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Finance fin570 final exam solutions

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Math questions:

 

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.30 million for land and $9.70 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.25 million, $2.21 million above book value. The farm is expected to produce revenue of $2.01 million each year, and annual cash flow from operations equals $1.91 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.) Answer ______

 

2. Capital Co. has a capital structure, based on current market     values, that consists of 41 percent debt, 3 percent preferred stock, and 56 percent common stock. If the returns required by investors are 10 percent, 11 percent, and 16 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

After Tax WACC? Answer _______

 

3. Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

 

 

A

$1,844,022

B

$2,123,612

C

$803,010

D

$2,303,010

 

 

 

4. Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?

 

A. 57.9

B.65.2

C.61.7

D. 64.3

 

5. Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

 

6. Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

            

 

A

$16,670

B

$19,444

C

$26,454

D

$22,680

 

7. PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

 

 

A

$2,735,200

B

$2,431,224

C

$2,615,432

D

$2,815,885

 

8. PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000, $112,000, $164,000, $84,000, and $242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

 

 

A

$480,906

B

$477,235

C

$429,560

D

$414,322

 

9. Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)

 

 

A

$5,233,442

B

$2,667,904

C

$3,594,524

D

$1,745,600

 

10. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

 

 

 

11. Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

 

 

 

12. PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?

 

 

A

$12.50

B

$11.63

C

$9.72

D

$13.50

 

13. Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

 

 

 

14. How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

 

 

 

15. The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

 

 

A

15.00%

B

14.65%

C

15.36%

D

12.00%

 

 

16. M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?

 

 

 

17. Multiple Analysis: Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

 

 

A

$453.6 million

B

$1,315 million

C

$1,787 million

D

$1,334 million

 

18. External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?

 

 

 

19. Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

 

 

A

15%, 85%

B

85%, 15%

C

45%, 55%

D

55%, 45%

 

 

 

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July 1, 2023
    

 

 

15.              The journal entry to record the declaration of a cash dividend would include a:

A)credit to Cash

B)debit to Dividend Expense

C)debit to Retained Earnings

D)debit to Dividends Payable

 

16.  A Deficit in Retained Earnings can be created by all of the following except.

A)  Net losses exceeding net income

B)   Paying more in dividends than earnings generated

C)   Receiving less than the par value when stock is issued

D)  All of the above can create a deficit

 

17.The entry to record the declaration and the entry to record the payment of a cash dividend would include all the following except:

A)  Credit to dividend payable

B)  Debit to Retained Earnings

C)   Debit to dividend payable

D)   Debit to dividend expense

 

18.              The account "Stock Dividends Distributable" would be shown on a company's financial statements as:

A)contributed capital

B)an expense

C)a liability

D)revenue

 

 

19.              A common stock dividend results in a decrease in:

A)assets

B)common stock

C)retained earnings

D)both assets and retained earnings

 

20.  Which of the following is true about a stock dividend.

A)  Assets decrease and owners’ equity decreases

B)   Assets increase and Liabilities increase

C)   Contributed Capital increases and Retained earnings decreases

D)   Liabilities decrease and Contributed Capital Increases

 

 

21.              PAC Corporation has 500,000 shares of $5 par value common stock authorized, and 300,000 shares issued and outstanding. The market value of the stock is $14 per share. The journal entry to record the declaration of a 15% stock dividend would include a:

A)credit to dividend payable for $1,050,000

B)credit to Common Stock for $375,000

C)debit to Retained Earnings for $630,000

D)Credit to Stock Dividends Distributable for $375,000

 

22.              Foster Corporation has 800,000 shares of $3 par value common stock authorized, and 350,000 shares issued and outstanding. The market value of the stock is $22 per share. The journal entry to record the declaration of a 75% stock dividend would include a:

A)credit to dividend payable for $1,800,000

B)credit to Common Stock Dividends Distributable for $787,500

C)debit to Retained Earnings for $5,775,000

D)credit to Common Stock Dividends Distributable for $4,987,500

 

23.                 Olio Corporation has 900,000 shares of $1 par value common stock authorized, and 550,000 shares issued and outstanding. The market value of the stock is $18 per share. The journal entry to record the declaration of a 10% stock dividend would include a:

A)credit to dividend payable for $90,000

B)credit to Common Stock Dividends Distributable for $90,000

C)debit to Retained Earnings for $990,000

D)credit to Paid-in-Capital in Excess of Par for $55,000

 

 

24.              The journal entry to record the distribution of a small common stock dividend would include a:

A)credit to Paid-in-Capital in Excess of Par--Common Stock

B)debit to Stock Dividends Distributable

C)credit to Retained Earnings

D)debit to Common Stock

 

 

default image
July 1, 2023
    

 

 

15.              The journal entry to record the declaration of a cash dividend would include a:

A)credit to Cash

B)debit to Dividend Expense

C)debit to Retained Earnings

D)debit to Dividends Payable

 

16.  A Deficit in Retained Earnings can be created by all of the following except.

A)  Net losses exceeding net income

B)   Paying more in dividends than earnings generated

C)   Receiving less than the par value when stock is issued

D)  All of the above can create a deficit

 

17.The entry to record the declaration and the entry to record the payment of a cash dividend would include all the following except:

A)  Credit to dividend payable

B)  Debit to Retained Earnings

C)   Debit to dividend payable

D)   Debit to dividend expense

 

18.              The account "Stock Dividends Distributable" would be shown on a company's financial statements as:

A)contributed capital

B)an expense

C)a liability

D)revenue

 

 

19.              A common stock dividend results in a decrease in:

A)assets

B)common stock

C)retained earnings

D)both assets and retained earnings

 

20.  Which of the following is true about a stock dividend.

A)  Assets decrease and owners’ equity decreases

B)   Assets increase and Liabilities increase

C)   Contributed Capital increases and Retained earnings decreases

D)   Liabilities decrease and Contributed Capital Increases

 

 

21.              PAC Corporation has 500,000 shares of $5 par value common stock authorized, and 300,000 shares issued and outstanding. The market value of the stock is $14 per share. The journal entry to record the declaration of a 15% stock dividend would include a:

A)credit to dividend payable for $1,050,000

B)credit to Common Stock for $375,000

C)debit to Retained Earnings for $630,000

D)Credit to Stock Dividends Distributable for $375,000

 

22.              Foster Corporation has 800,000 shares of $3 par value common stock authorized, and 350,000 shares issued and outstanding. The market value of the stock is $22 per share. The journal entry to record the declaration of a 75% stock dividend would include a:

A)credit to dividend payable for $1,800,000

B)credit to Common Stock Dividends Distributable for $787,500

C)debit to Retained Earnings for $5,775,000

D)credit to Common Stock Dividends Distributable for $4,987,500

 

23.                 Olio Corporation has 900,000 shares of $1 par value common stock authorized, and 550,000 shares issued and outstanding. The market value of the stock is $18 per share. The journal entry to record the declaration of a 10% stock dividend would include a:

A)credit to dividend payable for $90,000

B)credit to Common Stock Dividends Distributable for $90,000

C)debit to Retained Earnings for $990,000

D)credit to Paid-in-Capital in Excess of Par for $55,000

 

 

24.              The journal entry to record the distribution of a small common stock dividend would include a:

A)credit to Paid-in-Capital in Excess of Par--Common Stock

B)debit to Stock Dividends Distributable

C)credit to Retained Earnings

D)debit to Common Stock

 

 

default image
July 1, 2023
    

 

 

15.              The journal entry to record the declaration of a cash dividend would include a:

A)credit to Cash

B)debit to Dividend Expense

C)debit to Retained Earnings

D)debit to Dividends Payable

 

16.  A Deficit in Retained Earnings can be created by all of the following except.

A)  Net losses exceeding net income

B)   Paying more in dividends than earnings generated

C)   Receiving less than the par value when stock is issued

D)  All of the above can create a deficit

 

17.The entry to record the declaration and the entry to record the payment of a cash dividend would include all the following except:

A)  Credit to dividend payable

B)  Debit to Retained Earnings

C)   Debit to dividend payable

D)   Debit to dividend expense

 

18.              The account "Stock Dividends Distributable" would be shown on a company's financial statements as:

A)contributed capital

B)an expense

C)a liability

D)revenue

 

 

19.              A common stock dividend results in a decrease in:

A)assets

B)common stock

C)retained earnings

D)both assets and retained earnings

 

20.  Which of the following is true about a stock dividend.

A)  Assets decrease and owners’ equity decreases

B)   Assets increase and Liabilities increase

C)   Contributed Capital increases and Retained earnings decreases

D)   Liabilities decrease and Contributed Capital Increases

 

 

21.              PAC Corporation has 500,000 shares of $5 par value common stock authorized, and 300,000 shares issued and outstanding. The market value of the stock is $14 per share. The journal entry to record the declaration of a 15% stock dividend would include a:

A)credit to dividend payable for $1,050,000

B)credit to Common Stock for $375,000

C)debit to Retained Earnings for $630,000

D)Credit to Stock Dividends Distributable for $375,000

 

22.              Foster Corporation has 800,000 shares of $3 par value common stock authorized, and 350,000 shares issued and outstanding. The market value of the stock is $22 per share. The journal entry to record the declaration of a 75% stock dividend would include a:

A)credit to dividend payable for $1,800,000

B)credit to Common Stock Dividends Distributable for $787,500

C)debit to Retained Earnings for $5,775,000

D)credit to Common Stock Dividends Distributable for $4,987,500

 

23.                 Olio Corporation has 900,000 shares of $1 par value common stock authorized, and 550,000 shares issued and outstanding. The market value of the stock is $18 per share. The journal entry to record the declaration of a 10% stock dividend would include a:

A)credit to dividend payable for $90,000

B)credit to Common Stock Dividends Distributable for $90,000

C)debit to Retained Earnings for $990,000

D)credit to Paid-in-Capital in Excess of Par for $55,000

 

 

24.              The journal entry to record the distribution of a small common stock dividend would include a:

A)credit to Paid-in-Capital in Excess of Par--Common Stock

B)debit to Stock Dividends Distributable

C)credit to Retained Earnings

D)debit to Common Stock

 

 

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