- Of the following choices, ________ is the best way to increase current shareholder value.
increasing the current value of the overall firm
2. Assume the firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the sustainable growth rate the firm can achieve while maintaining its capital structure? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
8.03 percent
3. Of the following choices, ________ is most likely to create an agency problem.
abandoning a profitable project because it involves some risk
4. Which growth rate can a firm grow at the maximum?
sustainable growth rate
5. If a firm always grows at its internal growth rate, what will happen to capital structure?
leverage will decrease
6. Assume the firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the internal growth rate the firm can achieve without any external financing? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
3.88 percent
7. In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets:
minus the changes in both liabilities and equity
8. Assume the profit margin is projected to increase to 9 percent while the dividend payout ratio remains constant. If sales increase by 12 percent, what is the projected total retained earnings (hint: add the additional RE onto the current RE)? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190
$1,520.40
9. Assume the profit margin and dividend payout ratios are constant. What is the projected retained earnings on the Income Statement if sales increase by 7 percent? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190
315.65
10. Assume the firm has a constant dividend payout ratio and a projected sales increase of 12 percent. All costs, assets, and current liabilities vary directly with sales. The firm is currently at full production. What is the external financing need? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
$521.60
11. Which growth rate can a firm grow at the maximum?
Sustainable growth rate
12. Assume the profit margin and dividend payout ratios are constant. What is the projected retained earnings on the Income Statement if sales increase by 7 percent? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
$315.65
13. Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
yes; The project IRR is greater than the required return.
14. A new project with an average book value of $120,000 is expected to produce $20,000 net income in the first year, $13,000 the second year, $30,000 the third year, and $50,000 in year 4. What is the average accounting return on this project
23.54%
15. You should accept a project when the:
net present value is positive.
16. Which one of the following indicates a project should be accepted?
PI = 1.02
17. Should the proposed project be accepted based on the profitability index (PI)? Why or why not?
yes; The PI is greater than 1.0.
18. Should the proposed project be accepted based on the payback period? Why or why not?
yes; The payback period is less than the required payback period
19. Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
yes; The project IRR is greater than the required return
20. What is the net present value of the proposed project?
$6,831.84
21. Which one of the following statements is correct concerning the profitability index (PI)?
PI is used to rank positive NPV projects when the available funds are limited.
22. What is the net present value of the proposed project?
$6,831.84
23. What is the discounted payback period?
More than 2 years but less than 3 years
24. Should the proposed project be accepted based on the profitability index (PI)? Why or why not?
yes; The PI is greater than 1.0.
25. Which one of the following methods of project analysis ignores time value of money?
payback period
26. Which one of the following indicates a project should be accepted?
PI = 1.02
27. Which one of the following statements is correct regarding interest rate risk?
A 10-year zero coupon bond has more interest rate risk than a 10-year coupon bond.
28. A semiannual corporate bond has a face value of $1,000, a yield to maturity of 7.2 percent, and a coupon rate of 7.5 percent. The bond matures 10 years from today. This bond:
has a current yield of 7.34 percent.
29. An annual, ten-year bond is currently selling for $1,037.86 and has a yield to maturity of 6.23 percent. What is the coupon rate of this bond if the face value is $1,000?
6.75%
30. A zero coupon bond has a yield to maturity of 6.33 percent and 12 years until it fully matures. What is the current price of this bond if the face value is $1,000?
$478.77
31. TES, Inc. offers an 8.5 percent bond with a yield to maturity of 7.65 percent. The bond pays interest annually and matures in 22 years. What is the market price of one of these bonds if the face value is $1,000?
$1,089.16
32. A new project with an average book value of $120,000 is expected to produce $20,000 net income in the first year, $13,000 the second year, $30,000 the third year, and $50,000 in year 4. What is the average accounting return on this project?
23.54 percent
33. A mutually exclusive project is a project whose:
acceptance or rejection affects the acceptance of other projects.
34. A project will have more than one IRR if and only if the
cash flow pattern exhibits more than one sign change
35. Which one of the following statements is correct concerning the profitability index (PI)?
PI is used to rank positive NPV projects when the available funds are limited.
36. Which one of the following methods of project analysis ignores time value of money?
payback period
37. Signature Sweets, Inc. has 8 percent semiannual bonds outstanding with 15 years to maturity. The latest quote on these bonds is 109.16. What is the yield to maturity?
7%
38. The bonds of XYZ, Inc. are currently quoted at 97.65 and mature in 13 years. The bonds pay a $45 semiannual coupon. What is the current yield on these bonds?
9.22%
39. The price you pay to purchase a Treasury bond is the _____ price.
asked
40. Which one of the following bonds is the least sensitive to interest rate risk?
3 years; 5 % coupon
41. A bond with a 6% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.
$1,000; $30
42. If a firm always grows at its internal growth rate, what will happen to capital structure?
Leverage will decrease
43. Assume the profit margin is projected to increase to 9 percent while the dividend payout ratio remains constant. If sales increase by 12 percent, what is the projected total retained earnings (hint: add the additional RE onto the current RE)? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
$1.520.40
44. Assume the profit margin and dividend payout ratio are constant. By what amount will retained earningsincrease if sales are projected to increase by 11 percent? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
$327.45
45. Assume the firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the sustainable growth rate the firm can achieve while maintaining its capital structure? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
8.03%
46. Assume the firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the internal growth rate the firm can achieve without any external financing? Currently, the firm’s sales =$4,700, net income is $420, total assets=7890, dividends=125, A/P =790, LTD= 3130, and common stock=2780, and retained earnings =1190.
3.88%
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