FINCL MANGE OF FIRM
FINCL MANGE OF FIRM FIN 3403
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This 6 page Class Notes was uploaded by Jeanne Daugherty on Thursday September 17, 2015. The Class Notes belongs to FIN 3403 at Florida State University taught by Gary Benesh in Fall. Since its upload, it has received 94 views. For similar materials see /class/205375/fin-3403-florida-state-university in Finance at Florida State University.
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Date Created: 09/17/15
Gary Benesh EXAM IV FIN 3403 I pledge that I have neither given nor received assistance while taking this exam Signature Print Name MULTIPLE CHOICE AND TRUEFALSE QUESTIONS 4 points egg INSTRUCTIONS Darken the letter corresponding to the most appropriate response If you are asked to select the statements that is are true or false and more than one statement is correct choose the response that indicates that this is the case Use the yearend information reported by the Morgan Corporation provided beloLvLin answering Questions 1 through 3 H E9 b 9999 DP99quot EDPPFquot Current Liabilities 35000 Long Term Debt 135000 Common Stock 20000 1 par value 20000 shares Paid in Surplus 150000 Retained Earnings 125 000 Total Liabilities amp Owner s Equity 465000 Morgan s Return on Assets for the year is closest to 266 114 167 181 211 Morgan s DebttoEquity Ratio is closest to 58 69 37 48 52 Total Sales 600000 Net Pro t Margin 14 Current Stock Price 6200 Accounts Receivables Balance 30000 AJ 4 0501 a 0 00 m 5 H7 000 MI W 5 1 a A E H J LL LIB 71 100 22w Wowmm divaL Gaffer12 On a common size balance sheet for Morgan the entry for accounts receivable would be closest to 943 645 782 712 845 30000 m7000 Use the following information in answerinol questions 4 through 7 The Clouse Corporation has 2 million shares of common stock outstanding 500000 shares of preferred stock and 100000 bonds The common stock is selling for 80 per share The preferred stock is selling for 30 per share and pays an annual dividend of 250 per share The bonds are 96 percent 20 year 1000 face value bonds and are presently selling at 1125 per bond Interest is paid semiannually Clouse39s stock has a beta of140 the annual yield on oneyear treasury bills is 3 and the required rate of return on the market is estimated at 1 1 The rms tax rate is 30 percent 4 Clouse39s after tax cost of debt is closest to 771A f F g quot quot Lquot I my W 11 quot 11 if if 489 11 E 617 40 582 39 r 739 D 940 7 13 5quot U1 E o 3J1thx 5 Clouse39s cost of preferred stock is closest to 800 h 39l39 833 0 00 crm 50 o O o 1 to 583 6 Clouse39s cost of common equity is closest to I I l K 19 1 L 391 158 184 3 iii 115 139 M manc m 7 OS 0 7 Clouse39s weighted average cost ofcapital is closest to r 39 39 quot r 139 7 v to 7 339 1quot quot 126 Ma 3 I 39 quot1 I l L 1 114 W quotr L 97 F I I 106 393 3 13 l39396L 11 39 1 111 39 39 1 099575 8 The best argument for a company to pay out most of its earnings in dividends is that it is likely to reduce the tax burden of the company s shareholders because investors clearly prefer rms to pay out most of their earnings in dividends to provide investors with more current income from their investment portfolio because rms that pay higher dividends are less risky than rms that pay lower dividends because a rm has limited investment opportunities with positive net present values 99061 1 3 a 505 t1100 17306 UJ 0000 9 A rm with a 30 percent tax rate is considering two alternative nancing plans Plan I calls for 500000 equity 50000 shares and 300000 debt with an interest rate of 9 percent Plan H calls for 300000 equity 30000 shares and 500000 of debt with an interest rate of 10 percent The earnings per share at the EBIT EPS breakeven level Is closest to I I a 067 53900 000 5 300000 5 2 132 2 00000 A 5 d 088 7 17000 1 50000 6 081 3000039 17000 50000 Yo000 1 697500 30000 39 0000 30000 0000 10 The Smith Corporation uses the Equity Risk Premium Approach to estimate its cost of equity capital At present Smith s 7 15 year 1000 bonds semiannual interest are selling at 935 The company employs an equity risk premium of 6 percent Smith s estimated cost of equity capital is closest to N181 PMT 121 a 152 b 137 30 CHI 34 000 c 148 r L d39 125 774 0 m7 e 80 11 Our discussion of capital structure suggests that rms that are in the best position to use larger amounts of debt nancing are those characterized by relatively low nancial risk and a low tax rate relatively high business risk and a high tax rate low asset turnover ratios relatively low business risk and a relatively high tax rate 1 a relatively high degree of variability in their EBIT stream DP99quot 12 Which of the following is a correct completion of the sentence The Weighted Average Cost of Capital will equal the rm s cost of common equity capital if the rm uses no debt or preferred stock nancing requires the cost of equity to be adjusted for the tax deductibility of dividend payments is the correct discount rate to use when calculating the NPV of projects that are of typical risk for the rm is directly observable in nancial markets Both a and c are correct choices I sop99 s 13 Firm HL has 1000000 in assets and an expected BBIT of 150000 for the coming year Assuming HL39s debtasset ratio is 60 percent its interest rate on its debt is 10 percent and its tax rate is 30 percent HL39s expected return on equlty RC39E for the corjmtg ylea v sgll be closest to To M Ma E 6 IT I 50 000 a 14 ALE 39 000000 39quot In h Ji39 0 0 000 b 16 209quot 019 42001000 W C 1 VH3 play000 6 17 000 d 23 q 03 000 75 11 e 19 1 H ML 93000 400 000 14 Select the statement that is true If rm A has a higher current ratio than rm B rm A must manage its working capital better than rm B The asset turnover ratio tells ushow much net income is generated om each dollar of sales Other things equal a lower inventory turnover ratio is preferred to a higher inventory turnover ratio The net pro t margin measures the pro tability relative to total assets All of the above are false statements EDP99 15 9909quot 16 The optimal debttoequity mix for a given rm is the debtequity mix that leads to the lowest weighted average cost of capital the debtequity mix that leads to the highest weighted average cost of capital the debtequity mix that leads to the lowest cost of equity capital the debtequity mix that leads to the lowest chance that the rm will go bankrupt Both a and d are correct According to the quotInformational Content of Dividendsquot hypothesis the positive stock price reaction associated with a dividend increase announcement is sup99 s 099 20 attributable to the fact that investors prefer higher dividend payouts to lower dividend payouts attributable to the quotclientele effectquot attributable to the fact that investors prefer lower dividend payouts to higher dividend payouts attributable to the fact that investors prefer higher retention ratios attributable to the belief that the dividend increase is a signal from the rm39s management that the rm is likely to perform well in the future With respect to alternative capital structures which of the following statements is are true The variability in the common shareholders earnings per share distribution will increase as the use of debt nancing relative to equity nancing is increased The rm s cost of equity will increase as the use of debt nancing relative to equity nancing is increased The total business risk of a rm increases as the rm increases its use of debt nancing Both a and b are true statements All of the above are true statements Select the statements that is are true The quick ratio is a coverage ratio The rm should attempt to maximize its weighted average cost of capital The lower the accounts receivable turnover ratio the better other things equal The net pro t margin tells us how many cents out of each dollar of sales ends up as net income Both b and c are true statements Select the statements that is are true Stock dividends result in an increased number of shares for shareholders but do not involve any cash distribution by the rm On 11 stock s exdividend date the stock price typically decreases by approximately the amount of the divi end Firms that pay regular cash dividends increase the amount of the dividend nearly every quarter Both a and b are true statements All of the above are true statements A rm s debt nancing consists of one issue of bonds with a total face value of 10 million dollars ten thousand 1000 bonds The coupon rate on the bonds is 9 percent and the bonds are presently selling for 1084 If the rm had EBIT of 4300000 and net income of 2240000 in the year just ended what was the rm39s timesinteresteamed ratio for the year 9999 25 36W marina MM X 1051 quot q 46 M 33 3 39 Ll 48 900 K 21 Select the statements that isare true a The residual dividend policy is based on the logic that equity raised through selling new shares of stock is cheaper than that generated through the retention of earnings b As of now the maximum tax rate on both dividend income and longtenn capital gains is 15 c As a rule stock prices react much more sharply to dividend decrease announcements than they do dividend increase announcements 1 Both b and c are true statements c All of the above are true statements 22 In 2000 the Gilhoy corporation which has 56000 shares of stock outstanding had EBIT of 600000 interest expense of 100000 a tax rate of 30 percent Given that Gilhoy paid a common dividend per share of 150 in 2000 the dividend payout ratio for the year was closest to Q00 000 a 14 011421 4 00 b 21 9 oa d 30 quot5 mooo e 38V 0 30 000 23 In a world with no taxes and no bankruptcy costs we concluded that the WACC will decline as the rm increases its use of debt nancing the cost of equity nancing will be lower than the cost of debt nancing rms should increase their use of debt nancing beyond the break even point the WACC will be constant regardless of the mix of debt and equity utilized by the rm rms are better off nancing all of their assets with equity 999571 24 Suppose that in the year just ended a rm with 5 million dollars in assets had an asset turnover ratio of 50 EBIT of 12000000 interest expense of 2000000 and a tax rate of 30 The net pro t margin for the rm forthe year is closest to 5 1 x fal i I f 5 L M a 18 2 000 000 b 28 M ML 39 M No c 242 Z i 7 0 I 0 d 30 WWW0005 e 26 3 00quot 7 AH 2000M0 25 FSU s stock which is presently selling for 48 per share paid a dividend of 200 in the year just ended If you project FSU39s dividend to grow at a rate of 7 per year inde nitely what is the best estimate of FSU39s cost of equity capital a 1352 bar3A39 0 b 118 11 c 125 200 quot07 39 d 115 e 109 quHH Z 7 H H a I Ui n U l5 l gi0nCc 0J1xJ3 3 a it g A Jaw EQUATIONS FOR EXAM 4 1 WACC WDRDMUt WERE WPRP WDRDAT WERE WPRP 2 REDlP0g husLP olf mr In l vb HMJ 9 3 R Rr RRRM Rt 13 or RE R 1111mm 5 4 RE YTM on the debt Equity risk premium W3 7L 5 I 39 1L 0 5 RMT RD lt YTM on LT Debt 1t RpDIPo limo 013 0quot Iquot L 7 quot K 7 wo MVn MVTOTAL WP MVP MVTOTAL We MVE MVTOTAL 8 EPSA EBIT I Alt S A and EPSB EBIT IB1t I 83 I 83 SA 9 EBITBE 1A 13 Ina39Qla cncx p7l SB SA SB SA xquot 10 Dividend Yield Dividend over some period price at beginning of the period D1 P0 I 3 ll Dividend Payout Ratio dps eps and Retention Ratio 1 DPO 13 Quick Ratio Acid Test CAInventoryCL Current Ratio CACL L1 50 39 l 14 Inventory Turnover C OF G S INV 03 15 Accounts Receivable Turnover SALES AR r is 16 Days Sales in Receivables Average Collection Period AR DAILY SALES 17 Asset Turnover Sales Assets U18 Debt Ratio Total Debt Assets quotquot0523 DebtEquity Total Debt Total SH s Equity 20 Times Interest Earned TIE EBITnterest Expense fir 2 Net Pro t Margin NUSaIes 4003 11200 3574 1 Operating Return on Assets EBITAssets 23 Return on Assets NIAssets 24 Return on Equity NIEquity W Price Earnings Ratio Current stock price last 12 months EPS I vb 26 Marketto Book Current Stock Price Book Value per share of Common Stock 1 27 PEG Ratio Price Earnings Ratio Estimated growth rate in eps 7 r JV I 54 w 4 44 le Np Ol quot abs 7 AJWALJ Etw fj Exam 4 Equations l 4 121