FIN 534 Final Exam 3

FIN 534 Final Exam 3

1. Which of
the following statements is correct?
2. Grandin
Inc. is evaluating its dividend policy. It has a capital budget of $625,000,
and it wants to maintain a target capital structure of 60% debt and 40% equity.
The company forecasts a net income of $475,000. If it follows the residual
dividend policy, what is its forecasted dividend payout ratio?
3. The
projected capital budget of Kandell Corporation is $1,000,000, its target
capital structure is 60% debt and 40% equity, and its forecasted net income is
$550,000. If the company follows a residual dividend policy, what total
dividends, if any, will it pay out?
4. The
capital budget of Creative Ventures Inc. is $1,000,000. The company wants to
maintain a target capital structure that is 30% debt and 70% equity. The
company forecasts that its net income this year will be $800,000. If the
company follows a residual dividend policy, what will be its total dividend
payment?
5. In the
real world, dividends
6. Which of
the following statements is correct?
7. If a firm
adheres strictly to the residual dividend policy, the issuance of new common
stock would suggest that
8. Which of
the following statements is CORRECT?
9. Which of
the following statements is correct?
10. If a
firm adheres strictly to the residual dividend policy, then if its optimal
capital budget requires the use of all earnings for a given year (along with
new debt according to the optimal debt/total assets ratio), then the firm
should pay
11. Which of
the following actions will best enable a company to raise additional equity
capital?
12. Poff
Industries’ stock currently sells for $120 a share. You own 100 shares of the
stock. The company is contemplating a 2-for-1 stock split. Which of the
following best describes what your position will be after such a split takes
place?
13. Consider
two very different firms, M and N. Firm M is a mature firm in a mature
industry. Its annual net income and net cash flows are both consistently high
and stable. However, M’s growth prospects are quite limited, so its capital
budget is small relative to its net income. Firm N is a relatively new firm in
a new and growing industry. Its markets and products have not stabilized, so
its annual operating income fluctuates considerably. However, N has substantial
growth opportunities, and its capital budget is expected to be large relative
to its net income for the foreseeable future. Which of the following statements
is correct?
14. Which of
the following statements is NOT correct?
15. Which of
the following statements is correct?
16. Which of
the following would increase the likelihood that a company would increase its
debt ratio, other things held constant?
17. Blueline
Publishers is considering a recapitalization plan. It is currently 100% equity
financed but under the plan it would issue long-term debt with a yield of 9%
and use the proceeds to repurchase common stock. The recapitalization would not
change the company’s total assets, nor would it affect the firm’s basic earning
power, which is currently 15%. The CFO believes that this recapitalization
would reduce the WACC and increase stock price. Which of the following would
also be likely to occur if the company goes ahead with the recapitalization
plan?
18. Which of
the following events is likely to encourage a company to raise its target debt
ratio, other things held constant?
19. Two
operationally similar companies, HD and LD, have the same total assets,
operating income (EBIT), tax rate, and business risk. Company HD, however, has
a much higher debt ratio than LD. Also HD’s basic earning power (BEP) exceeds
its cost of debt (rd). Which of the following statements is CORRECT?
20. Which of
the following statements is CORRECT?
21. Firms U
and L both have a basic earning power ratio of 20% and each has the same amount
of assets. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm
L is financed with 50% debt and 50% equity. Firm L’s debt has a before-tax cost
of 8%. Both firms have positive net income. Which of the following statements
is CORRECT?
22. Which of
the following statements best describes the optimal capital structure? The
optimal capital structure is the mix of debt, equity, and preferred stock that
maximizes the company’s ____.
23.
Companies HD and LD have identical tax rates, total assets, and basic earning
power ratios, and their basic earning power exceeds their before-tax cost of
debt, rd. However, Company HD has a higher debt ratio and thus more interest
expense than Company LD. Which of the following statements is CORRECT?
24. Which of
the following statements is CORRECT?
25. Other
things held constant, which of the following events is most likely to encourage
a firm to increase the amount of debt in its capital structure?
26. Daylight
Solutions is considering a recapitalization that would increase its debt ratio
and increase its interest expense. The company would issue new bonds and use
the proceeds to buy back shares of its common stock. The company’s CFO thinks
the plan will not change total assets or operating income, but that it will
increase earnings per share (EPS). Assuming the CFO’s estimates are correct,
which of the following statements is CORRECT?
27. Which of
the following statements is CORRECT?
28. Which of
the following statements is CORRECT?
29. Which of
the following is NOT associated with (or does not contribute to) business risk?
Recall that business risk is affected by a firm’s operations.
30. Which of
the following statements is CORRECT?