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Homework answers / question archive / Question 1)   In March, with the spot price of wheat at $5

Question 1)   In March, with the spot price of wheat at $5

Finance

Question 1)

 

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery’s gain (or loss) on the futures contracts?

     
       
  • Question 2

 

   
 

The price of a call option tends to be lower when which of the following is higher (all else equal)?

     
 
     
  • Question 3

 

   
 

Which one of the following statements is true?

     
 
     
  • Question 4

 

   
 

Which of the following statements regarding preferred stock is true?

     
       
  • Question 5

 

   
 

Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?

     
       
  • Question 6

 

   
 

Which of the following is NOT likely to be a prudent financing policy for a rapidly growing business?

     
       
  • Question 7

 

   
 

Which of the following factors favor the issuance of equity in the financing decision?
 
I. Market signaling
II. Distress costs
III. Management incentives IV. Financial flexibility

     
       
  • Question 8

 

   
 

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

     
       
  • Question 9

 

   
 

Which of the following is/are helpful for evaluating the effect of leverage on a company’s risk and potential returns?
 
I. Estimated pro forma coverage ratios
II. The recognition that financing decisions do not affect firm or shareholder value
III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk

     
 
     
  • Question 10

 

   
 

Which of the following would NOT be considered a cost of financial distress?

     
 
     
  • Question 11

 

   
 

Financial leverage
 
I. increases expected ROE but does not affect its variability.
II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.

     
       
  • Question 12

 

   
 

You are estimating your company’s external financing needs for the next year. At the end of next year, you expect that owners’ equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the next year?

     
       
  • Question 13

 

   
 

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections?
I. Simulation
II. Ad hoc adjustments
III. Scenario analysis
IV. Sensitivity analysis

     
       
  • Question 14

 

   
 

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April were $430, and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya’s accounts receivable period is 30 days. What is the firm’s beginning cash balance on June 1?

     
       
  • Question 15

 

   
 

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan?
 
I. How much will our sales grow?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?

     
       
  • Question 16

 

   
 

Which one of the following statements is correct concerning the cash balance of a firm?

     
 
     
  • Question 17

 

   
 

Which of the following statements is correct if a firm’s pro forma financial statements project net income of $12,000 and external financing required of $5,000?

     
 
     
  • Question 18

 

   
 

The sustainable growth rate of a firm is best described as the

     
       
  • Question 19

 

   
 

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation’s sustainable growth rate?

     
       
  • Question 20

 

   
 

The retention ratio is

     
 
     
  • Question 21

 

   
 

Which one of the following correctly defines the retention ratio?

     
       
  • Question 22

 

   
 

Which of the following can affect a firm's sustainable rate of growth?
I. Asset turnover ratio
II. Profit margin
III. Dividend policy
IV. Financial leverage

     
       
  • Question 23

 

   
 

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb’s sustainable growth rate?

     
       
  • Question 24

 

   
 

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

     
       
  • Question 25

 

   
 

Which of the following statements are correct?
 
I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors.
II. When an acquiring firm purchases a target firm’s equity, the acquirer need not assume the target’s liabilities.
III. The market value of a public company reflects the worth of the business to minority investors.
IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value.
 

     
       
  • Question 26

 

   
 

Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding.

 

Buyitall

Tarjay

Shares outstanding

1,500

1,100

Price per share

$32

$26


 
Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash?
 

     
       
  • Question 27

 

   
 

The following table presents forecasted financial and other information for Havasham Industries:

 

2015

2016

2017

Projected EBIT

$ 317

$ 339

$ 363

Earnings after tax

197

210

225

Free cash flow

135

144

155

Havasham's WACC

8.2%

 

 

Expected growth rate in FCFs after 2017

4.0%

 

 

Warranted MV firm/FCF in 2017

19.4

 

 

Warranted P/E in 2017

18.7

 

 


 
What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using a warranted multiple of free cash flow as your estimate?

     
       
  • Question 28

 

   
 

Which of the following statements are correct?
I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities.
II. When an acquiring firm purchases a target firm’s equity, the acquirer must assume the target’s liabilities.
III. The market value of a public company reflects the worth of the business to minority investors.
IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value.

     
       
  • Question 29

 

   
 

The following table presents forecasted financial and other information for Havasham Industries:

 

2015

2016

2017

Projected EBIT

$ 317

$ 339

$ 363

Earnings after tax

197

210

225

Free cash flow

135

144

155

Havasham's WACC

8.2%

 

 

Expected growth rate in FCFs after 2017

4.0%

 

 

Warranted MV firm/FCF in 2017

19.4

 

 

Warranted P/E in 2017

18.7

 

 


 
What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using the perpetual-growth equation as your estimate?

     
       
  • Question 30

 

   
 

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.?
 

     
       

 

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