
true
Conflicts such as those between mutually exclusive projects can never occur between independent projects. One project might have the higher IRR and the other the higher NPV, but this does not lead to problems in deciding whether to invest in either, neither, or both of the projects. True or false?
true
In Miller's 1963 study, he noted that the deductibility of interest favors the use of debt financing, but the more favorable tax treatment of income from stocks lowers the required rates of return on stocks and thus favors the use of equity financing. Most observers believe that interest deductibility has the stronger effect, hence that our tax system favors the corporate use of debt. True or false? a. True b. False
true
Interest is a tax deductible expense, and deductions are most valuable to firms with high tax rates. Therefore, the higher a firm's tax rate, the greater the advantage of debt. True or false?
true
One important difference between capital budgeting and security analysis is that in security analysis the analyst must generally take the projected cash flows as given rather than something the analyst can influence, whereas firms can often influence the cash flows from projects by making operating changes. True or false?
true
Proponents of MM's dividend irrelevance theory can use the signaling, or information content theory to explain why an increase in a stock's dividend is often accompanied by an increase in its price, while a dividend cut generally leads to a decline in the stock's price. True or false?
true
The cash budget shows, often on a monthly basis, expected collections from sales, the cash payments that must be made during the period, and the projected cash flow for the period. Cumulative cash flow is determined, and the target cash balance is subtracted from the cumulative cash flow to determine the firm's need for financing or surplus cash available for investment. True or false?
true
The inputs used in most capital budgeting analyses are not known with certainty; hence, the results of a quantitative analysis may be quite different from the actual, after-the-fact results. Also, five capital budgeting criteria are commonly used, and each provides a somewhat different bit of information. Therefore, it is rational for a firm to calculate and give some consideration to each of the five criteria. For most decisions, the greatest weight should be given to the NPV, but it would be foolish to ignore the information provided by the other criteria. True or false?
true
The stronger a firm's financial position, the easier it is for it to borrow on good terms. Consequently, the firm's optimal holdings of cash and securities will be smaller than if its financial position were weak. True or false?
true
The target payout ratio is the target percentage of net income paid out as cash dividends. True or false?
true
There are two types of DRIPS: (1) plans that involve only "old stock" that is already outstanding and (2) plans that involve newly issued stock. In either case, the stockholder must pay taxes on the amount of the dividends, even though stock rather than cash is received. True or false?
true
There has been a strong trend in recent years toward the use of the NPV and IRR methods as the primary criteria, and away from the regular payback as the primary criterion for selecting capital budgeting projects. True or false?
true
Typically, common dividends cannot be paid if the firm has omitted its preferred dividend. Preferred arrearages must be satisfied before common dividends can be resumed. True or false?
true
Unlike bank loans and costly trade credit, accruals are typically considered to have a zero cost. True or false?
true
Working capital is equal to the firm's current assets, whereas net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This assumes that all current assets are used in the firm's normal operations. True or false?
true
in a perfect world, a firm would identify its optimal capital structure based on market values, raise capital so as to maintain that structure, and use the optimal percentages to calculate its WACC. However, the world is not perfect. It is impossible to identify a precisely optimal capital structure, and given the volatility inherent in financial markets, it would be impossible to remain on target over time even if the optimal capital structure could be identified. As a result, most firms focus on a target debt-to-capital ratio range as opposed to a single number. True or false?
true
The rate at which the NPV profile lines of two mutually exclusive projects cross is called the "crossover rate." If the cost of capital is greater than the crossover rate, then no conflict will occur because the project with the higher NPV will also have the higher IRR. True or false?
truw
Projects S and L have the following cash flows, and both have an 11% cost of capital. What is S's NPV? 0 1 2 3 -600 500 300 100 -600 100 300 600
$167.06
Projects S and L have the following cash flows, and both have an 11% cost of capital. What is L's NPV?
. $172.29
Capital structure of a corporation, deals with capital provided by:
. Investors of all sorts.
the NPV should be used as the primary capital budgeting decision criterion because:
. It tells us how much the project is expected to add or subtract from a firm's value.
Given the following facts, use the Hamada equation to calculate the unlevered beta, bU. bL = 1.25; T = 35%; wd = 55%; and wc = 45%.
0.7
Given the following facts, use the Hamada equation to calculate the levered beta, bL. bU = 0.6; T = 35%; wd = 30%; and wc = 70%.
0.77
