Problem 1. The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the firm's cost of equity?
A) 21.0%
B) 23.3%
C) 25.9%
D) 28.8%
E) 32.0%
Problem 2. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year: 1 2 Free cash flow -$50 $100
A) $1,456
B) $1,529
C) $1,606
D) $1,686
E) $1,770
Problem 3. Last year Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
A) $312.5
B) $328.1
C) $344.5
D) $361.8
E) $379.8
Problem 4. Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?
A) 11.4%
B) 12.0%
C) 12.6%
D) 13.3%
E) 14.0%
Problem 5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
A) The new project is expected to reduce sales of one of the company's existing products by 5%.
B) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary should be charged to the project's initial cost.
C) The company has spent and expensed $1 million on R&D associated with the new project.
D) The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.
E) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.
Problem 6. The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.a. Trueb. False
A) True
B) False
Problem 7. In general, firms should use their weighted average cost of capital (WACC) to evaluate capital budgeting projects because most projects are funded with general corporate funds, which come from a variety of sources. However, if the firm plans to use only debt or only equity to fund a particular project, it should use the after-tax cost of that specific type of capital to evaluate that project. a. Trueb. False
A) True
B) False
Problem 8. The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the value of the firm according to MM with corporate taxes?
A) $475,875
B) $528,750
C) $587,500
D) $646,250
E) $710,875
Problem 9. Taussig Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulated analyses. This research produced the following numbers: Project X Project Y Expected NPV $350,000 $350,000 Standard NPV) $100,000 $150,000 Project beta (vs. market) 1.4 0.8 Correlationdeviation ( of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects. Which of the following statements is correct?
A) Project X has more stand-alone risk than Project Y.
B) Project X has more corporate (or within-firm) risk than Project Y.
C) Project X has more market risk than Project Y.
D) Project X has the same level of corporate risk as Project Y.
E) Project X has less market risk than Project Y.
Problem 10. Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t=5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t=5?
A) $713
B) $757
C) $797
D) $839
E) $883
Problem 11. Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?
A) $1,714,750
B) $1,805,000
C) $1,900,000
D) $2,000,000
E) $2,100,000
Problem 12. A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $750,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet this profit goal?
A) 4,513
B) 4,750
C) 5,000
D) 5,250
E) 5,513
Problem 13. Bankston corporation forecasts that if all of its existing financial policies are adhered to, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would reduce its need to issue new common stock?
A) Increase the percentage of debt in the target capital structure.
B) Increase the dividend payout ratio for the upcoming year.
C) Increase the proposed capital budget.
D) Reduce the amount of short-term bank debt in order to increase the current ratio.
E) Reduce the percentage of debt in the target capital structure.
Problem 14. The capital intensity ratio is generally defined as follows:
A) Sales divided by total assets, i.e., the total assets turnover ratio.
B) The percentage of liabilities that increase spontaneously as a percentage of sales.
C) The ratio of sales to current assets.
D) The ratio of current assets to sales.
E) The amount of assets required per dollar of sales, or A*/S0.
Problem 15. The Miller model begins with the MM model with taxes and then adds personal taxes.a. Trueb. False
A) True
B) False
Problem 16. Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt--HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs? Applicable to Both Firms Firm HD's Data Firm LD's Data Assets $200 Debt ratio 50% Debt ratio 30% EBIT $40 Interest rate 12% Interest rate 10% Tax rate 35%
A) 2.18%
B) 2.29%
C) 2.41%
D) 2.54%
E) 2.66%
Problem 17. Which of the following statements is correct?
A) One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.
B) One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C) Stock repurchases can be used by a firm that wants to increase its debt ratio.
D) Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
E) One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
Problem 18. Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
A) 40.61%
B) 42.75%
C) 45.00%
D) 47.37%
E) 49.74%
Problem 19. The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.a. Trueb. False
A) True
B) False
Problem 20. Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFn for the coming year? Dollars are in millions. Last year's sales = S0 $350 Last year's accounts payable $40Sales growth rate = g 30% Last year's notes payable (to bank) $50Last year's total assets = A0 $500 Last year's accruals $30Last year's profit margin = M 5% Target payout ratio 60%
A) $102.8
B) $108.2
C) $113.9
D) $119.9
E) $125.9