FIN 534 - Homework Chapter 17

FIN 534 - Homework Chapter 17

1. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?

a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.

b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.

c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.

d. The spot rate equals the 90-day forward rate.

e. The spot rate equals the 180-day forward rate.

2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.

a. premium of 8%

b. premium of 18%

c. discount of 18%

d. discount of 8%

e. premium of 16%

3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

a. -$396

b. -$243

c. $0

d. $243

e. $638

4. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

a. 123.75 Swiss francs

b. 454.55 Swiss francs

c. 750.00 Swiss francs

d. 1,237.50 Swiss francs

e. 1,650.00 Swiss francs

5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?

a. $1.01 million

b. $2.77 million

c. $3.09 million

d. $5.96 million

e. $7.39 million

FIN 534 - Homework Chapter 16

FIN 534 - Homework Chapter 16

1. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):

 Peak Off-Peak

 Cash $ 50 $ 30

 Marketable securities 0 20

 Accounts receivable 40 20

 Inventories 100 50

 Net fixed assets 500 500

 Total assets $690 $620

 Payables and accruals $ 30 $ 10

 Short-term bank debt 50 0

 Long-term debt 300 300

 Common equity 310 310

 Total claims $690 $620

 From this data we may conclude that

a. Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities.

b. Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.

c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.

e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.

2. Which of the following statements is CORRECT?

a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.

b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.

c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.

d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.

3. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

a. $260,642

b. $274,360

c. $288,800

d. $304,000

e. $320,000

4. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle?

Average inventory = $75,000

Annual sales = $600,000

Annual cost of goods sold = $360,000

Average accounts receivable = $160,000

Average accounts payable = $25,000

a. 120.6 days

b. 126.9 days

c. 133.6 days

d. 140.6 days

e. 148.0 days

5. Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

a. 10.59%

b. 11.15%

c. 11.74%

d. 12.36%

e. 13.01%

FIN 534 - Homework Chapter 15

FIN 534 - Homework Chapter 15

FIN 534 – Homework Chapter 15

1. Which of the following statements best describes the optimal capital structure?

a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s earnings per share (EPS).

b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s stock price.

c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of equity.

d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of debt.

e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of preferred stock.

2. Which of the following statements is CORRECT?

                    

a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that maximizes its stock price.

c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure that maximizes its earnings per share.

d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.

e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.

3. Which of the following statements is CORRECT?

a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.

b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decisions.

c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.

d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.

e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.

4. Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?

a. Company HD has a higher return on assets (ROA) than Company LD.

b. Company HD has a higher times interest earned (TIE) ratio than Company LD.

c. Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD’s.

d. The two companies have the same ROE.

e. Company HD’s ROE would be higher if it had no debt.

5. Which of the following statements is CORRECT?

a. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.

b. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.

c. Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.

d. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.

e. Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms' costs of capital.

FIN 534 - Homework Chapter 14

FIN 534 - Homework Chapter 14

FIN 534 – Homework Chapter 14

1. 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