The mixture of long-term funding sources that a firm uses to finance its assets
Which of the following factors affect the optimal (best) capital structure for
the firm’s cost of debt, cost of common equity, and cost of preferred stock (if
all of the above
When forecasting changes in Net Working Capital, which of the following could
spontaneously as sales increase?
decrease in common stock on the balance sheet
increases in gross fixed equipment
increase in long-term debt
increase in accounts receivables
Your firm is in the 30% tax bracket with a before-tax required rate of return
of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt
calculate its after-tax WACC.
The following net cash flows are projected for two separate projects. Your
of return is 12%.
Calculate the payback period for each project.
Calculate the NPV of each project.
Calculate the IRR of each project.
Which project(s) would you accept and why?
6.The relevant cash flows in capital
budgeting can best be described as:
incremental after-tax net income
incremental cash flows
externality cash flows
changes in fixed asset cash flows
the following to answer questions 7-8:
have been asked to render an opinion to your boss as to whether your employer
should enter into the short-term capital project described below.
project requires the purchase of a new piece of equipment for a price of
firm has paid a consultant $1,000 to estimate the revenues expected from the
project. The firm that ships the equipment and installs it in our plant will
project’s incremental operating cashflows before taxes will be $12,000 per year
for three years. At the end of three years the equipment will be sold for
$5000. The equipment has a three-year useful life and will be depreciated using
the three-year MACRS (Modified Accelerated Cost Recovery System – current U.S.
accounting rules) schedule that specifies the percentage of equipment costs to
be depreciated per year as follows: 33.3%, 44.5%, 14.8%,7.4%). The tax rate is
34% and the firm’s required rate of return is 17%.
a. What is the Acquisition Cost (the tax basis) for the equipment?
What are the depreciation deductions for years 1, 2, and 3?
If the asset is sold for more than its depreciated value, the difference is
income and taxes must be paid on that gain. What will be the after tax net cash
from the sale of the asset at the end of year three?
Given the Acquisition Cost, the incremental operating cashflows, the
EBIT, and the taxes owed, calculate the total operating cash flow for each of
Based on the net cash flows that you calculated in the question above, what is
net present value
internal rate of return
9.What is the relevant initial cash
outflow for the following project?
cost $ 50,000
increase needed $ 2,000
increase needed $ 3,000
in Accounts payable $ 2,000
Your firm is considering an acquisition with incremental net cash flows
projected to be $152,500 in Year 10, the last year of the analysis that you
have done to evaluate the
What is the present value of the “Terminal Value” of this opportunity if you
a long-term growth rate of 3% and your firm’s WACC is 9.0%?
If the seller insists he will accept no less than $2 million and the total
the incremental cash flows for years 0-10 of your forecast = $1 million, should
proceed with the Acquisition? Why or why not?
The sales break-even point is defined as:
the level of sales that a firm must reach to cover fixed costs
the level of income that a firm must reach to cover variable costs
the level of sales that a firm must reach to cover all operating costs
the point where operating income equals fixed costs
Given fixed costs of $200,000, variable costs of $6.20 per unit, and a sales
price per unit of $7.00, calculate the break-even point in units.
Operating leverage has the effect of triggering:
a smaller percentage change in EBIT when a given percentage change in sales
a smaller given percentage change in EBIT when a larger percentage change in
a smaller given percentage change in EBIT when a smaller percentage change in
a larger percentage change in EBIT when a given percentage change in sales
If variable costs = $10.00 per unit; and the selling price = $13.00 per unit,
point in units = 100,000, calculate the fixed costs.
Firms with high fixed operating costs:
tend to have low variable costs
tend to have high variable costs
tend to have low operating leverage
tend to have low sales levels
As a firm moves to a capital structure with higher debt:
financial risk of the firm increases
financial risk of the firm decreases if interest payments are tax deductible
financial risk of the firm is unaffected if interest payments are tax
Which of the following are investment grade bonds?
AAA U.S. Treasury Bonds
A- corporate mortgage bonds
BBB corporate debentures
All of the above are investment grade bonds.
For investors, an important characteristic of a secured bond is that it has:
a plan for paying off the bond at maturity
no restrictive covenants
a claim on specific assets in the event of default
an independent trustee
Which statement is FALSE regarding preferred stock?
Preferred stock is issued by a limited number of corporations.
Preferred shareholders have priority over the creditors of the corporation.
Preferred shareholders do not have voting rights.
All of the above are false.
Which of the following statements about residual income – i.e., net income
after taxes -is not accurate?
it is income left over after other claimants of the firm have been paid
it is almost always paid out in the form of a cash dividend to both common and
it can be reinvested in the firm
it can be reinvested in the firm and can be paid in the form of dividends to
The board of directors of a publicly traded company:
is elected by, and represents the interests of the common stockholders
is part of the professional management team
is appointed by the CEO
is a figurehead position only
Why might a firm issue new stock?
to send a signal
for dilution–too few shares outstanding makes the share price too high for
to increase its debt/equity ratio
to raise capital and therefore lower the firm’s financial risk
Investors are likely to view a new issuance of common stock as a signal that:
A) prospects of the firm are better
than generally believed
prospects of the firm are worse than generally believed
the firm is preparing for a new debt issue
management or directors of the board are being put in place