finance question

Ronaldo
Inc. has a capital budget of $1,000,000, but it wants to maintain a target
capital structure of 50% debt and 50% equity. The company forecasts this year’s
net income to be $1,000,000. If the company follows a residual dividend policy,
what will be its dividend payout ratio?

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a.

30%

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b.

50%

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c.

20%

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d.

40%

ABC
Communications recently completed a 5-for-4 stock split. Prior to the split,
its stock price was $70 per share. The firm’s total market value increased by
20% as a result of the split. What was the price of the company’s stock
following the stock split?

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a.

$50.4

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b.

$61.6

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c.

$46.2

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d.

$67.2

Brandi
Co. has an unlevered beta of 1.30. The firm currently has no debt, but is
considering changing its capital structure to be 30% debt and 70% equity. If
its corporate tax rate is 40%, what is Brandi’s levered beta?

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a.

1.26

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b.

1.38

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c.

1.51

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d.

1.63

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e.

1.75

Brandi
Co. has a levered beta of 1.30. The firm currently has 30% debt, but is
considering changing its capital structure to be 0% debt and 100% equity. If
its corporate tax rate is 40%, what is Brandi’s unlevered beta?

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a.

0.80

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b.

0.88

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c.

0.95

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d.

1.03

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e.

2.0

Brandi
Co. has a beta of 1.00. The firm currently has 30% debt, but is considering changing
its capital structure to be 20% debt and 80% equity. If its corporate tax rate
is 40%, what is Brandi’s levered beta at 20% debt level?
Hint:
First calculate unlevered beta using old capital structure and then calculate
levered beta using the new capital structure.

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a.

1.19

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b.

0.91

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c.

1.01

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d.

1.75

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e.

1.10

On
average, a firm purchases $2,000,000 in merchandise a month. It has inventories
equal to two month purchases on hand at all times. If the firm analyzes its
accounts using a 360-day year, what is the firm’s inventory conversion period?
IC
= Inv/Avg. daily purchases

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a.

120 days

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b.

30.0 days

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c.

60 days

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d.

15.0 days

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e.

7.5 days

Helena Furnishings
wants to sharply reduce its cash conversion cycle. Which of the following steps
would reduce its cash conversion cycle?

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a.

Everything else being same, the company decreases its
average inventory.

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b.

Everything else being same, the company increases the credit
period provided to customers.

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c.

Everything else being same, the company pays faster to its
suppliers.

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d.

All of the statements above are correct.

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e.

None of the statements above are correct.

The Danser Company
expects to have sales of $40,000 in January, $40,000 in February, and $40,000
in March. If 25 percent of sales are for cash and get a 10 percent discount, 50
percent are credit sales paid in the month following the sale, and 25 percent
are credit sales paid 2 months following the sale, what are the cash receipts
from sales in March?

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a.

$44,000

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b.

$40,000

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c.

$36,000

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d.

$39,000

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e.

$30,000

The
president of Lowell Inc. has asked you to evaluate the proposed acquisition of
a new computer. The computer’s price is $60,000, and it falls into the MACRS
3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4).
Purchase of the computer would require an increase in net operating working
capital of $2,000. The computer would increase the firm’s before-tax revenues
by $20,000 per year but would also increase operating costs by $5,000 per year.
The computer is expected to be used for 4 years and then be sold for $25,000.
The firm’s marginal tax rate is 40 percent, and the project’s cost of capital
is 14 percent. What is the net investment required at t = 0?

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a.

-$42,000

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b.

-$62,000

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c.

-$38,600

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d.

-$37,600

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e.

-$36,600

The
president of Lowell Inc. has asked you to evaluate the proposed acquisition of
a new computer. The computer’s price is $60,000, and it falls into the MACRS
3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4).
Purchase of the computer would require an increase in net operating working
capital of $2,000. The computer would increase the firm’s before-tax revenues
by $20,000 per year but would also increase operating costs by $5,000 per year.
The computer is expected to be used for 4 years and then be sold for $25,000.
The firm’s marginal tax rate is 40 percent, and the project’s cost of capital
is 14 percent. What is the operating cash flow in Year 2?

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a.

$19,800

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b.

$10,240

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c.

$11,687

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d.

$13,453

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The
president of Lowell Inc. has asked you to evaluate the proposed acquisition of
a new computer. The computer’s price is $60,000, and it falls into the MACRS
3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4).
Purchase of the computer would require an increase in net operating working
capital of $2,000. The computer would increase the firm’s before-tax revenues
by $20,000 per year but would also increase operating costs by $5,000 per year.
The computer is expected to be used for 4 years and then be sold for $25,000.
The firm’s marginal tax rate is 40 percent, and the project’s cost of capital
is 14 percent. What is the total value of the terminal year non-operating cash
flows (after-tax salvage value + working capital recovered) at the end of Year
4?

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a.

$17,000

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b.

$18,680

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c.

$21,000

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d.

$25,000

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e.

$27,000

The
president of Lowell Inc. has asked you to evaluate the proposed acquisition of
a new computer. The computer’s price is $60,000, and it falls into the MACRS
3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4).
Purchase of the computer would require an increase in net operating working
capital of $2,000. The computer would increase the firm’s before-tax revenues
by $20,000 per year but would also increase operating costs by $5,000 per year.
The computer is expected to be used for 4 years and then be sold for $25,000.
The firm’s marginal tax rate is 40 percent, and the project’s cost of capital
is 14 percent. What is the project’s NPV?

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a.

$2,622

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b.

$2,803

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c.

$2,917

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d.

-$7,029

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e.

-$10,809

When evaluating a new
project, the firm should consider all of the following factors except:

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a.

Changes in working capital attributable to the project.

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b.

Previous expenditures associated with a market test to
determine the feasibility of the project, if the expenditures have been expensed
for tax purposes.

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c.

The current market value of any equipment to be replaced.

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d.

The resulting difference in depreciation expense if the project
involves replacement.

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e.

All of the statements above should be considered.

The
current price of a stock is $50 and the annual risk-free rate is 8 percent. A
call option with an exercise price of $55 and one year until expiration has a
current value of $7.20. What is the value of a put option (to the nearest
dollar) written on the stock with the same exercise price and expiration date
as the call option? (Use put-call parity)

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a.

$9.00

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b.

$5.00

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c.

$6.00

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d.

$7.00

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e.

$8.00

Deeble
Construction Co.’s stock is trading at $30 a share. There are also call options
on the company’s stock, some with an exercise price of $25 and some with an
exercise price of $35. All options expire in three months. Which of the
following best describes the value of these options?

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a.

The options with the $25 exercise
price have an exercise value equal to $5.

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b.

The options with the $25 exercise price will sell for $5.

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c.

The options with the $25 exercise price will sell for less than
the options with the $35 exercise price.

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d.

The options with the $35 exercise price have an exercise value
greater than $0.

Albright Motors is
expected to pay a year-end dividend of $3.00 a share (D1 = $3.00). The stock
currently sells for $30 a share. The required (and expected) rate of return on
the stock is 17 percent. If the dividend is expected to grow at a constant
rate, g, what is g?

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a.

5.00%

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b.

6.00%

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c.

8.00%

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d.

9.00%

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e.

7.00%

Dabney
Electronics currently has no debt. Its operating income (EBIT) is $30 million
and its tax rate is 40 percent. It pays out all of its net income as dividends
and has a zero growth rate. It has 2.5 million shares of stock outstanding.
If it moves to a capital structure that has 40 percent debt and 60
percent equity (based on market values), its investment bankers believe its
weighted average cost of capital would be 10 percent. What would its stock
price be immediately after issuing debt if it changes to the new capital
structure?

(Hint:
Find value of the firm after capitalization using Va = FCF1/(WACC-g), and then
calculate price of the stock using P0 = [S + (D – D0) ] / n0)

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a.

$72

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b.

$90

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c.

$200

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d.

$48

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e.

$60

Which of the following
statements about the cost of capital is INCORRECT?

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a.

A company’s target capital structure affects its weighted
average cost of capital.

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b.

Weighted average cost of capital calculations should be based on
the after-tax-costs of all the individual capital components.

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c.

If a company’s tax rate increases, then, all else
equal, its weighted average cost of capital will increase.

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d.

Flotation costs can increase the cost of preferred stock.

Cartwright Brothers’
stock is currently selling for $40 a share. The stock is expected to pay a $4
dividend at the end of the year. The stock’s dividend is expected to grow at a
constant rate of 12 percent a year forever. The risk-free rate (kRF) is 7
percent and the market risk premium (kM – kRF) is 5 percent. What is the
stock’s beta?

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a.

5.00

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b.

1.00

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c.

2.00

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d.

3.00

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e.

4.00