T&P Assignments Exam 1
Kurt Myers Management Consultants, Inc. has a current ratio of 1.5 and a quick ratio of 1.0. If its current liabilities are $10,000, what are its inventories?
$ 5,000
Whitney Rush Auditing Service, Inc. has a debt ratio of 50% and an equity multiplier of 2. What is their stockholders' equity if total debt is $100,000?
$100,000
A firm's price-to-earnings ratio is 8 and its market-to-book ratio is 2. If its earnings per share are $4.00, what is the book value per share?
$16
What is the market price per share of Daniel Aldave Quants, Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market-to-book ratio of 1.5?
$16.20
Daniel Aldave has a solar panel energy savings project which has the following cash flows: Year Cash Flow 0 -$245,454 1 100,000 2 100,000 3 150,000 4 40,000 5 25,000 The cost of capital is 10 percent. What is the project's discounted payback period?
2.64 years
Williams is considering the following project and is computing the IRR. The firm has a cost of capital of 10%. What is the IRR for this project? Year Project Cash Flows 0 -$1,000 1 400 2 300 3 500 4 400
21.22%
Which of the following financial ratios is market-based? return on investment debt-to-equity gross profit margin price-to-earnings
P/E
Proven reserves is the lowest reserves number and is the amount that the geologists have the highest level of being sure there is at least this amount of oil in the reserve formation. This is also known as ______________.
P90
A digital assembly system that costs $160,000 is expected to operate for 8 years. The estimated salvage value at the end of 8 years is $12,000. The system is expected to save the company $38,000 in labor costs before taxes and depreciation. The company will depreciate this system on a 5-year MACRS schedule. If the firm's cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project. (Note: Requires MACRS tables.)
PVIF PVNCF 1 ($38,000 - $32,000)0.65 + $32,000 = $35,900 0.893 $ 32,059 2 ($38,000 - $51,200)0.65 + $51,200 = $42,620 0.797 $ 33,968 3 ($38,000 - $30,720)0.65 + $30,720 = $35,452 0.712 $ 25,242 4 ($38,000 - $18,432)0.65 + $18,432 = $31,151 0.636 $ 19,812 5 ($38,000 - $18,432)0.65 + $18,432 = $31,151 0.567 $ 17,663 6 ($38,000 - $9,216)0.65 + $9,216 = $27,925 0.507 $ 14,158 7 ($38,000 - $0)0.65 + $0 = $24,700 0.452 $ 11,164 8 ($38,000 - $0)0.65 + $12,000(0.65) = $32,500 0.404 $ 13,130 $167,196 -$160,000 NPV = $ 7,196
Which of the following is talking about Monte Carlo Simulation Analysis? Examines several possible situations, usually worst case, most likely case, and best case. Particularly helpful in project analysis since the outcomes from large investment projects are often the result of the interaction of a number of interrelated factors (or value drivers). All of the answers are correct. Shows how changes in a variable such as unit sales affect NPV or IRR.
Particularly helpful in project analysis since the outcomes from large investment projects are often the result of the interaction of a number of interrelated factors (or value drivers).
The shareholder wealth maximization goal states that management should seek to maximize the ____ of the expected future returns to the owners of the firm.
Present Value
Which method is the following sentence talking about to estimate the reserves ? " The lowest figure, the amount that the geologists are 90% sure is there(sometimes 95% is used which would be P95)" Hint: This is from the Capital Budgeting and Risk Analysis in the Oil and Gas Industry lecture.
Proved or Proven
Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is?
There is a separation of ownership and control in corporations.
Which population distribution method only needs two parameters-- mean and standard deviation?
normal and lognormal
If the net present value of an investment project is positive, then the ____.
project's rate of return is greater than the firm's cost of capital
A firm may decide not to accept projects unless they have positive net present values and paybacks of less than some stated number of years. What is the name of this approach?
Net Present Value/Payback Approach
What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?
$42
What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year.
$48,300 Solution: NINV = $42,000 + $1,500 + $4,800 = $48,300
A major disadvantage of the payback period method (the plain payback) is that it:
- Does not directly account for the time value of money. - Is useless as a risk indicator. - Ignores cash flows beyond the payback period
Which are the following risks are considered tangible risks? This question is related to the lecture about the Devil's Tower project. Select all answers that are correct. This is a multiple answer question.
- commodity price risk - credit risk - construction risk - inflation - reservoir risk
The major factors that determine the market value of a company's shares of stock include all of the following
- risk of its cash flows and the timing of its cash flows - risk of its cash flows - timing of its cash flows
The fixed asset turnover ratio is influenced by ____.
- the depreciation policies adopted by the firm - the extent to which fixed assets are leased rather than owned - the length of time since acquisition
Which of the following are true about an aggressive financing strategy of current assets? Select all that apply
- yields a higher return on equity - has a lower current ratio compared to the other strategies - involves greater risk - makes greater use of short-term debt as compared to long-term debt
Lynh Pham Commercial Oil Supply is considering an investment project which has the following cash flows: T Project Cash Flows 0 -$1000 1 400 2 300 3 500 4 400 The company's cost of capital is 10%. What is the project's plain payback (not discounted)?
2.6 years
What was the energy industry TEV/EBITDA for calendar year 2020? This is the trailing enterprise value to EBITDA. The trailing means for the last year.
10.2 This is a Capital IQ question. Log into CIQ and hover over the "Markets" tab at the top. Then, click on Energy under "Industries". Then on the left-hand side, select "Key Stats & Ratios" under the "Industry Profile". Look for this information on the page. Type the answer to one decimal place. Do not type the x sign. So if you see the number 9.9x for CY2020, type 9.9 in the box. Be sure to follow my directions because I will not give credit if you forget to add the decimal place or make other mistakes.
Determine the annual financing cost of a 9-month (274 days), $20,000 discounted bank loan at a stated interest rate of 9.5%, assuming no compensating balance is required. Fill in the blank. Write the number in % to two decimal places but do not type %. So if you calculate 12.54%, type 12.54 in the blank. I will not give credit to students that do not follow these directions so please be careful.
10.23
Determine the annual financing cost of forgoing the cash discount under the following credit terms. 3/30, net 120
12.54%
Erik Nunez Industries Inc. has a revolving credit agreement with its bank under which the company can borrow up to $15,000,000 at an interest rate of 1.5% above the prime rate (currently 10.5%). Nunez Industries is required to maintain a 15% compensating balance requirement and to pay a 0.5% commitment fee on the unused portion of the credit line. Assume that the company has no funds in its account at the bank that can be used to meet the compensating balance requirement. . Determine the annual financing cost of borrowing $5,000,000 under the credit agreement.
15.3
What was the industry average Return on Equity for the Airline industry for calendar year 2019, for the region "United States and Canada"? Type the answer in % to ONE DECIMAL PLACE. Do not type the % sign. So if you see the number 9.9% for CY2019, type 9.9 in the box. Be sure to follow my directions because I will not give credit if you forget to add the decimal place or make other mistakes.
25.2 This is a Capital IQ question. Log into CIQ, hover over the "Markets" tab at the top, then click on "Industries". Then on the left-hand side, select "Key Stats & Ratios" under the "Industry Profile" caategory. On the far right-hand side of the screen, click on "Refine Industry". Expand "Industrials", then "Transportation", and select "Airlines". Then click on "Submit". Next, click on "Refine Geography" on the far right hand side. Then select "United States and Canada" and push "Submit". Now look under column CY2019. :-)
Williams Companies Inc is considering a natural gas project which has the following cash flows. The cost of capital is 0%. What is the NPV of the project? Year Project Cash Flows 0 -$1,000 1 400 2 300 3 500 4 400
600
What was the payout ratio of the Coca-Cola for the fiscal period ending 2021? Please express your answer as a percentage (i.e., 30%).
74.2% Use Capital IQ. Navigate to The Coca-Cola Company (NYSE:KO) profile using the Search Bar at the top of the platform. Then select Income Statement under Financials/Valuation from the Left-Hand Menu. Under Income Statement tab, you will see the Coca-Cola's financial information.
_____ arise from the divergent objectives between owners and managers.
Agency problems
In Chapter 1 we learned that Financial managers have the primary responsibility for acquiring funds needed by a firm and for directing those funds into projects that will maximize the value of the firm. In one of the articles posted to the Week 1 folder, the CFO of the company said "My role as CFO is to make sure that we are rethinking capital allocation for omnichannel [capabilities]," Ms. Knight said. Omnichannel refers to the combination of traditional brick-and-mortar stores, e-commerce platforms and click-and-collect services. What is the name of this company?
Ahold Delhaize NV
Which company from the reading materials' articles has tried to diversify its products amid of its sales volume declined in the United States?
Anheuser-Busch InBev SA
Shareholder wealth is measured by the market value of the shareholder's common stock holdings. Market value is defined as the price at which the stock trades in the marketplace, such as NYSE. Thus, total shareholders, wealth equals the number of shares outstanding times the market price per share. Which company recently became the first U.S. public company to eclipse $2 trillion in market value, a dizzying achievement that highlights the company commanding role in the world economy. Hint: See the Week 1 readings from the Wall Street Journal.
Apple Inc
According to the Ch3 lecture, which company had remarkable improvement over 2016-2021 in ROE?
Apple and Lowes
According to an article, what type of industry has started to change its production line products due to the consumer preference shift in the US?
Automotive Industry
According to a WSJ article, which was not the reason that causes the Airbus' A380 failure?
Boeing rebound
Google plan to expand huge undersea cables to boost cloud computing is an example of:
Capital Budgeting
What was the company that Dr. Simkins mentions in the Ch. 16 Part 4 lecture that was using the technique: Stretching Accounts Payable?
Chesapeake Energy
According to the WSJ article, which company showed better-than-expected sales and margins after a series of reputation crisis?
Chipotle Mexican Grill Inc.
Which strategy indicated in the article has helped Lowe to increase its profit in 2019?
Cost-cutting strategy
Which one of the following is a capital budgeting decision? Determining how many shares of stock to issue. Deciding how to refinance a debt issue that is maturing Deciding whether or not to purchase a new machine for the production line.
Deciding whether or not to purchase a new machine for the production line.
EQT has a capital structure that has a revolving credit facility that the principle due changed by how much over the period 2017 to 2018.
Decreased $495MM.
What is the name of an index that measures the success of managers in achieving a goal of shareholder wealth maximization?
Economic Value Added EVA®
Financial managers can take a variety of actions to influence the market value of a company's stock. All of the following are classifications of actions taken
Financing Dividend Investing
Identify the company from the articles that showed the agency problems between its manager (agents) and shareholders (principals).
General Electric
According to the articles from the reading materials and my Ch.3 lecture, which company is struggling heavily due to the lagging performance of its power division?
General Electric (GE)
Which company has decided to cut its dividend for the second time since the great depression?
General Electric (GE)
Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at ____.
Increasing the MVA of the enterprise in any given year
____ indicate the ability of the firm to meet its short-term financial obligations.
Liquidity ratios
The 3 most common distributions used in Monte Carlo simulation are:
Lognormal, triangular, and uniform.
According to an article, what has caused WeWork's bonds to be increasing volatile?
Looming cash crunch and strategies to raise money
Which company is trying to regain its industry strength by hiring new executive chief and financial chief?
Lowe's Corporation, Inc.
TexMex is considering replacing its tortilla machine with a new model that sells for $46,000 including the cost of installation. The old machine has been fully depreciated and has a $0 salvage value. The new machine will be depreciated as a 3-year MACRS asset. Revenues are expected to increase $18,000 per year over the 5-year life of the new machine. At the end of 5 years the new machine is expected to have no salvage value. What is the IRR for this project if TexMex has a required rate of return of 14% and a marginal tax rate of 40%? Operating costs are not expected to increase from the current level of $8,000 per year.
Rationale: Solution: Year NCF 1 ($18,000 - $15,332)(0.60) + $15,332 = $16,933 2 ($18,000 - $20,447)(0.60) + $20,447 = $18,979 3 ($18,000 - $6,813)(0.60) + $6,813 = $13,525 4 ($18,000 - $3,409)(0.60) + $3,409 = $12,164 5 ($18,000 - $0)(0.60) + $0 = $10,800 By calculator, the IRR = 19.27%
Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less efficient one. The new machine will cost $240,000 including installation. The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property. It can be sold for $40,000. Compute the NINV for this project if KC has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
Rationale: Solution: Book value = $150,000 × 0.22 = $33,000 Tax on gain from sale = ($40,000 - $33,000) × 0.40 = $2,800 Cost of new machine $240,000 Salvage value of old machine (40,000) Tax due on sale of old machine 2,800 Net investment $202,800
Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present handmade production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.
Rationale: Solution: NCF = ($300,000 - $73,000)(1 - 0.4) + $73,000 = $209,200
Using the profitability index, which of the following mutually exclusive projects should be accepted? Project A: NPV = $6,000; NINV = $50,000 Project B: NPV = $10,000; NINV = $120,000 Project C: NPV = $8,000; NINV = $80,000
Rationale: Solution: PIA = $56/$50 = 1.12 PIB = $130/$120 = 1.08 PIC = $88/$80 = 1.1 Therefore, choose project A
According to a WSJ article, what factor has given more incentives for car makers to produce longer and wider vehicles?
Regulatory changes
Firms with a positive economic value added (EVA) have a(n) ____.
Return on capital greater than their cost of capital
Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.
Solution: New lathe cost $ 500,000 Less: Salvage value (old lathe) - 100,000* Net investment $ 400,000 *Book value (old lathe) = $250,000 - 10[($250,000 - $25,000)/15] = $100,000. Because book value equals salvage value, no gain or loss is incurred on sale of old lathe.
Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year, and operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34 percent and the first year's depreciation rate is 20 percent, what is the net cash flow in the first year.
Solution: NCF = ($35,000 - $15,000 - $19,600)(1 - 0.34) + $19,600 = $19,864
A drill press costs $30,000 and is expected to have a 10-year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. Assuming the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.
Solution: NCF = {[$0 - (-$4,500) - $3,000](1 - 0.40)} + $3,000 = $3,900
Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?
Solution: NINV = $800,000 + $240,000 + $48,000 - $75,000 - $17,000* = $996,000 *($125,000 - $75,000)(0.34) = $17,000 tax saving on loss
Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?
Solution: NPV = -$340,000 - $110,000(0.870) + $50,000(0.756) + $150,000(0.658) + $240,000(0.572) + $330,000(0.497) = $2,090
Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%?
Solution: NPV = -$874,000 + $170,000(5.660) = $88,200
According to the Chapter 3 lecture, why would Apple's capital structure come under scrutiny?
The company debt has mounted to $100 billion and raised too early than usual
Which company wants to reinvent itself as a maker of prepared foods, and its struggling with meat stockpiles, low prices and tariffs?
Tyson Food Inc.
Which segment of their business in the energy value chain generated the highest net profit after tax for ExxonMobil in 2017?
Upstream = International Use Capital IQ to answer the question. Look up the company in CIQ and then under "Financials/Valuation", select Segments.
Which of the following options are intangible risk?
Weather risk; Legal risk; Political risk.
Project C has been classified into risk class II by the analyst of a major firm. The risk premium required for projects in this risk class is 8%. The current risk-free rate measured by the analyst is 10%. If the project has an estimated return of 20%, the analyst would recommend:
accepting project C
The chief financial officer (CFO) normally has responsibility for all of the following EXCEPT _____.
advertising strategy
When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____. a financial ratio must be compared to some standard financial ratios are flags indicating potential areas of strength or weakness although there may be accounting differences between companies, these differences do not impact financial ratios a financial ratio must be dissected to discover its true meaning
although there may be accounting differences between companies, these differences do not impact financial ratios
Which of the following is consistent with an increase in a firm's return on investment? an increase in sales revenue costs increase more than revenues do an increase in the asset level required to maintain current sales volume costs decrease less than revenues do
an increase in sales revenue
Corporate securities represent claims against the _____.
assets and future earnings of the firm
A major problem with using the risk-adjusted discount rate approach is the determination of _____.
beta values for individual projects
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
capital structure
The _________ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities.
cash conversion cycle
To increase the return on stockholders' equity, management could increase the ____
equity multiplier
When the level of working capital is increased, all of the following are expected to occur except
expected profitability increases
Asset management ratios indicate ____.
how well a firm is using its assets to generate sales
The current ratio is not the most stringent measure of liquidity, because it ____.
includes some items, such as inventory, that may not be readily liquid
An _____ in the operating cycle, without a corresponding ____ in the payables deferral period will _____ the cash conversion cycle and creates further working capital financing needs for the company.
increase; increase; lengthen
Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed "waiting to invest" is the ____ option.
investment timing
A major advantage of the corporate form of business over both sole proprietorships and partnerships is the _____.
limited liability
Bondholders and other long-term creditors tend to prefer a ____ debt ratio because it provides ____ a major financial problem.
low; greater protection in the event of
Shareholder wealth is measured by the ____.
market value of the shareholders' common stock holdings
If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the_________ approach to asset financing.
matching
Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio? borrow short-term funds to pay off some payables purchase additional inventory on credit use cash to pay off notes payable collect some of her accounts receivables
purchase additional inventory on credit
What types of inventories are generally considered as acceptable for inventory loans?
raw materials and finished goods
The aggressive approach to the financing of a firm's current assets uses a _______ proportion of short-term debt and a ________ proportion of long-term debt.
relatively high, relatively low
The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately but _____.
result in a stream of benefits over several future time periods
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
risk
The ____ approach is widely used by firms that attempt to consider differential project risk in their capital budgeting procedures.
risk-adjusted discount rate
_____________ shows how changes in only one variable at a time, such as volume or price, affects the NPV or IRR.
sensitivity analysis
There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.
separation of ownership and control
All of the following economic environment factors affect stock prices
tax rates, competition, currency exchange rates
A major disadvantage of a sole proprietorship is the fact that _____.
the owner has unlimited personal liability
The Market Value Added (MVA) is ____.
the present value of all expected future EVA
The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when ______.
the projects under consideration have different risk characteristics
Figure 11.5 is from Chapter 11 and illustrates the difference between the use of a single discount rate, the WACC for all projects regardless of risk level, and a discount rate based on the security market line for each project (using the project's beta). Projects 1, 2, 3, and 4 are being evaluated by Janet Hayfron Enterprises. Using the weighted average cost of capital approach, which of the following projects should be acceptable. Select all that apply. This is a multiple answer question.
the two above the Weighted cost of capital line
Figure 11.5 is from Chapter 11 and illustrates the difference between the use of a single discount rate, the WACC for all projects regardless of risk level, and a discount rate based on the security market line for each project (using the project's beta). Projects 1, 2, 3, and 4 are being evaluated by Janet Hayfron Enterprises. Using the risk-adjusted discount rate approach, which of the following projects should be acceptable. Select all that apply. This is a multiple answer question.
the two above the risk free line
Financial managers are responsible not only for measuring value, but also for creating value. T/F
true
The net present value of an investment made by a firm represents the contribution of that investment to the ____ of the firm.
value
In evaluating project risks in the energy industry, which of the risks listed below is considered an "intangible risk", and is not a "tangible risk"?
weather
Carson Guinn with Phillips 66 is in the Credit area to monitor the credit risk of their customers. Carson graduated from OSU about three years ago and took Energy Finance from Dr. Simkins. She uses Capital IQ all the time in her job at Phillips 66. A feature she uses in her credit analysis is the "Capital Structure Summary" under "Financials/Valuation" in the left-hand tool bar. She looks at this to see many different leverage (debt) data about a company. On item she looks at is the company's "Undrawn Revolving Credit". This indicates the company has more funding available if they have short-term debt they need to pay. Assume that Chesapeake Energy is one of her clients. Does Chesapeake have any funds available in revolving credit at Sep-30-2019? If so, how much?
yes, $1,843 million.
