FINANCE QUESTIONS. 1. A proxy fight occurs when:
a competitor offers to sell their ownership interest in the firm.
the board of directors disagree on the members of the management team.
a group solicits voting rights to replace the board of directors.
the firm is declared insolvent.
the firm files for bankruptcy.
2. The process of planning and managing a firm’s long-term assets is called:
working capital management.
agency cost analysis.
3. Which one of the following actions by a financial manager creates an agency problem?
agreeing to pay bonuses based on the market value of the company’s stock
refusing to borrow money when doing so will create losses for the firm
agreeing to expand the company at the expense of stockholders’ value
increasing current costs in order to increase the market value of the stockholders’ equity
refusing to lower selling prices if doing so will reduce the net profits
4. Which one of these is a cash outflow from a corporation?
sale of an asset
profit retained by the firm
sale of common stock
issuance of debt
|First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually.|
|If you made a $66,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)|
|Difference in accounts|
6.Gerold invested $125 in an account that pays 5 percent simple interest. How much money will he have at the end of 7 years?
7. What is the present value of $12,450 to be received 5 years from today if the discount rate is 4.75 percent?
8. One year ago, you purchased 300 shares of IXC stock at a price of $22.05 per share, received $460 in dividends over the year, and today sold all of your shares for $29.32 per share. What was your dividend yield?
9. One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per share to date from this investment?
10.Which one of these accounts is classified as a current asset on the balance sheet?
net plant and equipment
11.Net working capital is defined as:
current assets plus stockholders’ equity.
current assets minus current liabilities.
fixed assets minus long-term liabilities.
total assets minus total liabilities.
current assets plus fixed assets.
12.Which one of the following accounts is included in stockholders’ equity?
accumulated retained earnings
plant and equipment
13. Which one of these equations is an accurate expression of the balance sheet?
Liabilities ≡ Stockholders’ equity −Assets
Stockholders’ equity ≡ Assets −Liabilities
Assets ≡ Stockholders’ equity −Liabilities
Stockholders’ equity ≡ Assets + Liabilities
Assets ≡ Liabilities −Stockholders’ equity
| Galaxy United, Inc.
2009 Income Statement
($ in millions)
|Less: Cost of goods sold||7,240|
|Earnings before interest and taxes||850|
|Less: Interest paid||77|
|Net income||$ 502|
| Galaxy United, Inc.
2008 and 2009 Balance Sheets
($ in millions)
|Cash||$ 130||$ 150||Accounts payable||$1,110||$1,150|
|Accounts rec.||940||790||Long-term debt||930||1,239|
|Net fixed assets||3,170||3,610|
|Total assets||$5,720||$6,070||Total liab. & equity||$5,720||$6,070|
What is the days’ sales in receivables? (use 2009 values)
15.The Purple Martin has annual sales of $4,800, total debt of $1,350, total equity of $2,400, and a profit margin of 7 percent. What is the return on assets?
16. A firm has a debt-equity ratio of .40. What is the total debt ratio?
17.Jessica’s Boutique has cash of $43, accounts receivable of $52, accounts payable of $210, and inventory of $150. What is the value of the quick ratio?
18.A firm has sales of $1,140, net income of $152, net fixed assets of $534, and current assets of $320. The firm has $101 in inventory. What is the common-size statement value of inventory?
19. If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the:
debt-equity ratio will remain constant while retained earnings increase.
fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity.
number of common shares outstanding will increase at the same rate of growth.
debt-equity ratio will have to increase.
fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase.
20.The sustainable growth rate:
is based on receiving additional external debt and equity financing.
assumes there is no external financing of any kind.
assumes the debt-equity ratio is variable.
assumes the dividend payout ratio is equal to zero.
is normally higher than the internal growth rate.
21.In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets:
plus the changes in both liabilities and equity.
minus the change in retained earnings.
minus the changes in liabilities.
minus the changes in both liabilities and equity.
plus the changes in liabilities minus the changes in equity.
|If the Hunter Corp. has an ROE of 15 and a payout ratio of 18 percent, what is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)|
|Sustainable growth rate|
|Assume the following ratios are constant:|
|Total asset turnover||2.60|
|What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)|
|Sustainable growth rate|
24. The most common means of financing a temporary cash deficit is a:
long-term unsecured bank loan.
short-term issue of corporate bonds.
short-term secured bank loan.
long-term secured bank loan.
short-term unsecured bank loan.
25.The cash cycle is defined as the time between:
cash disbursements and cash collection for an item.
the sale of inventory and cash collection.
selling a product and paying the supplier of that product.
the arrival of inventory and cash collected from receivables.
selling a product and collecting the accounts receivable.
|Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Input all amounts as positive values):|
|COUNTRY KETTLES, INC.
December 31, 2016
|Property, plant, and equipment||159,000||170,200|
|Less: Accumulated depreciation||(46,880||)||(51,100||)|
|Liabilities and Equity|
|Accumulated retained earnings||168,440||170,715|
|Total liabilities and equity||$||276,820||$||288,605|
|Property, plant, and equipment|
|Accumulated retained earnings|
|Consider the following financial statement information for the Rivers Corporation:|
|Cost of goods sold||76,000|
|Calculate the operating and cash cycles. (Use 365 days a year. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)|
28. In the formula, P3 = Div / R – g, the dividend is for period:
29. Next year’s annual dividend divided by the current stock price is called the:
yield to maturity.
capital gains yield.
30. The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.
interest rate risk
31.What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually?
|Titan Mining Corporation has 8.3 million shares of common stock outstanding and 270,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $31 per share and has a beta of 1.15, and the bonds have 15 years to maturity and sell for 112 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 4 percent, and the company’s tax rate is 30 percent.|
|a.||What is the firm’s market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)|
|b.||If the company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)|
|Filer Manufacturing has 8.5 million shares of common stock outstanding. The current share price is $55, and the book value per share is $3. The company also has two bond issues outstanding. The first bond issue has a face value of $70.4 million and a coupon rate of 7.2 percent and sells for 108.1 percent of par. The second issue has a face value of $60.4 million and a coupon rate of 7.7 percent and sells for 109.3 percent of par. The first issue matures in 7 years, the second in 28 years.|
|Suppose the company’s stock has a beta of 1.1. The risk-free rate is 3.3 percent, and the market risk premium is 7.2 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)|
34.A firm’s WACC can be correctly used to discount the expected cash flows of a new project when that project:
will be financed solely with internal equity.
will be managed by the firm’s current managers.
will be financed with the same proportions of debt and equity as those currently used by the overall firm.
has the same level of risk as the firm’s current operations.
will be financed solely with new debt and internal equity.
35.When computing WACC, you should use the:
pretax yield to maturity because it considers the current market price of debt.
pretax cost of debt because most corporations pay taxes at the same tax rate.
pretax cost of debt because it is the actual rate the firm is paying bondholders.
aftertax cost of debt because interest is tax deductible.
current yield because it is based on the current market price of debt.
36. When estimating the cost of equity using the DDM, which one of these is most apt to add error to this estimate?
current stock price
firm’s tax rate
dividend growth rate
next year’s dividend
37.Samson’s purchased a lot four years ago at a cost of $398,000. At that time, the firm spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the property placed a value of $629,000 on the property and building. Samson’s now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for new project?
38,All else constant, the net present value of a typical investment project increases when:
the discount rate increases.
the initial cost of a project increases.
the rate of return decreases.
all cash inflows occur during the last year instead of periodically throughout a project’s life.
each cash inflow is delayed by one year.
39. Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?
40.The primary reason that company projects with positive net present values are considered acceptable is that:
the project’s rate of return exceeds the rate of inflation.
they return the initial cash outlay within three years or less.
the required cash inflows exceed the actual cash inflows.
the investment’s cost exceeds the present value of the cash inflows.
they create value for the owners of the firm.
41. Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
An investment project that has positive cash flows for every time period after the initial investment should be accepted.
Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
An investment project should be accepted only if the NPV is equal to the initial cash flow.
42.Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?
Project A; because its NPV is positive while Project B’s NPV is negative
Project A; because it has the higher required rate of return
Project B; because it has the largest total cash inflow
Project B; because it has a negative NPV which indicates acceptance
neither project; because neither has an NPV equal to or greater than its initial cost
43.A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?
44.A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years 1 to 4, respectively. Because of its high risk, the project has been assigned a discount rate of 16 percent. In dollars, how much will this project return in today’s dollars for every $1 invested?
45.What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.