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Homework answers / question archive / Question 1)   Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?               Question 2         Mike just purchased a bond which pays $40 every six months in interest

Question 1)   Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?               Question 2         Mike just purchased a bond which pays $40 every six months in interest

Finance

Question 1)

 

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

     
       
  • Question 2

 

   
 

Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the
 

     
       
  • Question 3

 

   
 

Which one of the following statements is true?

     
       
  • Question 4

 

   
 

What is the holding period return for the year on a bond with a par value of $1,000 and a coupon rate of 8.5% if its price at the beginning of the year was $1,215 and its price at the end of the year was $1,020? Assume interest is paid annually.

     
       
  • Question 5

 

   
 

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

     
       
  • Question 6

 

   
 

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

     
       
  • Question 7

 

   
 

The basic lesson of the M&M theory is that the value of a firm is dependent upon

     
       
  • Question 8

 

   
 

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 9

 

   
 

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

     
       
  • Question 10

 

   
 

The term "financial distress costs" includes which of the following?
 
I. Direct bankruptcy costs
II. Indirect bankruptcy costs
III. Direct costs related to being financially distressed but not bankrupt IV. Indirect costs related to being financially distressed but not bankrupt

     
       
  • 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

 

   
 

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

     
       
  • Question 13

 

   
 

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

     
       
  • Question 14

 

   
 

You are preparing pro forma financial statements for 2017 using the percent-of-sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2017?

     
       
  • Question 15

 

   
 

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 16

 

   
 

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 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

 

   
 

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6, and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu’s sustainable rate of growth?

     
       
  • Question 20

 

   
 

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 21

 

   
 

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent, and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?
 

     
       
  • Question 22

 

   
 

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

     
       
  • Question 23

 

   
 

Which one of the following correctly defines the retention ratio?

     
       
  • Question 24

 

   
 

The sustainable growth rate

     
       
  • Question 25

 

   
 

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.?
 

     
       
  • Question 26

 

   
 

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. What was the cost of this acquisition to the shareholders of Ginormous Oil?

     
       
  • Question 27

 

   
 

Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be?

     
       
  • Question 28

 

   
 

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 price-to-earnings multiple as your estimate?

     
       
  • Question 29

 

   
 

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 30

 

   
 

A recent annual income statement for Stone Creek Roofing is shown below.
 
 

Net sales

$5,000

Cost of sales

 

3,200

Gross profit

 

1,800

Operating expense

 

800

Depreciation expense

 

200

Operating income

 

800

Interest expense

 

100

Income before tax

 

700

Tax

 

175

Income after tax

$

525

 

 

 


 
Assume that during the year, Stone Creek spent $180 on new capital equipment and increased current assets net of non-interest-bearing current liabilities by $120. What was Stone Creek’s free cash flow in this year?

     
       

 

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