FIN 420 Exam 1 | Complete Solutions, Latest Version

FIN 420 Exam 1 | Complete Solutions, Latest Version Financial planning: considers multiple options and scenarios. When constructing a pro forma statement, net working capital generally: varies proportionally with sale ...

FIN 420 Exam 1 | Complete Solutions, Latest Version Financial planning: considers multiple options and scenarios. When constructing a pro forma statement, net working capital generally: varies proportionally with sales. Financial plans: often contain alternative options based on economic developments. Atlas Industries combines the investment proposals from each operational unit into one single project for planning purposes. This process is referred to as: aggregation. Which one of the following is correct in relation to pro forma statements? The addition to retained earnings is equal to net income less cash dividends. The portion of net income that a firm reinvests in itself is called the: retention ratio. Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's: fixed assets. When developing a financial plan for a corporation you should consider which of the following? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? I, II, III, and IV Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements? Projected sales Financial planning includes the I. determination of asset requirements II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options. I, II, III, and IV When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance? Dividend policy The external financing need: will limit growth if unfunded. Which one of the following has the least effect on a firm's sustainable rate of growth? Quick ratio The maximum rate of growth a corporation can achieve can be increased by: increasing the retention ratio. Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow? Internal growth rate Financial plans generally tend to ignore: risks associated with cash flows. The financial planning process tends to place the least emphasis on a firm's: market value. Muder's Market has sales of $28,400, net income of $2,250, and a retention ratio of 60 percent. Assume the profit margin and the payout ratio are constant and sales increase by 6 percent. What is the pro forma retained earnings if the current retained earnings balance is $4,100? $5,531 Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent? $18,840 Black Top Express has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year? $12,209 The Paper Mill is operating at full capacity. Assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. The firm has sales of $42,700, net income of $5,500, total assets of $48,900, current liabilities of $3,650, long-term debt of $18,100, owners' equity of $27,150, and dividends of $1,925. What is the external financing need if sales increase by 14 percent? $2,260 Wilson's is currently operating at maximum capacity. The firm has a net income of $2,250, total assets of $24,600, long-term debt of $9,800, accounts payable of $2,700, dividends of $900, and total equity of $12,100. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent? −$323 Bill's has a profit margin of 5 percent and a dividend payout ratio of 20 percent. The total asset turnover is 1.6 and the debt-equity ratio is .4. What is the sustainable rate of growth? 9.84 percent A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio be if the firm wishes to keep these ratios constant? .95 Parodies Corp. has a return on assets of 10.9 percent, a return on equity of 16.7 percent, and a retention ratio of 40 percent. What is its sustainable growth rate? 7.16 percent Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? Sensitivity An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. Sensitivity A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? Sensitivity analysis; to identify the key variable that affects a project's profitability Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis? $2,703,940 A 7-year project is expected to generate annual sales of 9,800 units at a price of $85 per unit and a variable cost of $56 per unit. The equipment necessary for the project will cost $389,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $235,000 per year and the tax rate is 34 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price? $6,468 When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as: worst-case scenario analysis. Which of the following variables will be forecast at their highest expected level under a best-case scenario? Salvage value and units sold Simulation analysis is based on assigning a _____ and analyzing the results. wide range of values to multiple variables simultaneously New Town Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario? $984,061 Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario? $136,759 Variable costs can be defined as the costs that: vary directly with sales. When the operating cash flow of a project is equal to zero, the project is operating at the: cash break-even point. By definition, which one of the following must equal zero at the cash break-even point? Operating cash flow A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. Sales price per unit Fixed costs: are constant over the short-run regardless of the quantity of output produced. Which one of these is most associated with an IRR of negative 100 percent? Cash break-even point The change in revenue that occurs when one more unit of output is sold is referred to as: marginal revenue. Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? IRR and net income The Coffee Express has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis? 229,345 Cool Shades manufactures biotech sunglasses. The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point? 20,233 units A company is considering a project with a cash break-even point of 26,394 units. The selling price is $19 a unit, the variable cost per unit is $7, and depreciation is $89,800. What is the projected amount of fixed costs? $316,728 A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point? $36.24 Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? Degree of operating leverage A project has an estimated sales price of $71 per unit, variable costs of $44.03 per unit, fixed costs of $57,000, a required return of 14 percent, an initial investment of $79,500, no salvage value, and a life of four years. Ignore taxes. What is the degree of operating leverage at the financial break-even level of output? 3.09 The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47? 1.39 The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: facing hard rationing. The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: soft rationing. Taunton's is an all-equity firm that has 152,000 shares of stock outstanding. The CFO is considering borrowing $245,000 at 6 percent interest to repurchase 21,000 shares. Ignoring taxes, what is the value of the firm? $1,773,333 Value per share = $245,000/21,000Value per share = $11.67Firm value = 152,000($11.67)Firm value = $1,773,333 Ornaments, Inc., is an all-equity firm with a total market value of $674,000 and 33,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $96,800 if the economy is normal. If there is a recession, EBIT will be 30 percent lower, and if there is a boom, EBIT will be 40 percent higher. The tax rate is 35 percent. What is the EPS in a recession? $1.30 EPS = [$96,800(1 − .30) − $96,800(1 − .30)(.35)]/33,900]EPS = $1.30 Kelso Electric is an all-equity firm with 44,000 shares of stock outstanding. The company is considering the issue of $300,000 in debt at an interest rate of 6 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 27,000 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans? $46,588 EBIT/44,000 = [EBIT − $300,000(.06)]/27,000EBIT = $46,588 Southwest Sands currently has 25,500 shares of stock outstanding. It is considering issuing $149,000 of debt at an interest rate of 8.0 percent. The break-even level of EBIT between these two capital structure options is $81,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes. 3,752.59 shares $81,000/25,500 = [$81,000 − 149,000(.080)]/XX = 21,747.41 shares Shares repurchased = 25,500 − 21,747.41Shares repurchased = 3,752.59 shares Rappaport Industries has 6,100 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.1 percent and a yield to maturity of 6.4 percent. The tax rate is 34 percent. What is the present value of the interest tax shield? $4,148,000 Interest tax shield = .34 × 6,100 × $2,000Interest tax shield = $4,148,000 Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $156,000 per year. The cost of equity is 11.3 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.2 percent. Currently, the firm is considering converting to a debt-equity ratio of .66. What is the firm's levered value? $1,034,320 VU = $156,000(1 − .34)/.113VU = $911,150VL = $911,150 + .34(.66/1.66)($911,150)VL = $1,034,320 Brick House Cafe has a tax rate of 35 percent and paid total taxes of $40,700. The company had an interest expense of $18,100. What was the value of the interest tax shield? $6,335 Interest tax shield = .35($18,100)Interest tax shield = $6,335 Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 345,000 shares of stock and no debt. The second structure consists of 306,000 shares of stock and $2.14 million of debt. What is the price per share of equity? $54.87 345,000X = 306,000X + $2,140,000X = $54.87 Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a company firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court? 18 months Which one of these statements related to Chapter 11 bankruptcy is correct? Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage. The absolute priority rule determines: which parties receive payment first in a bankruptcy proceeding. A company is technically insolvent when: it is unable to meet its financial obligations Bankruptcy: is a legal proceeding. The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. indirect bankruptcy The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs direct bankruptcy Northern Air would like to sell 4,700 shares of stock using Dutch auction underwriting. The bids received are: Bidder Quantity Price A 1,000 $ 29.55 B 1,100 29.20 C 1,500 29.05 D 1,700 28.70 E 1,900 28.50 How much will the company raise in its offer? Ignore all flotation and transaction costs. $134,890Shares including Bidder D = 1,000 + 1,100 + 1,500 + 1,700Shares including Bidder D = 5,300Amount raised = $28.70 × 4,700Amount raised = $134,890 Pawprints Paint recently went public in a best efforts offering. The company offered 180,000 shares of stock for sale at an offer price of $30 per share. The administrative costs associated with the offering were $420,000 and the underwriter's spread was 7 percent. After completing their sales efforts, the underwriters determined that they sold a total of 173,700 shares. What were the net proceeds to the company? $4,426,230 Net proceeds = [173,700 × $30 × (1 − .07)] − $420,000Net proceeds = $4,426,230 Jenny Corp. needs to raise $54 million to fund a new project. The company will sell shares at a price of $29.20 in a general cash offer and the company's underwriters will charge a spread of 6.5 percent. The direct flotation costs associated with the issue are $975,000. How many shares need to be sold? 2,013,589 shares Required proceeds = ($975,000 + 54,000,000)/(1 − .065)Required proceeds = $58,796,791Number of shares offered = $58,796,791/$29.20Number of shares offered = 2,013,589 shares Which one of the following statements concerning venture capitalists is correct? Exit strategy is a key consideration when selecting a venture capitalist. Equity financing of new, non-public companies is broadly referred to as: private equity. It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital 40 When selecting a venture capitalist, which one of the following characteristics is probably the least important? Underwriting experience Which one of the following statements concerning venture capital financing is correct? Venture capitalists should have key contacts and financial strength. The Timken Company has announced a rights offer to raise $5.1 million. The company's stock currently sells for $34 per share, there are 1.207 million shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $30 per share. What is the ex-rights price per share? $33.51 Number of new shares = $5,100,000/$30Number of new shares = 170,000Number of rights needed to buy one share = 1,207,000/170,000Number of rights needed to buy one share = 7.1Ex-rights price per share = [$30 + 7.1($34)]/[1 + 7.1]Ex-rights price per share = $33.51 The stock of Cleaner Homes is currently selling for $15.40 a share. The new rights offering grants one right for each share of stock outstanding. The new shares being offered are priced at $13 plus three rights. What is the value of one right? $.60\ Cost per share = [$13 + 3($15.40)]/(1 + 3)Cost per share = $14.80Value of a right = $15.40 − 14.80Value of a right = $.60 Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans? 183,333 Number of new shares = $3,300,000/$18Number of new shares = 183,333 Miller Fruit wants to expand and needs $1.6 million to do so. Currently, the firm has 465,000 shares of stock outstanding at a market price per share of $32.50. The firm decided on a rights offering with one right granted for each share of outstanding stock. The subscription price is $28 a share. How many rights are needed to purchase one new share of stock in this offering? 8.14 Number of new shares = $1,600,000/$28Number of new shares = 57,143Rights needed for each new share = 465,000/57,143Rights needed for each new share = 8.14 Mountain Products has decided to raise $6 million via a rights offering. The company will issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25.20 and there are 1,500,000 shares currently outstanding. What is the value of one right? $.87 Number of new shares = $6,000,000/$20Number of new shares = 300,000Number of rights needed = 1,500,000/300,000Number of rights needed = 5Cost per share = [$20+ 5($25.20)]/(1 + 5)Cost per share = $24.33Value of a right = $25.20 − 24.33Value of a right = $.87 Southern Markets has announced a rights offer to raise $3,628,800. The company's stock currently sells for $26.80 per share, there are 675,000 shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $21 per share. What is the ex-rights price per share? $25.62