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Question 1

 

Which of the following is considered a hybrid organizational form?

 

 

sole proprietorship

 

 

partnership

 

 

corporation

 

 

limited liability partnership

 

Question 2

 

Which of the following is a principal within the agency relationship?

 

 

the board of directors

 

 

the CEO of the firm

 

 

a company engineer

 

 

a shareholder

 

 

 

Question 3

 

Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

Solution: Teakap has

                              Current Assets=$1,456,312

                               Total Assets =$4,812,369

                               Current Liabilities= $1,041,012

                               Common equity= $1,500,000 & Retained Earnings=$1,468,347

     Long Term Debt= ($4,812,369-$1,041,012-$15,00,000-$1,468,347

                             =$803,010

 

 

$803,010

 

 

$1,844,022

 

 

$2,303,010

 

 

$2,123,612

 

 

Question 4

 

 

Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?

 

 

The statement of net worth.

 

 

The statement of retained earnings.

 

 

The statement of working capital.

 

 

The statement of cash flows.

 

 

 

Question 5

 

 

 

Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?

Solution:365 days /5.6

             =65.2 days

 

 

61.7 days

 

 

65.2 days

 

 

57.9 days

 

 

64.3 days

 

Question 6

 

 

Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

Solution: We know, Equity Multiplier=Total assets/ stockholders equity

Also, Equity Multiplier=1/Equity Ratio

Or, 2.47/1= Equity Ratio

Equity proportion=2.47

Debt proportion=2.47-1

                       =1.47

 

 

1.47

 

 

0

 

 

1.74

 

 

0.60

 

 

 

Question 7

 

 

Which of the following is not a method of “benchmarking”?

 

 

Identify a group of firms that compete with the company being analyzed.

 

 

Evaluating a single firm’s performance over time.

 

 

Utilize the DuPont system to analyze a firm’s performance.

 

 

Conduct an industry group analysis.

 

 

 

Question 8

 

 

Your answer is correct.

Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

Solution: PV =$21,000/(1.08)3

                   =$16,670

 

 

$19,444

 

 

$16,670

 

 

$26,454

 

 

$22,680

 

Question 9

 

 

Your answer is correct.

PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

Solution:

     Pv  =$450,000/1.08+ $560,000/(1.08)2+$7,50,000/(1.08)3+$875,000/(1.08)4+ $1,000,000/(1.08)5

              =$(416,667+480,110+595,374+643,151+680,583

         =$2,815,885

      

 

                                 

 

 

$2,735,200

 

 

$2,815,885

 

 

$2,431,224

 

 

$2,615,432

 

 

Question 10

 

 

Your answer is correct.

PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000, $112,000, $164,000, $84,000, and $242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

Solution:

 Pv  =$79,000/1.15+ $112,000/(1.15)2+$164,000/(1.15)3+$84,000/(1.15)4+ $2,42,000/(1.15)5

      =$(68696+84,688+107833+48027+120316)

      =$429,560

 

 

$477,235

 

 

$429,560

 

 

$480,906

 

 

$414,322

 

Question 11

 

 

Your answer is correct.

Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)

Future Value of ordinary annuity=A X[(1+.i)n-1/i]

                                               =$5,000x[(1.10)45-1/.10]

                                               =$3,594,524

          

 

 

$3,594,524

 

 

$1,745,600

 

 

$5,233,442

 

 

$2,667,904

Question 12

 

 

Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

Solution: Given, 2 years ago the price was $20.

                        After 1 year it was sold for $25(P0=$25)

                            & Now it is selling for $28(p1=$28)

                            Dividend (D1=1.10)

                          Rate of Return(R)= D1+(P1-P0)/P0x100

                                                    =[$1.10+$(28-25)/25]x100

                                                    =16%

                   

 

 

16%

 

 

32%

 

 

40%

 

 

12%

 

Question 13

 

 

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

 

Solution: Given,n=6 years,i=8.25%,YTM=6.875%,PV of Bond =?

PV of Bond= (1000×8.25%) x[1-1/(1.06875)6/.06875]+ 1000/(1.06875)6

                      =(82.5×4.8)+671

               =$1,067

               

 

 

 

$923

 

 

$972

 

 

$1,066

 

 

$1,014

 

Question 14

 

 

PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?

Solution: Given,n=3,D1=$3.00, G=0.25,R=14%

Present Value of dividends over the next 4 years=$(3.00/1.14)+$3.25/(1.14)2+$3.50/(1.14)3+$3.75/(1.14)4

                                                                      =$(2.63+2.50+2.36+2.22)

                                                                       =$9.72

[D2=D1(1+g)=$3.00+.25=$3.25

D3=D2(1+g)=$3.25+.25=$3.50

D4=D3(1+g)=$3.50+.25=$3.75]

 

 

 

$9.72

 

 

$12.50

 

 

$11.63

 

 

$13.50

 

 

Question 15

 

 

Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

Solution: Given,  annual cashflow=$100,000

                         Initial outflow= $1,500,000, i=6%

                         Profitability Index=Cash inflow/ Cash outflow

                                                  =${100,000/.06}/$1,500,000

                                                = 1.11

 

 

0.90

 

 

1.11

 

 

1.90

 

 

0.11

 

 

Question 16

 

 

What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

 

 

The internal rate of return.

 

 

The discounted payback.

 

 

The modified internal rate of return.

 

 

The profitability index.

 

 

Question 17

 

 

Your answer is correct.

How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

Solution:Given, WACC=13%,Kd=10%,Ke=20%

We know,     Ke=Ko+(K0-Kd)B/S

Or,.20=.13+(.13-.10)x B/S

Or,.20-.13=.03x S/E

Or,.07=.03S/E

Or,.07/.03= S/E

Or,S:E=70:30

70% of the total fund is financed  by debt.

 

 

70%

 

 

50%

 

 

30%

 

33%

 

 

Question 18

 

 

Your answer is correct.

The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

Solution: D1=$2.10,g=3%,P1=$17.50

Cost of Equity = (Next Year’s dividends per share / Current market value of stock) + Growth rate of dividends

                 =($2.10/$17.50)+0.03

                 =0.15 or 15%

 

                      

 

 

15.36%

 

 

12.00%

 

 

14.65%

 

 

15.00%

 

 

Question 19

 

 

Your answer is correct.

If a company’s weighted average cost of capital is less than the required return on equity, then the firm:

 

 

Is financed with more than 50% debt

 

 

Must have preferred stock in its capital structure

 

 

Has debt in its capital structure

 

 

Is perceived to be safe

 

Question 20

 

 

Your answer is correct.

A firm’s capital structure is the mix of financial securities used to finance its activities and can include all of the following except

 

 

stock.

 

 

bonds.

 

 

equity options.

 

 

preferred stock.

 

 

Question 21

 

 

Your answer is correct.

M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

 

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?

Solution: Given,  Annual cashflow=$150, E=75%,D=25%,V=100,Ke=10%,Kd=7%,dividend=10%

WACC=(KexS/V) +(KdxB/V)

        =(.10x.75)+(.07x.25)

       =.0925 or  9.25%

Debt/Equity= 25/75=33%

When it changes its capital structure, reduces its equity by 15%, the debt to equity ratio=40/60=66.7%

 

 

           

 

 

$321

 

 

$225

 

 

$375

 

 

$600

 

 

 

Question 22

 

 

Your answer is correct.

Multiple Analysis: Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.

 

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

Solution: Given,

EBIT=$247 million

 Depriciation & amortization expenses= $84 million

Number of outstanding shares=135 million, share price o$12.80

Enterprise Value/EBITDA multiple=5.40

 We know that,

Enterprise value multiple=Enterprise value/ EBITDA[EBITDA=Revenue-Expenses

   Or,  5.40=Enterprise value/EBIT+ Depriciation

  Or,  5.40x$(247+84)=Enterprise Value

  Or, Enterprise Value =$1,787 million

 

 

 

 

$453.6 million

 

 

$1,334 million

 

 

$1,787 million

 

 

$1,315 million

 

 

 

 

Question 23

 

 

Your answer is correct.

External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?

Solution: Given,

             Total Assets= $4,417,665

              Net income=$2,771,342

              Dividend pay out ratio=60%

               Growth rate=RR xROE

                                 =(1- Dividend payout ratio)x ($2,771,342/$4,417,665)

                                 =25.1%

 

 

32.9%

 

 

25.1%

 

 

30.3%

 

 

27.3%

 

Question 24

 

 

Your answer is correct.

Which of the following cannot be engaged in managing the business?

 

 

a limited partner

 

 

a general partner

 

 

none of these

 

 

a sole proprietor

 

 

 

Question 25

 

 

Your answer is correct.

Which of the following does maximizing shareholder wealth not usually account for?

 

 

Government regulation.

 

 

Amount of Cash flows.

 

 

Risk.

 

 

The timing of cash flows.

 

Question 26

 

 

Your answer is correct.

The strategic plan does NOT identify

 

 

working capital strategies.

 

 

future mergers, alliances, and divestitures.

 

 

the lines of business a firm will compete in.

 

 

major areas of investment in real assets.

 

 

 

Question 27

 

 

Your answer is correct.

Firms that achieve higher growth rates without seeking external financing

 

 

are highly leveraged.

 

 

none of these.

 

 

have a low plowback ratio.

 

 

have less equity and/or are able to generate high net income leading to a high ROE.

Question 28

 

 

Your answer is correct.

Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

Solution: Given, Revenues= $312,766

                         Costs=$220,222

                        Interest payment=$31,477, tax rate=34%, dividends=$34,125

Dividend payour Ratio= Dividend/ Net income

                                 =$34,125/$(312,766-220,222-31,477)x(1-.34)

                                 =$34,125/40,304

                                 =0.85 or 85%

Retention Ratio= 1- Dividend payout ratio

                       =1-0.85

                       =.15 or 15%

 

 

 

15%, 85%

 

 

85%, 15%

 

 

55%, 45%

 

 

45%, 55%

 

Question 29

 

 

Your answer is correct.

The cash conversion cycle

 

 

begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.

 

 

shows how long the firm keeps its inventory before selling it.

 

 

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

 

 

estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.

 

 

 

Question 30

 

 

Your answer is correct.

You are provided the following working capital information for the Ridge Company:

Ridge Company

Account

$

 

 

Inventory

$12,890

Accounts receivable

12,800

Accounts payable

12,670

 

 

Net sales

$124,589

Cost of goods sold

99,630

Cash conversion cycle: What is the cash conversion cycle for Ridge Company?

CCC=Operating cycle-Average payment period

Operating Cycle =  Average age of inventory+ Average collection Period

AAI=Cost of Inventory/Cost of Goods sold x 365

     =$12,890/$99,630 x 365

     =  47.2 days        

ACP= Accounts Receivables/(Annual sales/365)

     = 37.5 days

Operating cycle=(47.2+37.5)days

                      =84.7

Average payment period=360 days/A/P Turnover Ratio[COGS/Average A/P=$99,630/{(12670+12890)/2}]

                                        =360/7.795=46.18

CCC=84.7-46.18

     =38.5 days

 

 

83.5 days

 

 

46.4 days

 

 

38.3 days

 

 

129.9 days

 

 

 

 

 

 

 

 

 

 

 

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