Finance Multiple Choice Questions

All else constant, what would Baldwin’s SG&A/Sales ratio be if the company had spent an additional \$1,500,000 for Buddy’s promotional budget and \$750,000 for Buddy’s sales budget?
Select: 1
11.3%
8.4%
11.8%
9.8%
The Chester’s balance sheet has \$106,417,000 in equity. Further, the company is expecting \$3,000,000 in net income next year. Assuming no dividends are paid and no stock is issued, what would their Book Value be next year?
Select: 1
\$16.22
\$71.60
\$32.41
\$33.33
Chester Corp. is downsizing the size of their workforce by 10% (to the nearest person) next year from various strategic initiatives. How much will the company pay in separation costs if each worker receives \$5,000 when separated?
Select: 1
\$225,000
\$2,030,000
\$90,000
\$812,000
In the Month of March, Baldwin Corporation received orders of 162 units at a price of \$15.00 for their product Bold. Baldwin uses the accrual method of accounting and offers 30 day credit terms. Baldwin delivers 108 units in March and the balance of 54 units in April. They received payment for 54 units in March, 54 units in April, and 54 units in May. How much revenue is recognized on the March income statement from this order? How much in the April Income statement? (Answer in thousands)
Select: 1
\$2,430 , 0
0 , \$2,430
\$1,620 , \$810
\$810 , \$810
Your Competitive Intelligence team is predicting that the Baldwin Company will invest in adding capacity to their Baker product this year. Assume Baldwin’s product Baker invests in increasing its capacity by 10% this year. Because of this new information, your company anticipates all other products in the Core segment will increase their capacity by the same amount. How much can the industry produce in the Core segment the next year? Consider only products primarily in the Core segment last year. Ignore current inventories. Figures in thousands (000).
Select: 1
8,725
9,702
7,675
8,652
11,066
3,980
7,668
Assume Andrews is paying a dividend of \$1.38 (per share). If this dividend was raised by 15%, given its current stock price, what would be the Dividend Yield?
Select: 1
0.9%
134.5%
0.7%
0.7%
Last year Abby charged \$2,753,867 Depreciation on the Income Statement of Andrews. If Abby sold a fully depreciated piece of equipment at a loss, the effect on Andrews’s financial statements would be (all other items remaining equal):
Select: 1
Decrease Net Cash from operations on the Cash Flow Statement
No impact on Net Cash from operations
Increase Net Cash from operations
Just impact the Balance Sheet
The Baldwin company wants to decrease its plant utilization for Buddy by 15%. How many units would need to be produced next year to meet this production goal? Ignore impact of accounts payable on plant utilization.
Select: 1
1,305
1,782
2,030
1,535

FINC620 – Quiz – Week 1

1.      Bosio Inc.’s perpetual preferred stock sells for \$97.50 per share, and it pays an \$8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?

2.      Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 7.75%; its tax rate is 40%; the next expected dividend is \$0.65 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is \$15.00 per share; the flotation cost for selling new shares is F = 10%; and the target capital structure is 45% debt and 55% common equity. What is the firm’s WACC, assuming it must issue new stock to finance its capital budget?

 3. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

4.      Multi-Part 9-1:
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.

 Assets Current assets \$  38,000,000 Net plant, property, and equipment 101,000,000 Total assets \$139,000,000 Liabilities and Equity Accounts payable \$  10,000,000 Accruals 9,000,000 Current liabilities \$  19,000,000 Long-term debt (40,000 bonds, \$1,000 par value) 40,000,000 Total liabilities \$  59,000,000 Common stock (10,000,000 shares) 30,000,000 Retained earnings 50,000,000 Total shareholders’ equity 80,000,000 Total liabilities and shareholders’ equity \$139,000,000

The stock is currently selling for \$15.25 per share, and its noncallable \$1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for \$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm’s tax rate is 40%.

Refer to Multi-Part 9-1. What is the best estimate of the firm’s WACC?

5.      Which of the following statements is CORRECT?

6.      S. Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = \$0.85; P0 = \$22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to \$40.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?

7.      Safeco Company and Risco Inc are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%. Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project.

Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is CORRECT?

 8.      Which of the following statements is CORRECT?

 9.      Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?   10.  Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

2         out of 2 points

 11.  Which of the following statements is CORRECT?

12.  Multi-Part 9-1:
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.

 Assets Current assets \$  38,000,000 Net plant, property, and equipment 101,000,000 Total assets \$139,000,000 Liabilities and Equity Accounts payable \$  10,000,000 Accruals 9,000,000 Current liabilities \$  19,000,000 Long-term debt (40,000 bonds, \$1,000 par value) 40,000,000 Total liabilities \$  59,000,000 Common stock (10,000,000 shares) 30,000,000 Retained earnings 50,000,000 Total shareholders’ equity 80,000,000 Total liabilities and shareholders’ equity \$139,000,000

The stock is currently selling for \$15.25 per share, and its noncallable \$1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for \$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm’s tax rate is 40%.

Refer to Multi-Part 9-1. Which of the following is the best estimate for the weight of debt for use in calculating the firm’s WACC?

 13.Which of the following statements is CORRECT?

 14. Weaver Chocolate Co. expects to earn \$3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for \$32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?

 15.Which of the following statements is CORRECT?

Dozier Corporation Is A Fast Growing Supplier Of Office Products. Analysts Project The Following Free Cash Flows (FCFs) During The Next 3 Years, After Which FCF Is Expected To Grow At A Constant 7% Rate. Dozier’s Weighted Average Cost Of Capital Is WACC

BA 350 Week 8 Final Exam Sum ( 100% Correct Solution + Steps by Steps Calculation with details *****)

2-4 – (Income Statement)

Pearson Brothers recently reported an EBITDA of \$7.5 Million and net income of \$1.8 million. It had \$2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
2-7 – (Corporate Tax Liability)

The Talley Corporation had a taxable income of \$365,000 from operations after all operating costs but before (1) interest charge of \$50,000, (2) dividends received of \$15,000, (3) dividends paid of \$25,000, and (4) income taxes. What are the company’s marginal and average tax rates on taxable income?
Chapter 3 Problem 3-8, 3-10
3-8 – (Profit Margin and Debt Ratio)
Assume you are given the following relationships for the Clayton Corporation: Sales/total assets   1.5 Return on assets (ROA)   3% Return on equity (ROE)   5% Calculate Clayton’s profit margin and debt ratio.
3-10 – (Times-interest-earned ratio)
The Manor Corporation has \$500,000 of debt outstanding, and it pays an interest rate of 10% annually: Manor’s annual sales are \$2 million, its average tax rate is 30%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan and bankruptcy will result. What is Manor’s TIE ratio?
Chapter 12 Problem 12.1 12-4
12.1 – (AFN Equation)
Baxter Video Product’s sales are expected to increase by 20% from \$5 million in 2010 to \$6 million in 2011. Its assets totaled \$3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were\$1 million, consisting of \$250,000 of accounts payable, \$500,000 of notes payable, and \$250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.
12-4 – (Sales Increase)
Bannister Legal Services generated \$2,000,000 in sales during 2010, and its year-end total assets were \$1,500,000. Also, at year-end 2010, current liabilities were \$500,000, consisting of \$200,000 of notes payable, \$200,000 of accounts payable, and \$100,000 of accruals. Looking ahead to 2011, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 5%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?
Chapter 13 Problem 13-6, 13-7, 13-8
13-6:
Brooks Enterprises has never paid a dividend. Free cash flow is projected to be
\$80,000 and \$100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company’s weighted average cost of capital is 12%.
a.      What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)
b.   Calculate the value of Brooks’s operations.
13- 7
Dozier Corporation is a fast growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s weighted average cost of capital is WACC = 13%.
YEAR
1        2         3
Free Cash Flow (\$millions)     -\$20     \$30      \$40
a.)    What is Dozier’s terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond year 3 discounted back to Year 3.)
b.)    What is the current value of operations for Dozier?
c.)    Suppose Dozier has \$10 million in marketable securities, \$100 million in debt, and 10 million shares of stock. What is the intrinsic price per share?
13.8
The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of operations is \$756 million, what is the 12/31/2010 intrinsic market value of equity?
Assets                                                             Liabilities and Equity
Cash                                      \$20.0               Accounts Payable              \$19.0
Marketable securities                77.0               Notes Payable                      151.0
Accounts receivable                 100.0                  Accruals                               51.0
Inventories                               200.0                   Total current liabilities  \$221.0
Total current assets      \$397.0                  Long term bonds               190.0
Net Plant and equipment           279.0                        Preferred stock                    76.0
Common stock
(par plus PIC)                       100.0
Retained earnings                89.0
Common equity                 \$189.0
Total Assets                            \$676.0             Total liabilities                    \$676.0
Chapter 4 Problem 4-4, 4-5, 4-20, 4-22
4-4:
If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

4-5:
You have \$42,180.53 in a brokerage account, and you plan to deposit an additional \$5,000 at the end of every future year until your account totals \$250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal?

4-20:
a. Set up an amortization schedule for a \$25,000 loan to be repaid in equal instalments at the end of each of the next 5 years. The interest rate is 10%.
b. How large must each annual payment be if the loan is for \$50,000? Assume that the interest rate remains at 10% and that the loan is still paid off over 5 years.
c. How large must each payment be if the loan is for \$50,000, the interest rate is 10%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Why are these payments not half as large as the payments on the loan in part b?
4-22:
Washington-Pacific invested \$4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of \$8 million. What is W-P’s expected rate of return?
Chapter 5 Problem 5-15, 5-21
5-15;
Absalom Motors’s 14% coupon rate, semiannual payment, \$1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of \$1,050. The bonds sell at a price of \$1,353.54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds?
5-21:
Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a \$1,000 par value, a 10% coupon rate, and semiannual interest payments.
a.  Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
b.  Suppose that, 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?
c.  Suppose, as in part a, that interest rates fell to 6%, 2 years after the issue date. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
Chapter 6 Problem 6-4, 6-10
6-4:

A stock’s returns have the following distribution:Demand for              Probability of      Rate of return

Company’s               this Demand        if this demand

Products                   Occuring             Occurs

Weak                       0.1                 (50%)

Below Average       0.2                  (5)

Average                  0.4                  16

Above average       0.2                  25

Strong                     0.1                  60

1.0

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

6-10:
You have a \$2 million portfolio consisting of a \$100,000 investment in each of 20different stocks. The portfolio has a beta of 1.1. You are considering selling \$100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions?
Chapter 7 Problem 7-4, 7-10
7-4:
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of \$5 at the end of each year. The preferred sells for \$50 a share. What is the stock’s required rate of return?
7-10:
The beta coefficient for Stock C is bC = 0.4 and that for Stock D is bD = −0.5. (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.)
a.       If the risk-free rate is 9% and the expected rate of return on an average stock is 13%, what are the required rates of return on Stocks C and D?
b.      For Stock C, suppose the current price, P0, is \$25; the next expected dividend,D1, is \$1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock were not in equilibrium.
Chapter 8 Problem 8-4, 8-5, 8-6

8-4:
The current price of a stock is \$33, and the annual risk-free rate is 6%. A call option with a strike price of \$32 and with 1 year until expiration has a current value of \$6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?
8-5:
Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is \$30, (2) strike price is \$35, (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.25.

8-6:
The current price of a stock is \$20. In 1 year, the price will be either \$26 or \$16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of \$21 and that expires in 1 year. (Hint: Use daily compounding.)
Chapter 9 Problem 9-3, 9-8, 9-13
9-3:
Duggins Veterinary Supplies can issue perpetual preferred stock at a price of \$50 a share with an annual dividend of \$4.50 a share. Ignoring flotation costs, what is the company’s cost of preferred stock, rps?
9-8;
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of equity capital?
9-13:
Messman Manufacturing will issue common stock to the public for \$30. The expected dividend and the growth in dividends are \$3.00 per share and 5%, respectively. If the flotation cost is 10% of the issue’s gross proceeds, what is the cost of external equity, re?
BA/350 Week 8 Final
BA350 Week 8 Final Exam
BA 350 Week 8 Final Exam Sum

**********************************************

Allen

9.4 Find the following values assuming a regular, or ordinary, annuity:

a The present value of \$400 per year for ten years at 10 percent

= \$400 x 6.145

= \$2,458.00

b The future value of \$400 per year for ten years at 10 percent

= \$400 x 15.937

= \$6,374.80

c The present value of \$200 per year for five years at 5 percent

= \$200 x 4.329

= \$865.80

d The future value of \$200 per year for five years at 5

= \$200 x 5.526

= \$1,105.20

9.6 Consider the following uneven cash flow stream:

Year                                Cash Flow               PV Factor                    Present Value

0                                         \$0

1                                        250                        0.909                           227.25

2                                        400                        0.826                           330.40

3                                        500                        0.751                           375.50

4                                        600                        0.683                           409.80

5                                        600                        0.621                           372.60

Total                                                       1,715.55

=======

a What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?

\$1,715.55

9.7 Consider another uneven cash flow stream:

9.7

Year Ca Year                                Cash Flow               PV Factor                    Present Value

0                                         \$2,000                  1.000                           2,000.00

1                                           2,000                  0.909                           1,818.00

2                                                 0                   0.826                                  0.00

3                                           1,500                  0.751                             1,126.50

4                                           2,500                  0.683                           1,707.50

5                                           4,000                  0.621                           2,484.00

Total                                                       9,136.00

=======

a. What is the present (Year 0) value of the cash flow stream if the opportunity cost rate is 10  percent?

\$9,136.00

b What is the value of the cash flow stream at the end of Year 5 if the cash flows are invested in an account that pays 10 percent annually

Year                                Cash Flow                           FV Factor                    Future Value

0                                         \$2,000                  1.611                           3,222.00

1                                           2,000                  1.464                           2,928.00

2                                                 0                   1.331                                  0.00

3                                           1,500                  1.210                             1,815.00

4                                           2,500                  1.100                           2,750.00

5                                           4,000                  1.000                          4,000.00

Total                                                       14,715.00

=======

9.9 Assume that you just won \$35 million in the Florida lottery, and hence the state will pay you 20 annual payments of \$1.75 million each beginning immediately. If the rate of return on securities of similar risk to the lottery earnings (e.g., the rate on 20-year U.S. Treasury bonds) is 6 percent, what is the present value of your winnings?

Present Value of Annuity of Annuity of \$1,750,000 for 20 years

Immediate Payment                                                    \$ 1,750,000

Annuity for 19 years at 6% (1,750,000 x 11.158)      \$19,526,500

Total                                                                \$21,276,500

=========