What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
The profitability index.
The internal rate of return.
The discounted payback.
The modified internal rate of return.
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?
70%
33%
50%
30%
If a company's weighted average cost of capital is less than the required return on equity, then the firm:
Has debt in its capital structure
Is perceived to be safe
Must have preferred stock in its capital structure
Is financed with more than 50% debt
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?
12.00%
14.65%
15.00%
15.36%
A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except
stock.
bonds.
equity options.
preferred stock.
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?
$600
$225
$321
$375
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.
$453.6 million
$1,787 million
$1,334 million
$1,315 million
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?
25.1%
30.3%
27.3%
32.9%
Which of the following cannot be engaged in managing the business?
none of these
a general partner
a sole proprietor
a limited partner
Which of the following does maximizing shareholder wealth not usually account for?
Risk.
Government regulation.
The timing of cash flows.
Amount of Cash flows.
The strategic plan does NOT identify
the lines of business a firm will compete in.
major areas of investment in real assets.
future mergers, alliances, and divestitures.
working capital strategies.
Firms that achieve higher growth rates without seeking external financing
are highly leveraged.
none of these.
have less equity and/or are able to generate high net income leading to a high ROE.
have a low plowback ratio.
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.
15%, 85%
55%, 45%
85%, 15%
45%, 55%
The cash conversion cycle
shows how long the firm keeps its inventory before selling it.
estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.
begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
You are provided the following working capital information for the Ridge Company:
Ridge Company
Account
$
Inventory
$12,890
Accounts receivable
12,800
Accounts payable
12,670
Net sales
$124,589
Cost of goods sold
99,630
Cash conversion cycle: What is the cash conversion cycle for Ridge Company?
38.3 days
129.9 days
46.4 days
83.5 days