Marcie’s Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie’s can grow is equal to:

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Marcie’s Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie’s can grow is equal to:

65 percent of the sustainable rate of growth.

65 percent of the internal rate of growth.

35 percent of the internal rate of growth.

the internal rate of growth.

the sustainable rate of growth.

22

f the Hunter Corp. has an ROE of 11 and a payout ratio of 19 percent, what is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate

%

23

24. The operating cycle can be decreased by:

increasing the accounts payable turnover rate.

discontinuing the discount given for early payment of an accounts receivable.

paying accounts payable faster.

collecting accounts receivable faster.

decreasing the inventory turnover rate.

25

The length of time between the payment for inventory and the collection of cash from receivables is called the:

inventory period.

operating cycle.

accounts receivable period.

cash cycle.

accounts payable period.

26.

Consider the following financial statement information for the Rivers Corporation:

Item

Beginning

Ending

Inventory

$

11,000

$

12,000

Accounts receivable

6,000

6,300

Accounts payable

8,200

8,600

Net sales

$

90,000

Cost of goods sold

70,000

Calculate the operating and cash cycles. (Use 365 days a year. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Operating cycle

days

Cash cycle

days

27.

Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Input all amounts as positive values):

COUNTRY KETTLES, INC.
Balance Sheet
December 31, 2016

2015

2016

Assets

Cash

$

31,400

$

30,590

Accounts receivable

70,900

74,080

Inventories

61,800

64,125

Property, plant, and equipment

157,000

167,800

Less: Accumulated depreciation

(46,720

)

(50,900

)

Total assets

$

274,380

$

285,695

Liabilities and Equity

Accounts payable

$

45,900

$

48,090

Accrued expenses

7,280

6,420

Long-term debt

26,600

29,500

Common stock

26,000

31,000

Accumulated retained earnings

168,600

170,685

Total liabilities and equity

$

274,380

$

285,695

Item

Source/Use

Amount

Cash

$

Accounts receivable

$

Inventories

$

Property, plant, and equipment

$

Accounts payable

$

Accrued expenses

$

Long-term debt

$

Common stock

$

Accumulated retained earnings

$

28.

The rate at which a stock’s price is expected to appreciate (or depreciate) is called the _____ yield.

earnings

dividend

current

total

capital gains

29.

Last year, a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26 percent. What was the real rate of return?

3.86%

3.2 7%

3.98%

3.71%

3.42%

30.

A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000 face value?

$1,102.77

$1,000.28

$1,002.77

$1,276.70

$1,016.33

31.

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond?

7.38%

8.74%

8.24%

8.40%

7.19%

32.

Miller Manufacturing has a target debt–equity ratio of .50. Its cost of equity is 15 percent, and its cost of debt is 6 percent. If the tax rate is 34 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC

%

33.

Use the sub navigation below to navigate within this series of questions.

33.

Filer Manufacturing has 9.2 million shares of common stock outstanding. The current share price is $62, and the book value per share is $4. The company also has two bond issues outstanding. The first bond issue has a face value of $71.8 million and a coupon rate of 7.9 percent and sells for 107.4 percent of par. The second issue has a face value of $61.8 million and a coupon rate of 8.4 percent and sells for 110.7 percent of par. The first issue matures in 8 years, the second in 27 years.

Suppose the company’s stock has a beta of 1.2. The risk-free rate is 4 percent, and the market risk premium is 7.9 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC

34.

When estimating the cost of equity using the DDM, which one of these is most apt to add error to this estimate?

beta

next year’s dividend

firm’s tax rate

dividend growth rate

current stock price

35

A firm’s WACC can be correctly used to discount the expected cash flows of a new project when that project:

will be financed solely with new debt and internal equity.

will be financed solely with internal equity.

has the same level of risk as the firm’s current operations.

will be financed with the same proportions of debt and equity as those currently used by the overall firm.

will be managed by the firm’s current managers.

36.

The weighted average cost of capital for a firm is the:

discount rate which the firm should apply to all of the projects it undertakes.

rate the firm should expect to pay on its next bond issue.

maximum rate which the firm should require on any projects it undertakes.

overall rate which the firm must earn on its existing assets to maintain its value.

rate of return that the firm’s preferred stockholders should expect to earn over the long term.

37.

Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?

$962,300

$963,200

$953,400

$948,900

$927,800

38

An independent investment is acceptable if the profitability index (PI) of the investment is:

less than one.

less than the internal rate of return.

greater than the internal rate of return.

greater than a pre-specified rate of return.

greater than one.

39.

Samson’s purchased a lot four years ago at a cost of $398,000. At that time, the firm spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the property placed a value of $629,000 on the property and building. Samson’s now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for new project?

$2,987,000

$2,929,000

$2,058,000

$2,300,000

$2,242,000

40

Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at an average price of $79 a pair. It is considering adding a lower-priced line of shoes which sell for $49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project?

$146,250

$98,750

$138,750

$52,000

$123,240

41

Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

$1,710,000

$1,498,000

$1,208,635

$1,661,500

$1,100,000

42.

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

$204.36

$797.22

−$1,195.12

−$1,350.49

−$287.22

43.

A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?

$3,011.40

$1,980.02

$2,903.19

$935.56

$2,474.76

44.

Flatte Restaurant is considering the purchase of a $10,400 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 2,200 soufflés per year, with each costing $2.60 to make and priced at $5.45. Assume that the discount rate is 16 percent and the tax rate is 34 percent.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Should the company make the purchase?

Yes

No

45.

What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent.

$68.20

$371.02

$86.87

$249.65

$270.16

1. The primary goal of financial management is to:

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1.

The primary goal of financial management is to:

minimize operational costs and maximize firm efficiency.

maximize current dividends per share of the existing stock.

maximize the current value per share of the existing stock.

avoid financial distress.

maintain steady growth in both sales and net earnings.

2

Financial managers should primarily strive to:

maximize current dividends even if doing so adds financial distress costs to the firm.

minimize costs while increasing current dividends.

maximize the current value per share of existing stock.

maximize current market share in every market in which the firm participates.

maximize the current profits of the firm.

3.

If a firm is currently profitable, then:

its reported sales exceed its costs.

its cash flows are known with certainty.

its current cash inflows must exceed its current cash outflows.

it will always have sufficient cash to pay its bills in a timely manner.

the timing of the cash flows on proposed projects is irrelevant.

4. The owners of a limited liability company generally prefer:

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.

being taxed personally on all business income.

being taxed like a corporation with liability like a partnership.

5.

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually.

If you made a $69,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Difference in accounts

$

6.

a.

Compute the future value of $2,000 compounded annually for 10 years at 6 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value

$

b.

Compute the future value of $2,000 compounded annually for 10 years at 11 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value

$

c.

Compute the future value of $2,000 compounded annually for 15 years at 6 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value

$

7.

What is the future value of $3,052 invested for 9 years at 5.00 percent compounded annually?

$4,450.57

$1,923.52

$4,720.69

$4,734.65

$4,748.62

8.

Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share and have received total dividend payments of $.60 a share. Today, you sold all of your shares for $22.20 a share. What is your total dollar return on this investment?

$1,440

$720

$3,840

$1,200

$1,920

9.

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

inflation premium.

geometric average return.

time premium.

risk premium.

arithmetic average return.

10.

Which one of the following accounts is included in stockholders’ equity?

intangible assets

plant and equipment

accumulated retained earnings

deferred taxes

long-term debt

11.

Shelton, Inc., has sales of $391,000, costs of $179,000, depreciation expense of $44,000, interest expense of $25,000, and a tax rate of 40 percent. (Do not round intermediate calculations.)

What is the net income for the firm?

Net income

$

Suppose the company paid out $34,000 in cash dividends. What is the addition to retained earnings?

Addition to retained earnings

$

12

Net working capital is defined as:

current assets plus fixed assets.

current assets minus current liabilities.

current assets plus stockholders’ equity.

fixed assets minus long-term liabilities.

total assets minus total liabilities.

13

Which one of these equations is an accurate expression of the balance sheet?

Stockholders’ equity ≡ Assets + Liabilities

Stockholders’ equity ≡ Assets −Liabilities

Liabilities ≡ Stockholders’ equity −Assets

Assets ≡ Stockholders’ equity −Liabilities

Assets ≡ Liabilities −Stockholders’ equity

14

Galaxy United, Inc.
2009 Income Statement
($ in millions)

Net sales

$8,450

Less: Cost of goods sold

7,220

Less: Depreciation

410

Earnings before interest and taxes

820

Less: Interest paid

83

Taxable Income

737

Less: Taxes

258

Net income

$ 479

Galaxy United, Inc.
2008 and 2009 Balance Sheets
($ in millions)

2008

2009

2008

2009

Cash

$ 110

$ 150

Accounts payable

$1,100

$1,130

Accounts rec.

940

780

Long-term debt

1,000

1,332

Inventory

1,490

1,510

Common stock

$3,110

$2,910

Sub-total

$2,540

$2,440

Retained earnings

520

698

Net fixed assets

3,190

3,630

Total assets

$5,730

$6,070

Total liab. & equity

$5,730

$6,070

What is the days’ sales in receivables? (use 2009 values)

41.0

33.7

24.9

47.5

80.4

15

A firm has sales of $1,360, net income of $227, net fixed assets of $469, and current assets of $329. The firm has $95 in inventory. What is the common-size statement value of inventory?

41.5 percent

11.9 percent

20.3 percent

7.0 percent

28.9 percent

16.

The Purple Martin has annual sales of $4,800, total debt of $1,360, total equity of $2,200, and a profit margin of 5 percent. What is the return on assets?

10.91 percent

6.74 percent

17.65 percent

8.72 percent

5.00 percent

17.

Al’s Sport Store has sales of $2,740, costs of goods sold of $2,100, inventory of $533, and accounts receivable of $444. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

71.0

92.6

140.0

130.0

91.4

18

Jessica’s Boutique has cash of $47, accounts receivable of $70, accounts payable of $190, and inventory of $160. What is the value of the quick ratio?

2.07

1.46

.37

.62

.84

19.

One of the primary weaknesses of many financial planning models is that they:

ignore the size, risk, and timing of cash flows.

are iterative in nature.

ignore the goals and objectives of senior management.

rely too much on financial relationships and too little on accounting relationships.

ignore cash payouts to stockholders.

20

If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the:

number of common shares outstanding will increase at the same rate of growth.

debt-equity ratio will remain constant while retained earnings increase.

debt-equity ratio will have to increase.

fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity.

fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase.

16. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock s expected capital gains yield for the coming year?

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16. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock s expected capital gains yield for the coming year?

a.

6.50%

b.

6.83%

c.

7.17%

d.

7.52%

e.

7.90%

17. Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC

12.25%

Year

0

1

2

3

4

Cash Flows

-$850

$300

$320

$340

$360

a.

13.42%

b.

14.91%

c.

16.56%

d.

18.22%

e.

20.04%

18. Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

a.

10.69%

b.

11.25%

c.

11.84%

d.

12.43%

e.

1305%

19. Lafarge 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?

a. Project B, which is of below-average risk and has a return of 8.5%.
b. Project C, which is of above-average risk and has a return of 11%.
c. Project A, which is of average risk and has a return of 9%.
d. None of the projects should be accepted.
e. All of the projects should be accepted.

a.

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

b.

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

c.

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

d.

None of the projects should be accepted

e.

All of the projects should be accepted

20. You work for Pitloa Inc., which is considering a new project whose data are shown below. What is the project s Year 1 cash flow?

Sales Revenues

$62,500

Depreciation

$8,000

Other operating costs

$25,000

Interest Expense

$8,000

Tax rate

35.0%

a.

$25,816

b.

$27,175

c.

$28,534

d.

$29,960

e.

$31,458

21. Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project s 10-year expected operating life. What is the project s Year 4 cash flow?

Equipment cost (depreciable basis)

$70,000

Sales revenues, each year

$42,500

Operating costs (excl. deprec.)

$25,000

Tax rate

35.0%

a.

$11,814

b.

$12,436

c.

$13,090

d.

$13,745

e.

$14,432

22. Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

a.

8.03%

b.

8.24%

c.

8.45%

d.

8.67%

e.

8.89%

23. Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

WACC: 7.5%

Year

0

1

2

3

4

CFS

$1,100

$550

$600

$100

$100

CFL

$2,700

$7650

$725

$800

$1,400

a.

$138.10

b.

$149.21

c.

$160.31

d.

$171.42

e.

$182.52

24. As a member of UA Corporation’s financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

Sales Revenues

$42,500

Depreciation

$10,000

Other operating costs

$17,000

Interest Expense

$4,000

Tax rate

35.0%

a.

$16,351

b.

$17,212

c.

$18,118

d.

$19,071

e.

$20,075

25. Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project s 3-year life. What is the project s Year 1 cash flow?

Equipment cost (depreciable basis)

$65,000

Straight-line depreciation rate

33.333%

Sales revenues, each year

$60,000

Operating costs (excl. deprec.)

$25,000

Tax rate

35.0%

a.

$28,115

b.

$28,836

c.

$29,575

d.

$30,333

e.

$31,092

26. Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm’s required return (rs) is 11%, what is its current stock price?

a.

$30.57

b.

$31.52

c.

$32.49

d.

$33.50

e.

$34.50

1. Susmel Inc. is considering a project that has the following cash flow data. What is the project’s payback?

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1. Susmel Inc. is considering a project that has the following cash flow data. What is the project’s payback?

Year

0

1

2

3

Cash Flows

-$500

$150

$200

$300

a.

2.03 years

b.

2.25 years

c.

2.50 years

d.

2.75 years

e.

3.03 years

2. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

Sales Revenues

$13,000

Depreciation

$4,000

Other operating costs

$6,000

Tax rate

35.0%

a.

$5,950

b.

$6,099

c.

$6,251

d.

$6,407

e.

$6,568

3. Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

a.

$2.20

b.

$2.44

c.

$2.69

d.

$2.96

e.

$3.25

4. If a typical company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

a.

become riskier over time, but its intrinsic value will be maximized

b.

become less risky over time, and this will maximize its intrinsic value

c.

accept too many low-risk projects and too few high-risk projects

d.

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized

e.

continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital

5. Qualcomm Inc.’s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock’s expected price 5 years from now?

a.

$40.17

b.

$41.20

c.

$42.26

d.

$43.34

e.

$44.46

6. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company’s beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price?

a.

$14.52

b.

$14.89

c.

$15.26

d.

$15.64

e.

$16.03

7. Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC: 10.00%

Year

0

1

2

3

4

Cash Flows

-$950

$525

$485

$445

$405

a.

1.61 years

b.

1.79 years

c.

1.99 years

d.

2.22 years

e.

2.44 years

8. Bilulu Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.

WACC: 8.75%

Year

0

1

2

3

4

CFS

-$1,100

$375

$375

$375

$375

CFL

-$2,200

$725

$725

$725

$725

a.

$32.12

b.

$35.33

c.

$38.87

d.

$40.15

e.

$42.16

9. Assume that Kish Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

a.

9.29%

b.

9.68%

c.

10.08%

d.

10.50%

e.

10.92%

10. Several years ago the Metalusa Inc. sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?

a.

4.28%

b.

4.46%

c.

4.65%

d.

4.83%

e.

5.03%

11. Data Computer Systems 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 (and even negative), in which case it will be rejected.

Year

0

1

2

3

Cash Flows

-$1,100

$450

$470

$490

a.

9.70%

b.

10.78%

c.

11.98%

d.

13.31%

e.

14.64%

12. Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the project s expected NPV?

WACC

10.0%

Net investment cost (depreciable basis)

$200,000

Units sold

50,000

Average price per unit, Year 1

$25.00

Fixed op. cost excl. deprec. (constant)

$150,000

Variable op. cost/unit, Year 1

$20.20

Annual depreciation rate

33.333%

Expected inflation rate per year

5.00%

Tax rate

40.0%

a.

$15,925

b.

$16,764

c.

$17,646

d.

$18,528

e.

$19,455

13. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock s expected total return for the coming year?

a.

8.37%

b.

8.59%

c.

8.81%

d.

9.03%

e.

9.27%

14. If a stock s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a. The expected return on the stock is 5% a year.
b. The stock s dividend yield is 5%.
c. The price of the stock is expected to decline in the future.
d. The stock s required return must be equal to or less than 5%.
e. The stock s price one year from now is expected to be 5% above the current price.

a.

The expected return on the stock is 5% a year

b.

The stock s dividend yield is 5%

c.

The price of the stock is expected to decline in the future

d.

The stock s required return must be equal to or less than 5%

e.

The stock s price one year from now is expected to be 5% above the current price

15. Mushali Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

a.

$5,558

b.

$5,850

c.

$6,143

d.

$6,450

e.

$6,772

1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years?

/0 Comments/in /by

1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years?

2. What are the main objectives of the financial policy that Rajat Singh must recommend to Deluxe Corporation’s board of directors?

3. Drawing on the financial ratios in case Exhibit 6, how much debt could Deluxe borrow at each rating level? What capitalization ratios would result from the borrowings implied by each rating category?

4. Is Deluxe’s current debt level appropriate? Why or why not?

5. Using Hudson Bancorp’s estimates of the costs of debt and equity in case Exhibit 8, which rating category has the lowest overall cost of funds? Do you agree with Hudson Bancorp’s view that equity investors are indifferent to the increases in financial risk across the investment-grade debt categories?

6. What should Singh recommend regarding:

· the target bond rating

· the level of flexibility or reserves

· the mix of debt and equity

· any other issues you believe should be brought to the attention of the CEO and the board

P.S. These questions do require calculations but their accuracy is not critical. It will be enough to provide well explained opinions with supporting analysis.

Synopsis

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business.

The objective is to recommend an appropriate financial policy for Deluxe Corporation and, in support of that recommendation, it is recommended to show the impact on the cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.

The Baldwin Company has just purchased $40,900,000 of plant and equipment that has an estimated useful life of 15 years. The expected salvage value at the end of 15 years is $4,090,000. What will the accumulated depreciation expense for this purchase (exclude all other plant and equipment) be after its second year of use?

/0 Comments/in /by

The Baldwin Company has just purchased $40,900,000 of plant and equipment that has an estimated useful life of 15 years. The expected salvage value at the end of 15 years is $4,090,000. What will the accumulated depreciation expense for this purchase (exclude all other plant and equipment) be after its second year of use? (Use FASB GAAP)

Select: 1

$4,908,000

$2,454,000

$5,453,333

$2,726,667

The Chester Company has just issued $7,169,042 in dividends last year. The effect of this payment on the balance sheet is:

Select: 1

Liabilities will increase $7,169,042

Expenses will increase $7,169,042

Net Profit will decrease $7,169,042

Equity will decrease $7,169,042

What is the Quick Ratio of Chester?Select: 1

1.4%

0.5%

2.0%

2.1%

Chester has a ROS of 0.08 (ROS = Net income/Sales). That means:

Select: 1

There is a 8% profit on each dollar of sales.

There are sales of $92 for every dollar of profit.

For every $8 of sales there is a profit of 1%.

There are sales of $8 for every dollar of profit.

Midyear on July 31st, the Digby Corporation’s balance sheet reported: Total Liabilities of $51.432 million Total Common Stock of $2.540 million Cash of $4.020 million Retained Earnings of $18.537 million. What were the Digby Corporation’s total assets?

Select: 1

$34.375 million

$36.915 million

$68.489 million

$72.509 million

Which mission statement best represents the Digby company?

Select: 1

Innovation meets revolution. We create value for our customers through breakthrough designs that lead to unique high-performance products.

Consistency and affordability are our goals. Our central mission is to offer dependable, low-price products that our customers can count on.

Providing value to our customers is why we get up in the morning. We accomplish this by offering products at a low price our customers can afford across a wide variety of market segments.

Lasting innovation is our motivation. We build premium products that are elegantly designed to meet the needs of a variety of market segments.

Review the Inquirer to determine Baldwin’s current strategy. How will they seek a competitive advantage? From the following list, select the top five sources of competitive advantage that Baldwin would be most likely to pursue.

Select: 5

Increase demand through TQM initiatives

Seek high automation levels

Seek high plant utilization, even if it risks occasional small stockouts

Add additional products

Reduce cost of goods through TQM initiatives

Offer attractive credit terms

Accept lower plant utilization and higher capacities to insure sufficient capacity is available to meet demand

Seek excellent product designs, high awareness, and high accessibility

Seek the lowest price in their target market while maintaining a competitive contribution margin

Reduce labor costs through training and recruitment