### Q6 The exercise price is the price that must be paid for a share of common stock when it is bought by exercising a warrant

T/F?

### Q6 The strike price is different from the exercise price and deals with convertibles rather than with warrants

T/F?

### Q6 If the current price of a stock is below the strike (exercise) price and there is still time before expiration, there will not be a time value in the market price of a call option on the stock.

T/F?

### Q6 An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

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###
Q6 Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

A. An increase in GCC's stock price.

B. An increase in the exercise price of the option.

C. An increase in the amount of time until the option expires.

D. An increase in the risk-free rate.

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

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### Q6 An investor who writes call options against stock held in his or her portfolio is said to be selling ____ options.

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Q6 Deeble Construction Co.'s stock is trading at $30 a share. There are also call options on the company's stock, some with an exercise price of $25 and some with an exercise price of $35. All options expire in three months. Which of the following best describes the value of these options?

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

b. The options with the $25 exercise price will sell for less than the options with the $35 exercise price.

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

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

e. If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5.

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### Q6 Suppose you believe that Du Pont's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $83.00 per share. If you bought a 100-share contract for $510.25 and Du Pont's stock price actually dropped to $63.00, you would make

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### Q6 The current price of a stock is $22. In one year, the price will be either $27 or $17. The annual risk-free rate is 6 percent. What is the price of a call option on the stock that has an exercise price of $22 and that expires in one year, rounded to the nearest dollar? [Hint: use daily compounding.]

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### Q7 The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.

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### Q7 Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

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Q7 Which of the following best describes free cash flow?

a.Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investments in operating capital have been made.

b.Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investments in operating capital have been made.

c.Free cash flow is the net change in the cash account on the balance sheet.

d.Free cash flow is equal to net income plus depreciation.

e.Free cash flow is equal to the cash flow from non-taxable transactions.

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### Q7 A corporation with a marginal tax rate of 35 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par, assuming a 70 percent dividend exclusion?

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### Q7 Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company's tax rate will remain at 40 percent. If the company's forecast is correct, how much will net income increase or decrease, as a result of the expansion?

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### Q7 Giglio Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT) = $500; Total assets = $2,000; and Total operating capital = $1700. The information for the current year is: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,300; and Total operating capital = $2,100. What is the free cash flow for the current year?

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Q7 A company has the following balance sheet. What is its net operating working capital?

Cash10Accounts payable30

Short-term investments30 Accruals10

Accounts receivable50 Notes payable50 Inventory40 Current liabilities90 Current assets130 Long-term debt60 Net fixed assets100 Common equity30 Retained earnings50 Total assets$230 Total liab. & equity$230

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### Q7 Tibbs Inc. has the following information for the current year: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,900; Short-term investments = $200; Stockholders equity = $1,800; Debt = $700; and Total net operating capital = $2,300. What is the Return on invested capital (ROIC) for the current year?

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###
Q7 Casey Motors recently reported the following information:

•Net income = $600,000.

•Tax rate = 40%.

•Interest expense = $200,000.

•Operating capital = $9 million.

•After-tax cost of capital = 10%.

What is the companys EVA?

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### Q8 Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

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### Q8 Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

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### Q8 Two firms have the same current ratio, 0.75, and the same amount of sales. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B

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Q8 Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

a.The transactions will have no effect on the current ratios.

b.The current ratios of both firms will be increased.

c.The current ratios of both firms will be decreased.

d.Only Pepsi Corporation's current ratio will be increased.

e.Only Coke Company's current ratio will be increased.

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Q8 Company R and Company S each have the same operating income (EBIT) and basic earning power (BEP) ratio. Company S, however, has a lower times-interest-earned (TIE) ratio. Which of the following statements is most correct?

a.Company S has a higher ROA.

b.Company S has a higher net income.

c.Company S has a higher interest expense.

d.Statements a and b are correct.

e.Statements a, b, and c are correct.

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Q8 Tapley Dental Supply Company has the following data:

Net income:$240 Sales:$10,000 Total assets:$6,000

Debt ratio:75% TIE ratio:2.0 Current ratio:1.2 BEP ratio:13.33%

If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

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### Q8 Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2 million in sales and its current liabilities are $1 million. What is the company's inventory turnover ratio?

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### Q8 Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000. Its total assets turnover was 6.0. The company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?

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### Q8 The Meryl Corporation's common stock is currently selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

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### Q8 Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income, but its ROE is 30 percent. What is B's debt ratio? (Hint: Begin by looking at the Du Pont equation.)

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### Q9 The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

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### Q9 A firm's profit margin is 5 percent, its debt/assets ratio is 56 percent, and its dividend payout ratio is 40 percent. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require external financing.

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### Q9 If the capital intensity ratio (A*/S0) of a firm actually decreases as sales increase, use of the percentage of sales method will typically understate the amount of additional funds required, other things held constant

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Q9 A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)?

a.The company has a lot of excess capacity.

b.The company has a high dividend payout ratio.

c.The company has a lot of spontaneous liabilities that increase as sales increase.

d.The company has a high profit margin.

e.All of the answers above are correct.

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Q9 Jill's Wigs Inc. had the following balance sheet last year:

Cash800 Accounts payable350

Accounts receivable450 Accrued wages150 Inventory950 Notes payable2,000 Net fixed assets34,000 Mortgage 26,500 Common stock3,200

Retained earnings4,000 Total assets$36,200Total liabilities & equity$36,200

Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

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Q9 Kenney Corporation reported the following income statement for the most recent year (numbers are in millions of dollars):

Sales $7,000

Total operating costs 3,000

EBIT $4,000

Interest 200

Earnings before tax (EBT)$3,800

Taxes (40%) 1,520

Net income available to common shareholders$2,280

The company forecasts that its sales will increase by 10 percent in the next year and its operating costs will increase in proportion to sales. The company's interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for the next year?

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### Q9 Using the AFN formula approach, calculate the total assets of Harmon Photo Company given the following information: Sales this year = $3,000; increase in sales projected for next year = 20 percent; net income this year = $250; dividend payout ratio = 40 percent; projected excess funds available next year = $100; accounts payable = $600; notes payable = $100; and accrued wages and taxes = $200. Except for the accounts noted, there were no other current liabilities. Assume that the firm's profit margin remains constant and that the company is operating at full capacity.

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Q9 The Tapley Company is trying to determine an acceptable growth rate in sales. While the firm wants to expand, it does not want to use any external funds to support such expansion due to the particularly high interest rates in the market now. Having gathered the following data for the firm, what is the maximum growth rate it can sustain without requiring additional funds?

Capital intensity ratio= 1.2

Profit margin= 10%

Dividend payout ratio= 50%

Current sales= $100,000

Spontaneous liabilities= $10,000

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Q9 Snowball & Company has the following balance sheet:

Current assets$ 7,000 A/P & Accruals$ 1,500

Fixed assets3,000

S-T (3-month) Loans2,000

Common Stock1,500

Ret. Earnings 5,000

Total assets$10,000

Total claims$10,000

Snowball's after-tax profit margin is 11 percent, and the company pays out 60 percent of its earnings as dividends. Its sales last year were $10,000; its assets were used to full capacity; no economies of scale exist in the use of assets; and the profit margin and payout ratio are expected to remain constant. The company uses the AFN equation to estimate funds requirements, and it plans to raise any required external capital as short-term bank loans. If sales grow by 50 percent, what will Snowball's current ratio be after it has raised the necessary expansion funds? (Note: Ignore any financing feedback effects.)

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Q9 Mom's Cookie Company has the following balance sheet for the most recent year:

Inventory $100

Payables and accruals$ 80

Other assets300

Other debt170

Common equity 150

Total assets$400

Total claims$400

Sales for the most recent year were $400; the after-tax profit margin was 8 percent; Mom paid out half of her earnings as dividends, and all assets except inventory were operated at full capacity and will increase in proportion to increases in sales. Data on three companies which Mom uses for benchmark comparisons are shown below:

Sales Inventory

A $300 $ 60

B 500 80

C 700 100

Mom forecasts a 50 percent increase in sales to $600 for the next year. Using the AFN equation and assuming constant ratios, Mom's accountant forecasted AFN for the next year. If you forecasted her inventory requirements by the regression method rather than the percentage of sales method, by how much would the AFN change? Assume that the profit margin remains constant at 8 percent, and excess inventory can be sold off.

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### Q10 The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to support its assets

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### Q10 The component costs of capital are market-determined variables in as much as they are based on investors' required returns

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Q10 Which of the following factors in the discounted cash flow (DCF) approach to estimating the cost of common equity is the least difficult to estimate?

a.Expected growth rate, g.

b.Dividend yield, D1/P0.

c.Required return, rs.

d.Expected rate of return, .

e.All of the above are equally difficult to estimate.

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Q10 For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.)

a.rd > rs > WACC.

b.rs > rd > WACC.

c.WACC > rs > rd.

d.rs > WACC > rd.

e.None of the statements above is correct.

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### Q10 The Global Advertising Company has a marginal tax rate of 40 percent. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. What is Global's cost of common stock?

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Q10 An analyst has collected the following information regarding Christopher Co.:

•The company's capital structure is 70 percent equity, 30 percent debt.

•The yield to maturity on the company's bonds is 9 percent.

•The company's year-end dividend is forecasted to be $0.80 a share.

•The company expects that its dividend will grow at a constant rate of 9 percent a year.

•The company's stock price is $25.

•The company's tax rate is 40 percent.

•The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital.

Given this information, calculate the company's WACC.

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### Q10 A company's balance sheets show a total of $30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of $25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is $30 million. The current stock price is $7.5 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects?

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Q10 A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm's weighted average cost of capital.

rd= 6%

Tax rate= 40%

P0= $25

Growth= 0%

D0= $2.00

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Q10 Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

•The company can issue bonds at a yield to maturity of 8.4 percent.

•The cost of preferred stock is 9 percent.

•The company's common stock currently sells for $30 a share.

•The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year.

•Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.

•The company's tax rate is 30 percent.

What is the company's weighted average cost of capital (WACC)?

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Tg07 A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales $1,000

Costs 700

Depreciation 100

EBIT $ 200

Interest expense 50

EBT $ 150

Taxes (40%) 60

Net income$ 90

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### Tg07 Bates Motors has the following information for the previous year: Net income $200; Net operating profit after taxes (NOPAT) $300; Total assets $1,000; and Total net operating capital $800. The information for the current year is: Net income $500; Net operating profit after taxes (NOPAT) $400; Total assets $1,300; and Total net operating capital $900. What is the free cash flow for the current year?

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Tg07 Casey Motors recently reported the following information:

•Net income $600,000.

•Tax rate 40%.

•Interest expense $200,000.

•Operating capital $9 million.

•After-tax cost of capital 10%.

What is the company's EVA?

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### Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a 365-day year. The company wants to reduce its DSO to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change?

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Tg07 You are considering adding a new product to your firm's existing product line. It should cause a 15 percent increase in your profit margin (i.e., new PM = old PM 1.15), but it will also require a 50 percent increase in total assets (i.e., new TA = old TA 1.5). You expect to finance this asset growth entirely by debt. If the following ratios were computed before the change, what will be the new ROE if the new product is added and sales remain constant?

Ratios before new product

Profit margin=0.10

Total assets turnover=2.00

Equity multiplier=2.00

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Tg07 Collins Company had the following partial balance sheet and complete annual income statement:

Partial Balance Sheet:

Cash $ 20

A/R 1,000

Inventories 2,000

Total current assets $3,020

Net fixed assets 2,980

Total assets $6,000

Income Statement:

Sales $10,000

Cost of goods sold 9,200

EBIT $ 800

Interest (10%) 400

EBT $ 400

Taxes (40%) 160

Net Income $ 240

The industry average DSO is 30 (based on a 365-day year). Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10 percent interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?

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Tg07 Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income, but its ROE is 30 percent. What is B's debt ratio? (Hint: Begin by looking at the Du Pont equation.)

NOW DO Tg07 14

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Tg07 A firm has the following balance sheet:

Cash $ 20

Accounts payable $ 20

Accounts receivable 20

Notes payable 40

Inventory 20

Long-term debt 80

Fixed assets 180

Common stock 80

Retained earnings 20

Total liabilitiesand equity $240

Total assets $240

Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional funds (AFN) will be needed?

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Tg07 Splash Bottling's December 31st balance sheet is given below:

Cash $ 10

Accounts payable $ 15

Accounts receivable 25

Notes payable 20

Inventory 40

Accrued wages and taxes 15

Net fixed assets 75

Long-term debt 30

Common equity 70

Total liabilities and equity$150

Total assets$150

Sales during the past year were $100, and they are expected to rise by 50 percent to $150 during next year. Also, during last year fixed assets were being utilized to only 85 percent of capacity, so Splash could have supported $100 of sales with fixed assets that were only 85 percent of last year's actual fixed assets. Assume that Splash's profit margin will remain constant at 5 percent and that the company will continue to pay out 60 percent of its earnings as dividends. To the nearest whole dollar, what amount of nonspontaneous, additional funds (AFN) will be needed during the next year?

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Tg07 Jackson Co. has the following balance sheet for the most recent year (as of December 31).

Current assets$ 600,000

Accounts payable$ 100,000

Fixed assets 400,000

Accruals 100,000

Notes payable100,000

Total current liabilities$ 300,000

Long-term debt 300,000

Total equity400,000

Total assets$1,000,000 Total claims$1,000,000

During the most recent year, the company reported sales of $5 million, net income of $100,000, and dividends of $60,000. The company anticipates its sales will increase 20 percent in the next year and its dividend payout will remain at 60 percent. Assume the company is at full capacity, so its assets and spontaneous liabilities will increase proportionately with an increase in sales.

Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. Given its forecast, how much long-term debt will the company have to issue in the next year?

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Tg07 An analyst has collected the following information regarding Christopher Co.:

•The company's capital structure is 70 percent equity, 30 percent debt.

•The yield to maturity on the company's bonds is 9 percent.

•The company's year-end dividend is forecasted to be $0.80 a share.

•The company expects that its dividend will grow at a constant rate of 9 percent a year.

•The company's stock price is $25.

•The company's tax rate is 40 percent.

•The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.

NOW DO Tg07 13

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Tg07 Hilliard Corp. wants to calculate its weighted average cost of capital (WACC). The company's CFO has collected the following information:

•The company's long-term bonds currently offer a yield to maturity of 8 percent.

•The company's stock price is $32 per share (P0 = $32).

•The company recently paid a dividend of $2 per share (D0 = $2.00).

•The dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).

•The company pays a 10 percent flotation cost whenever it issues new common stock (F = 10%).

•The company's target capital structure is 75 percent equity and 25 percent debt.

•The company's tax rate is 40 percent.

•The company anticipates issuing new common stock during the upcoming year.

What is the company's WACC?

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### JsTest An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

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### JsTest An investor who writes call options against stock held in his or her portfolio is said to be selling ____ options.

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### JsTest The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, what is the price of a call option on the stock that has an exercise price of 22 and that expires in one year, rounded to the nearest dollar? [Hint: Use daily compounding]

This solution uses the Portfolio Replication Method. The stock's range of payoffs in one year is $27 - $17 = $10. At expiration, the option will be worth $27 - $22 = $5 if the stock price is $27, and zero if the stock price $17. The range of payoffs for the stock option is $5 - 0 = $5. Equalize the range to find the number of shares of stock: Option range / Stock range = $5/$10 = 0.5. With 0.5 shares, the stock's payoff will be either $13.5 or $8.5. The portfolio's payoff will be $13.5 - $5 = $8.5, or $8.5 - 0 = $8.5. The present value of $8.5 at the daily compounded risk-free rate is: PV = $8.5 / (1+ (0.06/365))365 = $8.005. The option price is the current value of the stock in the portfolio minus the PV of the payoff: V = 0.5($22) - $8.005 = $3.00

$3.00

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JsTest An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:

•The price of the stock is $40.

•The strike price of the option is $40.

•The option matures in 3 months (t = 0.25).

•The standard deviation of the stock's returns is 0.40, and the variance is 0.16.

•The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:

•d1 = 0.175

•d2 = −0.025

•N(d1) = 0.56946

•N(d2) = 0.49003

N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?

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### JsTest Byrd Lumber has 2 million shares of common stock outstanding and its stock price is $15 a share. On the balance sheet, the company has $40 million of common equity. What is the company's Market Value Added (MVA)?

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###
JsTest A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales2000

Costs1200

Depreciation100

EBIT700

Interest Expense200

EBT500

Taxes (40%)200

Net 300

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### JsTest Strother Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT) = $600; Total assets = $2,000; and Total net operating capital = $1800. The information for the current year is: Net income = $900; Net operating profit after taxes (NOPAT) = $800; Total assets = $2,300; and Total net operating capital = $2200. What is the free cash flow of Strother Inc. for the current year?

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JsTest A company has the following balance sheet. What is its net operating working capital?

Cash10 Accounts Payable 20

Short-Term Invest20 Accruals30

Accounts Rec30 Notes Payable20

Inventory 40 Current Liab 70

Current Assets100 Lng-Trm Debt30

Net Fixed Assets80 Common Equity10

Retained Earnings 70

Total Assets180 Total Liab. & Equity180

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###
JsTest Daggy Corporation has the following simplified balance sheet:

Cash25,000

Current Liabilities200,000

Inventory 190,000

Accounts Receivable125,000

Long-Term Debt 300,000

Net Fixed Assets 360,000

Common Equity 200,000

Total Assets 700,000

Total Liab. & Equity 700,000

The company has been advised that their credit policy is too generous and that they should reduce their days' sales outstanding to 36.5 days (assume a 365-day year). The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company's long-term debt. The interest rate on long-term debt is 10 percent and the company's tax rate is 30 percent. The tighter credit policy is expected to reduce the company's sales to $750,000 and result in EBIT of $70,000. What is the company's expected ROE after the change in credit policy?

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### JsTest Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the day's sales outstanding will also increase by 50 percent. If the resulting increase in accounts receivable must be financed externally, how much external funding will Cannon need? Assume a 365-day year

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### JsTest Southeast Packaging's ROE last year was only 5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn?

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### JsTest Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6 percent. However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding. The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80 percent, but the interest rate on the refinanced debt will be 10 percent. The rate on the old debt is 14 percent. Refinancing will not affect sales, which are projected to be $300,000. EBIT will be 11 percent of sales and the firm's tax rate is 40 percent. If AEC refinances its high interest bonds, what will be its projected new ROE?

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###
JsTest A firm has the following balance sheet:

Cash $ 20

Accounts payable $ 20

Accounts receivable 20

Notes payable 40

Inventory 20

Long-term debt 80

Fixed assets 180

Common stock 80

Retained Earnings 20

Total assets $240

Total liabilities and equity $240

Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity,

but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year,

the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional funds (AFN) will be needed?

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JsTest A firm has the following balance sheet:

Cash $ 10

Accounts payable $ 10

Accounts receivable10

Notes payable 20

Inventories 10

Long-term debt 40

Fixed assets 90

Common stock 40

Retained earnings 10

Total assets $120

Total liabilities and equity $120

Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent. Assume that underutilized fixed assets cannot be sold. What are the total external financing requirements for the entire 4 years, that is, the total AFN for the 4-year period?

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JsTest Gemini Beverage has the following historical balance sheet:

Cash $ 20

Accounts payable $ 200

Accounts receivable240

Notes payable 130

Inventories 320

Accrued liabilities 30

Total current assets$ 580

Total current liabilities $ 360

Net plant & equipment 420

Long-term bonds 260

Common stock 270

Retained earnings 110

Total assets$1,000

Total liabilities and equity $1,000

Over the next year Gemini's current assets, accounts payable, and accrued liabilities will grow in proportion to sales. Last year's sales were $800 and this year's sales are expected to increase by 40 percent. The firm will retain $58 in earnings to fund current asset growth, and the rest of the increase will be funded entirely with notes payable. The net plant and equipment account will increase to $500 and will be funded directly by a new equity issue. What will Gemini's new current ratio be after the changes in the firm's financial picture are complete?

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JsTest Johnson Industries finance its project with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

•The company can issue bonds at a yield to maturity of 8.4 percent

•The cost of preferred stock is 9%

•The companys common stock currently sells for $30 a share

•The companys dividend is currently $2.00 a share (Do=$2.00), and is expected to grow at a constant rate of 6% a year.

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### NoName The current price of a stock is $50 and the annual risk-free rate is 6 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $7.20. What is the value of a put option (to the nearest dollar) written on the stock with the same exercise price and expiration date as the call option?

9

### NoName Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the same funds in the preferred stock of FPL, which should provide Allen with a before-tax return of 9%, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested?

all in FPL

### NoName A corp can earn 7.5% if it invests in municipal bonds. The corp can also earn 8.5% (before-tax) by investing in preferred stock. Assume that the two investments have equal risks. What is the break-even corp tax rate, which make the corp indifferent between the two investments?

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### NoName Hayes Corporation has $300 million of common equity on its balance sheet and 6 million shares of common stock outstanding. The company's Market Value Added (MVA) is $162 million. What is the company's stock price?

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NoName Blair Company has $5 million in total assets. The company's assets are financed with $1 million of debt and $4 million of common equity. The company's income statement is summarized below:

Operating income (EBIT) $1,000,000

Interest 100,000

Earnings before taxes (EBT) $ 900,000

Taxes (40%) 360,000

Net income $ 540,000

The company wants to increase its assets by $1 million, and it plans to finance this increase by issuing $1 million in new debt. This action will double the company's interest expense but its operating income will remain at 20 percent of its total assets, and its average tax rate will remain at 40 percent. If the company takes this action, what will happen to the companys NI, ROA, ROE?

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### NoName Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and its return on assets (ROA) was 9 percent. What was the company's interest expense?

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NoName XYZ's balance sheet and income statement are given below:

Balance Sheet:

Cash $ 50 Accounts payable $ 100

A/R150 Notes payable0

Inventories 300 Long-term debt (10%) 700

Fixed assets 500 Common equity (20 shares)200

Total assets$1,000 Total liabilities and equity$1,000

Income Statement:

Sales $1,000

Cost of goods sold 855

EBIT $ 145

Interest 70

EBT $ 75

Taxes (33.333%) 25

Net income $ 50

The industry average inventory turnover is 5, the interest rate on the firm's long-term debt is 10 percent, 20 shares are outstanding, and the stock sells at a P/E of 8.0. If XYZ changed its inventory methods so as to operate at the industry average inventory turnover, if it used the funds generated by this change to buy back common stock at the current market price and thus to reduce common equity, and if sales, the cost of goods sold, and the P/E ratio remained constant, by what dollar amount would its stock price increase?

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### NoName Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income as Company A, but its ROE is 30 percent. What is B's debt ratio? (Hint: Begin by looking at the Du Pont equation.)

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### NoName Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income as Company A, but its ROE is 30 percent. What is B's debt ratio? (Hint: Begin by looking at the Du Pont equation.)

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NoName . Lone Star Plastics has the following data:

Assets $100,000

Profit margin 6.0%

Tax rate 40%

Debt ratio 40.0%

Interest rate 8.0%

Total assets turnover 3.0

What is Lone Star's EBIT?

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NoName Baxter Box Company's balance sheet showed the following amounts as of December 31st:

Cash $ 10 Accounts payable $ 15

Accounts receivable 40 Accrued liabilities 5

Inventories 50 Notes payable 20

Net fixed assets 100 Long-term debt 20

Common stock 20

Retained earnings 120

Total liabilities and equity $200

Total assets $200

Last year the firm's sales were $2,000, and it had a profit margin of 10 percent and a dividend payout ratio of 50 percent. Baxter Box operated its fixed assets at 80 percent of capacity during the year. The company expects to increase next year's sales by 37.5 percent, to $2,750, but the profit margin is expected to fall to 3 percent and the dividend payout ratio is expected to rise to 60 percent. What is Baxter Box's additional funds needed (AFN) for next year?

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### NoName A company's balance sheets show a total of $30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of $25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is $30 million. The current stock price is $7.5 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects?

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NoName Dobson Dairies has a capital structure which consists of 60 percent long-term debt and 40 percent common stock. The company's CFO has obtained the following information:

•The before-tax yield to maturity on the company's bonds is 8 percent.

•The company's common stock is expected to pay a $3.00 dividend at year end (D1 = $3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for $60 a share.

•Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget.

•The company's tax rate is 40 percent.

What is the company's weighted average cost of capital (WACC)?

7.68

### An investor who writes call options against stock NOT held in his or her portfolio is said to be selling ____________options.

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StTest Savelots Stores' current financial statements are shown below:

Balance Sheet:

Inventories $ 500

Accounts payable $ 100

Other current assets 400

Short-term notes payable 370

Fixed assets 370

Common equity 800

Total assets $1,270

Total liab. and equity $1,270

Income Statement:

Sales $2,000

Operating costs 1,843

EBIT $ 157

Interest 37

EBT $ 120

Taxes (40%) 48

Net income $ 72

A recently released report indicates that Savelots' current ratio of 1.9 is in line with the industry average. However, its accounts payable, which have no interest cost and are due entirely to purchases of inventories, amount to only 20 percent of inventories versus an industry average of 60 percent. Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60 percent industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the balance sheet remains constant) and (2) also held its current ratio constant at 1.9. Assume that Savelots' tax rate is 40 percent, that its cost of short-term debt is 10 percent, and that the change in payments will not affect operations. In addition, common equity will not change. With the changes, what will be Savelots' new ROE?

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### StTest Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has $70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company's sales increase, its profit margin will remain at its current level. The company's dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales?

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StTest Moose Industries faces the following tax schedule:

Taxable income Base Amt %above

Up to $50,000 $ 0 15%

$50,000 - $75,000 7,500 25

$75,000 - $100,000 13,750 34

$100,000 - $335,000 22,250 39

$335,000 - $10,000,000 113,900 34

$10,000,000 - $15,000,000 3,400,000 35

$15,000,000 - $18,333,333 5,150,000 38

Over $18,333,333 6,416,667 35

Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the company's net income for the year?

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StTest Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 40 percent.

What is Rollins' WACC, cost of common stock using the bond-yield-plus-risk-premium approach?

What is the firm's cost of common stock (rs) using the DCF approach?

What is Rollins' cost of common stock (rs) using the CAPM approach?

What is Rollins' cost of preferred stock?

What is Rollins' component cost of debt?

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### StTest Vance Motors has current assets of $1.2 million. The company's current ratio is 1.2, its quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to increase its inventory turnover ratio to the industry average, which is 5, without reducing its sales. Any reductions in inventory will be used to reduce the company's current liabilities. What will be the company's current ratio, assuming that it is successful in improving its inventory turnover ratio to 5?

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### StTest Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $600 in after-tax income during the coming year, and it will retain 40 percent of those earnings. The current market price of the firm's stock is P0 = $28; its last dividend was D0 = $2.20, and its expected growth rate is 6 percent. Allison can issue new common stock at a 15 percent flotation cost. What will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital?

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