FIN 519 | Course Paper

Unlock access to all the studying documents.

View Full Document

Net capital spending is equal to:

A. ending net fixed assets minus beginning net fixed assets plus depreciation.

B. beginning net fixed assets minus ending net fixed assets plus depreciation.

C. ending net fixed assets minus beginning net fixed assets minus depreciation.

D. ending total assets minus beginning total assets plus depreciation.

E. ending total assets minus beginning total assets minus depreciation.

Cash dividends send which two of the following signals to the market?I. Agency costs

will be lowered since less cash will be held by the firm.II. The firm is planning on

downsizing.III. The firm is currently, and expects to continue to be, profitable.IV. The

firm will no longer conduct stock repurchases.

A. I and II only

B. II and III only

C. III and IV only

D. II and IV only

E. I and III only

Capital budgeting includes the evaluation of which of the following?

A. Size of future cash flows only

B. Size and timing of future cash flows only

C. Timing and risk of future cash flows only

D. Risk and size of future cash flows only

E. Size, timing, and risk of future cash flows

Gabes Market is comparing two different capital structures. Plan I would result in

11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of

stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes,

compare both of these plans to an all-equity plan assuming that EBIT will be $45,000.

The all-equity plan would result in 20,000 shares of stock outstanding. Of the three

plans, the firm will have the highest EPS with _____ and the lowest EPS with ____.

A. Plan I; Plan II

B. Plan I; all-equity plan

C. Plan II; Plan I

D. Plan II; all-equity plan

E. all-equity plan; Plan I

Short-run exposure to exchange rate risk is best illustrated by which one of the

following?

A. Change in book value when the market value of an asset remains constant

B. Daily fluctuations in the spot rate

C. Increases in the forward rate as the time to settlement increases

D. Changes in relative economic conditions between two countries

E. Unrealized foreign exchange gains

Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per share

during the year, and had an ending share price of $77. What was the capital gains yield?

A. 2.70 percent

B. 3.29 percent

C. 3.78 percent

D. 4.05 percent

E. 4.94 percent

Based on the most recent survey information presented in your textbook, CFOs tend to

use which two methods of investment analysis the most frequently?

A. Payback and net present value

B. Payback and internal rate of return

C. Internal rate of return and net present value

D. Net present value and profitability index

E. Profitability index and internal rate of return

Travel America Coaches currently sells 15,000 motor homes per year at $94,000 each,

and 1,500 luxury motor coaches per year at $159,000 each. The company wants to

introduce a low-range camper to fill out its product line; it hopes to sell 6,000 of these

campers per year at $14,500 each. An independent consultant has determined that if

Travel Coaches introduces the new campers, it should boost the sales of its existing

motor homes by 1,500 units per year, and reduce the sales of its luxury motor coaches

by 450 units per year. What amount should be used as the annual sales figure when

evaluating this project?

A. $87,000,000

B. $97,400,000

C. $156,450,000

D. $186,750,000

E. $228,000,000

You place an order for 800 units of Good Y at a unit price of $33. The supplier offers

terms of 1/15, net 45. The supplier is offering you a discount of _____ if you pay within

____ days.

A. $264; 15

B. $264; 30

C. $264; 45

D. $1,600; 15

E. $1,600; 45

Currently, you can exchange $100 for ¬97.25. The inflation rate in Euroland is expected

to be 3.8 percent as compared to 2.1 percent in the U.S. Assuming that relative

purchasing power parity exists, what should the exchange rate be four years from now?

A. 0.7042/$1

B. 0.7414/$1

C. 0.7670/$1

D. 0.9890/$1

E. 0.1.0403/$1

Which one of the following functions should be assigned to the treasurer rather than the

controller?

A. Data processing

B. Cost accounting

C. Tax management

D. Cash management

E. Financial accounting

Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon bonds at

par. Today, the bonds are quoted at 101.6. What is this firms pretax cost of debt?

A. 6.97 percent

B. 7.08 percent

C. 6.79 percent

D. 6.83 percent

E. 7.39 percent

Musical Charts just paid an annual dividend of $2.45 per share. This dividend is

expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a

stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return

is 12.6 percent. What is the cost of equity capital for this firm?

A. 10.28 percent

B. 11.84 percent

C. 12.29 percent

D. 12.95 percent

E. 13.42 percent

Andres Dog House had current assets of $67,200 and current liabilities of $71,100 last

year. This year, the current assets are $82,600 and the current liabilities are $85,100.

The depreciation expense for the past year is $9,600 and the interest paid is $8,700.

What is the amount of the change in net working capital?

A. -$2,800

B. -$1,400

C. $1,400

D. $2,100

E. $2,800

All else constant, an increase in a firms cost of debt:

A. could be caused by an increase in the firms tax rate.

B. will result in an increase in the firms cost of capital.

C. will lower the firms weighted average cost of capital.

D. will lower the firms cost of equity.

E. will increase the firms capital structure weight of debt.

Slaughter Industries just signed a sales contract with a new customer. What is this

contract worth as of the end of year 4 if the following payments will be received and the

firm earns 6 percent on its savings?

A. $397,425.35

B. $402,311.19

C. $466,118.00

D. $485,271.13

E. $489,512.14

Which one of the following is an example of systematic risk?

A. Major layoff by a regional manufacturer of power boats

B. Increase in consumption created by a reduction in personal tax rates

C. Surprise firing of a firms chief financial officer

D. Closure of a major retail chain of stores

E. Product recall by one manufacturer

Which one of the following represents the rate of return a firm must earn on its assets if

it is to maintain the current value of its securities?

A. Cost of equity

B. Internal rate of return

C. Aftertax cost of debt

D. Weighted average cost of capital

E. Debt-equity ratio

Which one of the following activities is a source of cash?

A. Decreasing long-term debt

B. Increasing inventory

C. Repurchasing shares of stock

D. Increasing fixed assets

E. Decreasing accounts receivable

Which one of the following is a speculative motive for holding cash?

A. Buying extra inventory because a key supplier offered a special one-time discount

B. Paying a $100 bonus to all employees at year-end

C. Paying the annual insurance premium on the firms assets

D. Needing to purchase a new delivery truck because the old one was totally destroyed

in an accident

E. Contributing $1,000 to help fund medical care for an uninsured neighbor

Explain the concept of incremental cash flow analysis and its purpose.

Jesse just won the state lottery. He has been given the option of receiving either $62.9

million today or $5 million a year for the next 35 years, with the first payment paid

today. Describe the process that Jesse should use to determine which payment option he

prefers. Ignore all taxes and assume that Jesse will live for at least 40 more years.

Kate is the sole founder of the exclusive retail store, Kates Interiors. Kate identified

additional locations that she believed offered profitable opportunities for expansion so

decided to take her firm public in order to finance her expansion plans. Bob is an

investor who purchased shares of Kates Interiors stock at the offer price. After one

month as a public firm, Kate realized that Bob had earned $1.1 million in profit on his

investment and had already cashed out and moved on. Kate, on the other hand, had

made no profit and still owns her shares. Explain how this could happen.

What does it mean when a loan is amortized? Explain how amortization methods can

vary from one loan to another.

For the period 1926-2011, small-company stocks had a risk premium of 12.6 percent.

What does the term risk premium mean? Is the risk premium on these stocks considered

to be relatively high or relative low as compared to other investment classes? Explain

why.

Provide two arguments in favor of IPO underpricing and two arguments against IPO

underpricing.

Give an example of a situation where the management of a firm is acting in a manner

that is contrary to the principal goal of financial management.

Explain how the selection of a method of depreciation can affect the net present value

of an investment for a tax-paying firm.

Over the next three years, you expect the rate of inflation to decrease, but yet remain

positive. After that, you expect inflation to increase steadily for the next several years.

Draw a term structure of interest rates graph based on this assumption and identify all

the components of that structure.

List three decisions that a financial manager makes that would fall under the category

of working capital management.