FIN 534 FINAL EXAM QUESTIONS AND ANSWERS ....100%

only Which of the following statements regarding interest tax shields is correct? Selected Answer: Taxes are reduced by the amount of the interest on a firm’s debt. Correct Answer: Taxable income is reduced by the amount of interest on a firm’s debt. The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed but not bankrupt IV. Indirect costs related to being financially distressed but not bankrupt Selected Answer: I, II, III, and IV Correct Answer: I, II, III, and IV Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a Selected Answer: cash budget. Correct Answer: cash budget. You are preparing pro forma financial statements for 2017 using the percent-of-sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2017? Selected Answer: $56,0 00 Correct Answer: $56,0 00 To estimate Missed Places, Inc.’s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP’s retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? Selected Answer: $169,0 00 Correct Answer: $169,0 00 Which one of the following statements is correct concerning the cash balance of a firm? Selected Answer: A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. Correct Answer: A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. Which of the following statements is correct if a firm’s pro forma financial statements project net income of $12,000 and external financing required of $5,000? Selected Answer: Retained earnings cannot grow by more than $12,000. Correct Answer: Retained earnings cannot grow by more than $12,000. Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis Selected Answer: I, III, and IV only Correct Answer: I, III, and IV only Which of the following actions would help a firm’s growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products Selected Answer: I, III, and IV only Correct Answer: I, III, and IV only Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano’s return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano’s performance over the past 5 years? Selected Answer: Milano’s leverage has increased. Correct Answer: Milano’s leverage has increased. Which of the following statements is true? Selected Answer: Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". Correct Answer: Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". Which one of the following correctly defines the retention ratio? Selected Answer: additions to retained earnings divided by net income Correct Answer: additions to retained earnings divided by net income Which one of the following will increase the sustainable rate of growth a corporation can achieve? Selected Answer: decrease in the dividend payout ratio Correct Answer: decrease in the dividend payout ratio Which of these ratios are the determinants of a firm’s sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio Selected Answer: I, II, III, and IV Correct Answer: I, II, III, and IV The sustainable growth rate Selected Answer: can never be greater than the return on equity. Correct Answer: can never be greater than the return on equity. Which of the following statements is/are correct? I. Going-concern value of a firm is equal to the present value of expected net income. II. When a buyer values a target firm, the appropriate discount rate is the buyer’s weighted-average cost of capital. III. The liquidation value estimate of terminal value usually vastly understates a healthy company’s terminal value. IV. The value of a firm’s equity equals the discounted cash flow value of the firm minus all liabilities. Selected Answer: I and II only Correct Answer: III only A recent annual income statement for Stone Creek Roofing is shown below. Net sales $5,000 Cost of sales 3,200 Gross profit 1,800 Operating expense 800 Depreciation expense 200 Operating income 800 Interest expense 100 Income before tax 700 Tax 175 Income after tax $ 525 Assume that during the year, Stone Creek spent $180 on new capital equipment and increased current assets net of non-interest-bearing current liabilities by $120. What was Stone Creek’s free cash flow in this year? Selected Answer: $42 5 Correct Answer: $50 0 Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be? Selected Answer: $150 million Correct Answer: $150 million The following table presents forecasted financial and other information for Havasham Industries: 2015 2016 2017 Projected EBIT $ 317 $ 339 $ 363 Earnings after tax 197 210 225 Free cash flow 135 144 155 Havasham's WACC 8.2% Expected growth rate in FCFs after 2017 4.0% Warranted MV firm/FCF in 2017 19.4 Warranted P/E in 2017 18.7 What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using the perpetual-growth equation as your estimate? Selected Answer: None of the options are correct. Correct Answer: None of the options are correct. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? Selected Answer: None of the options are correct. Correct Answer: $6.38 billion Which of the following statements are correct? I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities. II. When an acquiring firm purchases a target firm’s equity, the acquirer must assume the target’s liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. Selected Answer: II and III only Correct Answer: II and III