Question
PLEASE HELP!!! I NEED HELP. THANK YOU GOOD SOULS. Homer and Marge own 80% of a Jimmy Johns franchise. Bart is their operating partner and
PLEASE HELP!!! I NEED HELP. THANK YOU GOOD SOULS.
Homer and Marge own 80% of a Jimmy Johns franchise. Bart is their operating partner and owns the remaining 20% of the company. Bart is charged with managing the day-to-day operations of the company. In this role, Bart receives a salary, a company car and a bonus. Bart also stands to gain from future dividends and the growth in the value of the company. Homer and Marge derive all of their value from the company from future dividends and the growth in the value of the company. Since bonuses are earned immediately and dividends are earned in the future, this relationship is vulnerable to what kind of problem common with corporations where managers do not own the (entire) company?
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In market bubbles (such as the technology boom of the late 1990s and the real estate/mortgage boom of the mid-2000s), managers come under intense pressure to maximize the market price of their company (e.g. its stock price). This can result in a short-term focus for many managers resulting in decisions to try to maximize near-term earnings. Sometimes this focus results in poor management decisions. Many times, it even leads to earnings-manipulation and, in the worse cases, fraud. This is why, in the instructors opinion, so many financial frauds are discovered shortly after market bubbles. If not, maximizing market price, what should managers primary objective be?
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A firms (or any financial assets) value is determined by its future cash flows. To estimate what a firm is worth today, you must discount those future cash flows by the firms weighted average cost of capital (WACC). The WACC is determined by a firms cost of debt and its cost of equity. In turn, the general level of interest rates in the overall economy affects these costs. Thus,
What happens to the value of a financial asset in a rising interest rate environment (all else equal)?
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What happens to the value of a financial asset in a declining interest rate environment (all else equal)?
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Assume the most recent nominal GDP growth was 3% (and up strongly from its prior reading), the unemployment rate is at 4% (down from 6% in the prior period) and CPI is growing at 5% (up from just 3% in the prior month). What do you think the Federal Reserve is likely to do?
Lower rates to further increase GDP growth and further lower unemployment.
Lower rates to slow GDP growth and reduce inflation.
Raise rates to further increase GDP growth and further lower unemployment.
Raise rates to slow GDP growth and reduce inflation.
In addition to raising interest rates on funds it loans to banks, the Federal Reserve can stimulate the economy how?
By purchasing treasury securities in the open market, thus enabling the banks to lend more money at lower interest rates.
By selling treasury securities to banks, thus raising money for more government programs.
A federal budget deficit:
Generally slows economic growth due to higher interest rates.
Generally increases economic growth due to higher demand for goods and services.
Banks are highly regulated because...?
They are highly leveraged
They are important to the overall economy
The CEOs cannot be trusted
All of the above
A & B only
The best way to maximize a firms value is to maximize its Earnings Per Share (EPS).
True
False
Suppose the US Treasury announces plans to issue $50 billion of new bonds. Assuming this announcement was a surprise and all other things are held constant, what effect would this announcement have on bond prices and interest rates?
Prices and interest rates would both rise.
Prices would rise and interest rates would decline.
Prices and interest rates would both decline
There would be no change in prices or interest rates.
Prices would decline and interest rates would rise.
Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
Households start saving a larger percentage of their income.
The economy moves from a boom to a recession.
The level of inflation begins to decline.
Corporation step up their expansion plans and thus increase their demand for capital.
The Federal Reserve uses monetary policy in an attempt to stimulate the economy.
Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
Households reduce their consumption and increase their savings
The Federal Reserve decides to try to stimulate the economy
There is a decrease in expected inflation
The economy falls into a recession.
Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.
The income statement shows the difference between a firm's income and its costs i.e., its profits during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
True
False
What is the YTM on a 10-year bond with 9% annual coupon that is selling at $887? (Assume par value = $1,000 as we usually do in this class)
9.15%
9.91%
10.15%
10.91%
To calculate taxes, a firm can deduct all of the following EXCEPT:
Owners salary
Interest
Dividends
None of the above
Below are the year-end balance sheets for Wolken Enterprises:
Assets:
2013
2012
Cash
$ 200,000
$ 170,000
Accounts receivable
864,000
700,000
Inventories
2,000,000
1,400,000
Total current assets
$3,064,000
$2,270,000
Net fixed assets
6,000,000
5,600,000
Total assets
$9,064,000
$7,870,000
Liabilities and equity:
Accounts payable
$1,400,000
$1,090,000
Notes payable
1,600,000
1,800,000
Total current liabilities
$3,000,000
$2,890,000
Long-term debt
2,400,000
2,400,000
Common stock
3,000,000
2,000,000
Retained earnings
664,000
580,000
Total common equity
$3,664,000
$2,580,000
Total liabilities and equity
$9,064,000
$7,870,000
Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2012. As of the end of 2013, none of the principal on this debt had been repaid. Assume that the company's sales in 2012 and 2013 were the same. Which of the following statements must be CORRECT?
a.
Wolken increased its short-term bank debt in 2013.
b.
Wolken issued long-term debt in 2013.
c.
Wolken issued new common stock in 2013.
d.
Wolken repurchased some common stock in 2013.
e.
Wolken had negative net income in 2013.
Use the following information about Cartman Enterprises for questions 15-23.
Sales $1,000,000
Cost of Goods Sold $500,000
Operating Expenses $250,000
Interest Expense $100,000
Taxes $50,000
Depreciation & Amortization $50,000
What Cartmans Gross Profit?
What is Cartmans Operating Income or EBIT?
What is Cartmans Earnings Before Tax?
What is Cartmans Earnings After Tax or Net Income?
What is Cartmans EBITDA?
Using the texts definition, what is Net Cash Flow for this firm?
Warren Buffett likes to incorporate required capital spending in his cash flow estimate from the income statement. If required capital spending for Cartman Enterprises was $75,000, what would Buffetts estimate of Cash Flow be based upon this income statement data?
What is Cartmans effective tax rate?
What is Cartmans NOPAT?
An increase in operating current assets causes an increase in cash.
True
False
Use the following information about Kenny Company to answer questions 24-28.
Cash $50,000
Short term investments $150,000
Accounts Receivable $250,000
Inventories $500,000
Net PP&E $2,000,000
Other Long Term Assets $300,000
Accounts Payable $300,000
Notes Payable $100,000
Accruals $100,000
Long-term Debt $500,000
Please answer the following questions to determine the missing pieces of this balance sheet:
Kennys Total Current Assets?
Kennys Total Assets?
Kennys Total Current Liabilities?
Kennys Total Liabilities?
Kennys Shareholders (Common) Equity?
Use the following Cash Flow Statement for Stanleys Store for questions 29-32:
Net Income $200
Depreciation Expense $200
Increase in accounts receivable $100
Increase in inventories $200
Increase in accounts payable $50
Increase in accruals $50
Capital Spending (or cash used to buy fixed assets) of $500
Sale of short-term investments $50
Increase in debt $300
Dividends Paid $100
Based on this information, answer the following questions:
What were cash from operations?
How much cash was (used) or generated from investing activities?
How much cash was (used) or generated from financing activities?
What was the net change in cash for Stanleys Store?
The value of a company depends upon all of its future expected free cash flows (FCF) defined as NOPAT minus increases in operating working capital and operating fixed assets.
True
False
Operating Current Assets consists of all of the following EXCEPT
A/R
Inventories
Short-term investments
Accruals
Cash
Is an investment in machinery an investment in operating capital?
Yes
No
High FCF can cause waste if:
Interest expense is too high
Bonds are called in at a premium
Managers fail to act in the best interests of shareholders
Managers buy more assets that generate returns above the cost of capital
At its core, what is FCF?
The cash available for distribution to investors.
A driver of the fundamental value of the firm.
All of the above
None of the above
Below is the common equity section (in millions) of FIFA Industries' last two year-end balance sheets:
2012
2011
Common stock
$2,000
$1,000
Retained earnings
2,000
2,340
Total common equity
$4,000
$3,340
The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
a.
The company's net income in 2011 was higher than in 2012.
b.
The company issued common stock in 2012.
c.
The market price of the company's stock doubled in 2012.
d.
The company had positive net income in both 2011 and 2012, but the company's net income in 2009 was lower than it was in 2011.
e.
The company has more equity than debt on its balance sheet.
A financial metric used to determine if growth is adding value is
ROE
ROA
ROIC
NOPAT
Economic Value Added (EVA) measures how effective managerial actions in a given period.
True
False
EVA = NOPAT - (WACC)(Capital). In this form of the EVA question, (WACC)(Capital) represents, what?
An opportunity cost, but nevertheless a real cost
The cost of debt
The cost of equity
None of the above.
An inverted yield curve doesnt happen much. When it does, short-term bonds yield more than long-term bonds, all else equal.
True
False
Market Value Added (MVA) = Market Value of the firm - Book value of the firm. This metric, represents what?
The value added by management since the inception of the firm.
The value added by management since last year.
The value added by management since last quarter.
None of the above.
YTM = Current Yield for a coupon bond selling at par.
True
False
What affects an investments value?
The amount of expected cash flows
The timing of cash flows
The risk of cash flows
All of the above
None of the above
The WACC is the weighted average cost of capital and is affected by what?
The capital structure of the firm
The current interest rate environment
The risk of the firm
All of the above
None of the above
A California Muni Bond yielding 5% or a corporate bond yielding 7%. Assuming all other factors are equal, which bond should you prefer if your marginal tax rate is 30%?
The muni bond
The corporate bond
Either. You would be indifferent to the two.
Using the attached financial statements for Precision Castparts (PCP), please answer the following questions. When necessary, express your answer to the nearest single decimal place and ROUND correctly.
What is the current ratio in 2015?
What is the quick ratio in 2015?
What is the inventory turnover in 2015?
What is the DSO?
What is fixed assets turnover?
What is total assets turnover?
What is the debt ratio?
What is the liabilities-to-assets ratio?
What is the TIE ratio?
What is the EBITDA Coverage?
Calculate the net profit margin for the last three years?
Calculate the total asset turnover for the last three years?
Calculate the equity multiplier for the last three years?
What is the ROA for the past three years?
Calculate the ROE for the past three years?
What caused the change in ROE in 2014?
What caused the change in the metric in your answer to the last question?
What caused the change in ROE in 2015?
What caused the change in the metric in your answer to the last question?
What caused the change in the net profit margin in 2015 vs. 2014?
Calculate FCF for this firm in 2015.
Calculate ROIC for this firm in 2015.
Dilbert Enterprises has issued $1 billion of bonds with a sinking fund provision. With 5 years left until maturity, Dilbert Enterprises does not retire bonds as provided for in the sinking fund provision. What is the consequence of this action on the company?
Nothing as long as it still pays interest on the bonds and pays them off at maturity.
The bonds are in default as a result of violating the sinking fund covenant.
It depends on the payment history of Dilbert Enterprises.
None of the above.
A bond that currently trades at a premium will see its price do what until maturity (assuming nothing else changes except the passage of time)?
Rise to par
Fall to par
Remain the same since prevailing interest rates have not changed
None of the above
You put $2,000 in a CD paying 6% for 10 years. How much money do you have at the end of 10 years?
What is the Current Yield on a 10-year bond with 9% annual coupon that is selling at $887? (Assume par value = $1,000 as we usually do in this class)?
9.15%
9.91%
10.15%
10.91%
You are considering purchasing a 10% coupon bond that matures in 11 years. YTM on similar bonds with like risk characteristics currently yield 11%. What price should you consider paying for this bond?
You put $10,000 in a company 401K each year. The company matches this investment. You expect to earn 8% each year on this money and you work for the company for 25 years before you retire. How much money do you have at retirement?
You have decided that you need $3 million to retire in 35 years. How much money should you save each month if you can earn 9% on this money?
You purchase a rental house for $100,000 with 20% down. The rental income pays for all expenses and the mortgage for the entire time you own it. You sell it 18 years after you purchase it. Assuming real estate prices increase 3.5% per year, at what price did you sell this rental house?
Assuming you owe $45,000 on this house when you sell it, what is your gain on the house above?
What is your rate of return on your equity investment given this gain?
Your company is evaluating a project. The project is expected to cost $500,000 and generate the following cash flows: 100,000 in year one, 300,000 in years two and three, & -50,000 in year four (end of life). If your cost of capital (WACC) is 10%, should you undertake this project?
Yes
No
Not enough information
What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 13%?
What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 7%?
At maturity a bonds value always equals its par value.
True
False
A normal yield curve is?
Sloping upward
Flat
Sloping downward
Given what you know about intrinsic value, please calculate the intrinsic value of one ounce of gold.
The shape of the yield curve is drive by
Expectations about future inflation
Expectations about future cash flow
Perceptions about the relative risk of securities with different maturities
All of the above
A & C only.
Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?
What is the YTM in #89?
What is the Current Yield in #89?
Based upon your answers to question 89-91, do you think the corporation will call this bond?
Yes
No
There are several advantages of a sole proprietorship business organization. What is its chief disadvantage?
It is expensive to form
Unlimited liability
It is heavily regulated
There are several advantages of a partnership business organization. What is its chief disadvantage?
It is expensive to form
Unlimited liability
It is heavily regulated
Double taxation
There are several advantages of a corporate business organization. What is its chief disadvantage?
It is expensive to form
Unlimited liability
It is heavily regulated
Double taxation
Figure 1-3 in the text illustrates that the Federal budget deficit reached a peak in 2009. Why might this be?
Obamacare.
A weak economy resulted in lower tax revenues for the government.
Poor fiscal policy.
Poor monetary policy.
Interest rates have steadily fallen since 1980. How might this have affected asset prices in that time frame?
Interest rates have nothing to do with asset prices.
Declining rates likely helped inflate asset prices.
Declining rates likely slowed the rate of asset price increases.
None of the above.
Money markets are the markets for?
Markets for securities with maturities less than a year.
Markets for securities with maturities more than a year.
Markets for debt securities with maturities less than a year.
Markets for debt securities with maturities less than a year.
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