Questions in Finance

Please see attached documents. Thanks.

The best criterion for success in a capital budgeting decision would be to:
A) minimize the cost of the investment.
B) maximize the number of capital budgeting projects.
C) maximize the difference between cash inflows and cost.
D) finance all capital budgeting projects with debt.

When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of General Motors stock, General Motors receives:
A) the dollar value of the transaction.
B) the dollar amount of the transaction, less brokerage fees.
C) only the par value of the common stock.
D) nothing.

Within the realm of ethical decision making, managers should attempt to
A) the market value of the shareholders’ wealth.
B) their compensation plans.
C) their firm’s market share.
D) the profits of the firm.

The decision rule for net present value is to:
A) accept all projects with cash inflows exceeding initial cost.
B) reject all projects with rates of return exceeding the opportunity cost of capital.
C) accept all projects with positive net present values.
D) reject all projects lasting longer than 10 years.

What should occur when a project’s net present value is determined to be negative?
A) The discount rate should be decreased.
B) The profitability index should be calculated.
C) The present value of the project cost should be determined.
D) The project should be rejected.

Changes in net working capital can occur at:
A) the beginning of a project.
B) the end of a project.
C) any time during the life of a project.
D) the beginning of any accounting period.

The statement “We’ve got too much invested in that project to pull out now” possibly illustrates the need to:
A) switch to an accelerated method of depreciation.
B) be reacquainted with the concept of sunk costs.
C) reduce net working capital assigned to the project.
D) reduce discount rates to improve NPV.

A stock’s beta measures the:
A) average return on the stock.
B) variability in the stock’s returns compared to that of the market portfolio.
C) difference between the return on the stock and return on the market portfolio.
D) market risk premium on the stock.

The minimum acceptable expected rate of return on a project of a specific risk is the:
A) project cost of capital.
B) company cost of capital.
C) risk-free rate of return.
D) project beta times market risk premium.

Why is debt financing said to include a tax shield for the company?
A) Taxes are reduced by the amount of the debt.
B) Taxes are reduced by the amount of the interest.
C) Taxable income is reduced by the amount of the debt.
D) Taxable income is reduced by the amount of the interest.

The purpose of sensitivity analysis is to show:
A) the optimal level of the capital budget.
B) how price changes affect break-even volume.
C) seasonal variation in product demand.
D) how variables in a project affect profitability.

A company’s board of directors is primarily an agent of the company’s:
A) management.
B) employees.
C) shareholders.
D) management and employees.

One common reason for issuing two distinct classes of common stock is to:
A) sell different classes to increase profits.
B) allow one stock to increase in price while the other class declines.
C) restrict voting privileges from some shareholders.
D) conserve cash by offering dividends to only one class of stockholders.

When underwriters issue securities on a best efforts basis, they:
A) sell as much of the stock as possible, but with no guarantee.
B) submit a bid for purchase, which the issuer compares to other bids.
C) buy the entire issue from the firm.
D) guarantee that the issuer will receive the spread.

A major purpose of the prospectus is to:
A) inform investors of the security’s rate of return.
B) inform investors about the firm and securities being sold.
C) distribute stock warrants to prospective investors.
D) list the security’s dividend payment dates.

Shelf registration was enacted to allow:
A) the Department of Justice to prosecute those guilty of insider trading.
B) the prospectus to be distributed after the sale of securities begins.
C) underwriters to join together in syndication.
D) single registration of limited future financing plans.

Blue-sky laws exist in order to:
A) protect stock underwriters from fraudulent firms.
B) restrict the amount of profit from IPOs.
C) control the amount of stock owned by one investor.
D) protect investors from deceptive firms.

The Securities and Exchange Commission will not permit securities to be sold:
A) if they have been overpriced.
B) prior to approval of the registration statement.
C) unless the issuer guarantees their value.
D) until a shelf registration exists.

A private placement avoids which of the following costs:
A) depression in the stock price
B) administration costs
C) registration with the SEC
D) fixed costs

Arbitrageurs are said to look for riskless profits by:
A) contracting in the forward exchange markets.
B) buying at the spot rate and selling at the forward rate.
C) buying in one market and selling in another to take advantage of different prices for the same good.
D) buying short-term bonds and converting them to long-term bonds.

When shareholders attempt to garner additional votes in an attempt to oust management, it is called a:
A) management buy-out.
B) tender offer.
C) proxy contest.
D) poison pill.

Problem 1

Problem 1 is a ratio problem for Microsoft. It is attached as an Excel worksheet. Please complete it on the template and attach it to the message posting your final.

Problem 2

Quick Printing is considering buying a new printing press. The press will cost $150,000 and the machine can be sold for $30,000 in year 5. The machine is expected to increase net cash flow (revenues less operating expenses) by $35,000 each year for five years and then the machine will be sold. Quick’s cost of capital is 12%. Should Quick purchase the machine? Please show all you work.

Problem 3

Calculating WACC. Reactive Industries has the following capital structure. Its corporate tax rate is 35 percent. What is its WACC?

Security Market Value Required Rate of Return

Debt $20 million 6%
Preferred stock $10 million 8%
Common stock $50 million 12%

Problem 4

Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.

Income Statement-2006

Sales $950
Costs 250
Interest 50
Taxes 150
Net Income $500

Balance Sheet 2005 2006

Assets $2,700 $3,000
Total Assets $2,700 $3,000

Debt $ 900 $1,000
Equity 1,800 2,000
Total Debt and Equity $2,700 $3,000

a. Find Eagle’s required external funds if it maintains a dividend payout ratio of 70 percent and plans a growth rate of 15 percent in 2007.

b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? What will its value be?

c. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does not wish to issue any new shares of stock. Why must the dividend payment now be the balancing item? What will its value be?

Microsoft Corporation
Condensed Income Statement
For the Year Ended June 30, 2000
(In millions)

Revenue $22,956

Operating Expenses:
Cost of revenue 3,002
Research and development 3,775
Sales and marketing 4,141
General and administrative 1,009
Other expenses 92
Total operating expenses $12,019

Operating Income $10,937
Investment Income 3182
Gain on sales 156
Income before income taxes $14,275
Provision for income taxes 4854
Net income $9,421

Earnings per share:
Basic $1.81
Diluted 1.70
Market price per share at the end of the year $80.00

Microsoft Corporation
Condensed Income Statement Consolidated Balance Sheets
For the Years Ended June 30, 2000 and 1999
(In millions)

2000 1999
Current Assets:
Cash and equivalents $4,846 $4,975
Short-term investments 18,952 12,261
Total cash and short term investments $23,798 $17,236
Accounts receivable 3,250 2,245
Deferred income taxes 1,708 1,469
Other 1,552 752
Total current assets $30,308 $21,702
Property, plant and equipment, net 1,903 1,611
Equity and other investments 17,726 14,372
Other assets 2,213 940
Total Assets $52,150 $38,625

Liabilities and Stockholders’ Equity

Current Liabilities:
Accounts payable $1,083 $874
Accrued compensation 557 396
Income taxes 585 1,691
Unearned revenue 4,816 4,239
Other 2,714 1,602
Total current liabilities $9,755 $8,802

Deferred income taxes $1,027 $1,385

Stockholders’ Equity:
Convertible preferred stock–shares authorized 100 $- $980
shares issued and outstanding 13 and 0
Common stock and paid in capital–shares authorized
12,000 shares issued and outstanding 5,109 and 5,283 23,195 13,844
Retained earnings 18,173 13,614
Total Stockholders Equity $41,368 $28,438

Total Liabilities and Stockholders’ Equity $52,150 $38,625

Calculate the following ratios: Answer

a. Calculate Microsoft’s working capital, current ratio and acid test ratio as of June 30, 2000.
Working Capital Ratio
Current Ratio
Quick (acid test) Ratio
b. Calculate Microsoft’s ROE for the year ended June 30, 2000.
c. Calculate Microsoft’s ROI, showing margin and turnover, for the year ended June 30, 2000.
d. Calculate Microsoft’s price earnings ratio at June 30, 2000.
e. Calculate the following activity measures for Microsoft for the year ended June 30, 2000:
Accounts receivable turnover ratio.
Number of days in accounts receivable.
f. Calculate the following leverage measures for Microsoft for the year ended June 30, 2000:
Debt ratio.
Debt/equity ratio.

Use total liabilities for these calculations. Deferred taxes
are considered a liability for these calculations.

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