DQ 2

Cash Flow and Ratio Analysis

From Chapters 3 and 4 complete Study Problems 3-2 (page 85) and 4-2 (page 122) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

Grade Details

 1. Question : The income statement for Brit, Inc. Indicates that tax expense was $20,000. The balance sheet indicates that taxes payable for the same year increased by $ 5,000. What amount did Brit, Inc. actually pay in taxes during this year?

Student Answer:

 $ 15,000

 $ 20,000

 $ 25,000

 Cannot be determined without the cash balance

Points Received: 1 of 1

Comments:

 2. Question : A financial manager is considering two projects, A and B. A is expected to add $ 2 million to profits this year while B is expected to add $ 1 million to profits this year. Which of the following statements is most correct?

Student Answer:

 The manager should select project A because it maximizes profit.

 The manager should select the project that maximizes long-term profits, not just one year of profits.

 The manager should select project A or he is irrational.

 The manager should select the project that causes the stock price to increase the most, which could be A or B.

Points Received: 1 of 1

Comments:

 3. Question : Which of the following statements about depreciation is true?

Student Answer:

Points Received: 1 of 1

Comments:

 4. Question : The principle of risk-return tradeoff means that _____

Student Answer:

Points Received: 1 of 1

Comments:

 5. Question : The quick ratio of a firm would be increased by which of the following?

Student Answer:

Points Received: 1 of 1

Comments:

 6. Question : Common sized income statements ___________

Student Answer:

Points Received: 1 of 1

Comments:

 7. Question : The December 31, 2007 balance sheet shows net fixed assets of $100,000 and the December 31, 2008 balance sheet shows net fixed assets of $140,000. Depreciation expense for 2007 is $15,000 and depreciation expense for 2008 is $20,000. Based on the information, the cost of fixed assets purchased during 2008 is ________

Student Answer:

Points Received: 1 of 1

Comments:

 8. Question : Project A is expected to generate positive cash flow of $ 1 million in 10 years while Project B is expected to generate $ 500,000 in 5 years. Therefore, _______

Student Answer:

Points Received: 1 of 1

Comments:

 9. Question : Global.Com has cash of $75,000; short term notes payable of $100,000; accounts receivable of $275,000; accounts payable of $135,000; inventories of $350,000; and accrued expenses of $75,000. What is Global’s net working capital?

Student Answer:

Points Received: 1 of 1

Comments:

 10. Question : Which of the following statements is an example of a futures market transaction?

Student Answer:

Points Received: 1 of 1

Comments:

5-6. (Present value of an annuity) What is the present value of the following annuities?

a. $2,500 a year for 10 years discounted back to the present at 7 percent

=

= $2,500 × 7.024

= $17,560

Bonds and Common Stock

From Chapters 7 and 8 complete Study Problems 7-8 (pages 224-225) and 8-16 (page 253) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

7-8.   (Bond valuation) ExxonMobil 20-year bonds pay 9 percent interest annually on a $1,000 par value. If bonds sell at $945, what is the bonds’ expected rate of return?

Annual interest: $90Annual amortization of purchase discount: $55/20yrs. = $2.75Total annual return: $92.75Annual Yield: 92.75/945 = 9.788%

8-16. (Common stock valuation) The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.

 Grade Details

 1. Question : Butler Corp paid a dividend of $3.50 per share. The dividend is expected to grow at a constant rate of 8% per year. If Butler Corp. Is selling for $75.60 per share, the stockholders' expected rate of return is _________

Student Answer:

 12.63%

 12.53%

 13.00%

 14.38%

Points Received: 1 of 1

Comments:

 2. Question : Emery Inc. has a beta equal to 1.5 and a required return of 14 % based on the CAPM. If the risk free rate of return is 2%, the expected return on the market portfolio is _______________.

Student Answer:

 10%

 9%

 8%

 6%

Points Received: 0 of 1

Comments:

 3. Question : The capital asset pricing model _________.

Student Answer:

 Provides a risk-return trade off in which risk is measured in terms of the market volatility

 Provides a risk-return trade off in which risk is measured in terms of beta

 Measures risk as the coefficient of variation between security and market rates of return

 Depicts the total risk of a security

Points Received: 1 of 1

Comments:

 4. Question : Stock A has an expected return of 14 % with a standard deviation of 6%. If returns are normally distributed, then approximately two-third of the time the return on Stock A will be _______.

Student Answer:

Points Received: 1 of 1

Comments:

 5. Question : A corporate coup bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements in most correct?

Student Answer:

Points Received: 1 of 1

Comments:

 6. Question : Investment A has an expected rate of return of 15 % per year, while investment B has an expected rate of return of 12 % per year. A rational investor will choose _________.

Student Answer:

Points Received: 1 of 1

Comments:

 7. Question : A financial analyst tells you that investing in stocks will allow you to triple your money in 15 years. What annual rate of return is the analyst assuming you can earn?

Student Answer:

Points Received: 1 of 1

Comments:

 8. Question : SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic value [to the nearest dollar] of an SWH Corporation bond on January 1, 2008 to an investor with a required return of 6%?

Student Answer:

Points Received: 1 of 1

Comments:

 9. Question : Which of the following statements concerning stock valuation is most correct?

Student Answer:

Points Received: 1 of 1

Comments:

 10. Question : You are 21 years old today. Your grand parents set up a fund that will pay you $25,000 per year for 20 years, starting on your 65th birthday to supplement your retirement. If the trust can earn 7.5% per year, how much will your grand parents need to put in the trust fund today [rounded to the nearest ten dollars]?

Student Answer:

Points Received: 1 of 1

Comments:

NPV, PI, and IRR

From Chapters 9 and 10, complete Study Problems 9-4 (page 289) and 10-4 (page 325) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

Cost of Debt

From Chapter 11, complete Study Problem 11-10 (page 365) and post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

Grade Details

 1. Question : Jiffy Wax Corp. Can sell common stock for $15 per share and its investors require a 14 % return. However, the administrative or flotation costs associated with selling the stock amount to $2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling preferred stock?

Student Answer:

 30.00%

 21.50%

 16.67%

 14.00%

Points Received: 1 of 1

Comments:

 2. Question : Kinslow Manufacturing Company paid a dividend yesterday of $2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The price of Kinslow’s common stock today is $25 per share. If Kinslow decides to issue new common stock, flotation costs will equal $2.00 per share. Key’s marginal tax rate is 34 %. Based on the above information, the cost of retained earnings is _________

Student Answer:

Points Received: 1 of 1

Comments:

 3. Question : Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5 year useful life and will be depreciated using the straight line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $ 10,000 annually. Nickel’s income tax rate is 40%. What is the projected incremental cash flow of the machine or year 1?

Student Answer:

Points Received: 1 of 1

Comments:

 4. Question : Nargo Inc. Wants to replace a 7 year old machine with a new machine that is more efficient. The old machine cost $50,000 when new and has a current book value of $10,000. Margo can sell the machine to a foreign buyer for $12,000. Margo’s tax rate is 30%. The effect of the sale of the old machine on the initial outlay for the new machine is ________

Student Answer:

Points Received: 0 of 1

Comments:

 5. Question : A capital budgeting project has a net present value of $10,000 and a modified internal rate of return of 13%. The project's required rate of return is 11 %. The internal rate of return is ______

Student Answer:

Points Received: 1 of 1

Comments:

 6. Question : Higgins Office Corp. Plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt - 8 percent; preferred stock- 12 percent; common equity- 16 percent. Assuming a 40 percent marginal tax rate, what after tax rate of exchange must Higgins Office Corp. Earn on its investments if the value of the firm is to remain unchanged?

Student Answer:

Points Received: 1 of 1

Comments:

 7. Question : Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs $ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The internal rate of return for

Project B is ________

Student Answer:

Points Received: 1 of 1

Comments:

 8. Question : A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5 years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes?

Student Answer:

Points Received: 1 of 1

Comments:

 9. Question : Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs $ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The profitability index for Project B is ________

Student Answer:

Points Received: 1 of 1

Comments:

 10. Question : Jones Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company’s after tax cost of debt is 8%, its cost of preferred debt is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company’s marginal tax rate is 35%. What is the company’s weighted average cost of capital if retained earnings are used to fund the common equity portion?

Student Answer:

Points Received: 1 of 1

Comments:

Leverage

From Chapter 12, complete Study Problems 12-4 (page 409) and 12-8 (page 410): Post the answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

Problem 12-4

a. Breakeven Point in Sales Dollars =

b. Percentage increase in EBT and NI

Workings:

Calculation of Leverages:

Degree of Operating Leverage

Degree of Financial Leverage (DFL)

Degree of Combined Leverage (DCL) = (DOL) x (DFL)

Problem 12-8

a.Break-even point in units for the company

b. Selling Price

Less: Variable Cost

Contribution

Contribution Margin Ratio

Dollar sales volume

c.Degree of Operating Leverage

d.The projected effect on EBIT

Dividend Policies

From Chapter 13, complete Study Problem 13-4 (page 433) and post the answers to the discussion board. Remember to complete all parts of the problem and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’ postings.

Problem 13-4

Crystal Cargo, Inc.—Dividend Policies

a. Constant Payout Ratio of 50%

b. Stable target payout of 50%

 =(8960000*0.5/1000000)/5

Target Dividend $0.90

c. Small regular dividend of $0.50 plus year-end extra

Base Profits 1500000

% of Extra Profits 50%

YearDividend Per share

1 $0.50

2 $0.75

3 $0.68

4 $0.50

5 $1.15

Grade Details

 1. Question : Operating leverage refers to ________

Student Answer:

 Financing a portion of the firm’s assets with securities bearing a fixed rte of return

 The additional chance or insolvency borne by the common shareholder.

 The incurrence of fixed operating costs in the firm’s income stream

 A high degree of variable costs of production

Points Received: 1 of 1

Comments:

 2. Question : A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ______ earnings per share fluctuations resulting from changes in levels of sales.

Student Answer:

 No

 Constant

 LargeD Small

Points Received: 1 of 1

Comments:

 3. Question : JB Corporation has a retained earnings balance of $1,000,000. The company reported net income of $200,000, sales of $2,000,000, and had 100,000 shares of common stock outstanding. The company announced a dividend of $ 1 per share. Therefore, the company’s dividend payout ratio is _________.

Student Answer:

 10%

 20%

 50%

 100%

Points Received: 1 of 1

Comments:

 4. Question : Assume Harris, Inc. Has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10 % stock dividend?

Student Answer:

Points Received: 1 of 1

Comments:

 5. Question : All of the following are likely to result in the use of less debt in a company’s capital structure expect:

Student Answer:

Points Received: 1 of 1

Comments:

 6. Question : Which of the following statements would be consistent with the Dividend Irrelevance Theory?

Student Answer:

Points Received: 1 of 1

Comments:

 7. Question : The break even point in sales dollars is convenient if ______

Student Answer:

Points Received: 1 of 1

Comments:

 8. Question : In perfect capital markets there ______

Student Answer:

Points Received: 1 of 1

Comments:

 9. Question : Financial leverage could mean financing some of a firm’s assets with _______

Student Answer:

Points Received: 1 of 1

Comments:

 10. Question : Dividend policy is influenced by _______

Student Answer:

Points Received: 1 of 1

Comments: