MBA c14-20
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MBA c14-20

Course Number: FIN 4309, Spring 2008

College/University: UCLA

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practice questions Chapter 14-16 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ ____ ____ 1. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects. 2. Errors in the sales forecast can be offset by similar errors in costs and income...

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questions practice Chapter 14-16 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ ____ ____ 1. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects. 2. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. 3. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase. 4. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. 5. An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account. 6. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. 7. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance. 8. The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast. 9. Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained. 10. To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds). 11. The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis. 12. The percentage of sales method assumes that all financial ratios are constant, which means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive Y-intercept. 13. The percentage of sales method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin. 14. If any firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100 percent, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, the firm will require external financing. 15. A firm's profit margin is 5 percent, its debt/assets ratio is 56 percent, and its dividend payout ratio is 40 percent. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require external financing. 16. Two firms with the same capital intensity ratios were generating the same sales. However, one firm was operating below capacity. If the two firms expect the same growth in sales in the next period, it is more likely that the firm operating at full capacity will need additional funds, other things held constant. 17. If the capital intensity ratio (A*/S0) of a firm actually decreases as sales increase, use of the percentage of sales method will typically understate the amount of additional funds required, other things held constant. 18. The percentage of sales method is based on which of the following assumptions? ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ 19. Jefferson City Computers has developed a forecasting model to determine the additional funds it needs in the upcoming year. All else being equal, which of the following factors is likely to increase its additional funds needed (AFN)? ____ 20. The percentage of sales method produces accurate results unless which of the following conditions is (are) present? ____ 21. A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)? ____ 22. Which of the following statements is most correct? ____ 23. Which of the following statements is most correct? ____ 24. On the basis of historical relationships between its balance sheet items and its sales, profit margin, and dividend policy, Thode Corporation's analysts have graphed the relationship of additional funds needed (on the Y-axis) to possible growth rates in sales (on the X-axis). If Thode decides to increase the percentage of earnings paid out as dividends, which of the following changes would occur in the graph? ____ 25. Considering each action independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital? ____ 26. Which of the following statements is most correct? ____ 27. Which of the following statements is most correct? ____ 28. Which of the following statements is most correct? ____ 29. Jill's Wigs Inc. had the following balance sheet last year: Cash Accounts receivable Inventory Net fixed assets $ 800 450 950 34,000 Accounts payable Accrued wages Notes payable Mortgage Common stock Retained earnings Total liabilities and equity 350 150 2,000 26,500 3,200 4,000 $36,200 $ Total assets ______ $36,200 Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much? ____ 30. Kenney Corporation recently reported the following income statement for 2004 (numbers are in millions of dollars): Sales Total operating costs EBIT Interest Earnings before tax (EBT) Taxes (40%) Net income available to common shareholders $7,000 3,000 $4,000 200 $3,800 1,520 $2,280 The company forecasts that its sales will increase by 10 percent in 2005 and its operating costs will increase in proportion to sales. The company's interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for 2005? ____ 31. Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has $70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company's sales increase, its profit margin will remain at its current level. The company's dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales? ____ 32. A firm has the following balance sheet: Cash Accounts receivable Inventory Fixed assets Total assets $ 20 20 20 180 ____ $240 Accounts payable Notes payable Long-term debt Common stock Retained earnings Total liabilities and equity $ 20 40 80 80 20 $240 Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional funds (AFN) will be needed? ____ 33. Splash Bottling's December 31st balance sheet is given below: Cash Accounts receivable Inventory Net fixed assets Total assets $ 10 25 40 75 ____ $150 Accounts payable Notes payable Accrued wages and taxes Long-term debt Common equity Total liabilities and equity $ 15 20 15 30 70 $150 Sales during the past year were $100, and they are expected to rise by 50 percent to $150 during next year. Also, during last year fixed assets were being utilized to only 85 percent of capacity, so Splash could have supported $100 of sales with fixed assets that were only 85 percent of last year's actual fixed assets. Assume that Splash's profit margin will remain constant at 5 percent and that the company will continue to pay out 60 percent of its earnings as dividends. To the nearest whole dollar, what amount of nonspontaneous, additional funds (AFN) will be needed during the next year? ____ 34. A firm has the following balance sheet: Cash Accounts receivable Inventory Fixed assets Total assets $ 10 10 10 90 ____ $120 Accounts payable Notes payable Long-term debt Common stock Retained earnings Total liabilities and equity $ 10 20 40 40 10 $120 Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent. Assume that underutilized fixed assets cannot be sold. What are the total external financing requirements for the entire 4 years, i.e., the total AFN for the 4-year period? ____ 35. Baxter Box Company's balance sheet showed the following amounts as of December 31st: Cash $ 10 Accounts payable $ 15 Accounts receivable Inventory Net fixed assets 40 50 100 ____ $200 Total assets Accruals Notes payable Long-term debt Common stock Retained earnings Total liabilities and equity 5 20 20 20 120 $200 Last year the firm's sales were $2,000, and it had a profit margin of 10 percent and a dividend payout ratio of 50 percent. Baxter Box operated its fixed assets at 80 percent of capacity during the year. The company expects to increase next year's sales by 37.5 percent, to $2,750, but the profit margin is expected to fall to 3 percent, and the dividend payout ratio is expected to rise to 60 percent. What is Baxter Box's additional funds needed (AFN) for next year? ____ 36. Apex Roofing Inc. has the following balance sheet (in millions of dollars): Current assets Net fixed assets $3.0 4.0 Accounts payable Notes payable Accrued wages and taxes Total current liabilities Long-term debt Common equity Retained earnings Total liabilities and equity $1.2 0.8 0.3 $2.3 1.2 1.5 2.0 $7.0 Total assets ___ $7.0 Last year's sales were $10 million, and Apex estimates it will need to raise $2 million in new debt and equity next year. You have identified the following facts: (1) it pays out 30 percent of earnings as dividends; (2) a profit margin of 4 percent is projected; (3) fixed assets were used to full capacity; and (4) assets and spontaneous liabilities as shown on last year's balance sheet are expected to grow proportionally with sales. If the above assumptions hold, what sales growth rate is the firm anticipating? (Hint: You can use the AFN equation to help answer this problem.) ____ 37. Your company has the following balance sheet (in millions of dollars): Current assets Net fixed assets $4.0 4.0 Accounts payable Notes payable Accrued wages and taxes Total current liabilities Long-term debt Common equity Retained earnings Total liabilities and equity $0.8 1.0 0.2 $2.0 1.5 1.5 3.0 $8.0 Total assets ___ $8.0 You have determined the following facts: (1) last year's sales were $10 million; (2) the company will pay out 40 percent of earnings as dividends; (3) a profit margin of 3 percent is projected; (4) fixed assets were used to full capacity; and (5) all assets as well as spontaneous liabilities as shown on the balance sheet are expected to grow proportionally with sales. Further, your boss estimates she will need to raise $2 million externally by issuing new debt or common stock next year. If the above assumptions hold, what rate of sales growth is your boss expecting? (Hint: You can use the AFN equation to help answer this problem.) ____ 38. Using the AFN formula approach, calculate the total assets of Harmon Photo Company given the following information: Sales this year = $3,000; increase in sales projected for next year = 20 percent; net income this year = $250; dividend payout ratio = 40 percent; projected excess funds available next year = $100; accounts payable = $600; notes payable = $100; and accrued wages and taxes = $200. Except for the accounts noted, there were no other current liabilities. Assume that the firm's profit margin remains constant and that the company is operating at full capacity. ____ 39. Jackson Co. has the following balance sheet as of December 31, 2004. Assets: Current assets Fixed assets Claims: Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total equity Total claims $ 600,000 400,000 $ 100,000 100,000 100,000 $ 300,000 300,000 400,000 $1,000,000 Total assets _________ $1,000,000 In 2004, the company reported sales of $5 million, net income of $100,000, and dividends of $60,000. The company anticipates its sales will increase 20 percent in 2005 and its dividend payout will remain at 60 percent. Assume the company is at full capacity, so its assets and spontaneous liabilities will increase proportionately with an increase in sales. Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. Given its forecast, how much long-term debt will the company have to issue in 2005? ____ 40. Gemini Beverage has the following historical balance sheet: Cash Accounts receivable Inventory Total current assets Net plant & equipment 20 240 320 $ 580 $ 420 _____ $1,000 $ Accounts payable Notes payable Accruals Current liabilities Long-term bonds Common stock Retained earnings Total liab. & equity $ 200 130 30 $ 360 $ 260 270 110 $1,000 Total assets Over the next year Gemini's current assets, accounts payable, and accruals will grow in proportion to sales. Last year's sales were $800 and this year's sales are expected to increase by 40 percent. The firm will retain $58 in earnings to fund current asset growth, and the rest of the increase will be funded entirely with notes payable. The net plant and equipment account will increase to $500 and will be funded directly by a new equity issue. What will Gemini's new current ratio be after the changes in the firm's financial picture are complete? ____ 41. The Tapley Company is trying to determine an acceptable growth rate in sales. While the firm wants to expand, it does not want to use any external funds to support such expansion due to the particularly high interest rates in the market now. Having gathered the following data for the firm, what is the maximum growth rate it can sustain without requiring additional funds? Capital intensity ratio Profit margin = 1.2 = 10% Dividend payout ratio Current sales Spontaneous liabilities = 50% = $100,000 = $10,000 ____ 42. Snowball & Company has the following balance sheet: Current assets Fixed assets $ 7,000 3,000 ______ $10,000 A/P & Accruals S-T (3-month) Loans Common Stock Ret. Earnings Total claims $ 1,500 2,000 1,500 5,000 $10,000 Total assets Snowball's after-tax profit margin is 11 percent, and the company pays out 60 percent of its earnings as dividends. Its sales last year were $10,000; its assets were used to full capacity; no economies of scale exist in the use of assets; and the profit margin and payout ratio are expected to remain constant. The company uses the AFN equation to estimate funds requirements, and it plans to raise any required external capital as shortterm bank loans. If sales grow by 50 percent, what will Snowball's current ratio be after it has raised the necessary expansion funds? (Note: Ignore any financing feedback effects.) ____ 43. You have been given the attached information on the Crum Company. Crum expects sales to grow by 50 percent in 2005 and operating costs should increase in proportion to sales. Fixed assets were being operated at 40 percent of capacity in 2004, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during 2005. The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock. The interest rate is 8 percent; base interest expense on the debt at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding. What is Crum's projected ROE using the percentage of sales method? (Ignore any financing feedback effects.) The blank worksheet for the percentage of sales method follows. Information on the Crum Company: 2005 Forecast 2005 After AFN Sales Operating costs EBIT Interest EBT Taxes (40%) Net Income Dividends (60%) Add'n to R.E. Current Assets Net fixed Assets Total assets A/P and Accruals N/P 2004 $1,000.00 800.00 $ 200.00 15.00 $ 185.00 74.00 $ 111.00 66.60 $ 44.40 $ 700.00 300.00 $1,000.00 $ 150.00 200.00 Common stock Retained earnings Total Liab & Equity AFN Profit Margin ROE Debt/Assets Current ratio Payout Ratio AFN Financing: N/P Common Stock 150.00 500.00 $1,000.00 11.04% 16.98% 35.00% 2.00 60.00% Weights 0.3500 0.6500 1.0000 Dollars ____ 44. Mom's Cookie Company has the following 12/31/04 balance sheet: Inventory Other assets Total assets $100 300 ____ $400 Payables and accruals Other debt Common equity Total claims $ 80 170 _150 $400 Sales for 2004 were $400; the after-tax profit margin was 8 percent; Mom paid out half of her earnings as dividends, and all assets except inventory were operated at full capacity and will increase in proportion to increases in sales. Data on three companies which Mom uses for benchmark comparisons are shown below: Sales $300 500 700 Inventory $60 80 100 A B C ____ 45. ____ 46. ____ 47. ____ 48. ____ 49. ____ 50. ____ 51. Mom forecasts a 50 percent increase in sales to $600. Using the AFN equation and assuming constant ratios, Mom's accountant forecasted AFN for 2005. If you forecasted her inventory requirements by the regression method rather than the percentage of sales method, by how much would the AFN change? Assume that the profit margin remains constant at 8 percent, and excess inventory can be sold off. The corporate valuation model cannot be used for a company that doesn't pay dividends. Free cash flows should be discounted at the weighted average cost of capital to find the value of a company's operations. Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and dividend growth. Two important issues in corporate governance are the rules that affect the threat of a CEO's removal and the rules that allow a CEO to fire members of the board of directors. A poison pill is also known as a targeted share repurchase. An ESOP can be used to improve worker productivity and to prevent hostile takeovers. If a company's expected return on invested capital is less than its cost of equity, then the company has a negative market value added (MVA). ____ 52. The CEO of D'Amico Motors has been granted some stock options with typical provisions. If the stock of D'Amico Motors underperforms the market, the stock options will be worthless. ____ 53. Which of the following is not a barrier to a hostile takeover? ____ 54. Which of the following is not a possible reason to establish an ESOP? ____ 55. Which of the following statements is not correct? ____ 56. Which of the following is not always a way to increase the value of a company? ____ 57. Suppose a company's most recent free cash flow (i.e., yesterday's free cash flow) was $100 million and is expected to grow at a constant rate of 5 percent. If the company's weighted average cost of capital is 15 percent, what is the current value of operations? ____ 58. Suppose a company's projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company's weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million? ____ 59. A company forecasts free cash flow of $50 million in five years. It expects the free cash flow to grow at a constant rate of 6 percent thereafter. If the weighted average cost of capital is 12 percent, what is the horizon value, to the nearest million? ____ 60. A company forecasts free cash flow of $40 million in three years. It expects the free cash flow to grow at a constant rate of 5 percent thereafter. If the weighted average cost of capital is 10 percent and the cost of equity is 15 percent, what is the horizon value, to the nearest million? ____ 61. A company forecasts free cash flow in one year to be -$10 million and free cash flow in two years to be $20 million. After the second year, free cash flow will grow at a constant rate of 4 percent per year forever. If the overall cost of capital is 14 percent, what is the current value of operations, to the nearest million? ____ 62. Using the corporate valuation model, the value of a company's operations is $750 million. The company's balance sheet shows $50 million in short-term investments that are unrelated to operations. The balance sheet also shows $100 million in accounts payable, $100 million in notes payable, $200 million in long-term debt, $40 million in common stock (par plus paid-in-capital), and $160 million in retained earnings. What is your best estimate for the market value of equity? ____ 63. Using the corporate valuation model, the value of a company's operations is $400 million. The company's balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $50 million in accounts payable, $90 million in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company has 10 million shares of stock, what is your best estimate for the stock price per share? ____ 64. A company forecasts the following free cash flows (shown in millions of dollars). If the weighted average cost of capital is 13 percent and the free cash flows are expected to continue growing at the same rate after Year 3, what is the Year 0 value of operations, to the nearest million? Year: Free cash flow: 1 -$20 2 $40 3 $42 ____ 65. Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge a higher rate of interest to compensate for the present value of bankruptcy costs. ____ 66. The firm's business risk is largely determined by the financial characteristics of its industry. ____ 67. Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used. ____ 68. The firm's financial risk may have both market risk and diversifiable risk components. ____ 69. A firm's capital structure can never affect its free cash flows. ____ 70. Whenever a firm goes into debt, it is using financial leverage. ____ 71. If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share. ____ 72. The graphical probability distribution of net income, when financial leverage is used, would tend to be more peaked than a distribution where no leverage is present, other things held constant. ____ 73. Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical. ____ 74. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. ____ 75. The trade-off theory tells us that the capital structure decision involves a tradeoff between the costs of debt financing and the benefits of debt financing. ____ 76. Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk. ____ 77. Two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS. ____ 78. If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm. ____ 79. Which of the following statements is most correct? ____ 80. Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15 percent. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization? ____ 81. Which of the following events is likely to encourage a company to raise its target debt ratio? ____ 82. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure? ____ 83. Volga Publishing is considering a proposed increase in its debt ratio, which will also increase the company's interest expense. The plan would involve the company issuing new bonds and using the proceeds to buy back shares of its common stock. The company's CFO expects that the plan will not change the company's total assets or operating income. However, the company's CFO does estimate that it will increase the company's earnings per share (EPS). Assuming the CFO's estimates are correct, which of the following statements is most correct? ____ 84. Which of the following statements is false? As a firm increases its operating leverage for a given quantity of output, this ____ 85. If debt financing is used, which of the following is true? ____ 86. Company A and Company B have the same total assets, operating income (EBIT), tax rate, and business risk. Company A, however, has a much higher debt ratio than Company B. Company A's basic earning power (BEP) exceeds its cost of debt financing (r d). Which of the following statements is most correct? ____ 87. Which of the following statements is most correct? ____ 88. Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even? ____ 89. The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income? ____ 90. A consultant has collected the following information regarding Young Publishing: Total assets Operating income (EBIT) Interest expense Net income Share price $3,000 million $800 million $0 million $480 million $32.00 Tax rate Debt ratio WACC M/B ratio EPS = DPS 40% 0% 10% 1.00x $3.20 The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20 percent debt and 80 percent equity (based on market values) that the cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent. If the company makes this change, what would be the total market value of the firm? (The answers are in millions.) ____ 91. Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and 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 if it changes to the new capital structure? ____ 92. Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, r M - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Simon's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity? ____ 93. Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed With debt (wd) Percent financed with equity (wc) Debt-to-equity ratio (D/S) Bond rating Before-tax cost of debt 0.10 0.20 0.30 0.40 0.50 0.90 0.80 0.70 0.60 0.50 0.10/0.90 = 0.11 0.20/0.80 = 0.25 0.30/0.70 = 0.43 0.40/0.60 = 0.67 0.50/0.50 = 1.00 AA A A BB B 7.0% 7.2 8.0 8.8 9.6 The company's tax rate, T, is 40 percent. The company uses the CAPM to estimate its cost of common equity, r s. The risk-free rate is 5 percent and the market risk premium is 6 percent. Aaron estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta," bU, equals 1.0.) On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure? A. J. Croft The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. ____ 94. Refer to A. J. Croft. What is AJC's current total market value and weighted average cost of capital? ____ 95. Refer to A. J. Croft. The firm is considering moving to a capital structure that is comprised of 40 percent debt and 60 percent equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 7 percent, while the required rate of return on equity would increase to 9.5 percent. If this plan were carried out, what would be AJC's new WACC and total value? ____ 96. Refer to A. J. Croft. Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share? ____ 97. Refer to A. J. Croft. Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting structure capital would have a $336,000 total market value of equity and $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization? ____ 98. In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm. However, when taxes are considered, MM show a positive relationship between debt and value. ____ 99. According to MM, in a world without taxes, the optimal capital structure for a firm is approximately 100 percent debt financing. ____ 100. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient. ____ 101. MM showed that in a world without taxes, a firm's optimal capital structure would be almost 100 percent debt. ____ 102. MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100 percent debt. ____ 103. MM showed that in a world without taxes, a firm's value doesn't depend on debt. ____ 104. The Miller Model takes the MM Model with taxes and adds personal taxes. ____ 105. The Miller Model takes the MM Model and assumes further that personal taxes are zero. ____ 106. The MM Model with corporate taxes is a special case of the Miller Model, but with zero personal taxes. ____ 107. The MM Model is a special case of the Miller Model, but with zero corporate taxes. ____ 108. In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity. ____ 109. In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC. ____ 110. In the MM extension with growth, the appropriate discount rate for the tax shield is the cost of debt. ____ 111. When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt. ____ 112. When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt. ____ 113. The major contribution of the Miller model is that it demonstrates that ____ 114. Which of the following statements concerning capital structure theory is false? ____ 115. Which of the following statements concerning the MM extension with growth is false? ____ 116. Which of the following statements concerning the MM extension with growth is false? ____ 117. Which of the following statements concerning the MM extension with growth is false? ____ 118. Your firm has debt worth $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 5 percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is its cost of equity? ____ 119. Your firm has debt worth $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 5 percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is the unlevered value of the firm? ____ 120. Your firm has debt worth $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 4 percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is the value of your firm's tax shield? Trumbull, Inc. Trumbull, Inc., has total value (debt plus equity) of $5 million and $2 million face value of 1-year zero coupon debt. The volatility ( ) of Trumbull's total value is 0.60, and the risk free rate is 5 percent. Assume that N(d1) = 0.9720 and N(d2) = 0.9050. ____ 121. Refer to Trumbull, Inc. What is the value of Trumbull's equity if it is viewed as an option? ____ 122. Refer to Trumbull, Inc. What is the value of Trumbull's debt if its equity is viewed as an option? ____ 123. Refer to Trumbull, Inc. What is the yield on Trumbull's debt? Gomez Computer Systems Gomez Computer Systems has EBIT of $200,000, a growth rate of 6 percent, and faces a tax rate of 40 percent. In order to support growth, Gomez must reinvest 20 percent of its EBIT in net operating assets. Gomez has $300,000 in 8 percent debt outstanding, and a similar company with no debt has a cost of equity of 11 percent. ____ 124. Refer to Gomez Computer Systems. According to the MM extension with growth, what is the value of Gomez's tax shield? ____ 125. Refer to Gomez Computer Systems. According to the MM extension with growth, what is Gomez's unlevered value? ____ 126. Refer to Gomez Computer Systems. According to the MM extension with growth, what is Gomez's value of equity? Kimberly Corporation The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30 percent. Kimberly uses $500,000 of 12.0 percent debt financing, and the cost of equity to an unlevered firm in the same risk class is 16.0 percent. ____ 127. Refer to Kimberly Corporation. What is the value of the firm according to MM with corporate taxes? ____ 128. Refer to Kimberly Corporation. What is the firm's cost of equity? ____ 129. Refer to Kimberly Corporation. The firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is 20 percent, what is the implied personal tax rate on debt income? ____ 130. The optimal distribution policy for a firm strikes a balance between current dividends and capital gains, and results in the maximization of stock price. ____ 131. The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price. ____ 132. MM's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital. ____ 133. If investors do, in fact, prefer that firms retain most of their earnings, then firms that want to maximize stock price should hold dividend payments to low levels. ____ 134. The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock. ____ 135. If a firm adopts a residual distribution policy, distributions are determined as a residual item. Therefore, the better the firm's investment opportunities, the lower its distributions should be. ____ 136. A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders' wealth. ____ 137. A reverse split reduces the number of shares outstanding. ____ 138. Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk. ____ 139. A firm that follows a residual distribution policy must believe that the dividend irrelevance theory is correct. ____ 140. One implication of the bird-in-the-hand theory of dividends is that a reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant. ____ 141. If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year. ____ 142. Even if a stock split has no information content, and even if the dividend per share adjusted for the split does not increase, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small. ____ 143. If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs. ____ 144. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that ____ 145. Which of the following statements is most correct? ____ 146. In the real world, we find that dividends ____ 147. A decrease in a firm's willingness to pay dividends is likely to result from an increase in its ____ 148. Which of the following statements best describes the theories of investors' preferences for dividends? ____ 149. Which of the following statements is most correct? ____ 150. Which of the following would not have an influence on the optimal distribution policy? ____ 151. A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts? ____ 152. You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently trades at $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place? ____ 153. Which of the following statements is most correct? ____ 154. Which of the following statements is most correct? ____ 155. Which of the following statements is most correct? ____ 156. Which of the following statements is most correct? ____ 157. If the MM hypothesis about dividends is correct, and if one found a group of companies that differed only with respect to dividend policy, which of the following statements would be most correct? ____ 158. Which of the following statements is most correct? ____ 159. Which of the following statements is most correct? ____ 160. Which of the following statements is most correct? ____ 161. If a firm adheres strictly to the residual distribution policy (with all distributions in the form of dividends), a sale of new common stock by the company would suggest that ____ 162. If a firm adheres strictly to the residual distribution policy with all distributions in the form of dividends), then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio), the firm should pay ____ 163. Modigliani and Miller (MM) argued that dividend policy is irrelevant. On the other hand, Gordon and Lintner (GL) argued that dividend policy does matter. GL's argument rests on the contention that ____ 164. Which of the following statements is most correct? ____ 165. Which of the following statements is most correct? ____ 166. Which of the following statements is most correct? ____ 167. Which of the following statements is most correct? ____ 168. Which of the following statements is most correct? ____ 169. Which of the following statements is most correct? ____ 170. Which of the following statements is most correct? ____ 171. Which of the following actions will enable a company to raise additional equity capital (that is, which of the following will raise the total book value of equity)? ____ 172. Which of the following statements is most correct? ____ 173. Firm M is a mature firm in a mature industry. Its annual net income and net cash flow are both consistently high and very stable. The company's growth prospects are quite limited; therefore, the company's capital budget is small relative to its net income. Firm N is a relatively new firm in a new industry. Its annual operating income fluctuates considerably, but the company has substantial growth opportunities. Its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is most correct? ____ 174. Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure that is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual distribution policy (with all distributions in the form of dividends), what will be its payout ratio? ____ 175. Chandler Communications' CFO has provided the following information: The company's capital budget is expected to be $5,000,000. The company's target capital structure is 70 percent debt and 30 percent equity. The company's net income is $4,500,000. If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year? ____ 176. Strategic Systems Inc. expects to have net income of $800,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million. If Strategic uses the residual distribution model (with all distributions in the form of dividends) to determine next year's dividend payout, what is the expected dividend payout ratio? ____ 177. Powell Products anticipates that its capital budget next year will be $3 million. The company expects to report net income of $5 million this year. The company's target capital structure is 65 percent common equity and 35 percent long-term debt. Assume the company follows a strict residual distribution policy (with all distributions in the form of dividends). What is the expected dividend payout ratio this year? ____ 178. Arden Manufacturing follows a strict residual distribution policy (with all distributions in the form of dividends). The company is forecasting that its net income will be $500 million this year. The company anticipates that its capital budget will be $250 million. The company has a target capital structure that consists of 50 percent equity and 50 percent long-term debt. What is the company's anticipated dividend payout ratio? ____ 179. Redwood Systems follows a strict residual distribution policy (with all distributions in the form of dividends). The company estimates that its capital expenditures this year will be $40 million, its net income will be $30 million, and its target capital structure is 60 percent equity and 40 percent debt. What will be the company's dividend payout ratio? ____ 180. Wolfpack Multimedia follows a strict residual distribution policy (with all distributions in the form of dividends). Wolfpack forecasts that its net income will be $12 million this year. The company has no depreciation expense so its net cash flow is $12 million, and its target capital structure consists of 70 percent equity and 30 percent debt. Wolfpack's capital budget is $10 million. What is the company's dividend payout ratio? ____ 181. Albany Motors recently completed a 3-for-1 stock split. Prior to the split, the company had 10 million shares outstanding and its stock price was $150 per share. After the split, the total market value of the company's stock equaled $1.5 billion. What was the price of the company's stock following the stock split? ____ 182. Loiselle Graphics recently announced a 3-for-1 stock split. Prior to the split, the company's stock was trading at $90 per share. The split had no effect on the wealth of the company's investors. What will be the new stock price? ____ 183. Tarheel Computing's stock was trading at $150 per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 5 percent increase in Tarheel's market capitalization. (Market capitalization equals the stock price times the number of shares.) What was Tarheel's price after the stock split? ____ 184. Flavortech Inc. expects EBIT of $2,000,000 for the current year. The firm's capital structure consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The cost of equity is 14 percent, and the company pays a 10 percent rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. For the next year, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target capital structure. If the firm follows a residual distribution policy (with all distributions in the form of dividends) and has no other projects, what is its expected dividend payout ratio? ____ 185. Driver Corporation has plans calling for a capital budget of $60 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10 percent on all its debt, and faces a marginal tax rate of 35 percent. If the firm maintains a residual distribution policy (with all distributions in the form of dividends) and will keep its optimal capital structure intact, what will be the amount of the dividends it pays out after financing its capital budget? ____ 186. Your company has decided that its capital budget during the coming year will be $20 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent. If the company follows the residual distribution policy (with all distributions in the form of dividends) and maintains the same capital structure, what will its dividend payout ratio be? ____ 187. Plato Inc. expects to have net income of $5,000,000 during the next year. Plato's target capital structure is 35 percent debt and 65 percent equity. The company's director of capital budgeting has determined that the optimal capital budget for the coming year is $6,000,000. If Plato follows a residual distribution policy (with all distributions in the form of dividends) to determine the coming year's dividend, then what is Plato's payout ratio? ____ 188. Brock Brothers wants to maintain its capital structure that is 30 percent debt, and 70 percent equity. The company forecasts that its net income this year will be $1,000,000. The company follows a residual distribution policy (with all distributions in the form of dividends), and anticipates a dividend payout ratio of 40 percent. What is the size of the company's capital budget? ____ 189. The following facts apply to your company: Target capital structure: 50% debt; 50% equity. EBIT: Assets: Tax rate: Cost of new and old debt: $200 million. $500 million. 40%. 8%. ____ 190. ____ 191. ____ 192. ____ 193. ____ 194. ____ 195. ____ 196. ____ 197. ____ ____ ____ ____ ____ 198. 199. 200. 201. 202. ____ 203. ____ 204. Based on the residual distribution policy (with all distributions in the form of dividends), the payout ratio is 60 percent. How large (in millions of dollars) will the capital budget be? Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares. The cost of meeting SEC and possible additional state reporting requirements regarding disclosure of certain financial information about the firm, the danger of losing control, and the possibility of an inactive market or low stock price are all potential disadvantages of going public. Investment bankers are not really like commercial "bankers" in the sense of taking deposits and issuing loans; rather, they help firms issue securities in the secondary market and their activities are limited to raising new equity capital. A company issued 5-year bonds when the yield curve was inverted. Since that time long-term (10 years or longer) rates haven't changed but the yield curve has resumed its normal shape. Under such conditions a bond refunding would be profitable. The appropriate discount rate to use in the discounting process when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk to the interest savings. If the firm applies the after-tax cost of marginal debt as the discount rate in analyzing a refunding decision, and the NPV of refunding is positive, the firm should immediately refund the outstanding debt issue and replace it with a cheaper issue. When a firm refunds a debt issue, the firm gains and bondholders lose. This points out the risk of a call provision to bondholders and why bonds without a call feature command higher prices than callable bonds. Which of the following advantages of going public simultaneously implies a potential disadvantage of going public? Which of the following statements about listing on a stock exchange is most correct? Which of the following statements is most correct? Which of the following statements concerning common stock and the investment banking process is false? Which of the following statements is most correct? Which of the following factors will increase the likelihood that a company will choose to call its outstanding bonds? Mesmer Analytic, a biotechnology firm, floated an initial public offering of 2,000,000 shares at a price of $5.00 per share. The firm's owner/managers held 60 percent of the company's $1.00 par value authorized and issued stock following the public offering. One month after the IPO, the firm's board of directors declared a one-time dividend of $0.50 per share payable to all stockholders, meaning that the owner/managers would receive an immediate dividend, in part out of the pockets of the new public stockholders. What was the book value per share of the firm before and after the special dividend was paid? Basic Buildings Inc. has decided to go public with a $5,000,000 new equity issue. Its investment bankers agreed to take a smaller fee now (6 percent of par value versus 10 percent) in exchange for a 1-year option to purchase an additional 200,000 shares of the company at $5.00 per share. The investment banking firm expects to exercise its option and purchase the 200,000 shares in exactly one year's time when the stock price is expected to be $6.50 per share. However, if the stock price is actually $12.00 per share one year from now, what is the present value of the entire underwriting agreement to the investment banker? Assume that the investment banker's required return on such arrangements is 15 percent and ignore any tax considerations. ____ 205. Machina Corporation is financing an ongoing construction project. The firm needs $8 million of new capital during each of the next three years. The firm has a choice of issuing new debt and equity each year as the funds are needed, or issuing the debt now and the equity later. The firm's capital structure is 40 percent debt and 60 percent equity. Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects due to timing of the cash flows, what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues? ____ 206. The City of Gainesville issued $1,000,000 of 14 percent coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now Gainesville can call the bonds if it chooses to do so. The call premium would be 10 percent of the face amount. New 20-year, 12 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $20,000. What is the net present value of the refunding? ____ 207. The State of Florida issued $2,000,000 of 12 percent coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5 percent of the face amount. Today 15-year, 10 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $40,000. What is the net present value of the refunding? ____ 208. Leyland Enterprises has $5,000,000 in bonds outstanding. The bonds each have a maturity value of $1,000, an annual coupon of 12 percent, and 15 years left until maturity. The bonds can be called at any time at a call price of $1,100 per bond. If the bonds are called, the company must pay flotation costs of $50,000 ($10 for every $1,000 of bonds outstanding). Ignore tax considerations--assume that the tax rate is zero. The company's decision whether to call the bonds depends critically on the current interest rate it would pay on new bonds issued. What is the breakeven interest rate, below which it is profitable to call in the bonds? ____ 209. Lackner Bros. has 12 percent semiannual bonds outstanding which mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace the bonds with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be, in order for it to be profitable to call the bonds today? (That is, what is the "breakeven rate"?) New York Water New York Water (NYW) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14 percent bonds over the 30-year life of that issue. NYW's investment bankers have indicated that the company could sell a new 25year issue at an interest rate of 11.67 percent in today's market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40 percent. The new bonds would be issued at the same time the old bonds were called. ____ 210. Refer to New York Water. What is the relevant refunding investment outlay? ____ 211. Refer to New York Water. What are the relevant annual interest savings for NYW if refunding takes place? ____ 212. Refer to New York Water. What are the relevant annual flotation cost tax effects for NYW if refunding takes place? ____ 213. Refer to New York Water. What is the NYW bond refunding's NPV? ____ 214. Many leases written today combine the features of operating and financial leases. Such leases could be called "combination leases." ____ 215. Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the capital budgeting decision. ____ 216. A leveraged lease is more risky from the lessee's standpoint than is an unleveraged lease. ____ ____ ____ ____ ____ 217. 218. 219. 220. 221. ____ 222. ____ 223. ____ 224. ____ 225. ____ 226. ____ 227. ____ 228. ____ 229. ____ 230. ____ ____ ____ ____ 231. 232. 233. 234. ____ 235. ____ 236. A sale and leaseback arrangement is a type of financial, or capital, lease. The full amount of a lease payment is tax deductible if the contract is a genuine lease. Operating leases help to pass the risk of obsolescence from the user to the lessor. Under a sale and leaseback arrangement, the seller is the lessee and the buyer is the lessor. Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement, and under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet. A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease. In a synthetic lease a special purpose entity (SPE) leases an asset and turns it over to the company for use, keeping the asset off of the company's books. A special purpose entity (SPE) is a company set up to purchase an asset and then lease it back to another company in such a way that neither the asset nor the capitalized lease must appear on the company's books. If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value. Assume that a piece of leased equipment has a high rather than a low residual value. From the lessee's viewpoint, it might be better to own the asset than to lease it because with a high residual value the lessee will likely face a higher lease rate. The riskiness of the cash flows to the lessee, with the possible exception of residual value, is about the same as the riskiness of the lessee's Operating leases usually have terms that include In the lease versus buy decision, leasing is often preferable Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the Which of the following statements is most correct? Heavy use of off-balance sheet lease financing will tend to The lease analysis should compare the cost of leasing to the Stanley Corporation is considering a five-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and is amortized over five years with end-of-year payments. Stanley can also lease the equipment for an end-of-year payment of $1,790,000. What is the difference in the actual out-ofpocket cash flows between the two payments, that is, by how much (in thousands of dollars) does one payment exceed the other? Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm's production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end-of-year lease payments of $2,100,000. The firm's tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000. What is the net advantage to leasing (NAL)? [Note: MACRS table required] Carolina Trucking Company (CTC) is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The loan rate would be 10 percent and would be amortized over the 4year period, if CTC decided to borrow money and buy the asset rather than lease it. The loan payments would be made at the end of the year. The truck has a 4-year economic life, and its estimated residual value is $10,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. CTC's tax rate is 40 percent. Should the firm lease or buy? ____ 237. Furman Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for three years and then sold, because Furman plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after three years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the three years of usage. Conversely, Furman could lease the equipment for three years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. Furman is in the 20 percent tax bracket, and it could obtain a three-year simple interest loan to purchase the equipment at a before-tax cost of 10 percent. Furman should Essay 238. Suppose that the lessee and lesser are mirror images of one another. That is, they have the same tax rate, estimate the same residual value, have the same maintenance contract costs, and so on. What would happen when these parties try to negotiate a lease contract? 239. The conventional format for analyzing lease versus purchase decisions in effect assumes that the money to buy the equipment will be obtained by borrowing. Suppose a firm has sufficient excess funds in the cash account to buy the equipment outright. Does this fact change the analysis? Explain. (Hint: Consider the discount rate.)

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UCLA - FIN - 4309
Practice Final MBA 730Problem 1. Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of capital, the company has produced the followi
UCLA - FIN - 4309
BEAM023 and BEFM012 UNIVERSITY OF EXETER SCHOOL OF BUSINESS AND ECONOMICSJANUARY 2007Fundamentals of Financial Management Financial Theory and ManagementModule Convenor: Professor Richard HarrisDuration: TWO HOURSAnswer ALL questions in Sec
SUNY Stony Brook - MAT - 123
1MP CHAPTER 2 SOLUTIONSSection 2.11 2 5 8 3 6 91a. -A=4 71b. 3A=3 6 9 12 15 18 21 24 271c. A+2B is undefined.1 4 7 2 5 8 3 6 91d. AT=1e. BT=1 20 1 1 2461f. AB=10 15 16 241g. BA is undefined.2.y y y1 2 3.500
SUNY Stony Brook - MAT - 123
1MP CHAPTER 3 SOLUTIONSSECTION 3.1 1. max z = s.t. 30x1 x1 4x1 10x1 x1 + 100x2 + x2 7 (Land Constraint) + 10x2 40(Labor Constraint) 30(Govt. Constraint) 0, x2 02a. No, government constraint is violated. 2b. No; Labor constraint is not satisfied.
SUNY Stony Brook - MAT - 123
1CHAPTER 3 MP REVIEW PROBLEMS1. Let x1 = barrels of beer produced x2 = barrels of ale produced Then we should solve max z = 5x1 + 2x2 s.t. 5x1 + 2x2 60 2x1 + x2 25 x1, x2 0 Graphically we find the optimal solution to be z = 60, x1 = 10, x2 = 5, x1
SUNY Stony Brook - MAT - 123
1MP CHAPTER 4 SOLUTIONS SECTION 4.1 1. max z = 3x1 s.t. 2x1 x1 x1 + + + + 2x2 x2 + s1 = 100 x2 + s2 = 80 s3 = 402.min z = 50x1 + 100x2 s.t. 7x1 + 2x2 - e1 = 28 2x1 + 12x2 - e2 = 243. min z = 3x1 + s.t. x1 x1 + 2x1 x2 e1 = 3 x2 + s2 = 4 x2 = 33
SUNY Stony Brook - MAT - 123
1SOLUTIONS TO CHAPTER 4 MP REVIEW PROBLEMS 1. z x1 x2 x3 s1 s2 RHS _ 1 -5 -3 -1 0 0 0 _ 0 1 1 3 1 0 6 _ 0 5 3 6 0 1 15 _ __ 1 0 0 5 0 1 15 _ 0 0 2/5 9/5 1 -1/5 3 _ 0 1 3/5 6/5 0 1/5 3 _ This is an optimal tableau with the optimal solution being z =
Johns Hopkins - MATH - 110.211
C H A P T E R1Vectors1.1 VECTORS IN TWO AND THREE DIMENSIONS 1. Here we just connect the point (0, 0) to the points indicated :y 3 2.5 2 c 1.5 1 0.5 -1 1 2 3 x ab2. Although more difficult for students to represent this on paper, the figure
Johns Hopkins - MATH - 110.211
C H A P T E R2Differentiation in Several Variables2.1 FUNCTIONS OF SEVERAL VARIABLES; GRAPHING SURFACES 1. f : R ' R : x & 2x2 C 1 (a) Domain f D {x R}, Range f D {y R|y 1}. (b) No. For instance f 1 D 3 D f -1 . (c) No. For instance if y D 0,
Johns Hopkins - MATH - 110.211
C H A P T E R3Vector-Valued Functions3.1 PARAMETRIZED CURVES AND KEPLER'S LAWS 1. The graph is a line segment with slope -1/2 and y intercept 3:y 4 3 2 1 x -3 -2 -1 12. In this case y D 1/x and both x and y are positive:y 4321123
Johns Hopkins - MATH - 110.211
C H A P T E R4Maxima and Minima in Several Variables4.1 DIFFERENTIALS AND TAYLOR'S THEOREM In Exercises 17 we will first calculate f x , f x , . , f k x and f a , f a , . , f formula for Taylor's theorem in one variable (Theorem 1.1 in the text)
Johns Hopkins - MATH - 110.211
C H A P T E R5Multiple Integration5.1 INTRODUCTION: AREAS AND VOLUMES 1.2 0 1 3x2 C y dy dx D02yD3x2 y C y2 /2yD1dx D023x2 C 9/2 - x2 C 1/22dxD022x2 C 4 dx D 2x3 /3 C 4x0D 40/3.2. 0 1 2 y sin x dy dx D0y2 s
Maryland - CHEM - 232
SN2, SN1, E1, E2 Reaction Flow ChartLook at -site where leaving group is attachedPrimary SN2/E2 (More SN2)Secondary E2/SN2/E1/SN1Tertiary E2/E1/SN1Bulky Nucleophile/ Base?Good Nucleophile / Strong Base?YES YES NO YES NONOE2SN2 E2/S
Maryland - CHEM - 232
Maryland - CHEM - 232
Synthesis Practice ProblemsWeek of 4/16/07Here's a warmup - fill in the missing structures/reagents:HBr???Synthesis: Complete the following syntheses clearly showing the intermediate products and the reagents/conditions needed to complete
Maryland - CHEM - 232
Synthesis Practice ProblemsWeek of 4/16/07SOLUTIONSNOTE: There may be other acceptable ways to synthesize these compounds besides the pathways below. Trying to find other pathways to the product is good practice!W.U.HBr Br LDA (2eq) H H H2 Pd-
Maryland - CHEM - 232
pKa ValuesOH3O+0C H20O O-H 5O C HO 10O-H 10 N-H 35CH3-O-H16N-H10H H2O 16 C CH 40C H50CCH25
Maryland - CHEM - 232
Equilibrium Practice ProblemsPART A:1) Predict which side the equilibrium favors 2) Estimate the Keq for the chemical equation1.OHN OH N2.OH2 OH3.O O O H 2O H3O O4.H5.OH NOH N6.O O O O O OPART B:1.Predict the products
Maryland - CHEM - 232
Equilibrium Practice Problems SOLUTIONSPART A:1.OH N O H NpKa 10pKa 10Equilibrium Favors: neither side (i.e. equal amts of reactants + products) pKa's equal Keq 10(10-10) = 100 = 1 2.OH2 OHpKa 0 Equilibrium Favors: right side Keq 10(50-
Maryland - CHEM - 232
Synthesis Practice ProblemsWeek of 5/7/07Fill in the missing reagents/starting materials/products. Show stereochemistry when applicable.1.OH??Cl Br2 CCl4?2.?HBr Br??3.?OHOH PCC OH? ? ? ?Think of two ways to get to the
Maryland - CHEM - 232
Synthesis Practice ProblemsWeek of 5/7/07 SOLUTIONSNote that other reagents may be substituted in some cases to give you the same product.1.OH POCl3 HCl -80oC Cl Br2 CCl4+ enantiomer Br Br Cl2.2eq LDA HBr Br Nao NH33.H+ OH H2O OH OH PCC
Maryland - CHEM - 232
EnergyFrequency ( ) in hertz 1020 1018 1016 1014 1012 1010Gamma RaysX-RaysUltravioletVisibleInfraredMicrowaveRadio10-1010-810-610-4 Wavelength ( ) in cm10-21
Maryland - CHEM - 232
Functional GroupsO C CAlkaneR OHAldehydeC CAlkeneR O R'KetoneCCAlkyneR O OHCarboxylic AcidCOHAlcoholR O R'EsterO C NAmineR O Cl OAcid ChlorideCOCEtherR O RAnhydrideO C SHThiolR NAmideO C S
Maryland - ENES - 102
Problem 1.3:Problem 1.16:-Problem 1.22:Problem 1.27:
Maryland - ENES - 102
Problem 2.17:Problem 2.19:Problem 2.22:Problem 2.26:Problem 2.37(b):Problem 2.38(a):Problem 2.39(d):Problem 2.40:
Maryland - ENES - 102
Problem 2.33:-Problem 2.34:Problem 2.41(b):Problem 2.42(a):Problem 2.43(a):Problem 2.44(b):Problem 2.45:Problem 2.45: (con't)Problem 2.48:Problem 2.48: (con't.)
Maryland - ENES - 102
Problem 3.6:Problem 3.9:Alternate Method:Problem 3.16:Problem 3.18:Problem 3.18 - Alternate Method:Problem 3.28:Problem 3.31:Problem 3.36:Problem 3.37:
Maryland - ENES - 102
Problem 3.10:Problem 3.11:Problem 3.21:Problem 3.23:Problem 3.39:-Problem 3.44:Problem 3.46:Problem 3.48:
Maryland - ENES - 102
Problem 4.1:Problem 4.4:Problem 4.13:Problem 4.19:-Problem 4.22:Problem 4.25:Problem 4.27:Problem 4.27: (con't)Problem 4.28:Problem 4.31:Problem 4.32:Problem 4.35:Problem 4.42:
Maryland - ENES - 102
Problem 5.5:-Problem 5.7:Problem 5.34:Problem 5.34: (con't)Problem 5.34: (con't)Problem 5.13:-Problem 5.9:Problem 5.12:Problem 5.12 - Alternate Method:Problem 5.14:Problem 5.33:
Maryland - ENES - 102
Problem 6.10:Problem 6.13:Problem 6.13: (con't)Problem 6.20:Problem 6.35:Problem 6.17:Problem 6.25:Problem 6.26:Problem 6.30:
Maryland - ENES - 102
Problem 7.4:Problem 7.17:Problem 7.18:Problem 7.19:Problem 7.20:Problem 7.20: (con't)Problem 7.21:Problem 7.21: (con't)Problem H.01:Problem H.02:Problem H.02: (con't)
Maryland - ENES - 102
Problem 7.5*:Problem 7.5*: (con't)Problem 7.13:Problem 7.13: (con't)Problem 7.14:Problem 7.14: (con't)Problem H.03:Problem H.03: (con't)Problem 8.4:Problem 8.14:Problem 8.15:Problem 8.21:Problem 8.5:Problem 8.12:Problem 8.
Maryland - ENES - 102
Problem 9.5(c):-Problem 9.7:Problem 9.9:Problem 9.11:Problem 9.12:Problem 9.13:Problem 9.30:Problem 9.31:
Maryland - ENES - 102
Problem C.18:Problem C.23:Problem C.23 - Alternate Method:Problem C.27:Problem C.27 - Alternate Method:Problem C.34:Problem C.34 - Alternate Method:Problem C.25:Problem C.25 - Alternate Method:Problem C.26:Problem C.26: (con't)P
University of Phoenix - MATH - 2811
Triqonometrv Final ExamReviewSheetPS7t02Directions: a problem givenin radians solution General lf is the shouldalsobe in radians.(Ofcourse, exception the is whenconverting fromradians degrees.) answers to All shouldbe exactunless statedotherwise.
University of Phoenix - MATH - 2811
Tirn Sono "*^4 130 ,?3" tJ rrt{5o 'Fi natExo.^ K", in.*JKei, . 4t t b,b . a1 0 i5lr1&.+5':ou, b1.5"Trb.TIk,o 8locl " f3 . A 1 '4fAo%, 6q, lq", x- t 2 . s . 7 r nf,;rcL L(sLc prad- 0.0,f 5CCcs A.\tr , S., n
University of Phoenix - MATH - 2811
MA111 Proctored ExaminationAugust 2002This test consists of 25 equally weighted questions. The maximum allowable time for completion is 90 minutes. Section 5.1 Angles and Arcs 1. Find the supplement of a 4712' angle. a. b. c. d. 2. 4288' 4248' 13
Thomas Edison State - MATH - 251
Calculus I WA1Section 1.2 24) 6x 5y = 15 -5y = 15 6xy15 6 x 5 5 3 6x 5yY intercept = -3 Slope =6 526) y = -1 No slope, y intercept = -128) Line is vertical32) yy1m( x x1 )y 43 ( x ( 2) 53 6 x 5 5 3 6 5( y 4) 5( x ) 5 5 5
Thomas Edison State - MATH - 251
Calculus I Thomas Edison WA2Section 2.2xlim 2 x 531given 2x 5 2x 340) let0 1if 0 x 3x 32x 5 f ( x) L1Section 2.3x 2 3x h( x ) x a ) lim h( x)x 2b) lim h( x)x 022 (3)( 2) 4 6 x 2 2 42) 2 2 x 3 x 0 (3)(0) b) x 0 2 x 3 x x
Thomas Edison State - MATH - 251
WA 3 Calculus ICHAPTER 3 Section 3.1f ( x) 3x 2 f '( x) f ( x x) f ( x) x 0 x (3( x x) ( x x) (3 x 2) x (5 x 5 x) 3 x 2 x 2 x 5 x 2 x lim14)2x 2 Result here should be just 3f ( x) f '( x)1 x2xlim0f ( x x) x x2 x x x x (x3 2 2
Thomas Edison State - MATH - 251
WA 4 Calculus IChapter 4Section 4.1f x f' x 0 xx22x 4 2 1 21,12x 2 1 1, 5 1, 124)2x 2CriticalPoint & minimum maximumg x g x28) g ' x3x11,1x3 1 x 3 1, 1, 1 32 3no critical pointmin max1 3Section 4.4f x f' x f
Thomas Edison State - MATH - 251
WA 5 Calculus IChapter 5 Section 5.1dr d 6) r d dx 12dxx 2 dx10) x 1 c 1 1 c x x( x 3)dx 12) x 3dx2 3x 4 3x 2 c 4 22 (t sin t )dtt3 cost c 3 32) check . d ' 3t 2 sin t t 2 sin t 3 sec y(tan y sec y)dy
University of Texas - BIO - 365R
Name_Time of Class_First Exam- BIO 365R Fall 2006 Semester There are 36 questions, worth a total of 100 points. There are 9 pages: Make sure you have all 9 pages. Questions 1-25 below (worth 2 pts each) are either Multiple Choice or True False. M
University of Texas - BIO - 365R
Biology 365RDiscussion Questions 1 Objectives: To understand some really basic neuroanatomy. To learn about the blood-brain-barrier. 1. You should be able to define, identify, or discuss the following: cranial nerve spinal nerve gyrus "hills" in ce
University of Texas - BIO - 339
University of Texas - BIO - 365R
Lecture 15, October 25, 2007 The Eye and Retina lens and cornea: their role in accomodation zonula fiber stretch an elastic lens, zonula fiber attachments can be changed by contracting ciliary muscle, accommodation Defects in accommodation: myopia, h
University of Texas - BIO - 365R
Our nervous system is usually divided into 2 parts or divisions1.10 Major components of the nervous system and their functional relationships. (Part 1)1.11 Flexure in long axis of nervous system arose as humans evolved upright posture. (3)A1 Ve
University of Texas - BIO - 365R
10.15 Circuitry for generating receptive field center responses of retinal ganglion cells. (Part 1)10.19 Circuitry for generating receptive field surround of an on-center retinal ganglion cell. (Part 1)11.5 Projection of the binocular field of vi
University of Texas - BIO - 365R
Lecture 17, November 1, 2007 Announcements: Society for Neuroscience meeting: problems with office hours and discussion sessions Important difference between notes and lecture on horizontal cells! Please work through, so you understand and can explai
University of Texas - BIO - 365R
Experience-dependent Plasticity of the Visual Cortex11.12 Columnar organization of orientation selectivity in the monkey striate cortex.How neighboring RFs in the LGN must connect in the cortex to give simple cells of different orientations.Vis
University of Texas - BIO - 365R
10.12 Color vision.11.17 The visual areas beyond the striate cortex are broadly organized into two pathways.WhereWhat25.11 Selective activation of face cells in the inferior temporal cortex of a rhesus monkey. (Part 1)25.11 Selective activa
University of Texas - KIN - 324K
Bone A type of connective tissue Characterized by extracellular material produced by connective tissue Cells Fibroblasts Chondroblasts Osteoblasts hematopoietic stem cell -bone marrow Types of bone Long Short bones in the hand and foot Sesamoid-found
University of Texas - KIN - 324K
Text: Marieb, E,N,. Human Anatomy and Physiology, 7th Ed. 2007 Agur and Dalley Grant's Atlas of Human Anatomy, 11th Ed, Lippincott Williams & Wilkins GRADING Your final score will be based on 800 pointsLecture Portion Your lecture exams will total 3
University of Texas - KIN - 324K
Connective Tissue: fat, blood, bone, cartilage Unique characteristics: Range of vascularity (as opposed to avascular epithelium) Tissue cell surrounded by extracellular material Extracellular material: composed of three types of fibers, fibers oft
University of Texas - KIN - 324K
Cardiac Output Q Sedentary average person Q= SV X HR HR @ rest =70 SV @ rest=70-80 ml Q @ rest=5,000-6,000 ml/min - HR @ maximal work = 220-age - SV @ maximal work =110-120 - Q @ maximal work = 22-24 L/minBlood Volume and Body's Capacity to Ho
University of Texas - KIN - 324K
Applied Human Anatomy, Spring 200702/05/2007 (Mon)-Review of cartilage Cartilage: Support b/w bones Hyaline cartilage: surface of the ends of bones that articulate in joints Fibrocartilage: intervertebral disc, hydration, and suffer for th
University of Texas - KIN - 324K
JointsClassifications: Synarthrotic Amphiarthrotic Diathrotic I. Synarthrotic: no movement, no joint capsule, fastened by hyaline cartilage A. sutures between bones in skull Fibrous FibrousB. gomphosis between teeth and jawsC. synchondrosis
University of Texas - KIN - 324K
Human Applied Anatomy, Spring 200701/31/2007 (Wed)Muscle Tissue - The muscle tissue is stimulated to cause movement across our joints - Structure of skeletal muscle muscle cell (muscle fiber)/endomysium(connective tissue around each fiber) fasc
Brandeis - ANTH - 1
Tribal Communication Each member of the tribe, despite being a culturally diverse group, maintains an understanding of one another. Although English is the dominant language within the tribe, not all members use it consistently. Without focusing too
Brandeis - BISC - 3
"The present is the key to the past." Introduction Even before Charles Darwin's On the Origin of Species was the acceptance of the idea of uniformitarianism. Largely due to the work of Charles Lyell on geology, catastrophism was replaced by uniformit