Category Archives: FIN 534

FIN 534 Week 6 Chapter 10 Solution Latest

FIN 534 Week 6 Chapter 10 Solution Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-6-chapter-10-solution-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 6 Chapter 10 Solution Latest

Which of the following statements is CORRECT?

 

a. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 

b. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 

c. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 

d. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 

e. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 

 

 

2. Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one project’s cash flows come in the early years, while most of the other project’s cash flows occur in the later years. The two NPV profiles are given below:

 

Which of the following statements is CORRECT?

 

a. More of Project A’s cash flows occur in the later years.

 

b. More of Project B’s cash flows occur in the later years.

 

c. We must have information on the cost of capital in order to determine which project has the larger early cash flows.

 

d. The NPV profile graph is inconsistent with the statement made in the problem.

 

e. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project’s IRR.

 

 

 

3. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

 

a. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).

 

b. It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).

 

c. The firm will accept too many projects in all economic states because a 4-year payback is too low.

 

d. The firm will accept too few projects in all economic states because a 4-year payback is too high.

 

e. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.

 

 

 

4. You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project’s risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

 

a. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.

 

b. You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.

 

c. You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm’s value will increase if the project is accepted.

 

d. You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the WACC, which indicates that the firm’s value will decline if the project is accepted.

 

e. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firm’s value will decline if it is accepted.

 

 

 

5. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

 

WACC: 6.00%

 

Year 0 1 2 3 4

 

CFS -$1,025 $380 $380 $380 $380

 

CFL -$2,150 $765 $765 $765 $765

 

 

 

a. $188.68

 

b. $198.61

 

c. $209.07

 

d. $219.52

 

e. $230.49

 

FIN 534 Week 6 Chapter 11 Solution Latest

FIN 534 Week 6 Chapter 11 Solution Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-6-chapter-11-solution-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 6 Chapter 11 Solution Latest

Which of the following statements is CORRECT

a. An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

 

b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.

 

c. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.

 

d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

 

e. Identifying an externality can never lead to an increase in the calculated NPV.

 

 

 

 

 

2. 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 simulation analyses. This research produced the following data:

 

 

 

Project X                                 Project Y

 

Expected NPV           $350,000                               $350,000

 

Standard deviation (σNPV) $100,000                       $150,000

 

Project beta (vs. market) 1.4                                       0.8

 

 

 

Correlation 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.

 

 

 

 

 

3. Which of the following statements is CORRECT?

 

 

 

a. If an asset is sold for less than its book value at the end of a project’s life, it will generate a loss for the firm, hence its terminal cash flow will be negative.

 

b. Only incremental cash flows are relevant in project analysis, the proper incremental cash flows are the reported accounting profits, and thus reported accounting income should be used as the basis for investor and managerial decisions.

 

c. It is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project’s completion. Working capital like inventory is almost always used up in operations. Thus, cash flows associated with working capital should be included only at the start of a project’s life.

 

d. If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.

 

e. Changes in net working capital refer to changes in current assets and current liabilities, not to changes in long-term assets and liabilities. Therefore, changes in net working capital should not be considered in a capital budgeting analysis.

 

 

 

 

 

4. Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV?

 

 

 

Risk-adjusted WACC 10.0%

 

Net investment cost (depreciable basis) $65,000

 

Straight-line deprec. rate 33.3333%

 

Sales revenues, each year $65,500

 

Operating costs (excl. deprec.), each year $25,000

 

Tax rate 35.0%

 

 

 

a. $15,740

 

b. $16,569

 

c. $17,441

 

d. $18,359

 

e. $19,325

 

 

 

 

 

5. Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project’s 3-year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project’s life, and this is just one of the firm’s many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project’s NPV decline? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.)

 

 

 

WACC 10.0%

 

Net investment cost (depreciable basis) $60,000

 

Number of cars washed 2,800

 

Average price per car $25.00

 

Fixed op. cost (excl. deprec.) $10,000

 

Variable op. cost/unit (i.e., VC per car washed) $5.375

 

Annual depreciation $20,000

 

Tax rate 35.0%

 

 

 

a. $28,939

 

b. $30,462

 

c. $32,066

 

d. $33,753

 

e. $35,530

 

FIN 534 Week 6 DQ 1 Latest

FIN 534 Week 6 DQ 1 Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-6-dq-1-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 6 DQ 1 Latest

Analyze the concept of “stress test” as applied to financial institutions and create a better alternative for assessing the viability of a financial institution.

 

 

FIN 534 Week 6 Quiz 5 Latest

FIN 534 Week 6 Quiz 5 Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-6-quiz-5-latest

For more classes visit

http://www.assignmentclick.com/

 

FIN 534 Week 6 Quiz 5 Latest

 

Question 1

 

Call options on XYZ Corporation’s common stock trade in the market. Which of the following statements is most correct, holding other things constant?

 

 

 

Question 2

 

Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the

 

 

 

 

 

Question 3

 

Which of the following statements is CORRECT?

 

 

 

Question 4

 

Which of the following statements is CORRECT?

 

 

 

Question 5

 

 

 

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

 

 

 

Question 6

 

An option that gives the holder the right to sell a stock at a specified price at some future time is

 

 

 

Question 7

 

 

 

2 out of 2 points

 

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%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option’s value?

 

 

 

Question 8

 

 

 

2 out of 2 points

 

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

 

 

 

Question 9

 

Which of the following statements is CORRECT?

 

 

 

Question 10

 

Deeble Construction Co.’s stock is trading at $30 a share. Call options on the company’s stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?

 

 

 

Question 11

 

 

 

2 out of 2 points

 

Which of the following statements is CORRECT?

 

 

 

Question 12

 

Warner Motors’ stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

 

 

 

 

 

 

 

Question 13

 

 

 

2 out of 2 points

 

Suppose you believe that Johnson Company’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson’s stock price actually rises to $45, what would your pre-tax net profit be?

 

 

 

Question 14

 

 

 

2 out of 2 points

 

Which of the following statements is CORRECT?

 

 

 

Question 15

 

Suppose you believe that Delva Corporation’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 $85 per share. If you bought this option for $510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be?

 

 

 

Question 16

 

Which of the following statements is CORRECT?

 

 

 

Question 17

 

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

 

 

 

Question 18

 

When working with the CAPM, which of the following factors can be determined with the most precision?

 

 

 

Question 19

 

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements

 

 

 

is CORRECT?

 

 

 

Question 20

 

 

 

2 out of 2 points

 

Which of the following statements is CORRECT?

 

 

 

Question 21

 

Safeco Company and RiscoInc are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%. Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project.

 

 

 

Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is CORRECT?

 

 

 

Question 22

 

Which of the following statements is CORRECT?

 

 

 

Question 23

 

Which of the following statements is CORRECT?

 

 

 

Question 24

 

Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

 

 

 

Question 25

 

 

 

Which of the following statements is CORRECT?

 

 

 

Question 26

 

 

 

2 out of 2 points

 

For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

 

 

 

Answer

 

 

 

Question 27

 

Which of the following statements is CORRECT?

 

 

 

Question 28

 

The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects. The firm’s overall WACC is 12%. The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO’s position is accepted, what is likely to happen over time?

 

Correct Answer:

 

The company will take on too many high-risk projects and reject too many low-risk projects.

 

 

 

Question 29

 

 

 

2 out of 2 points

 

Which of the following statements is CORRECT?

 

 

 

Question 30

 

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

 

FIN 534 Week 7 Chapter 12 Solution Latest

FIN 534 Week 7 Chapter 12 Solution Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-7-chapter-12-solution-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 7 Chapter 12 Solution Latest

1. Which of the following statements is CORRECT?

a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

 

b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

 

c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.

 

d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.

 

e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.

 

 

 

2. Which of the following statements is CORRECT?

 

a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm’s AFN equals zero.

 

b. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.

 

c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.

 

d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.

 

e. Dividend policy does not affect the requirement for external funds based on the AFN equation.

 

 

 

3. Which of the following statements is CORRECT?

 

a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner.

 

b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.

 

c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.

 

d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.

 

e. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases.

 

 

 

4. Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

 

a. 28.5%

 

b. 30.0%

 

c. 31.5%

 

d. 33.1%

 

e. 34.7%

 

 

 

 

 

5. Howton&Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm’s investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

 

Last year’s sales = S0 $300.0 Last year’s accounts payable $50.0

 

Sales growth rate = g 40% Last year’s notes payable $15.0

 

Last year’s total assets = A0* $500.0 Last year’s accruals $20.0

 

Last year’s profit margin = PM 20.0% Initial payout ratio 10.0%

 

a. $31.9

 

b. $33.6

 

c. $35.3

 

d. $37.0

 

e. $38.9

 

FIN 534 Week 7 Chapter 13 Solution Latest

FIN 534 Week 7 Chapter 13 Solution Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-7-chapter-13-solution-latest

For more classes visit

http://www.assignmentclick.com/

 

FIN 534 Week 7 Chapter 13 Solution Latest

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

3. Based on the corporate valuation model, the value of a company’s operations is $1,200 million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

 

 

 

a. $24.90

 

b. $27.67

 

c. $30.43

 

d. $33.48

 

e. $36.82

 

 

 

 

 

4. Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

 

a. $23.00

 

b. $25.56

 

c. $28.40

 

d. $31.24

 

e. $34.36

 

 

 

 

 

 

 

5. Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

 

Year: 1 2 3

 

Free cash flow: -$20 $42 $45

 

a. $586

 

b. $617

 

c. $648

 

d. $680

 

e. $714

FIN 534 Week 7 DQ 1 Latest

FIN 534 Week 7 DQ 1 Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-7-dq-1-latest

For more classes visit

http://www.assignmentclick.com/

 

FIN 534 Week 7 DQ 1 Latest

Analyze the process of forecasting financial statements and make at least one recommendation for improving the accuracy of forecasts. Provide specific examples to support your response.

FIN 534 Week 7 DQ 2 Latest

FIN 534 Week 7 DQ 2 Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-7-dq-2-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 7 DQ 2 Latest

Drawing on what you discovered in the e-Activity, determine what additional steps can be taken in the valuation of a corporation to avoid instances like the one you researched from occurring in the future. Provide specific examples to support your response.

FIN 534 Week 7 Quiz 6 Latest

FIN 534 Week 7 Quiz 6 Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-7-quiz-6-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 7 Quiz 6 Latest

Question 1

Which of the following statements is CORRECT?

Answer

 

Question 2

Which of the following statements is CORRECT?

 

Question 3

Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

 

Question 4

Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT

a disadvantage of the payback method?

 

Question 5

Which of the following statements is CORRECT?

 

Question 6

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

 

Question 7

Which of the following statements is CORRECT?

 

 

Question 8

Which of the following statements is CORRECT?

 

Question 9

Which of the following statements is CORRECT?

 

Question 10

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

 

Question 11

Which of the following statements is CORRECT?

 

Question 12

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

 

 

Question 13

Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L’s IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

 

 

Question 14

Which of the following statements is CORRECT?

 

 

Question 15

Which of the following statements is CORRECT?

 

Question 16

The relative risk of a proposed project is best accounted for by which of the following procedures?

 

 

Question 17

Which of the following statements is CORRECT?

 

 

Question 18

Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear–there is no mortgage on it. Which of the following statements is CORRECT?

 

 

Question 19

Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

 

 

Question 20

Which of the following statements is CORRECT?

 

 

Question 21

A company is considering a new project. The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

 

 

Question 22

Which of the following factors should be included in the cash flows used to estimate a project’s NPV?

 

Question 23

Which of the following rules is CORRECT for capital budgeting analysis?

 

Question 24

Currently, Powell Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project’s sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?

 

 

Question 25

2 out of 2 points

Which of the following statements is CORRECT?

 

 

 

Question 26

Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?

 

 

 

Question 27

A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

 

 

Question 28

When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:

Question 29

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

 

Question 30

Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?

 

 

 

FIN 534 Week 8 Chapter 14 Solution Latest

FIN 534 Week 8 Chapter 14 Solution Latest

Check this A+ tutorial guideline at

http://www.assignmentclick.com/fin-534-strayer/fin-534-week-8-chapter-14-solution-latest

For more classes visit

http://www.assignmentclick.com/

FIN 534 Week 8 Chapter 14 Solution Latest

Which of the following statements about dividend policies is CORRECT?

a. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the ―bird-in-the hand‖ effect.

b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.

 

c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.

 

d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.

 

e. The clientele effect suggests that companies should follow a stable dividend policy.

 

 

 

 

 

2. 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.

 

 

 

 

 

3. Which of the following statements is CORRECT?

 

 

 

a. When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

 

b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.

 

c. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.

 

d. When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.

 

e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.

 

 

 

 

 

4. Which of the following statements is CORRECT?

 

a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout.

 

b. The clientele effect can explain why so many firms change their dividend policies so often.

 

c. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.

 

d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don’t change the firm’s total amount of book equity.

 

e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.

 

 

 

 

 

5. DeAngelo Corp.’s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

 

 

 

Increase in Capital Budget

 

Increase Debt Lower Payout Do Both to 75% to 20%___________________

 

 

 

a. $114.0 $73.3 $333.9

 

b. $120.0 $77.2 $351.5

 

c. $126.4 $81.2 $370.0

 

d. $133.0 $85.5 $389.5

 

e. $140.0 $90.0 $410.0