fnce quiz 1 Flashcards
The Grant Corp. has $20 million in assets, 70% financed by debt and 30% financed by common stock. The interest rate on the debt is 12% and the book value of the stock is $10 per share. The company is considering two financing plans for an expansion to $25 million in assets.
(a) If EBIT is 13% on total assets, compute e.p.s. for the current situation and for Plans A and B.
1 EBIT = 13% of assets. Current = $20 million.13 = 2,600,000;1
Planned = $25 million.13 = 3,250,000 1
2 Interest
• Current = .720,000,000.12 = 1,680,000 1
• Plan A = 1,680,000+(.75,000,000.15) = 1,680,000 + 525,000 = 2,205,000 1
• Plan B = same as current, no new debt 1
3 #shares
• Current = .320,000,000/10 = 600,000 1
• Plan A = 600,000+.35,000,000/20 = 600,000+75,000 = 675,000 1
• Plan B = 600,000 + 5,000,000/20 = 600,000+250,000 = 850,000 1
- Maximization of shareholder wealth is a concept in which:
A. increased earnings is of primary importance.
B. profits are maximized on a quarterly basis.
C. virtually all earnings are paid as dividends to common shareholders.
D. optimally increasing the long-term value of the firm is emphasized.
D. optimally increasing the long-term value of the firm is emphasized.
- Which of the following is true?
A. Maximizing profits is the same as maximizing shareholder wealth.
B. Consistent with the objectives of the firm, an appropriate risk-return tradeoff must be determined.
C. The agency theory applies equally to owner managed businesses and public corporations.
D. Maximum percentage return on investments in the short-run is the highest priority.
B. Consistent with the objectives of the firm, an appropriate risk-return tradeoff must be determined.
3. A conservative financing plan involves: A. Heavier reliance on debt. B. Heavier reliance on equity. C. High degree of financial leverage. D. High degree of combined leverage.
B. Heavier reliance on equity.
4. When a firm employs no debt A. it has a financial leverage of one. B. it has a financial leverage of zero C. its operating leverage is equal to its financial leverage. D. it will not be profitable.
A. it has a financial leverage of one.
An aggressive, risk-oriented firm will likely
A. borrow long-term and carry low levels of liquidity.
B. borrow short-term and carry low levels of liquidity.
C. borrow long-term and carry high levels of liquidity.
D. borrow short-term and carry high levels of liquidity.
B. borrow short-term and carry low levels of liquidity.
- Which of the following is not a method of speeding up collections?
A. Lock-box system.
B. Regional collection centers.
C. Extended disbursement float.
D. All of the above are methods for speeding up collections.
D. All of the above are methods for speeding up collections.
7. Which of the following is not a factor influencing the selection of a marketable security? A. Yield. B. Maturity. C. Float. D. Safety.
C. Float.
8. Ideally, permanent current assets should be financed by: A. Long-term funds. B. Short-term funds. C. Borrowed funds. D. Internally generated funds.
A. Long-term funds.
- The term structure of interest rates:
A. Is an indication of investors’ expectations about inflation and future interest rates.
B. Will be downward sloping if short-term interest rates are higher than long-term rates.
C. Will be upward sloping under normal conditions.
D. All of the above.
D. All of the above.
10. The three primary policy variables to consider when extending credit include all of the following except: A. Credit standards. B. The level of interest rates. C. The terms of trade. D. Collection policy.
B. The level of interest rates.
11. Probably the safest and most marketable instrument for short-term investment is: A. Commercial paper. B. Large denomination certificates. C. Bankers' acceptances. D. Treasury bills.
D. Treasury bills.
- Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal?
A. A reduction in marketable securities which are earning a return of 14.2%
B. A decrease in inventories which are earning a 17.6% return
C. An increase in bank loans that would cost us 11.5%
D. An increase in accounts payable that would cost our firm 15%
C. An increase in bank loans that would cost us 11.5%
13. If you bought a T-bill at $99.44 and held it for 180 days what would your return be? A. 1.14% B. .011419% C. .0056% D. 11.49%
A. 1.14%
100-99.44/ (99.44)…x100= 1.14
- A firm would be indifferent between financing plans when
A. debt is equal to equity.
B. return on assets equals return on equity.
C. the cost of borrowed funds equals the return on equity.
D. the cost of borrowed funds equals the return on assets.
D. the cost of borrowed funds equals the return on assets.
