Financial Management

| October 22, 2018

Financial Management

Which of the following is NOT
one of the steps taken in the financial planning process?

Answer

Monitor operations after
implementing the plan to spot any deviations and then take corrective
actions.

Determine the amount of capital
that will be needed to support the plan.

Develop a set of forecasted
financial statements under alternative versions of the operating plan in
order to analyze the effects of different operating procedures on projected
profits and financial ratios.

Consult with key competitors about
the optimal set of prices to charge, i.e., the prices that will maximize
profits for our firm and its competitors.

4.167 points
Question
2

Scott
Enterprises is considering a project that has the following cash flow and WACC
data. What is the project’s NPV? Note that if a project’s expected NPV is
negative, it should be rejected.

WACC:

11.00%

Year

0

1

2

3

4

Cash flows

−$1,000

$350

$350

$350

$350

Answer

$81.56

$85.86

$90.15

$94.66

4.167 points
Question
3

With
its current financial policies, Flagstaff Inc. will have to issue new common
stock to fund its capital budget. Since new stock has a higher cost than
reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of
the following actions would REDUCE its need to issue new common stock?
Answer

Increase the percentage of debt in
the target capital structure.

Increase the proposed capital
budget.

Reduce the amount of short-term
bank debt in order to increase the current ratio.

Reduce the percentage of debt in
the target capital structure.

4.167 points
Question
4

Jill’s
Wigs, inc. had the following balance sheet last year:

Cash

$800

Accounts payable
$350

Accounts receivable
450

Accrued wages
150

Inventory
950

Notes payable
2,000

Net fixed assets
34,000

Mortgage

26,500

Common stock
3,200

Retained
earnings 4,000

Total assets
$36,200

Total liabilities &
equity $36,200

Jill
has just invented a non-slip wig for men which she expects will cause sales to
double from $10,000 to $20,000, increasing net income to $1,000. She
feels that she can handle the increase without adding any fixed assets.
(1) WIll Jill need any outside capital if she pays no dividends?
(2) If so, how much?
Answer

No; zero

Yes; $7,700

Yes; $1,700

Yes; $700

4.167 points
Question
5

If
the expected rate of return on a stock exceeds the required rate,
Answer

The stock should be sold

The company is probably not trying
to maximize price per share.

The stock is a good buy.

Dividends are not being
declared.

4.167 points
Question
6

Puckett
Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8%
for below-average risk projects, 10% for average-risk projects, and 12% for
above-average risk projects. Which of the following independent projects
should Puckett accept, assuming that the company uses the NPV method when
choosing projects?
Answer

Project B, which has below-average
risk and an IRR = 8.5%.

Project C, which has above-average
risk and an IRR = 11%.

All of these projects should be
accepted.

Project A, which has average risk
and an IRR = 9%.

4.167 points
Question
7

Based
on the corporate valuation model, the value of Weidner Co.’s operations is
$1,200 million. The company’s balance sheet shows $80 million in accounts
receivable, $60 million in inventory, and $100 million in short-term
investments that are unrelated to operations. The balance sheet also shows $90
million in accounts payable, $120 million in notes payable, $300 million in
long-term debt, $50 million in preferred stock, $180 million in retained
earnings, and $800 million in total common equity. If Weidner has 30 million
shares of stock outstanding, what is the best estimate of the stock’s price per
share?
Answer

$24.90

$27.67

$30.43

$33.48

4.167 points
Question
8

Which
of the following actions DO NOT reduce agency cost of debt?
Answer

Adding new projects that require
funding beyond the current assets of your company.

Securing a loan with your
company’s assets.

Placing restrictive covenants in
debt agreements.

Placing restrictions on issuing
more debt within the corporate structure.

4.167 points
Question
9

Young
& Liu Inc.’s free cash flow during the just-ended year (t = 0) was $100
million, and FCF is expected to grow at a constant rate of 5% in the future. If
the weighted average cost of capital is 15%, what is the firm’s value of
operations, in millions?
Answer

$948

$998

$1,050

$1,103

4.167 points
Question
10

Your
new employer, Freeman Software, is considering a new project whose data are
shown below. The equipment that would be used has a 3-year tax life, and the
allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and
7.41% for Years 1 through 4. Revenues and other operating costs are expected to
be constant over the project’s 10-year expected life. What is the Year 1 cash
flow?

Equipment cost (depreciable basis)

$65,000

Sales revenues, each year

$60,000

Operating costs (excl. deprec.)

$25,000

Tax rate

35.0%

Answer

$30,333

$33,442

$35,114

$36,869

4.167 points
Question
11

If
you own 100% of a company and the only money invested is your own, describe the
degree to which there is an agency conflict.
Answer

20% agency conflict

50% agency conflict

there is no agency conflict

75% agency conflict

4.167 points
Question
12

Spence
Company is considering a project that has the following cash flow data. What is
the project’s IRR? Note that a project’s IRR can be less than the WACC or
negative, in both cases it will be rejected.

Year

0

1

2

3

4

Cash flows

−$1,050

$400

$400

$400

$400

Answer

15.61%

17.34%

19.27%

21.20%

4.167 points
Question
13

Which
of these items will not generally be affected by an increase in the debt ratio?

Answer

Financial risk.

Market risk.

The firm’s beta.

Business risk.

4.167 points
Question
14

Suppose
one U.S. dollar can purchase 144 yen today in the foreign exchange market. If
the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy
tomorrow?
Answer

155.5 yen

144.0 yen

133.5 yen

78.0 yen

4.167 points
Question
15

The
world-famous discounter, Fernwood Booksellers, specializes in selling
paperbacks for $7 each. The variable cost per book is $5. At current annual
sales of 200,000 books, the publisher is just breaking even. It is estimated
that if the authors’ royalties are reduced, the variable cost per book will
drop by $1. Assume authors’ royalties are reduced and sales remain constant;
how much more money can the publisher put into advertising (a fixed cost) and
still break even?
Answer

$600,000

$466,667

$333,333

$200,000

4.167 points
Question
16

A
firm is considering a new project whose risk is greater than the risk of the
firm’s average project, based on all methods for assessing risk. In evaluating
this project, it would be reasonable for management to do which of the
following?
Answer

Increase the estimated NPV of the
project to reflect its greater risk.

Reject the project, since its
acceptance would increase the firm’s risk.

Ignore the risk differential if
the project would amount to only a small fraction of the firm’s total assets.

Increase the cost of capital used
to evaluate the project to reflect its higher-than-average risk.

4.167 points
Question
17

If
1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can
you purchase for one Canadian dollar?
Answer

0.37

0.61

1.64

3.28

4.167 points
Question
18

Which
of the following events is likely to encourage a company to raise its target
debt ratio, other things held constant?
Answer

An increase in the personal tax
rate.

An increase in the company’s
operating leverage.

The Federal Reserve tightens
interest rates in an effort to fight inflation.

The company’s stock price hits a
new high.

An increase in the corporate tax
rate.

4.167 points
Question
19

Perpetual
preferred stock from Franklin Inc. 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?
Answer

8.72%

9.08%

9.44%

10.22%

4.167 points
Question
20

In
an organization that has outside shareholders, who would bear the cost of
managerial perks?
Answer

Only the managers

Only the employees

No one would bear the costs

Outside shareholders would bear
some of the costs

4.167 points
Question
21

Taylor
Inc. estimates that its average-risk projects have a WACC of 10%, its
below-average risk projects have a WACC of 8%, and its above-average risk
projects have a WACC of 12%. Which of the following projects (A, B, and C)
should the company accept?
Answer

Project C, which is of
above-average risk and has a return of 11%.

Project A, which is of average
risk and has a return of 9%.

None of the projects should be
accepted.

Project B, which is of
below-average risk and has a return of 8.5%.

4.167 points
Question
22

$35.50
per share is the current price for Foster Farms’ stock. The dividend is
projected to increase at a constant rate of 5.50% per year. The required rate
of return on the stock, rs, is 9.00%. What is the stock’s expected
price 3 years from today?
Answer

$38.83

$39.83

$40.85

$41.69

4.167 points
Question
23

Which
of the following is NOT a reason why companies move into
international operations?
Answer

To develop new markets for the
firm’s products.

Because important raw materials
are located abroad.

To achieve political favors.

To take advantage of lower
production costs in regions where labor costs are relatively low.

4.167 points
Question
24

The
Besnier Company had $250 million of sales last year, and it had $75 million of
fixed assets that were being operated at 80% of capacity. In millions, how
large could sales have been if the company had operated at full capacity?
Answer

$312.5

$328.1

$344.5

$379.8

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