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:

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