1 In a general partnership, the general partners have liability and have control over day to day operations limited no no total unlimited no limited total unlimited total 2 Whichoneoftheseisacorrectdefinition Long term debt is defined as a residual claim on a firms assets Net working capital equals current assets plus current liabilities Current liabilities are debts that must be repaid in 18 months or less Tangible assets are fixed assets such as patents Currentassetsareassetswithshortlives,suchasinventory 3 Theownersofalimitedliabilitycompanygenerallyprefer being taxed personally on all business income having liability exposure similar to that of a general partner having liability exposure similar to that of a sole proprietor being taxed like a corporation beingtaxedlikeacorporationwithliabilitylikeapartnership 4 Whichoneofthefollowingisleastapttohelpconvincemanagerstoworkinthebestinterestofthestockholders payraisesbasedonlengthofservice implementation of a stock option plan threat of a proxy fight management compensation tied to the market value of the firms stock threatofatakeoverofthefirmbyunsatisfiedstockholders 5 a Computethefuturevalueof$2,000compoundedannuallyfor20yearsat4percent (Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e g ,32 16 )Futurevalue$ b Computethefuturevalueof$2,000compoundedannuallyfor15yearsat10percent (Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e g ,32 16 )Futurevalue$ c Computethefuturevalueof$2,000compoundedannuallyfor25yearsat4percent (Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e g ,32 16 )Futurevalue$ 6 Foreachofthefollowing,computethepresentvalue(Donotroundintermediatecalculationsandroundyouranswersto2decimalplaces,e g ,32 16 ) PresentValueYearsInterestRateFuturevalue $ 148 $15,551 $ 514 $52,557 $ 3015 $887,073 $ 358$551,164 7 FirstCityBankpays8percentsimpleinterestonitssavingsaccountbalances,whereasSecondCityBankpays8percentinterestcompoundedannually Ifyoumadea$74,000depositineachbank,howmuchmoremoneywouldyouearnfromyourSecondCityBankaccountattheendof8years (Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e g ,32 16 ) Differenceinaccounts$ 8 Winslow,Inc stockiscurrentlysellingfor$40ashare Thestockhasadividendyieldof3 8percent Howmuchdividendincomewillyoureceiveperyearifyoupurchase500sharesofthisstock $1,053 $152 $190 $329 $760 9 Youbought360sharesofstockatatotalcostof$7,754 40 Youreceivedatotalof$403 20individendsandsoldyoursharesfor$19 98ashare Whatwasyourtotalrateofreturn 5 38 7 24 1 29 3 67 2 04 10 Accordingtogenerallyacceptedaccountingprinciples(GAAP),revenueisrecognizedasincomewhen income taxes are paid on the revenue earned the transaction is complete and the goods or services are delivered a contract is signed to perform a service or deliver a good payment is requested managersdecidetorecognizeit 11 Sankey,Inc ,hascurrentassetsof$4,230,netfixedassetsof$25,700,currentliabilitiesof$3,500,andlong termdebtof$14,400 (Donotroundintermediatecalculations )Whatisthevalueoftheshareholders'equityaccountforthisfirm Shareholders'equity$ Howmuchisnetworkingcapital Networkingcapital$ 12 Thefinancialstatementsummarizingafirm'saccountingperformanceoveraperiodoftimeisthe statement of equity income statement tax reconciliation statement balance sheet statementofcashflows 13 Networkingcapitalisdefinedas current assets minus current liabilities total assets minus total liabilities fixed assets minus long term liabilities current assets plus stockholders' equity currentassetsplusfixedassets 14 Jessica'sBoutiquehascashof$59,accountsreceivableof$62,accountspayableof$210,andinventoryof$140 Whatisthevalueofthequickratio 30 1 82 67 58 1 24 15 Al'sSportStorehassalesof$2,940,costsofgoodssoldof$2,090,inventoryof$526,andaccountsreceivableof$445 Howmanydays,onaverage,doesittakethefirmtosellitsinventoryassumingthatallsalesareoncredit 90 6 65 3 119 9 91 9 120 4 16 GalaxyUnited,Inc 2009IncomeStatement ($inmillions) Netsales$8,550 Less Costofgoodssold7,150 Less Depreciation410 Earningsbeforeinterestandtaxes990 Less Interestpaid82 TaxableIncome908 Less Taxes318 Netincome$590 GalaxyUnited,Inc 2008and2009BalanceSheets($inmillions) 2008200920082009 Cash$120$140Accountspayable$1,120$1,130 Accountsrec 940790Long termdebt9901,201 Inventory1,4801,520Commonstock$3,140$2,940 Sub total$2,540$2,450Retainedearnings510799 Netfixedassets3,2203,620 Totalassets$5,760$6,070Totalliab equity$5,760$6,070 Whatisthereturnonequityfor2009 14 percent 17 percent 11 percent 16 percent 19percent 17 ReliableCarshassalesof$3,790,totalassetsof$3,350,andaprofitmarginof5percent Thefirmhasatotaldebtratioof41percent Whatisthereturnonequity 9 59 percent 12 20 percent 13 80 percent 8 47 percent 5 66percent 18 Afirmhasadebt equityratioof 41 Whatisthetotaldebtratio 1 44 31 29 1 41 69 19 Thereturnonequitycanbecalculatedas ROA Equity multiplier ROA Debt equity ratio ROA (Net income Total assets) Profit margin ROA Total asset turnover ProfitmarginROA 20 Oneoftheprimaryweaknessesofmanyfinancialplanningmodelsisthatthey rely too much on financial relationships and too little on accounting relationships are iterative in nature ignore the goals and objectives of senior management ignore cash payouts to stockholders ignorethesize,risk,andtimingofcashflows 21 Inthefinancialplanningmodel,theexternalfinancingneeded(EFN)asshownonaproformabalancesheetisequaltothechangesinassets minus the change in retained earnings minus the changes in both liabilities and equity minus the changes in liabilities plus the changes in both liabilities and equity plusthechangesinliabilitiesminusthechangesinequity 22 TheWintergrassCompanyhasanROEof15 1percentandapayoutratioof40percent Whatisthecompanyssustainablegrowthrate (Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e g ,32 16 )Sustainablegrowthrate 23 Assumethefollowingratiosareconstant Totalassetturnover2 50 Profitmargin5 4 Equitymultiplier1 30 Payoutratio35 Whatisthesustainablegrowthrate (Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e g ,32 16 )Sustainablegrowthrate 24 Thelengthoftimebetweentheacquisitionofinventoryanditssaleiscalledthe cash cycle accounts payable period accounts receivable period inventory period operatingcycle 25 Aprearranged,short termbankloanmadeonaformalorinformalbasis,andtypicallyreviewed forrenewalannually,iscalleda compensating balance cleanup loan roll over line of credit letterofcredit 26 HerearethemostrecentbalancesheetsforCountryKettles,Inc Excludingaccumulateddepreciation,determinewhethereachitemisasourceorauseofcash,andtheamount (Donotroundintermediatecalculationsandroundyouranswerstothenearestwholenumber,e g ,32 Inputallamountsaspositivevalues) COUNTRYKETTLES,INC BalanceSheet December31,2016 20152016 Assets Cash$31,800$31,030 Accountsreceivable71,30074,560 Inventories 62,20064,625 Property,plant,andequipment 161,000 172,600 Less Accumulateddepreciation(47,040)(51,300)Totalassets$279,260$291,515 LiabilitiesandEquity Accountspayable$46,300$48,530 Accruedexpenses7,6806,740 Long termdebt27,00030,100 Commonstock30,00035,400 Accumulatedretainedearnings168,280170,745 Totalliabilitiesandequity$279,260$291,515 ItemSource UseAmount Cash$ Accountsreceivable$ Inventories$ Property,plant,andequipment$ Accountspayable$ Accruedexpenses$ Long termdebt$ Commonstock$ Accumulatedretainedearnings$ 27 ConsiderthefollowingfinancialstatementinformationfortheRiversCorporation ItemBeginningEnding Inventory$10,900$11,900 Accountsreceivable5,9006,200 Accountspayable8,1008,500 Netsales$89,000 Costofgoodssold69,000 Calculatetheoperatingandcashcycles (Use365daysayear Donotroundintermediatecalculationsandroundyouranswersto2decimalplaces,e g ,32 16 ) Operatingcycle days Cashcycle days 28 The premiumisthatportionofthebondyieldthatrepresentscompensationforpotentialdifficultiesthatmightbeencounteredshouldthebondholderwishtosellthebondpriortomaturity default risk liquidity taxability inflation interestraterisk 29 Howmuchareyouwillingtopayforoneshareofstockifthecompanyjustpaidanannualdividendof$1 03,thedividendsincreaseby3percentannually,andyourequirearateofreturnof15percent $8 84 $6 87 $9 49 $10 40 $8 58 30 Therateatwhichastock'spriceisexpectedtoappreciate(ordepreciate)iscalledthe yield total capital gains current earnings dividend 31 Whichoneoftheseappliestothedividendgrowthmodelofstockvaluation The rate of growth must be positive The model cannot be applied if the growth rate is zero The dividend must be for the same time period as the stock price The dividend amount must be constant over time Thegrowthratemustbelessthanthediscountrate 32 YouaregiventhefollowinginformationforHuntingtonPowerCo Assumethecompanystaxrateis40percent Debt 8,0006 9percentcouponbondsoutstanding,$1,000parvalue,20yearstomaturity,sellingfor105percentofpar thebondsmakesemiannualpayments Commonstock 410,000sharesoutstanding,sellingfor$59pershare thebetais1 15 Market 9percentmarketriskpremiumand4 9percentrisk freerate Whatisthecompany'sWACC (Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e g ,32 16 ) WACC 33 FilerManufacturinghas7 7millionsharesofcommonstockoutstanding Thecurrentsharepriceis$47,andthebookvaluepershareis$5 Thecompanyalsohastwobondissuesoutstanding Thefirstbondissuehasafacevalueof$68 8millionandacouponrateof6 4percentandsellsfor108 9percentofpar Thesecondissuehasafacevalueof$58 8millionandacouponrateof6 9percentandsellsfor107 7percentofpar Thefirstissuematuresin9years,thesecondin26years Supposethecompanysstockhasabetaof1 3 Therisk freerateis2 5percent,andthemarket riskpremiumis6 4percent Assumethattheoverallcostofdebtistheweightedaverageimpliedbythetwooutstandingdebtissues Bothbondsmakesemiannualpayments Thetaxrateis40percent WhatisthecompanysWACC (Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e g ,32 16 )WACC 34 AfirmsWACCcanbecorrectlyusedtodiscounttheexpectedcashflowsofanewprojectwhenthatproject has the same level of risk as the firms current operations will be financed solely with new debt and internal equity will be financed with the same proportions of debt and equity as those currently used by the overall firm will be managed by the firms current managers willbefinancedsolelywithinternalequity 35 WhencomputingWACC,youshouldusethe pretax yield to maturity because it considers the current market price of debt pretax cost of debt because it is the actual rate the firm is paying bondholders pretax cost of debt because most corporations pay taxes at the same tax rate current yield because it is based on the current market price of debt aftertaxcostofdebtbecauseinterestistaxdeductible 36 TheCAPMhasanadvantageoverDDMbecausetheCAPM ignores changes in the overall market over time is more simplistic specifically considers a firms degree of operating leverage applies to firms that pay dividends explicitlyadjustsforrisk 37 Thenetpresentvaluemethodofcapitalbudgetinganalysisdoesallofthefollowingexcept consider all relevant cash flow information provide a specific anticipated rate of return use all of a project's cash flows discount all future cash flows incorporateriskintotheanalysis 38 Lee'sFurniturejustpurchased$24,000offixedassetsthatareclassifiedas5 yearMACRSproperty TheMACRSratesare20percent,32percent,19 2percent,11 52percent,11 52percent,and5 76percentforYears1to6,respectively Whatistheamountofthedepreciationexpenseforthethirdyear $4,800 $2,507 $4,608 $2,765 $2,304 39 JamestownLtd currentlyproducesboatsailsandisconsideringexpandingitsoperationstoincludeawnings Theexpansionwouldrequiretheuseoflandthefirmpurchasedthreeyearsagoatacostof$142,000thatiscurrentlyvaluedat$137,500 Theexpansioncouldusesomeequipmentthatiscurrentlysittingidleif$6,700ofmodificationsweremadetoit Theequipmentoriginallycost$139,500sixyearsago,hasacurrentbookvalueof$24,700,andacurrentmarketvalueof$39,000 Othercapitalpurchasescosting$780,000willalsoberequired Whatistheamountoftheinitialcashflowforthisexpansionproject $963,200 $948,900 $927,800 $962,300 $953,400 40 Ifyouwanttoreviewaprojectfromabenefit costperspective,youshouldusethe methodofanalysis internal rate of return profitability index net present value payback discountedpayback 41 Theprofitabilityindexofaninvestmentprojectistheratioofthe net present value of every project cash flow to the initial cost net present value of the projects cash outflows divided by the net present value of its inflows internal rate of return to the current market rate of interest present value of the Time 1 and subsequent cash flows to the initial cost averagenetincometotheaverageinvestment 42 Aprojectcosting$6,200initiallyshouldproducecashinflowsof$2,860ayearforthreeyears Afterthethreeyears,theprojectwillbeshutdownandwillbesoldattheendofYear4foranestimatednetcashamountof$3,300 Whatisthenetpresentvalueofthisprojectiftherequiredrateofreturnis11 3percent $2,903 19 $2,474 76 $935 56 $1,980 02 $3,011 40 43 WilsonsMarketisconsideringtwomutuallyexclusiveprojectsthatwillnotberepeated Therequiredrateofreturnis13 9percentforProjectAand12 5percentforProjectB ProjectAhasaninitialcostof$54,500,andshouldproducecashinflowsof$16,400,$28,900,and$31,700forYears1to3,respectively ProjectBhasaninitialcostof$69,400,andshouldproducecashinflowsof$0,$48,300,and$42,100,forYears1to3,respectively Whichproject,orprojects,ifeither,shouldbeacceptedandwhy Project B because it has the largest total cash inflow Project A because it has the higher required rate of return Project B because it has a negative NPV which indicates acceptance neither project because neither has an NPV equal to or greater than its initial cost ProjectA becauseitsNPVispositivewhileProjectBsNPVisnegative 44 Whatisthenetpresentvalueofaprojectthathasaninitialcashoutflowof$7,670andcashinflowsof$1,280inYear1,$6,980inYear3,and$2,750inYear4 Thediscountrateis12 5percent $270 16 $86 87 $68 20 $371 02 $249 65 45 Aproposedprojectcosts$300andhascashflowsof$80,$200,$75,and$90forYears1to4,respectively Becauseofitshighrisk,theprojecthasbeenassignedadiscountrateof16percent Indollars,howmuchwillthisprojectreturnintodaysdollarsforevery$1invested $ 99 $1 01 $1 05 $ 97 $1 03

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1. In a general partnership, the general partners have _ liability and have _ control over day-to-day operations. limited; no no; total unlimited; no limited;

1. In a general partnership, the general partners have _____ liability and have _____ control over day-to-day operations.

limited; no
no; total
unlimited; no
limited; total
unlimited;total
2.Whichoneoftheseisacorrectdefinition?
Long-term debt is defined as a residual claim on a firms assets.
Net working capital equals current assets plus current liabilities.
Current liabilities are debts that must be repaid in 18 months or less.
Tangible assets are fixed assets such as patents.
Currentassetsareassetswithshortlives,suchasinventory.
3.Theownersofalimitedliabilitycompanygenerallyprefer:
being taxed personally on all business income.
having liability exposure similar to that of a general partner.
having liability exposure similar to that of a sole proprietor.
being taxed like a corporation.
beingtaxedlikeacorporationwithliabilitylikeapartnership.
4.Whichoneofthefollowingisleastapttohelpconvincemanagerstoworkinthebestinterestofthestockholders?
payraisesbasedonlengthofservice
implementation of a stock option plan
threat of a proxy fight
management compensation tied to the market value of the firms stock
threatofatakeoverofthefirmbyunsatisfiedstockholders
5.a.Computethefuturevalueof$2,000compoundedannuallyfor20yearsat4percent.(Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e.g.,32.16.)Futurevalue$_________
b.Computethefuturevalueof$2,000compoundedannuallyfor15yearsat10percent.(Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e.g.,32.16.)Futurevalue$_________
c.Computethefuturevalueof$2,000compoundedannuallyfor25yearsat4percent.(Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e.g.,32.16.)Futurevalue$_________
6.Foreachofthefollowing,computethepresentvalue(Donotroundintermediatecalculationsandroundyouranswersto2decimalplaces,e.g.,32.16.):
PresentValueYearsInterestRateFuturevalue
- $_________148% $15,551
- $_________514 $52,557
- $_________3015 $887,073
- $_________358$551,164
- 7.FirstCityBankpays8percentsimpleinterestonitssavingsaccountbalances,whereasSecondCityBankpays8percentinterestcompoundedannually.Ifyoumadea$74,000depositineachbank,howmuchmoremoneywouldyouearnfromyourSecondCityBankaccountattheendof8years?(Donotroundintermediatecalculationsandroundyouranswerto2decimalplaces,e.g.,32.16.)
- Differenceinaccounts$_________
8.Winslow,Inc.stockiscurrentlysellingfor$40ashare.Thestockhasadividendyieldof3.8percent.Howmuchdividendincomewillyoureceiveperyearifyoupurchase500sharesofthisstock?
$1,053
$152
$190
$329
$760
9.Youbought360sharesofstockatatotalcostof$7,754.40.Youreceivedatotalof$403.20individendsandsoldyoursharesfor$19.98ashare.Whatwasyourtotalrateofreturn?
5.38%
7.24%
-1.29%
3.67%
-2.04%
10.Accordingtogenerallyacceptedaccountingprinciples(GAAP),revenueisrecognizedasincomewhen:
income taxes are paid on the revenue earned.
the transaction is complete and the goods or services are delivered.
a contract is signed to perform a service or deliver a good.
payment is requested.
managersdecidetorecognizeit.
11.Sankey,Inc.,hascurrentassetsof$4,230,netfixedassetsof$25,700,currentliabilitiesof$3,500,andlong-termdebtof$14,400.(Donotroundintermediatecalculations.)Whatisthevalueoftheshareholders'equityaccountforthisfirm?
Shareholders'equity$_________
Howmuchisnetworkingcapital?Networkingcapital$_________
12.Thefinancialstatementsummarizingafirm'saccountingperformanceoveraperiodoftimeisthe:
statement of equity..
income statement.
tax reconciliation statement.
balance sheet.
statementofcashflows.
13.Networkingcapitalisdefinedas:
current assets minus current liabilities.
total assets minus total liabilities.
fixed assets minus long-term liabilities.
current assets plus stockholders' equity.
currentassetsplusfixedassets.
14.Jessica'sBoutiquehascashof$59,accountsreceivableof$62,accountspayableof$210,andinventoryof$140.Whatisthevalueofthequickratio?
.30
1.82
.67
.58
1.24
15.Al'sSportStorehassalesof$2,940,costsofgoodssoldof$2,090,inventoryof$526,andaccountsreceivableof$445.Howmanydays,onaverage,doesittakethefirmtosellitsinventoryassumingthatallsalesareoncredit?
90.6
65.3
119.9
91.9
120.4
16.GalaxyUnited,Inc.2009IncomeStatement ($inmillions)
Netsales$8,550
Less:Costofgoodssold7,150
Less:Depreciation410
Earningsbeforeinterestandtaxes990
Less:Interestpaid82
TaxableIncome908
Less:Taxes318
Netincome$590
GalaxyUnited,Inc.2008and2009BalanceSheets($inmillions)
2008200920082009
Cash$120$140Accountspayable$1,120$1,130
Accountsrec.940790Long-termdebt9901,201
Inventory1,4801,520Commonstock$3,140$2,940
Sub-total$2,540$2,450Retainedearnings510799
Netfixedassets3,2203,620
Totalassets$5,760$6,070Totalliab.&equity$5,760$6,070
Whatisthereturnonequityfor2009?
14 percent
17 percent
11 percent
16 percent
19percent
17.ReliableCarshassalesof$3,790,totalassetsof$3,350,andaprofitmarginof5percent.Thefirmhasatotaldebtratioof41percent.Whatisthereturnonequity?
9.59 percent
12.20 percent
13.80 percent
8.47 percent
5.66percent
18.Afirmhasadebt-equityratioof.41.Whatisthetotaldebtratio?
1.44
.31
.29
1.41
.69
19.Thereturnonequitycanbecalculatedas:
ROA Equity multiplier.
ROA Debt-equity ratio.
ROA (Net income / Total assets).
Profit margin ROA Total asset turnover.
ProfitmarginROA.
20.Oneoftheprimaryweaknessesofmanyfinancialplanningmodelsisthatthey:
rely too much on financial relationships and too little on accounting relationships.
are iterative in nature.
ignore the goals and objectives of senior management.
ignore cash payouts to stockholders.
ignorethesize,risk,andtimingofcashflows.
21.Inthefinancialplanningmodel,theexternalfinancingneeded(EFN)asshownonaproformabalancesheetisequaltothechangesinassets:
minus the change in retained earnings.
minus the changes in both liabilities and equity.
minus the changes in liabilities.
plus the changes in both liabilities and equity.
plusthechangesinliabilitiesminusthechangesinequity.
22.TheWintergrassCompanyhasanROEof15.1percentandapayoutratioof40percent.Whatisthecompanyssustainablegrowthrate?(Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e.g.,32.16.)Sustainablegrowthrate_________%
23.Assumethefollowingratiosareconstant:
Totalassetturnover2.50
Profitmargin5.4%
Equitymultiplier1.30
Payoutratio35%Whatisthesustainablegrowthrate?(Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e.g.,32.16.)Sustainablegrowthrate_________%
24.Thelengthoftimebetweentheacquisitionofinventoryanditssaleiscalledthe:
cash cycle.
accounts payable period.
accounts receivable period.
inventory period.
operatingcycle.
25.Aprearranged,short-termbankloanmadeonaformalorinformalbasis,andtypicallyreviewed
forrenewalannually,iscalleda:
compensating balance.
cleanup loan.
roll-over.
line of credit.
letterofcredit.
26.HerearethemostrecentbalancesheetsforCountryKettles,Inc.Excludingaccumulateddepreciation,determinewhethereachitemisasourceorauseofcash,andtheamount.(Donotroundintermediatecalculationsandroundyouranswerstothenearestwholenumber,e.g.,32.Inputallamountsaspositivevalues):
COUNTRYKETTLES,INC.
BalanceSheet
December31,2016
20152016
Assets
Cash$31,800$31,030
Accountsreceivable71,30074,560
Inventories 62,20064,625
Property,plant,andequipment 161,000 172,600
Less:Accumulateddepreciation(47,040)(51,300)Totalassets$279,260$291,515
LiabilitiesandEquity
Accountspayable$46,300$48,530
Accruedexpenses7,6806,740
Long-termdebt27,00030,100
Commonstock30,00035,400
Accumulatedretainedearnings168,280170,745
Totalliabilitiesandequity$279,260$291,515
ItemSource/UseAmount
Cash$_________
Accountsreceivable$_________
Inventories$_________
Property,plant,andequipment$_________
Accountspayable$_________
Accruedexpenses$_________
Long-termdebt$_________
Commonstock$_________
Accumulatedretainedearnings$_________
27.ConsiderthefollowingfinancialstatementinformationfortheRiversCorporation:
ItemBeginningEnding
Inventory$10,900$11,900
Accountsreceivable5,9006,200
Accountspayable8,1008,500
Netsales$89,000
Costofgoodssold69,000
Calculatetheoperatingandcashcycles.(Use365daysayear.Donotroundintermediatecalculationsandroundyouranswersto2decimalplaces,e.g.,32.16.)
Operatingcycle_________days
Cashcycle_________days
28.The_____premiumisthatportionofthebondyieldthatrepresentscompensationforpotentialdifficultiesthatmightbeencounteredshouldthebondholderwishtosellthebondpriortomaturity.
default risk
liquidity
taxability
inflation
interestraterisk
29.Howmuchareyouwillingtopayforoneshareofstockifthecompanyjustpaidanannualdividendof$1.03,thedividendsincreaseby3percentannually,andyourequirearateofreturnof15percent?
$8.84
$6.87
$9.49
$10.40
$8.58
30.Therateatwhichastock'spriceisexpectedtoappreciate(ordepreciate)iscalledthe_____yield.
total
capital gains
current
earnings
dividend
31.Whichoneoftheseappliestothedividendgrowthmodelofstockvaluation?
The rate of growth must be positive.
The model cannot be applied if the growth rate is zero.
The dividend must be for the same time period as the stock price.
The dividend amount must be constant over time.
Thegrowthratemustbelessthanthediscountrate.
32.YouaregiventhefollowinginformationforHuntingtonPowerCo.Assumethecompanystaxrateis40percent.
Debt:8,0006.9percentcouponbondsoutstanding,$1,000parvalue,20yearstomaturity,sellingfor105percentofpar;thebondsmakesemiannualpayments.
Commonstock:410,000sharesoutstanding,sellingfor$59pershare;thebetais1.15.
Market:9percentmarketriskpremiumand4.9percentrisk-freerate.
Whatisthecompany'sWACC?(Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e.g.,32.16.)
WACC_________%
33.FilerManufacturinghas7.7millionsharesofcommonstockoutstanding.Thecurrentsharepriceis$47,andthebookvaluepershareis$5.Thecompanyalsohastwobondissuesoutstanding.Thefirstbondissuehasafacevalueof$68.8millionandacouponrateof6.4percentandsellsfor108.9percentofpar.Thesecondissuehasafacevalueof$58.8millionandacouponrateof6.9percentandsellsfor107.7percentofpar.Thefirstissuematuresin9years,thesecondin26years.
Supposethecompanysstockhasabetaof1.3.Therisk-freerateis2.5percent,andthemarket
riskpremiumis6.4percent.Assumethattheoverallcostofdebtistheweightedaverageimpliedbythetwooutstandingdebtissues.Bothbondsmakesemiannualpayments.Thetaxrateis40percent.WhatisthecompanysWACC?(Donotroundintermediatecalculationsandenteryouranswerasapercentroundedto2decimalplaces,e.g.,32.16.)WACC_________%
34.AfirmsWACCcanbecorrectlyusedtodiscounttheexpectedcashflowsofanewprojectwhenthatproject:
has the same level of risk as the firms current operations.
will be financed solely with new debt and internal equity.
will be financed with the same proportions of debt and equity as those currently used by the overall firm.
will be managed by the firms current managers.
willbefinancedsolelywithinternalequity.
35.WhencomputingWACC,youshouldusethe:
pretax yield to maturity because it considers the current market price of debt.
pretax cost of debt because it is the actual rate the firm is paying bondholders.
pretax cost of debt because most corporations pay taxes at the same tax rate.
current yield because it is based on the current market price of debt.
aftertaxcostofdebtbecauseinterestistaxdeductible.
36.TheCAPMhasanadvantageoverDDMbecausetheCAPM:
ignores changes in the overall market over time.
is more simplistic.
specifically considers a firms degree of operating leverage.
applies to firms that pay dividends.
explicitlyadjustsforrisk.
37.Thenetpresentvaluemethodofcapitalbudgetinganalysisdoesallofthefollowingexcept:
consider all relevant cash flow information.
provide a specific anticipated rate of return.
use all of a project's cash flows.
discount all future cash flows.
incorporateriskintotheanalysis.
38.Lee'sFurniturejustpurchased$24,000offixedassetsthatareclassifiedas5-yearMACRSproperty.TheMACRSratesare20percent,32percent,19.2percent,11.52percent,11.52percent,and5.76percentforYears1to6,respectively.Whatistheamountofthedepreciationexpenseforthethirdyear?
$4,800
$2,507
$4,608
$2,765
$2,304
39.JamestownLtd.currentlyproducesboatsailsandisconsideringexpandingitsoperationstoincludeawnings.Theexpansionwouldrequiretheuseoflandthefirmpurchasedthreeyearsagoatacostof$142,000thatiscurrentlyvaluedat$137,500.Theexpansioncouldusesomeequipmentthatiscurrentlysittingidleif$6,700ofmodificationsweremadetoit.Theequipmentoriginallycost$139,500sixyearsago,hasacurrentbookvalueof$24,700,andacurrentmarketvalueof$39,000.Othercapitalpurchasescosting$780,000willalsoberequired.Whatistheamountoftheinitialcashflowforthisexpansionproject?
$963,200
$948,900
$927,800
$962,300
$953,400
40.Ifyouwanttoreviewaprojectfromabenefit-costperspective,youshouldusethe_______methodofanalysis.
internal rate of return
profitability index
net present value
payback
discountedpayback
41.Theprofitabilityindexofaninvestmentprojectistheratioofthe:
net present value of every project cash flow to the initial cost.
net present value of the projects cash outflows divided by the net present value of its inflows.
internal rate of return to the current market rate of interest.
present value of the Time 1 and subsequent cash flows to the initial cost.
averagenetincometotheaverageinvestment.
42.Aprojectcosting$6,200initiallyshouldproducecashinflowsof$2,860ayearforthreeyears.Afterthethreeyears,theprojectwillbeshutdownandwillbesoldattheendofYear4foranestimatednetcashamountof$3,300.Whatisthenetpresentvalueofthisprojectiftherequiredrateofreturnis11.3percent?
$2,903.19
$2,474.76
$935.56
$1,980.02
$3,011.40
43.WilsonsMarketisconsideringtwomutuallyexclusiveprojectsthatwillnotberepeated.Therequiredrateofreturnis13.9percentforProjectAand12.5percentforProjectB.ProjectAhasaninitialcostof$54,500,andshouldproducecashinflowsof$16,400,$28,900,and$31,700forYears1to3,respectively.ProjectBhasaninitialcostof$69,400,andshouldproducecashinflowsof$0,$48,300,and$42,100,forYears1to3,respectively.Whichproject,orprojects,ifeither,shouldbeacceptedandwhy?
Project B; because it has the largest total cash inflow
Project A; because it has the higher required rate of return
Project B; because it has a negative NPV which indicates acceptance
neither project; because neither has an NPV equal to or greater than its initial cost
ProjectA;becauseitsNPVispositivewhileProjectBsNPVisnegative
44.Whatisthenetpresentvalueofaprojectthathasaninitialcashoutflowof$7,670andcashinflowsof$1,280inYear1,$6,980inYear3,and$2,750inYear4?Thediscountrateis12.5percent.
$270.16
$86.87
$68.20
$371.02
$249.65
45.Aproposedprojectcosts$300andhascashflowsof$80,$200,$75,and$90forYears1to4,respectively.Becauseofitshighrisk,theprojecthasbeenassignedadiscountrateof16percent.Indollars,howmuchwillthisprojectreturnintodaysdollarsforevery$1invested?
$.99
$1.01
$1.05
$.97
$1.03