Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

Question 1Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

 

Question 2Ruff 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 3Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below?

 

Question 4You are estimating your company’s external financing needs for the next year. At the end of next year, you expect that owners’ equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the next year?

 

Question 5You 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 6On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April were $430, and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya’s accounts receivable period is 30 days. What is the firm’s beginning cash balance on June 1?

 

Question 7Which of the following statements are correct?

 

 I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors.

 

II. When an acquiring firm purchases a target firm’s equity, the acquirer need not 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 8Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding.

 

                Buyitall Tarjay

 

Shares outstanding         1,500     1,100

 

Price per share  $32         $26

 

Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash?

 

 Question 9Atmosphere, 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 10The 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 multiple of free cash flow as your estimate?

 

Question 11STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1’s stock is trading for $50, and comparable firm 2’s stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.)

 

Question 12Ginormous 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 13You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?

 

Question 14Which of the following can affect a firm’s sustainable rate of growth?

 

I. Asset turnover ratio

 

II. Profit margin

 

III. Dividend policy

 

IV. Financial leverage

 

Question 15Which one of the following correctly defines the retention ratio?

 

Question 16Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation’s sustainable growth rate?

 

Question 17A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85, and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin?

 

Question 18Which of the following is NOT a reason for why U.S. corporations haven’t issued more equity in recent years?

 

 Question 19Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

 

Question 20Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the

 

Question 21The price of a call option tends to be lower when which of the following is higher (all else equal)?

 

Question 22Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter’s fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?

 

Question 23Principal amounts are usually exchanged

 

 Question 24Which of the following variables does NOT affect the value of a stock option?

 

Question 25Homemade leverage is

 

Question 26When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

 

Question 27In general, the capital structures used by non-financial U.S. firms

 

Question 28Which of the following is/are helpful for evaluating the effect of leverage on a company’s risk and potential returns?

 

 I. Estimated pro forma coverage ratios

 

II. The recognition that financing decisions do not affect firm or shareholder value

 

III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk

 

Question 29According to the pecking order theory of capital structure, why do firms avoid issuing equity?

 

Question 30According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct?

 

 I. For financing needs, firms prefer to first tap internal sources, such as retained profits and excess cash.

 

II. There is an inverse relationship between a firm’s profit level and its debt level.

 

III. Firms prefer to issue new equity rather than source external debt.

 

IV. A firm’s capital structure is dictated by its need for external financing.

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