A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout
ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no
external financing sources. What must the total asset turnover be?
A. 0.98
B. 1.06
C. 1.21
D. 1.44
E. 1.59
Which one of the following statements matches M&M Proposition I?
A. The cost of equity capital has a positive linear relationship with a firms capital
structure.
B. The dividends paid by a firm determine the firms value.
C. The cost of equity capital varies in response to changes in a firms capital structure.
D. The value of a firm is independent of the firms capital structure.
E. The value of a firm is dependent on the firms capital structure.
Kelly decided to accept the risk and purchased a high growth stock. Her returns for the
past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent,
respectively. What is the standard deviation of these returns?
A. 43.20 percent
B. 45.46 percent
C. 47.88 percent
D. 50.83 percent
E. 58.39 percent
Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a
perpetual stream of $2,500 payments that begin at year t = 25?
A. $16,412.02
B. $17,208.00
C. $34,335.96
D. $36,235.06
E. $36,711.41
Which of the following are determinants of a firms sustainable rate of growth?I.
Amount of sales generated from each dollar invested in assetsII. Amount of debt per
dollar of equityIII. Amount of current assets per dollar of current liabilitiesIV.
Percentage of net income distributed as dividends
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Franklin Oil issued 150,000 shares of stock last week. The underwriters charged a 7.5
percent spread in exchange for agreeing to a firm commitment. The legal and
accounting fees amounted to $310,000 and the company incurred $65,000 in indirect
costs. The offer price was $31 a share. Within the first hour of trading, the stock price
increased to $34 a share. What was the flotation cost as a percentage of the funds
raised?
A. 20.89 percent
B. 24.03 percent
C. 24.47 percent
D. 26.55 percent
E. 29.89 percent
Bama & Co. owes a total of $21,684 in taxes for this year. The taxable income is
$61,509. If the firm earns $100 more in income, it will owe an additional $56 in taxes.
What is the average tax rate on income of $61,609?
A. 28.00 percent
B. 30.33 percent
C. 33.33 percent
D. 35.00 percent
E. 35.29 percent
Fig Newton Industries is considering a project and has developed the following
estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed
costs = $216,400. The depreciation is $94,700 a year and the tax rate is 40 percent.
What effect would an increase of $1 in the selling price have on the operating cash
flow?
A. $4,380
B. $4,823
C. $5,316
D. $5,448
E. $7,300
China Importers would like to spend $221,000 to expand its warehouse. However, the
company has a loan outstanding that must be repaid in 2.5 years and thus will need the
$221,000 at that time. The warehouse expansion project is expected to increase the cash
inflows by $58,000 in the first year, $139,000 in the second year, and $210,000 a year
for the following 2 years. Should the firm expand at this time? Why or why not?
A. Yes, because the money will be recovered in 1.69 years
B. Yes, because the money will be recovered in 1.87 years
C. Yes, because the money will be recovered in 2.11 years
D. No, because the project never pays back
E. No, because the money will not be recovered in time to repay the loan
Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding
and a total market value of $352,000. Based on its current capital structure, the firm is
expected to have earnings before interest and taxes of $26,000 if the economy is
normal, $3,000 if the economy is in a recession, and $33,000 if the economy booms.
Ignore taxes. Management is considering issuing $88,000 of debt with a 6 percent
coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock.
What will the earnings per share be if the debt is issued and the economy is in a
recession?
A. -$0.27
B. -$0.19
C. $0.03
D. $0.26
E. $0.31