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FIN 534 Complete Course FIN534 Complete Course

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FIN 534 Week 1 Discussion

Discussion 1: An Overview of Financial Management

A. What were the principal causes of the recent financial crisis (it is known as the Great

Recession)? Would you include Government policies that encouraged housing purchases for

those who could not afford them, artificially low interest rates implemented by the Federal

Reserve, banks and mortgage brokers who were greedy, the failure of Government regulators to

provide proper oversight to the banks and other financial institutions, individuals who borrowed

and spent more than they should have, or some other causes?

B. From the e-Activity, examine ethical behavior within firms in relation to financial

management. Provide at least two (2) recent (in the last 5 years) examples (other than Enron,

WorldCom, and Bernie Madoff) of companies that have been guilty of ethics-based malfeasance

related to financial management. What were the specific sanctions that were imposed and

explain why the sanctions and penalties were appropriate?

C. How do you describe the significant changes that have occurred in the CFO (chief financial

officer) position in recent years? What changes do you think will occur in the future? Provide

specific examples that are supported by at least two credible references accompanied by proper

reference citations. (See the Instructor Insights section of the classroom for some reference

materials.)


Discussion 1: Analysis of Financial Statements



A. This discussion assignment will allow for the completion of a ratio analysis. It will also

provide information that will be useful as you prepare the written report for Assignment 1:

Financial Research Report, which is due at the end of Week 9.

Step 1: Select a publicly-traded company that you will (or might) use for Assignment 1:

Financial Research Report, which is due at the end of Week 9.

Step 2: Locate financial ratio data from Mergent Online. Financial statements, ratios, and other

useful information are available from the Mergent Online database that is available through the

Strayer University Learning Resource Center (online). Please notice that financial ratios are

grouped into appropriate categories (Profitability Ratios, Liquidity Ratios, Debt Management

Ratios, and Asset Management Ratios), which makes it easy to set up the ratios and use them in

the analysis.

Accessing the Mergent Online Database – Financial Statements for companies, financial ratios,

and Form 10K annual reports can be obtained from the Strayer University Learning Resource

Center, which is accessible from the Online Classroom (see tab at the top of the screen).

Select – Learning Resource Center

Select – Databases

Select Mergent Online

Then, in the block titled “Company Search – Enter Symbol or Company Name” enter the

company’s name or its Stock Ticker Symbol (e.g., for McCormick & Company, enter MKC).

Next, select the company from the drop-down menu.

For Financial Statements – Select “Company Financials” tab

For Financial Ratios – Select “Company Financials” tab and “Ratios” sub-tab

For Form 10K Annual Reports – Select “Filings” tab (and then select the most recent Annual

Form 10K report)

Step 3: Enter the financial ratio data into the Financial Ratio Analysis Model (the attached Excel

spreadsheet). The data need to be entered into the yellow-coded cells (column is titled “Oldest

Year”) progressing to the most recent year on the left (column is titled “Most Recent Year”).

The model presently contains financial information for McCormick & Company (Stock Ticker

MKC).

You will note that the Excel spreadsheet model is programmed to identify if each ratio improved

or deteriorated over the time period. And, the spreadsheet is programmed to calculate the

percentage change in each of the ratios during the same period. This information should be

helpful as you prepare your analysis.

(Note: This spreadsheet could be “imported” into the Assignment 1: Financial Research Report

due at the end of Week 10.)

Step 4: Prepare an analysis and discussion of the financial ratio data that are examined in the

Financial Ratio Analysis Model. It is always appropriate to include the actual ratio data in the

written analysis in addition to its presentation in a table, chart or graph.

(Note: In addition to Mergent, another good source of financial data and company information

is: http://www.advfn.com .)

B. From the scenario, determine two (2) financing strategies that TFC could utilize to accomplish

its expansion goals. You may, for example, consider your analysis of TFC’s financial

statements, as well as your knowledge of TFC’s excessive cash position. What is the rationale

for your response?

FIN 534 Week 2 Homework Assignment set 1


Discussion 1: Time Value of Money and Bond Valuation

.A. Please respond to the following:

Starting with your current situation, what must you do to ensure an annual retirement income of

$75,000 starting at age 65? Make sure that you submit calculations that support the conclusions

http://www.advfn.com/

(you may use the Excel retirement calculators that are provided, online retirement calculators, or

develop you own Excel solution).

.B. What are the advantages and disadvantages of a call provision from the viewpoints of both a

firm and its bondholders? If you were the CEO of a firm, would you recommend a call provision

for a new bond issue? Why or why not? Can you identify a recent bond issue that has a call

provision fund?

.C. From the Scenario and e-Activity, recommend two (2) bonds that you believe TFC should

invest in, and provide rationale for your recommendations? Make sure that you identify the

issuers of the bonds, the coupon rates, the maturity dates, the yields to maturity, the present

prices of the bonds, etc.?

1 Intro TVM Retirement Calculators 0713.docx

2-2 Basic Retirement Estimator 031915.xlsx

2-3 Retirement Estimator PB 031915.xlsx

2-4 Basic Retirement Estimator Inflation 031915.xlsx

2-5 Growing Annuity Payment 032815.xlsx


Discussion 1: Risk and Return

A. Assume that you own a sizeable investment portfolio that is invested exclusively in a broad-

based stock market index fund. Assume also that you contemplate adding a sizeable investment

in the stock of the company that you have elected to use for Assignment 1 (which is due at the

end of Week 10). What will happen to the overall riskiness of the portfolio, and why, with the

addition of the new investment? What specific indicators support your conclusion? Should you

make the additional investment – why or why not?


https://blackboard.strayer.edu/courses/1/FIN534011VA016-1158-001/db/_47976671_1/embedded/2-5%20Growing%20Annuity%20Payment%20032815.xlsx

https://blackboard.strayer.edu/courses/1/FIN534011VA016-1158-001/db/_47976671_1/embedded/2-4%20Basic%20Retirement%20Estimator%20Inflation%20031915.xlsx

https://blackboard.strayer.edu/courses/1/FIN534011VA016-1158-001/db/_47976671_1/embedded/2-3%20Retirement%20Estimator%20PB%20031915.xlsx

https://blackboard.strayer.edu/courses/1/FIN534011VA016-1158-001/db/_47976671_1/embedded/2-2%20Basic%20Retirement%20Estimator%20031915.xlsx

https://blackboard.strayer.edu/courses/1/FIN534011VA016-1158-001/db/_47976671_1/embedded/1%20Intro%20TVM%20Retirement%20Calculators%200713.docx

B. Using the company that you have selected for Assignment No. 1 Financial Research Project

(due at the end of Week 9), value a share of the company’s stock using both the (1) constant

growth dividend discount model, and (2) a discounted free cash flow model, and compare those

values to the current trading price of a share of the stock? Is the stock undervalued or

overvalued? Carefully explain the assumptions used in the valuations and the rationale for your

response?

An Excel-based Dividend Discount Model is provided if you want to use it (see attached file).

You may use http://www.valuepro.net for the discounted free cash flow valuation model.)

Alternatively, you may use the Excel-based Discounted Cash Flow Valuation Model (file

attached).

Make sure that the presentations discuss the assumptions used in the valuations and present the

results of the valuations with comparisons to the existing stock price.

Note: See the attached for information about ValuePro.net and for an Excel Dividend Discount

Model template.

1 Using ValuePro Online Valuation Model 1014.docx

2 DDM Stock Valuation Models 1014.xls

3 Discussion DDM Excel Model 1014.docx

4 DFCF Valuation Model 0714.xls


Discussion 1: Financial Options and Applications and Weighted Average Cost of Capital

A. What are several ways to use stocks and options to create a risk-free hedged portfolio?

Support your answer by providing examples of specific stocks and options that are used to create

the portfolio (i.e., what specific instruments are used)?

Obtaining Information About Specific Options

https://blackboard.strayer.edu/bbcswebdav/pid-17733064-dt-content-rid-108105459_2/xid-108105459_2




http://www.valuepro.net/

The Discussion 1 this week requires using specific stocks and specific options to create hedged

portfolios. This information may help you to obtain the necessary information:

The CBOE (Chicago Board Options Exchange) is a convenient source of information about

stock options. It is very easy to obtain the “option chain” (listing of all options on a particular

stock) by entering the “Ticker Symbol” of the underlying stock.

The information about options can be obtained at:

http://www.cboe.com/delayedquote/quotetable.aspx

B. From the scenario, create an estimate of TFC’s weighted average cost of capital (WACC) and

its required rate of return?

What is TFC’s WACC and how is it calculated (need figures, see Week 5 Scenario)?

What is TFC’s required rate of return on common stock and how is it calculated (need figures,

see Week 4 Scenario)?

How should TFC decide whether to expand or not expand, that is, what indicators should it use

to make this decision (do not need the amounts – that will be next week)?

Calculate TFC's WACC Student.xlsx

FIN 534 Week 5 Midterm Exam Part 1

Question 1

Which of the following statements is CORRECT?

Question 2

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into

a regular corporation. Which of the following statements is CORRECT?.


http://www.cboe.com/delayedquote/quotetable.aspx

Question 3


Question 4

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a

family reunion. At the reunion your brother gave you a check for the stock and you gave your

brother the stock certificates. Which of the following statements best describes this transaction?

Question 5


Question 6


Question 7


Question 8

Which of the following is a primary market transaction?

Question 9


Question 10


Question 11

Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative

free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the

following factors could explain this situation?

Question 12

Which of the following would be most likely to occur in the year after Congress, in an effort to

increase tax revenue, passed legislation that forced companies to depreciate equipment over

longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume

that the same depreciation method is used for tax and stockholder reporting purposes.

Question 13

Analysts following Armstrong Products recently noted that the company's operating net cash

flow increased over the prior year, yet cash as reported on the balance sheet decreased. Which of

the following factors could explain this situation?

Question 14


Question 15


Question 16


Question 17

The LeMond Corporation just purchased a new production line. Assume that the firm planned to

depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a

provision that requires the company to depreciate the equipment on a straight-line basis over 7

years. Other things held constant, which of the following will occur as a result of this

Congressional action? Assume that the company uses the same depreciation method for tax and

stockholder reporting purposes.

Question 18

Which of the following would indicate an improvement in a company's financial position,

holding other things constant?

Question 19

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they

have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM).

However, Company Heidee has the higher debt ratio. Which of the following statements is

CORRECT?

Question 20

Companies A and C each reported the same earnings per share (EPS), but Company A's stock

trades at a higher price. Which of the following statements is CORRECT?

Question 21

Cordelion Communications is considering issuing new common stock and using the proceeds to

reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate

Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company

goes ahead with the stock issue?

Question 22

Considered alone, which of the following would increase a company's current ratio?

Question 23

A firm wants to strengthen its financial position. Which of the following actions would increase

its current ratio?

Question 24

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio

are both below the industry average. Which of the following statements is CORRECT?

Question 25


FIN 534 Week 5 Midterm Exam Part 2

Question 1

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of

these statements is CORRECT?

Question 2

Which of the following statements is CORRECT, assuming positive interest rates and holding

other things constant?

Question 3

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded

annually. If you invest $2,000 in the CD, how much will you have when it matures?

Question 4

How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5%

with annual compounding?

Question 5

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly.


Question 6

You plan to analyze the value of a potential investment by calculating the sum of the present

values of its expected cash flows. Which of the following would increase the calculated value of

the investment?

Question 7

Which of the following statements is NOT CORRECT?

Question 8

Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not

convertible, is not callable, and has no sinking fund. Alternatively, Nicholas could issue a 20-

year bond that is convertible into common equity, may be called, and has a sinking fund. Which

of the following most accurately describes the coupon rate that Nicholas would have to pay on

the convertible, callable bond?

Question 9

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon.

Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by

the same amount, which of the following statements would be CORRECT?

Question 10

If its yield to maturity declined by 1%, which of the following bonds would have the largest

percentage increase in value?

Question 12

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7%

yield to maturity, and the YTM is expected to remain constant. Which of the following

statements is CORRECT?

Question 13


Question 14

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must

be true, according to the CAPM?

Question 15

If you randomly select stocks and add them to your portfolio, which of the following statements

best describes what you should expect?

Question 16

How would the Security Market Line be affected, other things held constant, if the expected

inflation rate decreases and investors also become more risk averse?

Question 17


Question 18


Question 19


Question 20

Stock X has the following data. Assuming the stock market is efficient and the stock is in

equilibrium, which of the following statements is CORRECT?

Expected dividend, D1

$3.00

Current Price, P0

$50

Expected constant growth rate

6.0%

Question 21

You, in analyzing a stock, find that its expected return exceeds its required return. This suggests

that you think

Question 22


Question 23


Question 24

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1

= $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The

dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected

growth rate?

Question 25

Two constant growth stocks are in equilibrium, have the same price, and have the same required

rate of return. Which of the following statements is CORRECT?


Discussion 1: Capital Budgeting and Risk Analysis

A. Describe a capital budgeting project (i.e., an investment in fixed assets) that might be

undertaken by the company that you have selected for Assignment 1. Make sure that the project

has an initial investment in Year 0, followed by a series of annual cash flows for at least seven

(7) years. In addition, determine the discount rate, or hurdle rate, that is appropriate for this

project and explain the determination of that rate.

Develop your own Excel spreadsheet model that can be used to determine the Net Present

Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), and

Profitability Index (PI)?

The Excel spreadsheet that you develop must use Excel’s automated financial functions for

determining the NPV, IRR and MIRR.

Following the completion of the spreadsheet analysis, explain whether, or not, the project should

be implemented? Also, discuss what the various indicators (i.e., NPV, IRR, MIRR and PI)

mean?

For this question, it is necessary to develop your own Excel spreadsheet; it needs to be

submitted.

B. From the scenario, suggest whether TFC should expand to the West Coast first. Provide a

rationale (reasons) for your response in which you cite at least two (2) capital budgeting

techniques (e.g., NPV, IRR, MIRR, Payback Period, etc.) that caused you to arrive at your

decision.

Instructions Developing Capital Budgeting Analysis.docx

WK 6 Student Scenario Capital Budget Analysis.xlsx


REMEMBER - HOMEWORK ASSIGNMENTS MUST BE SUBMITTED IN WORKING

EXCEL FORMAT.





Discussion 1: Financial Planning and Agency Conflicts

A. From the scenario, cite your forecasting conclusions (financial data from TFC’s financial

statements and forecasted statements) that support TFC’s plan to expand to the West Coast

market. Note: the response has to include specific operational, financial, and forecasted data that

support the conclusions.

Speculate as to whether or not the agency conflicts discussed in the scenario could become a

roadblock to your conclusions. What are the reasons for your response?

B. What are two (two) desired characteristics of a board of directors? Provide support for your

response by explaining how these characteristics usually lead to effective corporate governance.

Also, review the company’s Form 10K report and do a “Google search” of “Corporate

Governance and the Name of the Company,” that you are using for the Financial Research

project for this class. Discuss and assess the appropriateness and effectiveness (i.e., evaluate the

strengths and weaknesses) of the corporate governance policies and practices of the company?


Distributions to Shareholders and Capital Structure Decisions

Examine the financial statements for the company that you selected for the Financial Research

Project.

A. Capital Structure

1. Refer to the Balance Sheet –

a. What is the capital structure of the company (i.e., dollar amounts of Retained Earnings,

Capital Stock, Preferred Stock, debt, etc.).

b. What is the Debt to Assets ratio?

2. Using the data from the previous questions, explain which theory of capital structure seems to

best explain how the company that you selected for the Financial Research Project maintains its

capital structure?

Note: The traditional capital structure theories that are examined in your textbook include: (1)

Static Tradeoff Theory, (2) Signaling Theory, (3) Reserve Borrowing Capacity, (4) Pecking

Order Theory, (5) Using Debt to Constrain Managers, and (6) Windows of Opportunity.

B. Distributions to Shareholders:

1. Refer to the Statement of Cash Flows –

(a) How much did the company pay out in dividends last year (i.e., the last year for which

financial statements were prepared)?

(b) How much stock did the company repurchase last year (i.e., the last year for which financial

statements were prepared)?

2. Explain why the company did, or did not pay dividends or repurchase stock?

3. Should the company increase or decrease the amount of dividends paid and stock

repurchased? Why or why not?

4. What theory best describes the way the company handles its distributions to shareholders?

(Note: The main dividend theories are discussed below.)

Note: The traditional Dividend Theories are:

Remember the key question – Does dividend policy affect stock price?

Dividend Irrelevance (Miller and Modigliani)

1. Investors are concerned about total return, and therefore don’t care if returns come from

dividends or stock price appreciation.

2. Investors have the choice of “Homemade Dividends” or cash from selling shares; or, the

investor could reinvest a dividend in more shares. Either strategy confounds the dividend

decisions.

Dividend Relevance

Bird-In-Hand Theory (Gordon and Lintner) –

1. Presumes that investors believe that dividends are more certain than capital gains –

management can control dividends, but can’t directly control a stock’s price.

2. Assumes that investors value a dollar of dividends more highly than a dollar of capital gains

since discount rate for stock paying dividends is lower (less risky).

Tax Differential Theory –

1. The after-tax return to investors is what matters and this is maximized if tax payments can be

lowered or deferred.

2. The tax changes in 2003 reduced the tax rate for dividends through 2010 (extended for two

more years), so that advantage is nullified as it is the same as the long-term capital gains rate,

15%.

Other Perspectives

Residual Dividend Theory -

1. Flotation costs eliminate the indifference between financing new projects with internally

generated funds compared to new external financing (that has flotation costs).

2. Suggests that dividends are paid only if profits are not used entirely for investment purposes –

that is, when there are “residual earnings” after financing new projects.

Clientele Effect –

1. Due to transaction costs, investors may not want to create “homemade dividends” or buy

additional stock.

2. Investors sort themselves out by their preferences for dividends or capital gains.

3. That is, firms draw a clientele which has a preference for the firm’s existing or stated

dividend policy.

Information Effect –

1. Investors may use a change in dividend policy as a “signal” about the firm’s financial

condition.

2. A larger than expected dividend could signal the likelihood of improved earnings; a lower

than expected dividend may be a signal that earnings may decline.

Agency Costs –

1. Stock price of a firm controlled by investors who are separate from management may be

lower than the stock price of a closely-held firm; this difference in price is the result of agency

costs.

2. Dividend policy may be a tool to reduce agency costs; if dividends are paid, management has

to replace the capital with new equity, which will result in closer monitoring by financial

markets, auditors, regulators, etc.

Expectations Theory –

1. Investors form expectations about the amount of forthcoming dividend payments.

2. Then, investors compare actual dividend to their expected dividend; if there is a difference,

investors will use the difference as a clue about future earnings and there will be either an

increase, or decrease, in the stock price.



Discussion 1: Working Capital Management

A. Why might a business not want to hold too much or too little working capital? (Remember,

working capital is current assets, not working capital minus current assets.)

Explain if the company that you selected for Assignment 1 has too much, too little, or just the

right amount of working capital? How did you make this determination?

B. What are two (2) practical actions that the firm you selected for Assignment 1 can take to

shorten its cash conversion cycle? Does the company need to shorten its cash conversion cycle

and how do you know that (calculate the cash conversion cycle using the attached model)?

C. What working capital financing strategy is used by the company that you selected for

Assignment 1. What actual financial data support the conclusion? Make sure that you complete

the analysis using the attached Excel model that examines a firm’s working capital financing

strategy.

Note: The completed models are to be submitted with the analyses.

Working Capital and Net Working Capital: What's the Difference?

This week's Discussion deals primarily with Working Capital. Many students get confused with

the distinction between Working Capital and Net Working Capital.

Chapter 16 of the textbook does a good job of explaining the difference: Current Assets ae often

referred to as Working Capital, since they represent the resources needed for the day-to-day

operations of the firm's long-term capital investments. Current assets are also used to satisfy

short-term obligations, or current liabilities. (In contrast), the amount by which current assets

exceed current liabilities is referred to as Net Working Capital.

For the purpose of this week's classroom discussion, we are interested in Working Capital

(Current Assets).

FIN 534 Week 9 Assignment

Assignment 1: Financial Research Report

Due Week 9 and worth 300 points

Imagine that you are a financial manager researching investments for your client that align with

its investment goals. Use the Internet or the Strayer Library to research any U.S. publicly traded

company that you may consider as an investment opportunity for your client. (Note: Please

ensure that you are able to find enough information about this company in order to complete this

assignment. You will create an appendix, in which you will insert related information.)

The assignment covers the following topics:

Rationale for choosing the company for which to invest

Ratio analysis

Stock price analysis

Recommendations

Refer to the following resources to assist with completing your assignment:

Stock Selection

Forbes – “Six Rules to Follow When Picking Stocks”

CNN Money – “Stocks: Investing in stocks”

The Motley Fool – “13 Steps to Investing Foolishly”

Seeking Alpha – “The Graham And Dodd Method For Valuing Stocks”

Investopedia – “Guide to Stock-Picking Strategies”

Seeking Alpha – “Get Your Smart Beta Here! Dividend Growth Stocks As ‘Strategic

Beta’ Investments”

Market and Company Information

U.S. Securities and Exchange Commission – “Market Structure”

Yahoo! Finance

Mergent Online (Note: This resource is also available through the Strayer Learning

Resource Center.)

Seeking Alpha (Note: Also available through the Android or iTunes App store.)

Morningstar (Note: You can create a no-cost Basic Access account.)

Research Hub, located in the left menu of your course in Blackboard.

Write a ten to fifteen (10-15) page paper in which you:

http://www.morningstar.com/stocks.html

http://seekingalpha.com/

http://libdatab.strayer.edu/login?url=http://www.mergentonline.com/basicsearch.php

http://finance.yahoo.com/

http://www.sec.gov/marketstructure/#.VfsQohFVhBd

http://seekingalpha.com/article/3457406-get-your-smart-beta-here-dividend-growth-stocks-as-strategic-beta-investments

http://seekingalpha.com/article/3457406-get-your-smart-beta-here-dividend-growth-stocks-as-strategic-beta-investments

http://www.investopedia.com/university/stockpicking/

http://seekingalpha.com/article/44626-the-graham-and-dodd-method-for-valuing-stocks

http://www.fool.com/how-to-invest/thirteen-steps/index.aspx

http://money.cnn.com/pf/money-essentials-stocks/

http://www.forbes.com/sites/benzingainsights/2012/06/15/six-rules-to-follow-when-picking-stocks/

1. Provide a rationale for the U.S. publicly traded company that you selected, indicating the

significant factors driving your decision as a financial manager.

2. Determine the profile of the investor for which this company may be a fit, relative to that

potential investor’s investment strategy. Provide support for your rationale.

3. Select any five (5) financial ratios that you have learned about in the text. Analyze the

past three (3) years of the company’s financial data, which you may obtain from the

company’s financial statements. Determine the company’s financial health. (Note:

Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per

share, and price earnings ratio.)

4. Based on your financial review, determine the risk level of the company from your

investor’s point of view. Indicate key strategies that you may use in order to minimize

these perceived risks.

5. Provide your recommendations of this stock as an investment opportunity. Support your

rationale with resources, such as peer-reviewed articles or material from the Strayer

Library.

6. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia and

other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins

on all sides; citations and references must follow APA or school-specific format. Check

with your professor for any additional instructions.

Include a cover page containing the title of the assignment, the student’s name, the

professor’s name, the course title, and the date. The cover page and the reference page are

not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

Critique financial management strategies that support business operations in various

market environments.

Analyze financial statements for key ratios, cash flow positions, and taxation effects.

Review fixed income strategies using time value of money concept, bond valuation

methods, and interest rate calculations.

Estimate the risk and return on financial investments.

Apply financial management options to corporate finance.

Determine the cost of capital and how to maximize returns.

Formulate cash flow analysis for capital projects including project risks and returns.

Evaluate how corporate valuation and forecasting affect financial management.

Analyze how capital structure decision-making practices impact financial management.

Use technology and information resources to research issues in financial management.

Write clearly and concisely about financial management using proper writing mechanics.


Discussion 1: Multinational Financial Management

A. Using the company that you selected for Assignment 1, review its Form 10K report and

identify risks that it considers to be associated with its international operations (this information

is normally reported in Section 1A of the company’s Form 10K report? Which three risks, in

your judgment, are the most important and what should the company do about them? (Note: If

the company you selected does not have international operations, select another company that

does have international operations for this analysis; some examples are KO, PEP, MSFT, GE,

MKC, etc).

B. For the company that you selected for Assignment 1, or the company you examined for

Question A above, review the company’s most recent Form 10K report and answer the following

questions:

1. To what extent has the firm’s financial results been affected by foreign currency adjustments

in each of the past three years and are these adjustments significant?

2. Why did the adjustments occur (Hint: Examine Section 1A of the Form 10K report and the

Notes to the Financial Statements)?

3. If you were the chief financial officer of the company, what actions might you take to manage

the foreign currency exposures of the company and why?

FIN 534 Week 10 Homework Assignment Set 5


Discussion 1: Knowledge Gained

A. Rate the three (3) most important concepts that you learned in this course in order of

importance (one (1) being the most important; three (3), the least). Explain the reasons for your

ratings.

B. What are two (2) applications of knowledge that you have learned in this course that apply to

your current position or a future position?

FIN 534 Week 11 Final Exam Part 1

Question 1

Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also

available, some with a strike price of $25 and some with a strike price of $35. Both options

expire in three months. Which of the following best describes the value of these options?

Answer

The options with the $25 strike price will sell for less than the options with the $35 strike

price.

The options with the $25 strike price have an exercise value greater than $5.

The options with the $35 strike price have an exercise value greater than $0.

If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price

would also increase by $5.

The options with the $25 strike price will sell for $5.

Question 2

Suppose you believe that Florio Company's stock price is going to decline from its current level

of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option

giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10

and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?

Answer

-$5.10

$19.90

$20.90

$22.50

$27.60

Question 3


Answer

Call options generally sell at a price greater than their exercise value, and the greater the

exercise value, the higher the premium on the option is likely to be.

Call options generally sell at a price below their exercise value, and the greater the exercise

value, the lower the premium on the option is likely to be.

Call options generally sell at a price below their exercise value, and the lower the exercise

value, the lower the premium on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a

stock must sell at exactly the same price as a call option on the stock.

If the underlying stock does not pay a dividend, it does not make good economic sense to

exercise a call option prior to its expiration date, even if this would yield an immediate

profit.

Question 4


Answer

Call options generally sell at a price less than their exercise value.

If a stock becomes riskier (more volatile), call options on the stock are likely to decline in

value.

Call options generally sell at prices above their exercise value, but for an in-the-money

option, the greater the exercise value in relation to the strike price, the lower the premium

on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a

stock must sell at exactly the same price as a call option on the stock.

If the underlying stock does not pay a dividend, it makes good economic sense to exercise a

call option as soon as the stock's price exceeds the strike price by about 10%, because this

permits the option holder to lock in an immediate profit.

Question 5

BLW Corporation is considering the terms to be set on the options it plans to issue to its

executives. Which of the following actions would decrease the value of the options, other things

held constant?

Answer

The exercise price of the option is increased.

The life of the option is increased, i.e., the time until it expires is lengthened.

The Federal Reserve takes actions that increase the risk-free rate.

BLW's stock price becomes more risky (higher variance).

BLW's stock price suddenly increases.

Question 6

Which of the following statements is most correct, holding other things constant, for XYZ

Corporation's traded call options?

Answer

The higher the strike price on XYZ's options, the higher the option's price will be.

Assuming the same strike price, an XYZ call option that expires in one month will sell at a

higher price than one that expires in three months.

If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will

increase.

If XYZ pays a dividend, then its option holders will not receive a cash payment, but the

strike price of the option will be reduced by the amount of the dividend.

The price of these call options is likely to rise if XYZ's stock price rises.

Question 7

Which of the following is NOT a capital component when calculating the weighted average cost

of capital (WACC) for use in capital budgeting?

Answer

Accounts payable.

Common stock “raised” by reinvesting earnings.

Common stock raised by new issues.

Preferred stock.

Long-term debt.

Question 8


Answer

All else equal, an increase in a company's stock price will increase its marginal cost of

reinvested earnings (not newly issued stock), rs.

All else equal, an increase in a company's stock price will increase its marginal cost of new

common equity, re.

Since the money is readily available, the after-tax cost of reinvested earnings (not newly

issued stock) is usually much lower than the after-tax cost of debt.

If a company's tax rate increases but the YTM on its noncallable bonds remains the same,

the after-tax cost of its debt will fall.

When calculating the cost of preferred stock, a company needs to adjust for taxes, because

preferred stock dividends are deductible by the paying corporation.

Question 9

A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00

annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost

of 5.00% of the issue price. What is the firm's cost of preferred stock?

Answer

7.81%

8.22%

8.65%

9.10%

9.56%

Question 10

Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses

that same cost of capital to evaluate all projects for the next 10 years, then the firm will most

likely

Answer

become less risky over time, and this will maximize its intrinsic value.

accept too many low-risk projects and too few high-risk projects.

become more risky and also have an increasing WACC. Its intrinsic value will not be

maximized.

continue as before, because there is no reason to expect its risk position or value to change

over time as a result of its use of a single cost of capital.

become riskier over time, but its intrinsic value will be maximized

Question 11

Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50

annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost

of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in

calculating the WACC?

Answer

8.72%

9.08%

9.44%

9.82%

10.22%

Question 12


Answer

The percentage flotation cost associated with issuing new common equity is typically

smaller than the flotation cost for new debt.

The WACC as used in capital budgeting is an estimate of the cost of all the capital a

company has raised to acquire its assets.

There is an "opportunity cost" associated with using reinvested earnings, hence they are not

"free."

The WACC as used in capital budgeting would be simply the after-tax cost of debt if the

firm plans to use only debt to finance its capital budget during the coming year.

The WACC as used in capital budgeting is an estimate of a company's before-tax cost of

capital.

Question 13

Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of

positive cash inflows. Project S's undiscounted net cash flows total $20,000, while L's total

undiscounted flows are $30,000. At a WACC of 10%, the two projects have identical NPVs.

Which project's NPV is more sensitive to changes in the WACC?

Answer

Project L.

Both projects are equally sensitive to changes in the WACC since their NPVs are equal at

all costs of capital.

Neither project is sensitive to changes in the discount rate, since both have NPV profiles

that are horizontal.

The solution cannot be determined because the problem gives us no information that can be

used to determine the projects' relative IRRs.

Project S.

Question 14

Which of the following statements is CORRECT? Assume that the project being considered has

normal cash flows, with one outflow followed by a series of inflows.

Answer

The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will

be.

If a project's NPV is less than zero, then its IRR must be less than the WACC.

If a project's NPV is greater than zero, then its IRR must be less than zero.

The NPV of a relatively low-risk project should be found using a relatively high WACC.

A project's NPV is found by compounding the cash inflows at the IRR to find the terminal

value (TV), then discounting the TV at the WACC.

Question 15


Answer

If a project has "normal" cash flows, then its MIRR must be positive.

If a project has "normal" cash flows, then it will have exactly two real IRRs.

The definition of "normal" cash flows is that the cash flow stream has one or more negative

cash flows followed by a stream of positive cash flows and then one negative cash flow at

the end of the project's life.

If a project has "normal" cash flows, then it can have only one real IRR, whereas a project

with "nonnormal" cash flows might have more than one real IRR.

If a project has "normal" cash flows, then its IRR must be positive.

Question 16

Which of the following statements is CORRECT? Assume that the project being considered has

normal cash flows, with one outflow followed by a series of inflows.

Answer

One drawback of the regular payback for evaluating projects is that this method does not

properly account for the time value of money.

If a project's payback is positive, then the project should be rejected because it must have a

negative NPV.

The regular payback ignores cash flows beyond the payback period, but the discounted

payback method overcomes this problem.

If a company uses the same payback requirement to evaluate all projects, say it requires a

payback of 4 years or less, then the company will tend to reject projects with relatively short

lives and accept long-lived projects, and this will cause its risk to increase over time.

The longer a project's payback period, the more desirable the project is normally considered

to be by this criterion.

Question 17

The WACC for two mutually exclusive projects that are being considered is 8%. Project K has

an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 8% current

WACC. However, you believe that money costs and thus your WACC will also increase. You

also think that the projects will not be funded until the WACC has increased, and their cash

flows will not be affected by the change in economic conditions. Under these conditions, which

of the following statements is CORRECT?

Answer

You should delay a decision until you have more information on the projects, even if this

means that a competitor might come in and capture this market.

You should recommend Project R, because at the new WACC it will have the higher NPV.

You should recommend Project K, because at the new WACC it will have the higher NPV.

You should recommend Project K because it has the higher IRR and will continue to have

the higher IRR even at the new WACC.

You should reject both projects because they will both have negative NPVs under the new

conditions.

Question 18

The WACC for two mutually exclusive projects that are being considered is 12%. Project K has

an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 12%

current WACC. Interest rates are currently high. However, you believe that money costs and thus

your WACC will soon decline. You also think that the projects will not be funded until the

WACC has decreased, and their cash flows will not be affected by the change in economic

conditions. Under these conditions, which of the following statements is CORRECT?

Answer

You should delay a decision until you have more information on the projects, even if this

means that a competitor might come in and capture this market.

You should recommend Project R, because at the new WACC it will have the higher NPV.

You should recommend Project K, because at the new WACC it will have the higher NPV.

You should recommend Project R because it will have both a higher IRR and a higher NPV

under the new conditions.

You should reject both projects because they will both have negative NPVs under the new

conditions.

Question 19

Which one of the following would NOT result in incremental cash flows and thus should NOT

be included in the capital budgeting analysis for a new product?

Answer

A new product will generate new sales, but some of those new sales will be from customers

who switch from one of the firm's current products.

A firm must obtain new equipment for the project, and $1 million is required for shipping

and installing the new machinery.

A firm has spent $2 million on R&D associated with a new product. These costs have been

expensed for tax purposes, and they cannot be recovered regardless of whether the new

project is accepted or rejected.

A firm can produce a new product, and the existence of that product will stimulate sales of

some of the firm's other products.

A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used

for agricultural purposes.

Question 20


Answer

In a capital budgeting analysis where part of the funds used to finance the project would be

raised as debt, failure to include interest expense as a cost when determining the project's

cash flows will lead to a downward bias in the NPV.

The existence of any type of "externality" will reduce the calculated NPV versus the NPV

that would exist without the externality.

If one of the assets to be used by a potential project is already owned by the firm, and if that

asset could be sold or leased to another firm if the new project were not undertaken, then the

net after-tax proceeds that could be obtained should be charged as a cost to the project under

consideration.

If one of the assets to be used by a potential project is already owned by the firm but is not

being used, then any costs associated with that asset is a sunk cost and should be ignored.

In a capital budgeting analysis where part of the funds used to finance the project would be

raised as debt, failure to include interest expense as a cost when determining the project's

cash flows will lead to an upward bias in the NPV.

Question 21

Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead

with the project, which of the following items should NOT be explicitly considered when cash

flows are estimated?

Answer

The project will utilize some equipment the company currently owns but is not now using.

A used equipment dealer has offered to buy the equipment.

The company has spent and expensed for tax purposes $3 million on research related to the

new detergent. These funds cannot be recovered, but the research may benefit other projects

that might be proposed in the future.

The new product will cut into sales of some of the firm's other products.

If the project is accepted, the company must invest $2 million in working capital. However,

all of these funds will be recovered at the end of the project's life.

The company will produce the new product in a vacant building that was used to produce

another product until last year. The building could be sold, leased to another company, or

used in the future to produce another of the firm's products.

Question 22

Which of the following procedures does the text say is used most frequently by businesses when

they do capital budgeting analyses?

Answer

Differential project risk cannot be accounted for by using "risk-adjusted discount rates"

because it is highly subjective and difficult to justify. It is better to not risk adjust at all.

Other things held constant, if returns on a project are thought to be positively correlated

with the returns on other firms in the economy, then the project's NPV will be found using a

lower discount rate than would be appropriate if the project's returns were negatively

correlated.

Monte Carlo simulation uses a computer to generate random sets of inputs, those inputs are

then used to determine a trial NPV, and a number of trial NPVs are averaged to find the

project's expected NPV. Sensitivity and scenario analyses, on the other hand, require much

more information regarding the input variables, including probability distributions and

correlations among those variables. This makes it easier to implement a simulation analysis

than a scenario or a sensitivity analysis, hence simulation is the most frequently used

procedure.

DCF techniques were originally developed to value passive investments (stocks and bonds).

However, capital budgeting projects are not passive investmentsmanagers can often take

positive actions after the investment has been made that alter the cash flow stream.

Opportunities for such actions are called real options. Real options are valuable, but this

value is not captured by conventional NPV analysis. Therefore, a project's real options must

be considered separately.

The firm's corporate, or overall, WACC is used to discount all project cash flows to find the

projects' NPVs. Then, depending on how risky different projects are judged to be, the

calculated NPVs are scaled up or down to adjust for differential risk.

Question 23

Which one of the following would NOT result in incremental cash flows and thus should NOT

be included in the capital budgeting analysis for a new product?

Answer

Revenues from an existing product would be lost as a result of customers switching to the

new product.

Shipping and installation costs associated with a machine that would be used to produce the

new product.

The cost of a study relating to the market for the new product that was completed last year.

The results of this research were positive, and they led to the tentative decision to go ahead

with the new product. The cost of the research was incurred and expensed for tax purposes

last year.

It is learned that land the company owns and would use for the new project, if it is accepted,

could be sold to another firm.

Using some of the firm's high-quality factory floor space that is currently unused to produce

the proposed new product. This space could be used for other products if it is not used for

the project under consideration.

Question 24

While developing a new product line, Cook Company spent $3 million two years ago to build a

plant for a new product. It then decided not to go forward with the project, so the building is

available for sale or for a new product. Cook owns the building free and clearthere is no

mortgage on it. Which of the following statements is CORRECT?

Answer

If the building could be sold, then the after-tax proceeds that would be generated by any

such sale should be charged as a cost to any new project that would use it.

This is an example of an externality, because the very existence of the building affects the

cash flows for any new project that Rowell might consider.

Since the building was built in the past, its cost is a sunk cost and thus need not be

considered when new projects are being evaluated, even if it would be used by those new

projects.

If there is a mortgage loan on the building, then the interest on that loan would have to be

charged to any new project that used the building.

Since the building has been paid for, it can be used by another project with no additional

cost. Therefore, it should not be reflected in the cash flows for any new project.

Question 25


Answer

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.

Dividends are paid with cash taken from the accumulated retained earnings account, hence

dividend policy does not affect the AFN forecast.

A negative AFN indicates that retained earnings and spontaneous liabilities are far more

than sufficient to finance the additional assets needed.

If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant,

then the AFN equation will provide more accurate forecasts than the forecasted financial

statements method.

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

Question 26

Spontaneous funds are generally defined as follows:

Answer

A forecasting approach in which the forecasted percentage of sales for each item is held

constant.

Funds that a firm must raise externally through short-term or long-term borrowing and/or by

selling new common or preferred stock.

Funds that arise out of normal business operations from its suppliers, employees, and the

government, and they include immediate increases in accounts payable, accrued wages, and

accrued taxes.

The amount of cash raised in a given year minus the amount of cash needed to finance the

additional capital expenditures and working capital needed to support the firm's growth.

Assets required per dollar of sales.

Question 27

The term "additional funds needed (AFN)" is generally defined as follows:

Answer

Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or

by selling new stock to support operations.

The amount of assets required per dollar of sales.

The amount of internally generated cash in a given year minus the amount of cash needed to

acquire the new assets needed to support growth.

A forecasting approach in which the forecasted percentage of sales for each balance sheet

account is held constant.

Funds that are obtained automatically from routine business transactions.

Question 28


Answer

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.

If a firm retains all of its earnings, then it cannot require any additional funds to support

sales growth.

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.

If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.

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.

Question 29

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales

and $100 million of fixed assets. However, its fixed assets were used at only 75% of capacity.

Now the company is developing its financial forecast for the coming year. As part of that

process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have

had had it been operating at full capacity. What target FA/Sales ratio should the company set?

Answer

28.5%

30.0%

31.5%

33.1%

34.7%

Question 30


Answer

The first, and perhaps the most critical, step in forecasting financial requirements is to

forecast future sales.

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.

The capital intensity ratio gives us an idea of the physical condition of the firm's fixed

assets.

The AFN equation produces more accurate forecasts than the forecasted financial statement

method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity

exists.

Perhaps the most important step when developing forecasted financial statements is to

determine the breakdown of common equity between common stock and retained earnings.

FIN 534 Week 11 Final Exam Part 2

Question 1

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

Answer

Targeted share repurchases.

Shareholder rights provisions.

Restricted voting rights.

Poison pills.

Abnormally high executive compensation.

Question 2

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

Answer

To enable the firm to borrow at a below-market interest rate.

To make it easier to grant stock options to employees.

To help prevent a hostile takeover.

To help retain valued employees.

To increase worker productivity.

Question 3

The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is

60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a

residual dividend policy, what total dividends, if any, will it pay out?

Answer

$122,176

$128,606

$135,375

$142,500

$150,000

Question 4


Answer

Back before the SEC was created in the 1930s, companies would declare reverse splits in

order to boost their stock prices. However, this was determined to be a deceptive practice,

and it is illegal today.

Stock splits create more administrative problems for investors than stock dividends,

especially determining the tax basis of their shares when they decide to sell them, so today

stock dividends are used far more often than stock splits.

When a company declares a stock split, the price of the stock typically declinesby about

50% after a 2-for-1 splitand this necessarily reduces the total market value of the equity.

If a firm's stock price is quite high relative to most stockssay $500 per sharethen it can

declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.

Moreover, if the price is relatively lowsay $2 per sharethen it can declare a "reverse

split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.

When firms are deciding on the size of stock splitssay whether to declare a 2-for-1 split or

a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then

the after-split price will be higher than if the 3-for-1 split had been used

Question 5

Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The

company is contemplating a 2-for-1 stock split. Which of the following best describes what your

position will be after such a split takes place?

Answer

You will have 200 shares of stock, and the stock will trade at or near $60 a share.





Question 6

Which of the following statements is correct?

Answer

An open-market dividend reinvestment plan will be most attractive to companies that need

new equity and would otherwise have to issue additional shares of common stock through

investment bankers.

Stock repurchases tend to reduce financial leverage.

If a company declares a 2-for-1 stock split, its stock price should roughly double.

One advantage of adopting the residual dividend policy is that this makes it easier for

corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.

If a firm repurchases some of its stock in the open market, then shareholders who sell their

stock for more than they paid for it will be subject to capital gains taxes.

Question 7

Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to

maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net

income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend

payout ratio?

Answer

40.61%

42.75%

45.00%

47.37%

49.74%

Question 8

Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of

$3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85%

equity. The company forecasts that its net income this year will be $3,500,000. If the company

follows a residual dividend policy, what will be its total dividend payment?

Answer

$205,000

$500,000

$950,000

$2,550,000

$3,050,000

Question 9

Which of the following statements is NOT correct?

Answer

After a 3-for-1 stock split, a company's price per share should fall, but the number of shares

outstanding will rise.

Investors can interpret a stock repurchase program as a signal that the firm's managers

believe the stock is undervalued.

Companies can repurchase shares to distribute large inflows of cash, say from the sale of a

division, to stockholders without paying cash dividends.

Stockholders pay no income tax on dividends if the dividends are used to purchase stock

through a dividend reinvestment plan.

Stock repurchases can be used by a firm as part of a plan to change its capital structure.

Question 10

Which of the following would increase the likelihood that a company would increase its debt

ratio, other things held constant?

Answer

An increase in the corporate tax rate.

An increase in the personal tax rate.

The Federal Reserve tightens interest rates in an effort to fight inflation.

The company's stock price hits a new low.

An increase in costs incurred when filing for bankruptcy.

Question 11


Answer

The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.

The optimal capital structure minimizes the cost of equity, which is a necessary condition

for maximizing the stock price.

The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity,

and the WACC.

The optimal capital structure simultaneously maximizes stock price and minimizes the

WACC.

As a rule, the optimal capital structure is found by determining the debt-equity mix that

maximizes expected EPS.

Question 12


Answer

The capital structure that minimizes a firm's weighted average cost of capital is also the

capital structure that maximizes its stock price.

The capital structure that minimizes the firm's weighted average cost of capital is also the

capital structure that maximizes its earnings per share.

If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio

must reduce its WACC.

Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-

adjusted tradeoff theory would suggest that firms should increase their use of debt.

A firm can use retained earnings without paying a flotation cost. Therefore, while the cost

of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

Question 13

Which of the following statements best describes the optimal capital structure? The optimal

capital structure is the mix of debt, equity, and preferred stock that maximizes the company's

____.

Answer

stock price.

cost of equity.

cost of debt.

cost of preferred stock.

earnings per share (EPS).

Question 14

Which of the following events is likely to encourage a company to raise its target debt ratio,

other things held constant?

Answer

An increase in the personal tax rate.

An increase in the company's operating leverage.

The Federal Reserve tightens interest rates in an effort to fight inflation.

The company's stock price hits a new high.

An increase in the corporate tax rate.

Question 15

Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and

their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a

higher debt ratio and thus more interest expense than Company LD. Which of the following

statements is CORRECT?

Answer

Company HD has a lower ROA than Company LD.

Company HD has a lower ROE than Company LD.

The two companies have the same ROA.

The two companies have the same ROE.

Company HD has a higher net income than Company LD.

Question 16

Firms U and L both have a basic earning power ratio of 20% and each has the same amount of

assets. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with

50% debt and 50% equity. Firm L's debt has a before-tax cost of 8%. Both firms have positive

net income. Which of the following statements is CORRECT?

Answer

Firm L has a lower ROA than Firm U.

Firm L has a lower ROE than Firm U.

Firm L has the higher times interest earned (TIE) ratio.

Firm L has a higher EBIT than Firm U.

The two companies have the same times interest earned (TIE) ratio.

Question 17

Which of the following items should a company report directly in its monthly cash budget?

Answer

Cash proceeds from selling one of its divisions.

Accrued interest on zero coupon bonds that it issued.

New shares issued in a stock split.

New shares issued in a stock dividend.

Its monthly depreciation expense.

Question 18

Which of the following statements is most consistent with efficient inventory management? The

firm has a

Answer

low incidence of production schedule disruptions.

below average total assets turnover ratio.

relatively high current ratio.

relatively low DSO.

below average inventory turnover ratio.

Question 19

Firms generally choose to finance temporary current operating assets with short-term debt

because

Answer

short-term interest rates have traditionally been more stable than long-term interest rates.

a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt

than a firm that borrows short term.

the yield curve is normally downward sloping.

short-term debt has a higher cost than equity capital.

matching the maturities of assets and liabilities reduces risk under some circumstances, and

also because short-term debt is often less expensive than long-term capital.

Question 20

Which of the following will cause an increase in net working capital, other things held constant?

Answer

A cash dividend is declared and paid.

Merchandise is sold at a profit, but the sale is on credit.

Long-term bonds are retired with the proceeds of a preferred stock issue.

Missing inventory is written off against retained earnings.

Cash is used to buy marketable securities.

Question 21

A lockbox plan is

Answer

used to identify inventory safety stocks.

used to slow down the collection of checks our firm writes.

used to speed up the collection of checks received.

used primarily by firms where currency is used frequently in transactions, such as fast food

restaurants, and less frequently by firms that receive payments as checks.

used to protect cash, i.e., to keep it from being stolen.

Question 22

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero

tax bracket?

Answer

Depreciation.

Cumulative cash.

Repurchases of common stock.

Payment for plant construction.

Payments lags.

Question 23

If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S.

dollar buy?

Answer

0.50

0.71

1.00

1.41

2.81

Question 24

Which of the following is NOT a reason why companies move into international operations?

Answer

To develop new markets for the firm's products.

To better serve their primary customers.

Because important raw materials are located abroad.

To increase their inventory levels.

To take advantage of lower production costs in regions where labor costs are relatively low.

Question 25

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-

day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a

1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If

interest rate parity holds, what is the spot exchange rate?

Answer

1 pound = $1.8000

1 pound = $1.6582

1 pound = $1.0000

1 pound = $0.8500

1 pound = $0.6031

Question 26

Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a

Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per

dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to

take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell

against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what

dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?

Answer

$1,075,958

$1,025,000

$1,000,000

$975,610

$929,404

Question 27

If the inflation rate in the United States is greater than the inflation rate in Britain, other things

held constant, the British pound will

Answer

Depreciate against the U.S. dollar.

Remain unchanged against the U.S. dollar.

Appreciate against other major currencies.

Appreciate against the dollar and other major currencies.

Appreciate against the U.S. dollar.

Question 28

In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still

sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what

would the car be selling for today in U.S. dollars?

Answer

$5.964

$8,200

$10,250

$12,628

$13,525

Question 29

Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange

market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the

pound over the next 30 days. How many dollars will a pound buy in 30 days?

Answer

1.12

1.63

1.82

2.04

3.64

Question 30

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian

dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of

hockey pucks in the United States?

Answer

$14.79

$63.00

$74.55

$85.88

$147.88

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