posted a question
Which of the following is NOT a key element in strategic planning as it is described in the text?
a. The mission statement.
b. The statement of the corporation’s scope.
c. The statement of cash flows.
d. The statement of corporate objectives.
e. The operating plan.


. Which of the following assumptions is embodied in the AFN formula?
a. All balance sheet accounts are tied directly to sales.
b. Accounts payable and accruals are tied directly to sales.
c. Common stock and long-term debt are tied directly to sales.
d. Fixed assets, but not current assets, are tied directly to sales.
e. Last year’s total assets were not optimal for last year’s sales.


. Which of the following is NOT one of the steps taken in the financial planning process?
a. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast.
b. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additiional changes in operations might improve results.
c. Projected ratios are calculated and analyzed.
d. Develop a set of projected financial statements.
e. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.


A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
b. The company increases its dividend payout ratio.
c. The company begins to pay employees monthly rather than weekly.
d. The company’s profit margin increases.
e. The company decides to stop taking discounts on purchased materials.


Which of the following statements is CORRECT?
a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.


Which of the following statements is CORRECT?
a. Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
b. Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
c. If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
d. Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
e. If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.


Which of the following statements is CORRECT?
a. Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.
b. The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
c. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
d. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
e. If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.


Which of the following statements is CORRECT?
a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.
b. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.
c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.
d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
e. Dividend policy does not affect the requirement for external funds based on the AFN equation.


Which of the following statements is CORRECT?
a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A*0/S0 and L*0/S0) vary from year to year in a stable, predictable manner.
b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.
d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
e. Regression techniques cannot be used in situations where excess capacity or economies of scale exist.


Last year Wei Guan Inc. had $425 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets?
a. $265.46
b. $194.52
c. $256.31
d. $201.38
e. $228.85


Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 80% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
a. 22.25%
b. 27.75%
c. 23.25%
d. 27.00%
e. 25.00%


Fairchild Garden Supply expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales). All dollars are in millions. What is the projected inventory turnover ratio for the coming year?
a. 2.76
b. 2.79
c. 2.59
d. 4.05
e. 3.40


Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

Last yr's sales = S0 $350 Last yr's accounts payable $40
Sales growth rate = g 30% Last yr's notes payable $50
Last yr's total assets = A*0 $580 Last yr's accruals $30
Last yr's prof margin = M 5% Target payout ratio 60%

a. $120.9
b. $139.6
c. $130.9
d. $143.9
e. $175.6


Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 90%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

Last yr's sales = S0 $300.0 Last yr's accounts payable $50.0
Sales growth rate = g 40% Last yr's notes payable $15.0
Last yr's total assets = A0 $500.0 Last yr's accruals $20.0
Last yr's profit margin = M 20.0% Initial payout ratio 10.0%
New payout ratio 90%

a. $65.9
b. $67.2
c. $68.5
d. $55.1
e. $54.4


Which of the following statements concerning risk management is NOT CORRECT?
a. Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.
b. Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, and it doesn't make much sense for most other firms.
c. Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings.
d. Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress.
e. Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.


An investor who sells an option to offset a stock position he/she holds is said to be selling a(n)
a. Call option.
b. Put option.
c. Out-of-the-money option.
d. Naked option.
e. Covered option.


Which of the following statements is CORRECT?
a. Put options give investors the right to buy a stock at a certain exercise price before a specified date.
b. Call options give investors the right to sell a stock at a certain exercise price before a specified date.
c. Options typically sell for less than their exercise value.
d. LEAPS are very short-term options that have begun trading on the exchanges in recent years.
e. Option holders are not entitled to receive dividends unless they choose to exercise their option.


Which of the following statements is most CORRECT?
a. One advantage of forward contracts is that they are default free.
b. Futures contracts generally trade on an organized exchange and are marked to market daily.
c. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
d. Forward contracts are generally standardized instruments, whereas futures contracts are generally tailor-made for the 2 parties of the contract.
e. Essentially there are no differences between forward and futures contracts, except that forward contracts are used only for financial assets while futures contracts are used only for commodities.


Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?
a. An increase in GCC's stock price.
b. An increase in the exercise price of the option.
c. An increase in the amount of time until the option expires.
d. An increase in the risk-free rate.
e. GCC's stock price becomes more risky (higher variance).


A 6-month call option on Meyers Inc.'s stock has a strike price of $45.00 and sells in the market for $8.25. Meyers' current stock price is $49.00. What is the option premium?
a. $4.70
b. $3.50
c. $4.25
d. $5.15
e. $4.35

. If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
a. Appreciate against the U.S. dollar.
b. Depreciate against the U.S. dollar.
c. Remain unchanged against the U.S. dollar.
d. Appreciate against other major currencies.
e. Appreciate against the dollar and other major currencies.


In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?
a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
d. The yen-dollar exhange rate in the 180-day forward market equals the yen-dollar exchange rate in the 90-day spot market.
e. The relationship between spot and forward interest rates cannot be inferred.


Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following statements is most CORRECT?
a. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Swiss securities.
b. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Japanese securities.
c. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Japanese securities.
d. Since interest rate parity holds interest rates should be the same in all three countries.
e. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Swiss securities.


If one U.S. dollar buys 1.46 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?
a. 0.7123
b. 0.5548
c. 0.6849
d. 0.5685
e. 0.6781


If one British pound can purchase $1.90 U.S. dollars, how many British pounds can one U.S. dollar buy?
a. 0.4947
b. 0.6105
c. 0.4053
d. 0.5263
e. 0.4579


Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.50 euros. What is the cross rate of Swiss francs to euros?
a. 2.9046
b. 3.0738
c. 2.8200
d. 2.3970
e. 3.1584


Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.40 Swiss francs. How many Swiss francs are needed to purchase 1 pound?
a. 2.3008
b. 3.1046
c. 2.5225
d. 2.8274
e. 2.7720


A currency trader observes the following quotes in the spot market:

1 U.S. dollar = 1.21 Japanese yen
1 British pound = 2.25 Swiss francs
1 British pound = 1.65 U.S. dollars

Given this information, how many yen can be purchased for 1 Swiss franc?
a. 1.0471
b. 1.0382
c. 0.8873
d. 0.9494
e. 0.6832


A currency trader observes the following quotes in the spot market:

1 U.S. dollar = 10.875 Mexican pesos
1 British pound = 3.955 Danish krone
1 British pound = 1.65 U.S. dollars

Given this information, how many Mexican pesos can be purchased for 1 Danish krone?
a. 5.3083
b. 3.6750
c. 5.6259
d. 3.4935
e. 4.5370


Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.665 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
a. $242.57
b. $259.55
c. $208.61
d. $213.46
e. $269.25


A product sells for $750 in the United States. The spot exchange rate is $1 to 1.25 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?
a. 956.25
b. 890.63
c. 1,040.63
d. 1,021.88
e. 937.50


From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's
a. equity cash flows.
b. capital budgeting project cash flows.
c. debt cash flows.
d. pension fund cash flows.
e. sales.


A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased
a. is financed with short-term debt.
b. is financed with long-term debt.
c. is financed with debt whose maturity matches the term of the lease.
d. is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.
e. is financed with retained earnings.


Curran Contracting is issuing new 18-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry an 11% annual interest rate. However, with the warrants attached the bonds will pay an 8% annual coupon. There are 30 warrants attached to each bond, which have a par value of $1,000. What is the implied value of each warrant?
a. $9.63
b. $6.39
c. $7.01
d. $8.78
e. $7.70


Herring Inc. is considering issuing 15-year, 7.5% semiannual coupon, $1,000 face value convertible bonds at a price of $1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible, investors would require an annual nominal yield of 10%. What is the straight-debt value of the bond at the time of issue?
a. $904.79
b. $613.96
c. $694.75
d. $912.86
e. $807.84


Ellis Enterprises is considering whether to lease or buy some necessary equipment it needs for a project that will last the next 3 years. If the firm buys the equipment, it will borrow $4,600,000 at 8% interest. The firm's tax rate is 35% and the firm's before-tax cost of debt is 8%. Annual maintenance costs associated with ownership are estimated to be $300,000 and the equipment will be depreciated on a straight-line basis over 3 years. What is the annual end-of-year lease payment (in thousands of dollars) for a 3-year lease that would make the firm indifferent between buying or leasing the equipment? (Suggestion: Delete 3 zeros from dollars and work in thousands.)
a. $2,437
b. $2,312
c. $2,604
d. $2,083
e. $2,541


Carolina Trucking Company (CTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,500 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 9%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $12,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,500 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. CTC's tax rate is 35%. What is the net advantage to leasing? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)
a. $1,026
b. $1,111
c. $1,248
d. $1,058
e. $1,121


Bev's Beverages is negotiating a lease on a new piece of equipment that would cost $80,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $25,000. A maintenance contract on the equipment would cost $2,500 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $23,600 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 8%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)
a. $1,213
b. $1,332
c. $1,497
d. $1,482
e. $1,257


Emerson Electrical Engineering Inc. is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry an 11% interest rate. However, with the warrants attached the bonds will pay a 9% annual coupon. There are 31 warrants attached to each bond, which have a par value of $1,000. The exercise price of the warrants is $25.00 and the expected stock price 10 years from now (when the warrants may be exercised) is $50.77. What is the investor's expected overall pre-tax rate of return for this bond-with-warrants issue?
a. 11.79%
b. 12.41%
c. 14.52%
d. 10.8%
e. 10.67%


Quaid Co.'s common stock sells for $34, pays a dividend of $2.10, and has an expected long-term growth rate of 6%. The firm's straight-debt bonds pay 10.8%. Quaid is planning a convertible bond issue. The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond. The bonds will sell for $1,000 and will be callable after 10 years. Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?
a. 12.86%
b. 13.63%
c. 11.32%
d. 12.35%
e. 11.96%


Expert answered the question
Please increase the price for your question to at least $40....  View Full Answer