One reason that investors may assign a different value to a stock is due to differences in
the appropriate discount rate to use in solving for present values.
The dividend irrelevance theory implies that the firm should follow a residual dividend
policy.
A strong U.S. dollar has a double benefit. It enables Americans to consume imported
goods at lower prices while making our products attractive overseas. The latter
increases export demand and leads to more jobs.
The maximum purchase price acceptable to an acquiring firm in a merger is equal to the
target’s pre-merger value.
The incremental cash flows of a replacement project can be estimated as the difference
between operating with the new and the old equipment.
The following changes in the equity accounts would all be shown under the category of
financing activities on the statement of cash flows: dividends paid, net income for the
year, sale of common stock.
The financial planning process for an existing business can be thought of as adjusting
recent financial statements for changes reflected in planning assumptions.
According to the Modified Accelerated Cost Recovery System (MACRS), which assets
are classified as a 5-year asset?
A.Computers
B.Industrial equipment
C.Trucks
D.Manufacturing tools
E.a and c
Financial plans are begun by forecasting individual line items starting with revenue and
stopping before:
A.interest expense.
B.tax expense.
C.operating expense.
D.net income.
If the net present value of a project is positive then the:
A.project would be unacceptable under the internal rate of return method.
B.project would be acceptable under the payback method.
C.project’s rate of return is greater than the firm’s cost of capital.
D.All of the above are correct.
Comet Powder Company has purchased a piece of equipment costing $100,000. It is
expected to generate a 10-year stream of benefits amounting to $16,273 per year.
Determine the rate of return Comet expects to earn from this equipment.
A.16.3%
B.62.7%
C.10%
D.20%
Concin has the following equity accounts on its balance sheet:
The current market price of Concin’s stock is $24.25. If the firm declares a 10% stock
dividend followed by a $0.06 per share cash dividend, what will be the impact on the
Common stock account?
A.No change
B.Increase of $225,000
C.Increase of $54,000
D.Increase of $21,600,000
Smooth Yogurt, Inc. has average receivables of $80,000, which turn over once every 60
days. It pledges all of its receivables to a bank that advances 80% of the total at 4%
over prime and charges a 2% administrative fee on the total amount pledged. If prime is
10.5%, what effective interest rate is Smooth paying for its receivables financing?
A.6.0%
B.14.5%
C.15.0%
D.29.5%
A firm has the following balance sheet. It expects sales to increase 30% over the
previous year’s level of $9,000, and anticipates retaining $3,000 of its earnings.
According to the unmodified percentage of sales method, the amount of external funds
needed will be:
A.$2,400.
B.$6,450.
C.$3,450.
D.None of the above
The liquidity preference theory of interest rates suggests that:
A.interest rates move randomly and without a pattern.
B.the yield curve is inverted because lenders prefer longer-term, more expensive debt.
C.the yield curve is upward sloping because lenders prefer shorter-term loans.
D.None of the above
Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project.
The equipment will cost $100,000 and will require an additional $10,000 for delivery
and installation. The expansion also will require Basin to increase immediately its net
working capital by $25,000. The expansion is expected to generate revenues of
$150,000 per year. Calculate the project’s net investment.
A.$81,000
B.$125,000
C.$131,000
D.None of the above
An accrual is best defined as:
A.a completed transaction that results in a liability.
B.an accumulation of a liability in regard to an incomplete transaction.
C.a completed transaction that results in an asset.
D.an expense paid in advance.
If the state tax rate is 20% and the federal tax rate is 30%, what is the total effective tax
rate?
A.34%
B.50%
C.44%
D.37%
A company is evaluating a capital project on a new line of business for the firm. The
firm’s current cost of capital is 12%. However, another firm, whose principal focus is in
the same field, is publicly traded and has a beta of 1.6. The market is currently yielding
12% and the yield on short-term treasury bills is 6%. The risk adjusted rate that should
be used for this project is:
A.12%.
B.18%.
C.25.2%.
D.15.6%.
If the United States has a consistent trade deficit with another country (we import more
from it than we export to it), the US dollar will ____ against that country’s currency.
A.strengthen
B.weaken
C.either a or b can happen
D.neither a nor b is likely to happen
Under what conditions might larger balances in inventory and accounts receivable not
help the firm to run more smoothly and efficiently?
The following data is associated with a proposed new project:
The initial cost of new equipment is estimated to be $15,000; which will be depreciated
straight line over five years. Inventory will increase by $2,000 before the project starts
and receivables will increase by $1,000 by the end of the first year. These working
capital increases will disappear at the end of the project. The project will generate
operating earnings of $6,000 per year before consideration of depreciation or taxes. The
corporate tax rate is 34%. Develop the project’s cash flows.
Why are business people fascinated by the central issue behind the study of leverage,
that is whether leverage influences stock price and whether there’s an optimal structure?
(Hint: Think in terms of management’s goals and of acquisitions.)
The Framer Corporation has been doing poorly for several years. Over the last three
years EPS fell from $3.00 to $2.00 and then to $1.50. Dividends, however, were held at
$1.50 for the first two of those years, and then jumped to $1.80 last year, $.30 higher
than earnings. What is likely to be behind this strange pattern? Would you invest in the
company’s stock?
Francis Corp is evaluating a capital budgeting project and has come up with the
following two branch decision tree analysis ($000). The firm’s cost of capital is 12%.
What is the project’s NPV?
($000)
Savings represent money people earn but don’t spend currently. They generally invest
that money by putting it in bank accounts or using it to buy stocks and bonds. Hence,
savings equals investment, a fundamental economic principle of an advanced economy.
Critique this statement.
The Winthrop Company expects to finish the current year with the financial results
indicated on the worksheet on the next page. Develop next year’s income statement and
ending balance sheet using that information and the following planning assumptions
and facts. Work to the nearest thousand dollars.
PLANNING ASSUMPTIONS and FACTS
Income Statement Items
Balance Sheet Items
