Multiple Choice Answers

Which of the following is a principal within the agency relationship?
a shareholder
the board of directors
a company engineer
the CEO of the firm
Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?
Which of the following is considered a hybrid organizational form?
limited liability partnership
sole proprietorship
Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?
The statement of net worth.
The statement of working capital.
The statement of cash flows.
The statement of retained earnings.
Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?
65.2 days
61.7 days
57.9 days
64.3 days
Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?
Which of the following is not a method of “benchmarking”?
Utilize the DuPont system to analyze a firm’s performance.
Conduct an industry group analysis.
Evaluating a single firm’s performance over time.
Identify a group of firms that compete with the company being analyzed.
Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)
PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)
PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000, $112,000, $164,000, $84,000, and $242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)
Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)
Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)
Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)
PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?
Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?
What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
The internal rate of return.
The discounted payback.
The modified internal rate of return.
The profitability index.
How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?
The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?
If a company’s weighted average cost of capital is less than the required return on equity, then the firm:
Has debt in its capital structure
Must have preferred stock in its capital structure
Is financed with more than 50% debt
Is perceived to be safe
A firm’s capital structure is the mix of financial securities used to finance its activities and can include all of the following except
equity options.
preferred stock.
M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.
If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?
Multiple Analysis: Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.
What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.
$1,315 million
$1,334 million
$453.6 million
$1,787 million
External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?
Which of the following cannot be engaged in managing the business?
a sole proprietor
none of these
a general partner
a limited partner
Which of the following does maximizing shareholder wealth not usually account for?
Amount of Cash flows.
Government regulation.
The timing of cash flows.
The strategic plan does NOT identify
the lines of business a firm will compete in.
major areas of investment in real assets.
future mergers, alliances, and divestitures.
working capital strategies.
Firms that achieve higher growth rates without seeking external financing
have less equity and/or are able to generate high net income leading to a high ROE.
have a low plowback ratio.
are highly leveraged.
none of these.
Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.
55%, 45%
15%, 85%
85%, 15%
45%, 55%
The cash conversion cycle
estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.
shows how long the firm keeps its inventory before selling it.
begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
You are provided the following working capital information for the Ridge Company:
Ridge Company
Account            $
Inventory         $12,890
Accounts receivable  12,800
Accounts payable       12,670
Net sales           $124,589
Cost of goods sold      99,630
Cash conversion cycle: What is the cash conversion cycle for Ridge Company?
38.3 days
46.4 days
129.9 days
83.5 days