Progress Test 2 Corporate Finance

A way to analyze whether debt or lease financing would be preferable is to:

o compare the payback periods for each alternative.
o compare the net present values under each alternative, using the before-tax cost of borrowing

as the discount rate.
o compare the effective interest costs involved for each alternative.
o compare the net present values under each alternative, using the cost of capital as the discount

rate.
o none of these

Last year, Wilson's had credit sales of $927,000 and cost of goods sold of $762,000. The beginning of the
year inventory was $100,000 and the end of the year inventory was $154,300. If the accounts receivables
average $87,400, what is the operating cycle?

o 95.32 days
o 78.60 days
o 70.01 days
o 104.42 days
o 92.09 days

The information content of a dividend increase generally signals that:

o management believes that the future earnings of the firm will be strong.
o the firm has few, if any, net present value projects to pursue.
o the firm has more cash than it needs due to sales declines.
o the firm has a one-time surplus of cash.
o none of these

Your firm is considering leasing a new radiographic device. The lease lasts for 5 years. The lease calls for 5

payments of $50,000 per year, due at the beginning of each year. The computer would cost $250,000 to
buy and would be straight-line depreciated to a zero-salvage value over 5 years. The firm can borrow at a
rate of 12%. The corporate tax rate is 40%. All tax benefit will be received at the end of the period. What
is the after-tax cash flow from leasing instead of buying in YEAR 0

o + $175,000
o + $185,000
o + $200,000
o + $225,000
o + $169,000

The Tip-Top Paving Co. has an equity cost of capital of 18.5%. The debt to value ratio is .6, the tax rate is
34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?

o 16.97%
o 3.06%
o 14.0%
o 0.08%

o None of these.

Share repurchase is most likely:

o a positive signal for investors because it is a sign that the company perceives its own stocks
overprice.

o a positive signal for investors because it is a sign that the company perceives its own stocks
underprice.

o a negative signal for investors because it is a sign of the lack of profitable investment

opportunities for the company.

o a neutral signal for investors because positive and negative aspects of the company purchasing
its own stocks are balanced.

Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs
$65 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order
size.

o 124 clocks
o 141 clocks
o 15 clocks
o 26 clocks

White company needs a machine, which costs $2,000 and can will be depreciated in a straight-line
manner over its four-years life. It will have no salvage value. The company can lease the equipment with
payments of $800 due at the beginning of each year. The company is in zero tax bracket. Knowing that
the appropriate interest rate is 12%, should ABC buy or lease the equipment? NAL: NPV of Lease minus
Buy

o Should buy as the NAL is - $485.249
o Should lease as the NAL is $485.249
o Should lease as the NAL is $890.823
o Should buy as the NAL is - $721.465
o None of these options

Companies will frequently use information from which of the following sources when conducting their
credit analysis?

o Payment history supplied by banks.

o Financial statements supplied by the customer.
o Payment history supplied by other firms.
o All of these.
o None of these.

For 2014, Blue Moon had sales of $318,000, cost of goods sold of $249,000 and inventory of $138,000.
For 2015, sales were $349,000, cost of goods sold were $256,000, and inventory was $155,000. What
was the inventory period for 2015?

o 194.01 days

o 208.88 days
o 206.03 days
o 216.99 days
o 231.09 days

You own 300 shares of Abco, Inc. stock. The company has stated that it plans on issuing a dividend of
$.60 a share one year from today and then issuing a final liquidating dividend of $24 a share two years
from today. Your required rate of return is 9%. Ignoring taxes, what is the value of one share of this stock
today?

o $28.0
o $24.0
o $28.5
o $20.75
o $26.2

Priscilla owns 500 shares of Delta stock. It is January 1, 2006, and the company recently issued a
statement that it will pay a $1.00 per share dividend on December 31, 2006 and a $1.00 per share
dividend on December 31, 2007. Priscilla does not want any dividend this year but does want as much

dividend income as possible next year. Her required return on this stock is 12%. Ignoring taxes, what will
Priscilla's homemade dividend (in total) per share be in 2007?

o $2.12
o $2.00
o $1.68
o $.50
o $1.62

Net disbursement float means the:

o collection float equals the disbursement float.
o the available balance is less than the book balance.
o disbursement float and book cash.
o book balance is greater than the ledger balance.
o disbursement float exceeds the collection float.

In the event of loan default,

o The lessee owns the asset
o The lease payments are made directly to the lessor
o The lease payments are made directly to the shareholders
o The lease will be canceled
o The lender has a first lien on the asset

Reasons for leasing are

o The firm's ROA is generally higher with an operating lease
o Tax advantages

o Debt displacement
o All of these
o None of these

A company is considering either an open market share repurchase or a cash dividend of an equal
amount. Compared to the open market share repurchase, the cash dividend is most likely to:

o increase a shareholder's wealth by a greater amount.
o increase a shareholder's wealth by a lesser amount.
o have a relative impact that depends on the tax treatment of the two alternatives.
o none of these
o all of these

Flexible short-term financial policies tend to:

o minimize the investment in inventory.
o maintain low cash balances.
o support few investments in marketable securities.
o tightly restrict credit sales.
o None of these

The Winter Wear Company has expected EBIT of $2,100, an unlevered cost of capital of 14% and a tax
rate of 40%. The company also has $2,800 of debt that carries a 8% coupon. The debt is selling at par
value. What is the value of this firm?

o $9,900
o $10,852
o $11,748
o $10,120
o $12,054

Singal Inc. is preparing its cash budget. It expects to have sales of $20,000 in January, $25,000 in
February, and $35,000 in March. If 20% of sales are for cash, 60% of credit sales paid in the month after
the sale, and another 40% of credit sales paid 2 months after the sale, what are the expected cash
receipts for March?

o $29,700
o $33,000
o $25,400
o $36,300
o $26,730

The cash cycle is defined as the time between:

o selling a product and collecting the accounts receivable.
o selling a product and paying the supplier of that product.
o the sale of inventory and cash collection.
o the arrival of inventory and cash collected from receivables.

o cash disbursements and cash collection for an item.

One difference between a financial lease and operating lease is that:

o there is often an option to buy in an operating lease.
o an operating lease is often cancellable by the lessor.
o a financial lease is often cancellable by the lessee.
o there is a often a call option in a financial lease.
o None of these

Homemade dividends are described by Modigliani and Miller to be the:

o re-arrangement of the firm's dividend stream as management needs.
o re-arrangement of the firm's dividend stream by investors buying or selling their holdings in the

stock.
o dividend one pays oneself to avoid risky stocks.
o present value of all dividends to be paid.
o None of these.

Arizona Seafood, Inc., plans $45 million in new borrowing to repurchase 3.6 million shares at their
market price of $ 12.50. The yield on the new debt will be 12%. The company has 43.6 million shares
outstanding and EPS of $0.60 before the repurchase. The company's tax rate is 40%. The company's EPS
after the share repurchase will be closest to:

o $0.50
o $0.67
o $0.57
o $0.65

Sources of cash do not include:

o decreases in notes payable.
o increases in cash flow.
o increases in accounts payable.
o increases in borrowing from banks.
o increases in taxes payable.

Your firm is considering leasing a new radiographic device. The lease lasts for 5 years. The lease calls for 5
payments of $50,000 per year, due at the beginning of each year. The computer would cost $250,000 to
buy and would be straight-line depreciated to a zero-salvage value over 5 years. The firm can borrow at a

rate of 12%. The corporate tax rate is 40%. All tax benefit will be received at the end of the period. What
is the after-tax cash flow from leasing instead of buying in YEAR 5?

o -$1,000
o -$0
o -$6,000
o -$31,000
o -$16,000

Mid-State BankCorp recently declared a 9-for-2 stock split. Prior to the split, the stock sold for $90 per
share. If the firm's total market value is unchanged by the split, what will the stock price be following the
split?

o $20.63
o $20.00
o $22.86
o $24.00
o $21.71

A lease is likely to be most beneficial to both parties when:

o A lease cannot be beneficial to both parties.
o A lease always has zero NPV, so both parties always break even.
o The lessor's tax rate is equal to the lessee's
o None of these
o All of these

Super Helmets corporation is considering buying a machine that costs $660,000. The machine will be
depreciated over 6 years by the straight-line method and will be worthless at that time. The corporation
can also lease the machine. The corporation can issue bonds at a 9% interest rate. If the corporate tax

rate is 40%, what would the lease payment have to be for both the lessor and the lessee to be indifferent
about the lease?

o $ 146,166
o $ 105,593
o $ 173,593
o $ 150,847
o $ 121,515

Fauver Industries plans to have a capital budget of $600,000. It wants to maintain a target capital
structure of 40% debt and 60% equity, and it also wants to pay a dividend of $240,000. If the company
follows the residual dividend model, how much net income must it earn to meet its investment
requirements, pay the dividend, and keep the capital structure in balance?

o $615,000
o $584,250
o $645,750
o $600,000
o $711,939

A key assumption of MM's Proposition I without taxes is:

o that financial leverage increases risk.
o that individuals can borrow on their own account at rates less than the firm.
o managers are acting to maximize the value of the firm.
o that individuals must be able to borrow on their own account at rates equal to the firm.

o All of these.

Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a

market price of $42 a share. The current cost of equity is 12% and the tax rate is 40%. Gail is considering
restructure the capital with $1 million of debt with a coupon rate of 8%. The debt will be sold at par
value. What is the levered value of the equity?

o $3.70 million
o $3.90 million
o $2.70 million
o $3.30 million
o $2.76 million

Smith and Johnson have expected sales of $380, $330, $450 and $480 for the months of January through
April, respectively. The accounts receivable period is 20 days. How much did the firm collect in the
month of March? Assume that a year has 360 days.

o $370
o $360
o $385
o $340
o $430

MM Proposition I with taxes supports the theory that:

o a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
o the value of a firm is inversely related to the amount of leverage used by the firm.
o there is a negative linear relationship between the amount of debt in a levered firm and its

value.
o the value of an levered firm is equal to the value of a unlevered firm plus the value of the

interest tax shield.

o none of these

The optimal capital structure has been achieved when the:

o debt-equity ratio is such that the cost of debt exceeds the cost of equity.
o debt-equity ratio is equal to 1.
o weight of equity is equal to the weight of debt.
o debt-equity ratio selected results in the highest possible value of the firm.
o debt-equity ratio selected results in the highest possible weighed average cost of capital.

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if
any, will it pay out? Capital budget: $1,000,000. %Debt: 65%. Net income (NI): $625,000

o $225,000
o $192,909
o $213,750
o $275,000

o $183,264