Companies for your comparative analysis: Caterpillar Inc. and Deere & Company

Companies for your comparative analysis: Caterpillar Inc. and Deere & Company

SITUATION

You are a financial analyst with HTC Corporation. HTC is an established investment banker which services an international market.  A client  has determined that it wants to invest $2.3 billion in either Deere & Co. or Caterpillar stock (real publicly-traded companies). Which of these companies’ shares is the best potential candidate for a long-term commitment?  Both targeted companies are competitively favorable.  However, based on some serious general and economic concerns about the fallout of companies in the industry in general, the CEO of the client-company has asked your CFO to conduct a financial analysis of both CAT and DE to determine if it is prudent to commit to either company.  The cost of this investment is significant and any interruption in cash flow from the investment during the next few years would adversely affect the client’s performance and profit. The CFO has given you the job of conducting this analysis. Specifically, the question is: will a commitment to invest in either Caterpillar or John Deere be financially viable over the next two to three years?

 

YOUR SPECIFIC ASSIGNMENT

Your specific assignment is to research, analyze, and prepare a report for the CFO on the actual financial performance of both DE and CAT for the most recent three years. In addition to reviewing the traditional financial performance indicators, you are also to review both targed companies past and current stock performance for the last one year. Your report is to consist of three parts:

(1)        An evaluation of financial performance for the last three years, for both companies.

(2)        An evaluation of stock performance for the last one year, for both companies.

(3)        Finally, a specific recommendation, with supporting rationale, as to whether or not either targeted company’s recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment.

To assist you in your task, the CFO has provided the following general guidance. Since it is recognized that the industry is undergoing a major contraction in selected markets, it is very important to comparatively evaluate both CAT and DE relative to financial and stock performance trends against its Industry.

IMPORTANT: You must include all necessary and relevant financial performance and stock information, trends, and projections in supporting your recommendation. These factors must include, financial ratio trends and industry comparatives, capital spending, stock growth, Beta values, credit rating service valuations, bond rating valuations, and management and investment reports – when these documents are available.

REPORT REQUIREMENTS

YOUR SPECIFIC ASSIGNMENT

Research and analyze the following information for both Caterpillar and Deere:

  • Annual Balance Sheets for the last three years.
  • The Income Statements for the last three years.
  • Annual reports, 10K or 10Q
  •  Industry data
  • Analysts’ reports on performance
  • Management reports or press releases

Using this information the students have to develop evaluation of the financial performance for both targeted companies. (Totally 85% of the assignment grade)

  1. Background and Industry (oneshortparagraph).
  2. Select of most significant financial performance results for the companies: Compare Revenue, net income, working capital, total assets for the last three years and other results of your choice of the companies against the industry. Present the table with this information in your report. Write about 1 page of the analysis of these financial performance results. (15% of the project grade)
  3. Find financial ratios for each company and the industry in the Internet. Write about 1-2 pages of analysis of the ratio results you received. (15% of the project grade). Compare the ratio results for each company against the other, and the industry.
  4. Prepare a DuPont analysis for three years. (10% of the project grade). Compare the each company’s results to each other and to the industry.
  5. Taking the information from the Income statements and the Balance sheets, calculate each company’s return on equity using the DuPont technique for the company for three years. Follow general formulas for such analysis. Show and discuss your calculation!
  6. Write about 1 page of analysis of the results that you received. Compare the results. If you think the management of Caterpillar and John Deere would like to improve their return on equity, what should the management of these companies do?
  7. Evaluate other areas of financial analysis: capital spending, stock growth, Beta values, credit rating service valuations (if possible), bond rating valuations (if possible), etc. Make an overall conclusion about financial performance of each company during the last years. Compare the results that you received against each company and the industry.  Summarize the results that you received in 1 pages. What are these firm’s financial strengths and weaknesses? (10% of the project grade)
  8. Collect and evaluate the data about stock performance of these assigned companies for the last one year. Compare the results that you received against the industry.
  9. Write about 1 page of analysis of the ratio results you received. (20% of the project grade).
  10. Develop a specific recommendation, with supporting rationale, as to whether or not the assigned company’s recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment. (about 1 page) (15% of the project grade)

If a bond is purchased at a price below the face value, the yield to maturity is:

Question 1

If a bond is purchased at a price below the face value, the yield to maturity is:
greater than the stated interest rate.
the same as the stated interest rate.
less than the stated interest rate.
zero.
of no significance.
.

Question 2

A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals in time is called:
dollar cost averaging.
dividend reinvestment plan.
buy and hold technique.
regulated transaction.
secured transaction.
.

Question 3

A stock that sells for less than $1 per share is called a:
fractional stock.
penny stock.
dollar stock.
ten-dollar stock.
bad investment.
.

Question 4

Which one of the following expenditures for retirees is likely to decrease?
clothing expenses
insurance expenses
medical expenses
expenses for leisure activities
gifts and contributions
.

Question 5

During your retirement, your employer’s health insurance plan and Medicare will cover your medical expenses.
false
true
.

Question 6

What is likely to be an individual’s single biggest asset?
Their automobile
Their jewelry
Their bank account
Their home
None of the choices
.

Question 7

With an open-end credit, you pay back one-time loans in a specified period of time in equal amounts.
false
true
.

Question 8

Which of the following is most likely not a valid reason for using credit?
Borrowing for a stay in a hospital because of appendicitis
Borrowing to purchase a car so that you can go to work full time
Borrowing to buy a printer for your home office now because you now it will be twice as expensive in two years
Borrowing to pay for your expensive dinner and movie every week
All of the choices are valid reasons for using credit
.

Question 9

Gordon Carey uses his Visa card to purchase a new digital camera and lens. What type of credit did Gordon use?
Installment sales credit
Installment cash credit
Single lump sum credit
Revolving credit
Incidental credit
.

Question 10

For most mutual funds, the net asset value is calculated:
yearly.
quarterly.
weekly.
daily.
whenever an investor calls and requests a price quote.
.

Question 11

Which of the following is an advantage of an exchange traded fund (EFT)?
No minimum investment amount
Shares can be bought and sold through a broker at any time at the current price
Management fees are often lower
Can use limit orders to purchase EFTs
All of the choices are advantages of EFTs
.

Question 12

For a mutual fund, the turnover ratio measures:
the length of time a manager has been in charge of the fund.
the amount of profit the fund earns from one investment period to the next.
the number of months the average investor holds the fund before selling.
the percentage of a fund’s holdings that have changed during a 12-month period.
the percentage of institutional investors who own the fund.
.

Question 13

Grady Perdue has assets worth $1,500,000 and has written a legal document that specifies that all of his money go to his children. After he dies, there is a legal process to determine whether his document specifying how his assets be divided is valid. This is also the legal process by which his executor manages and distributes his property. What is this legal process called?
An estate
A will
A trust
Probate
None of the choices
.

Question 14

A trust established by your will that becomes effective upon your death is called a(n) ____________ trust.
testamentary
living
revocable
irrevocable
insurance
.

Question 15

A legal document authorizing someone to act on your behalf is called a:
codicil.
rider.
power of attorney.
trustor.
proxy.
.

Question 16

A prime reason for buying an annuity is to:
save money for college education
start a new business
accumulate funds to invest in stocks
give you retirement income for the rest of your life
get rich quick
.

Question 17

Who has the greatest need for life insurance?
households with small children
singles living alone
singles living with parents
dual income couple
children
.

Question 18

Jerry Lewis is thinking about purchasing some life insurance. He goes to a company that is owned by shareholders. What type of life insurance company has he gone to?
A stock life insurance company
A debt life insurance company
A mutual life insurance company
An exclusionary life insurance company
None of the choices
.

Question 19

Automobile liability insurance covers the insured when he or she is held responsible for losses suffered by others.
True
False
.

Question 20

In times of high inflation, personal incomes generally keep up with the rate of inflation.

True
False
.

Question 21

Similar to corporate shareholders, holders of mutual funds have a say in running the company, since they have equity interest in the pool of assets and a residual claim on the profits.

True
False
.

Question 22

Savings is the accumulation of excess funds by intentionally spending less than you earn.
True
False
.

Question 23

A business cycle is a pattern of economic activity that includes an expansion, peak, contraction, and trough.
True
False
.

Question 24

High-demand occupations tend to pay low salaries.
True
False
.

Question 25

The most expensive loans are available from:
parents.
friends.
banks.
finance companies.
credit unions.

Question 26

Frank Wert wants to get a lower interest rate on his loan for the purchase of a new boat. He uses the boat as collateral for the loan. In which way is Frank reducing his lender’s risk?
He is sharing the interest rate risk with his lender
He is pledging valuable assets that can be seized if the loan is not repaid
He is taking a larger stake in the asset he is purchasing
He is repaying the loan over a faster period of time
None of the choices
.

Question 27

There are no costs involved in filing for a bankruptcy.
false
true
.

Question 28

Kevin Brown rides his bicycle to work so that he doesn’t have to worry about getting in a car accident. How is Kevin managing his risk?
Answer Risk Avoidance
Risk Reduction
Risk Assumption
Risk Shifting
Risk Creation
.

Question 29

Negligence refers to:
Answer failure to take ordinary and reasonable care.
cancellation of insurance.
property damage.
high risk insurance coverage.
common hazards in our society.
.
3.33 points
Question 30

Using a home security system is an example of ____________ risk.
Answer shifting
accepting
reducing
sharing
transferring

By proceeding with this exam, you are agreeing not to share the exam content or your responses with anyone, including future students of MGMT640

MGMT640 1121 Final Exam Spring 2015 Name: __________________________ Date: ___________________ The Final Exam is individual work. All work on the exam should be from your own efforts, with no assistance from classmates, family, friends or others. By proceeding with this exam, you are agreeing not to share the exam content or your responses with anyone, including future students of MGMT640. Your completed exam is due by 7:00 PM on Sunday, April 26, 2015 (upload to your Final Exam folder under Assignments ). Please refer to the Syllabus for the policy regarding late submissions. There will be no make-up exams except for documented emergencies. You are not required to submit your working. However, complete working showing formulas and calculations may be considered for partial credit for incorrect answers. Identify the letter of the choice that best completes the statement or answers the question. 1. A manufacturing company produces 100,000 units of product A at a total cost of $2.8 million. Total fixed costs are $1.2 million. If the company increases production by 18% and uses a 23% markup the price per unit will be: A) $31.54 B) $32.19 C) $35.47 D) $37.10 Use the following to answer questions 2-3: RNO Company’s market for the Model 55 has changed significantly, and RNO has had to drop the price per unit from $225 to $165. There are some units in the work in process inventory that have costs of $200 per unit associated with them. RNO could sell these units in their current state for $150 each. It will cost RNO $50 per unit to complete these units so that they can be sold for $165 each. 2. A new employee looks at the analysis and exclaims, “We’ll lose money with either of these alternatives! Let’s just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee wants) have on net income? A) Net income will increase by $35 per unit for each unit discarded. B) Net income will decrease by $265 per unit for each unit discarded. C) Net income will decrease by $150 per unit for 1
each unit discarded. D) It will have no effect on net income. 3. When the incremental revenues and expenses are analyzed, the company is better off by A) $10 per unit if they sell the units in their current state. B) $25 per unit if they sell the units in their current state. C) $115 per unit if they complete the units. D) $15 per unit if they complete the units. 4. A company using activity based pricing marks up the direct cost of goods by 43% plus charges customers for indirect costs based on the activities utilized by the customer. Indirect costs are charged as follows: $8.00 per order placed; $4.00 per separate item ordered; $30.00 per return. A customer places 10 orders with a total direct cost of $3,000, orders 300 separate items, and makes 6 returns. What will the customer be charged? A) $5,750 B) $3,000 C) $5,330 D) $4,290 5. Manufacturing overhead is allocated to products based on the number of machine hours required. In a year when 20,000 machine hours were anticipated, costs were budgeted at $125,000. If a product requires 7,000 machine hours, how much manufacturing overhead will be allocated to this product? A) $41,667 B) $42,850 C) $51,120 D) $43,750 Use the following to answer questions 6-7: The Sunrise Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $16 per room per night of occupancy. Fixed costs total $84,000 per month. 6. If the hotel spends an additional $10,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 5%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)? A) Total fixed costs will increase by $10,500. B) Net income will increase by $26,320. C) Net income will increase by $16,320. D) Total fixed costs will remain the same. 7. If 80% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
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Throughout this course, you have researched a wealth of data and analytics to construct a comprehensive financial analysis and proposal

Throughout this course, you have researched a wealth of data and analytics to construct a comprehensive financial analysis and proposal (excluding tables, figures, and addenda) of a chosen company following the nine-step assessment process detailed in Assessing a Company’s Future Financial Health.

There are three parts to the final component assignment of the Benchmark – Financial Analysis and Proposal.

Part One

Apply the final two steps of the nine-step assessment process detailed in Assessing A Company’s Future Financial Health (i.e., Step 8: Stress Testing and Step 9: Financing and Operating Plan for Current Year) to compose further assessment of the company/competitor pairing analysis as below:

  1. Perform stress testing under scenarios of likely adversity and value your firm using appropriate valuation techniques on the pro forma financial data analysis you constructed earlier in the course.
  2. Compare your results from step #1 against the current stock price of your chosen company and competitor. Construct an argument in favor of investing in either the chosen company, or the competitor, with sufficient supportive detail and/or data to make your case.

Part Two

Access the three prior component assignments, with instructor feedback incorporated, that you submitted in Topics 2, 4, and 6. Integrate these three assignments into the final Benchmark – Financial Analysis and Proposal submission along with the Component 4 assignment in this topic (Part One) to provide a comprehensive analysis inclusive of all nine steps that flows from start to finish. Note: You may need to re-write certain sections or statements in order to provide a cohesive flow to your submission. Assume this is a real-world proposal you will be presenting and revise or “polish” your work accordingly.

Part Three

Develop a 250-word “introduction” to your analysis and proposal that can serve as an overview in the event that you do present this to a single or group of potential investors. Consider factors that might impede an individual’s ability to focus on the information, and present only key and other potentially relevant points this individual or group needs to know.

Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion

Cases in Healthcare Finance, 5 th Edition Copyright 2014 Health Administration

Cases in Healthcare Finance, 5 th Edition Copyright 2014 Health Administration Press 12/6/2013 CASE 20 QUESTIONS CORAL BAY HOSPITAL Traditional Project Analysis 1. What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center? 2. Inflation is one of the most difficult factors to deal with in project analysis. a. Complete the inflation impact table shown in Exhibit 20.2. b. What management information is provided by the inflation impact table? 3. One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board. a. Perform a sensitivity analysis. b. What management information is provided by the sensitivity analysis? 4. a. Perform a scenario analysis. b. What management information is provided by the scenario analysis? c. Why is the expected NPV obtained in the scenario analysis different from the base case NPV? 5. A board member is interested in the utilization breakeven of the Center. a. What are the breakeven values of the three input variables that are highly uncertain? b. What management information is provided by the breakeven analysis? 6. To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, the hospital’s CFO, about both the risk inherent in the hospital’s average project and how the hospital typically adjusts for risk. a. What is the project’s differential risk-adjusted NPV? b. Assess the corporate risk of the project. (No calculations are required. Think about correlation of the surgery center and hospital cash flows.) 7. Jules Bergman is aware that there are some qualitative factors that are relevant to the surgery center decision. a. What qualitative factors might support project acceptance? b. What qualitative factors might preclude project acceptance? c. Can you think of any costs that might be associated with the project that have not been included in the analysis? d. Are there any potential benefits that have not been included? e. What additional data would you seek from other hospital staff members to conduct a more thorough analysis? 8. Considering all points, would you build the ambulatory surgery center? 9. In your opinion, what are three key learning points from this case?

Imagine that you are a financial manager researching investments for your client that align with its investment goals

Assignment 1: Financial Research Report Due Week 9 and worth 300 points Imagine that you are a financial manager researching investments for your client that align with its investment goals. Use the Internet or the Strayer Library to research any U.S. publicly traded company that you may consider as an investment opportunity for your client. (Note: Please ensure that you are able to find enough information about this company in order to complete this assignment. You will create an appendix, in which you will insert related information.) The assignment covers the following topics: Rationale for choosing the company for which to invest Ratio analysis Stock price analysis Recommendations Write a ten to fifteen (10-15) page paper in which you: 1. Provide a rationale for the U.S. publicly traded company that you selected, indicating the significant factors driving your decision as a Financial manager. 2. Determine the profile of the investor for which this company may be a Ft, relative to that potential investor’s investment strategy. Provide support for your rationale. 3. Select any Fve (5) Financial ratios that you have learned about in the text. Analyze the past three (3) years of the company’s Financial data, which you may obtain from the company’s Financial statements. Determine the company’s Financial health. (Note: Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per share, and price earnings ratio.) 4. Based on your Financial review, determine the risk level of the company from your investor’s point of view. Indicate key strategies that you may use in order to minimize these perceived risks. 5. Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources, such as peer-reviewed articles or material from the Strayer Library. 6. Use at least Fve (5) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are: Critique Financial management strategies that support business operations in various market environments. Analyze Financial statements for key ratios, cash ±ow positions, and taxation e²ects

Review fixed income strategies using time value of money concept, bond valuation methods, and interest rate calculations. Estimate the risk and return on financial investments. Apply financial management options to corporate finance. Determine the cost of capital and how to maximize returns. ±formulate cash ²ow analysis For capital projects including project risks and returns. Evaluate how corporate valuation and Forecasting a³ect financial management. Analyze how capital structure decision-making practices impact financial management. Use technology and information resources to research issues in financial management. Write clearly and concisely about financial management using proper writing mechanics

Problem 6-1 GBK, Inc. is considering a new product. The proposal is as follows: Project cost: $2,000,000 Project life: 5 yrs

Problem 6-1 GBK, Inc. is considering a new product. The proposal is as follows: Project cost: $2,000,000 Project life: 5 yrs Salvage value: zero Depreciation: straight line to zero Sales projection: 180 units per year Price per unit: $20,000 Variable cost per unit will be: $12,400 Fixed costs per year: $490,000 Required return on the project: 10% Relevant tax rate: 35% Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10% A] What are the upper and lower bounds for these projections? B] What is the base case NPV? C] What are the best case NPV and the worst case NPV scenarios? D] Evaluate the sensitivity of your base-case NPV to changes in fixed costs. E] What is the cash break-even level of output for this project (ignoring taxes)? F] What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number? Problem 6-2 You purchased one GBK, Inc. 6 percent coupon bond one year ago for $1,020. The bond makes annual payments and matures four years from now. You sell the bond today when the required return is 5 percent. The inflation rate was 2.8 percent over the past year. What was the real return on your investment?

RCA is considering two independent projects, X and Y. Both projects have a cost of capital of 14%

Question 1

RCA is considering two independent projects, X and Y. Both projects have a cost of capital of 14%. The cash flows that the projects will produce are:

Year
0
1
2
3

Project X
$(9,000)
4,000
4,000
4,000

Project Y
$(10,334)
3,000
5,000
6,000

RCA uses the IRR method for project selection. Based on the above data, RCA should accept:

a. Both projects

b. Project X, but not Project Y

c. Project Y, but not Project X

d. Neither project

.

Question 2

Sibling Company’s common stock has a beta of 1.40. If the risk-free rate of return is 7% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sibling’s stock?

a. 8.4%

b. 11.2%

c. 14.4%

d. 18.2%

.

Question 3

Which of the following investors incurs the least risk?

a. bondholders

b. preferred stockholders

c. common stockholders

d. all of the above bear equal risk

.

Question 4

Castle Corp. generated $2 million in operating profits. The firm’s corporate tax rate was 40%. If the WACC was 12%, what was the value of the firm?

a. $6.7 million

b. $10 million

c. $12.3 million

d. $16.7 million

.

Question 5

If the market price of a bond increases, then:

a. the yield to maturity decreases

b. the coupon rate decreases

c. the yield to maturity increases

d. none of the above

.

Question 6

The Acme Company is analyzing a project that has a cost of capital of 10%. The project’s estimated cost is $200,000. The cash flows that the project is expected to generate are as follows.

Year
1
2
3
4
5

Cash flow
$75,000
$85,000
$95,000
$65,000
$15,000

The discounted payback period for this project is:

a. 2.42 years

b. 2.86 years

c. 3 years

d. 3.72 years

.

Question 7

Metals, Inc. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common stock. The after-tax cost of debt is 5.25%, preferred stock has a required rate of return of 6.35%, and common stock has a required rate of return of 14.05%. What is Metals’ WACC?

a. 4.50%

b. 8.33%

c. 10.84%

d. 12.78%

.

Question 8

Wannabe a Brave, Inc. (WaB) is considering the purchase of a new machine which is expected to increase EBITDA by $5,000 annually. Due to this increase, WaB expects that its working capital will increase $3,000 for the project. The company will use the straight-line method to depreciate the $20,000 purchase price over the project’s 5 year economic life. The salvage value will be zero. The firm has a marginal tax rate of 34 percent and a cost of capital of 12 percent.

The machine’s after-tax operating cash flows for years 1-5 are _________.

a. $10,000

b. $4,660

c. $5,980

d. $1,980

.

Question 9

RRR Co. has a debt ratio of 45%. What is its Debt-to-Equity ratio?

a. 45%

b. 55%

c. 82%

d. 122%

.

Question 10

A stock dividend and a stock split are similar in that _____.

a. cash is paid out and the number of shares outstanding increases

b. no cash is paid out and the number of shares outstanding increases

c. both changes affect only the common stock account

d. cash is paid out and the only other effect is on the retained earnings account

e. they are totally dissimilar

.

Question 11

Wannabe a Brave, Inc. (WaB) is considering the purchase of a new machine which is expected to increase EBITDA by $5,000 annually. Due to this increase, WaB expects that its working capital will increase $3,000 for the project. The company will use the straight-line method to depreciate the $20,000 purchase price over the project’s 5 year economic life. The salvage value will be zero. The firm has a marginal tax rate of 34 percent and a cost of capital of 12 percent.

The machine’s initial cash outlay is ________.

a. $23,000

b. $21,000

c. $20,000

d. $17,000

.

Question 12

Katie’s Chocolates imports raw chocolate from Brazil. The current cost of chocolate in the spot market is $2.38 per pound. The company’s total imports are 200,000 pounds per year. What would the cost savings be to the company from hedging, at the current spot rate, this year’s purchases if chocolate goes up in price to $3.00 per pound?

a. $124,000

b. $200,000

c. $476,000

d. $600,000

.

Question 13

The intrinsic (exercise) value of a put option equals _____.

a. exercise price – stock price

b. stock price – exercise price

c. call premium – (exercise price – stock price)

d. put premium – (stock price – exercise price)

.

Question 14

A corporation with surplus cash flows may use the cash flows to:

a. pay special dividends

b. repurchase shares

c. pay interest

d. all of the above

.

Question 15

The optimal capital structure is

a. the mix of funds used by the firm in a manner that will maximize the firm’s common stock price

b. the mix of all items that appear on the right-hand side of the company’s balance sheet

c. the mix of funds that will minimize the firm’s beta

d. the mix of securities that will maximize the firm’s EPS

.

Question 16

An investor would buy a _____ if she believes that the price of the underlying stock will fall in the near future.

a. call option

b. convertible bond

c. put option

d. futures contract

.
Question 17

Last year, the sales for the Writing Room Stationery Company were $20 million. The ratios for several balance sheet items relative to sales were calculated as follows:

Cash

Accounts Receivable

Inventory
Net Fixed Assets

Accounts Payable

Notes Payable

Other Accruals

Net Income

5%
15%
20%
50%
20%
10%
5%
8.5%

The firm wishes to maintain its 25% payout ratio. If sales were to increase 5%, what would the Additional Funds Needed be?

a. $203,750

b. -$725,000

c. -$788,750

d. -$688,750

.

Question 18

Villa Pizza had sales in 2012 of $850,000. It expects sales to increase 10% this next year. The firm is operating at full capacity. If Asset/Sales = 55%, Liabilities/Sales = 20%, Profit Margin = 12% and the POR = 50%, what would be the Additional Funds Needed?

a. -$26,350

b. $24,650

c. $58,650

d. $246,500

.

Question 19

Target-Mart is planning a new store in Greenwich. The company will lease the needed space for 15 years. Equipment and fixtures for the store will cost $2,500,000 and will be depreciated totally using the straight-line depreciation method. In addition, inventories valued at $500,000 will also be needed to stock the store at the current time (before opening). Sales are expected to be $5 million each year. Operating expenses, ignoring depreciation, will be $2,500,000 each year. The firm will maintain the same inventory levels, and liquidate the inventory at the end of the 15-year period. The corporate tax rate is 34%. The WACC for Target-Mart is 11.75%.

What is the MIRR of this project?

a. 22.5%

b. 30.9%

c. 35.7%

d. 56.8%

.

Question 20

Speedy Growth Profitable Tech Company’s zero dividend policy may be explained by _____.

a. a dividend payment would indicate no more positive investment opportunities

b. Speedy has generated a greater return to shareholders than they can earn on the dividend

c. shareholders prefer growth and capital gains over dividends

d. all of the above

e. none of the above

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Question 21

Which of the following statements regarding capital budgeting is most accurate?

a. The higher the discounted payback period, the higher a project should be ranked.

b. A project that is expected to generate a negative NPV will produce an IRR that is greater than the cost of capital required to justify the investment.

c. When analyzing two independent projects, the IRR method will produce the same decision that is obtained from evaluating projects using the NPV method.

d. The Profitability Index (PI) is a better method for ranking projects than the Payback Period (PBP) because PI used cash flows and PBP doesn’t.

.

Question 22

Healy, Inc. currently has a beta of 1.25 and a debt-equity ratio of 1. The corporate tax rate is 35%. If the company increases debt so that its debt-equity ratio is 1.75, what would the resulting beta be?

a. 0.76

b. 1.25

c. 1.62

d. 1.75

.

Question 23

A project with a WACC of 10% has a net present value of -$175. The internal rate of return for this project will be:

a. Lower than 10%

b. Higher than 10%

c. Equal to 10%

d. Cannot be determined with the information given

.

Question 24

The South Bay Company manufactures computer chips for use in consumer electronics that are built to the specifications of major brand manufacturers. Company management is considering investing in a project to develop and produce its own line of electronic music storage and playback devices based on its own revolutionary and untested chip design. In analyzing the NPV of this project, a financial analyst should use ___.

a. the firm’s weighted average cost of capital as the discount rate

b. a discount rate that is higher than the firm’s WACC to reflect the additional risk of this project

c. very conservative estimates for the estimated cash flows and discount them at a rate that is lower than the firm’s WACC to reflect the additional risk of this project

d. the leveraged free cash flows of the project discounted at a higher risk-adjusted WACC

.

Question 25

If dividends are taxed, then investors in _____ tax brackets will tend to prefer high dividend payout stocks.

a. high

b. average

c. low

d. cannot tell from the information provided

.

Question 26

A company estimates that an average-risk project has a WACC of 9%, a below-average risk project has a 7% cost of capital, and an above-average risk project has an 11% cost of capital. Which of the following projects should the company accept?

a. Project A which has average risk and an IRR of 9.5%

b. Project B which has below-average risk and an IRR of 6.35%

c. Project C which has above-average risk and an IRR of 10.5%

d. All of the projects are acceptable

.

Question 27

Target-Mart is planning a new store in Greenwich. The company will lease the needed space for 15 years. Equipment and fixtures for the store will cost $2,500,000 and will be depreciated totally using the straight-line depreciation method. In addition, inventories valued at $500,000 will also be needed to stock the store at the current time (before opening). Sales are expected to be $5 million each year. Operating expenses, ignoring depreciation, will be $2,500,000 each year. The firm will maintain the same inventory levels, and liquidate the inventory at the end of the 15-year period. The corporate tax rate is 34%. The WACC for Target-Mart is 11.75%.

What is the NPV of this project?

a. $8,256,937

b. $8,829,179

c. $8,389,579

d. $8,875,198

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Question 28

Treasury bonds currently earn 5.8%. The expected market rate of return is 13.4%. The corporate tax rate is 40%. Given the following information for PDG Corporation, what is the debt ratio that maximizes the firm’s value?

wd
we
D/E
rd
b
rs
WACC

.20
.80

8%
1.2
14.92%
12.9%

.40
.60

9%

.60
.40

10%

.80
.20

12%

a. 20%

b. 40%

c. 60%

d. 80%

.

Question 29

Why do common stocks tend to grow in value over long periods of time?

a. the fact that almost all shares of common stock are convertible

b. the growth rate in earnings per share

c. the growth in the number of shareholders

d. all of the above

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Question 30

An analyst is interested in using the Black-Scholes model to value call options on the stock of QU, Inc. The analyst has accumulated the following information:

Stock price
$15

Exercise price
$18

Time until maturity
6 months

Standard deviation of the stock
20%

Risk free rate of return
4%

What is the value of the call option?

a. $0.43

b. $0.14

c. $3.38

d. $3.00

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Question 31

What type of risk is a direct result of a firm’s capital structure decision?

a. business risk

b. financial risk

c. systematic risk

d. interest rate risk

.

Question 32

An analyst is interested in using the Black-Scholes model to value put options on the stock of QU, Inc. The analyst has accumulated the following information:

Stock price
$40

Strike price
$40

Time until maturity
6 months

Standard deviation of the stock
12%

Risk free rate of return
16%

Using the Black-Scholes model, what is the value of a put option?

a. $1.94

b. $0.30

c. $3.76

d. $3.38

e. $2.12

.

Question 33

A discretionary form of financing would be:

a. Notes payable

b. Accounts payable

c. Accrued expenses

d. None of the above

Sally, an accounting technician, works on the sales ledger in Big Foods, a food wholesaler.

Sally, an accounting technician, works on the sales ledger in Big Foods, a food wholesaler. One of its customers, Fare Foods, is owned by Sally’s brother. Fare Foods has placed a large order and, like all other customers, receives a 2% prompt payment discount on invoices settled within 14 days.

The usual practice within the accounts department, which applies to all customers, is that the date recorded in the sales ledger is the date on which the payment is received in the accounts department (which must always be the same day that payment is received in the post or delivered to the reception desk). However, there are often one or two days between the cheques arriving at Big Foods and their eventual processing. In addition, cheques and cash received by Big Foods are banked only twice per week, on Wednesdays and Fridays. Sally

The 14 day settlement date for the Fare Foods account fell on a Tuesday. It is now 9.15 on the following morning, and Sally has just received the Fare Foods cheque. She decides to record the receipt date in the sales ledger as Tuesday, and she duly processes Fare Foods’ prompt payment discount of 2%. She sees no need to seek authorisation for this, as Fare Foods had the potential to become a very valuable customer.

What do you think about this?

The results from the mayor’s race have been reported by each precinct as follows:

The results from the mayor’s race have been reported by each precinct as follows: Candidate Candidate Candidate Candidate Precinct A B C D 1 192 48 206 37 2 147 90 312 21 3 186 12 121 38 4 114 21 408 39 5 267 13 382 29 Write a program to do the following: a. Read the raw vote totals from a data file that contains one row for each precinct. b. Display the table with appropriate headings for the rows and columns. c. Compute and display the total number of votes received by each candidate and the percent of the total votes cast. d. If any one candidate received over 50% of the votes, the program should print a message declaring that candidate the winner. e. If no candidate received 50% of the votes, the program should print a message declaring a run-off between the two candidates receiving the highest number of votes; the two candidates should be identified by their letter names. f. For testing, run the program with the above data, and also with another data file where Candidate C receives only 108 votes in precinct 4.