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MBA602 Test 3 ReviewLatest Questions & Answers
2022/2023 Assured Success With A+
Which of the following is NOT normally regarded as being a good reason to
establish an ESOP?
a. To help prevent a hostile takeover.
b. To enable the firm to borrow at a below-market interest rate.
c. To increase worker productivity.
d. To help retain valued employees.
e. To make it easier to grant stock options to employees.
A poison pill is also known as a corporate restructuring.
a. True
b.
False
ESOPs were originally designed to help improve worker productivity, but today
they are also used to help prevent hostile takeovers.
a.
True
b.
False
Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and
(2) the rules that cover the CEO's ability to remove members of the board.
a.
True
b.
False
The CEO of D'Amico Motors has been granted some stock options that have
provisions similar to most other executive stock options. If D'Amico's stock
underperforms the market, these options will necessarily be worthless.
a. True
b.
False
Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
a. Poison pills.
b. Restricted voting rights.
c. Shareholder rights provisions.
d. Abnormally high executive compensation.
e. Targeted share repurchases.
Spontaneous funds are generally defined as follows:
a. A forecasting approach in which the forecasted percentage of sales for
each item is held constant.
b. Assets required per dollar of sales.
c. The amount of cash raised in a given year minus the amount of cash
needed to finance the additional capital expenditures and working
capital needed to support the firm's growth.
d. Funds that arise out of normal business operations from its suppliers,
employees, and the government, and they include immediate
e. Funds that a firm must raise externally through short-term or long-term
borrowing and/or by selling new common or preferred stock.
Which of the following assumptions is embodied in the AFN equation?
a. Fixed assets, but not current assets, are tied directly to sales.
b. Common stock and long-term debt are tied directly to sales.
c. Last year's total assets were not optimal for last year's sales.
d. None of the firm's ratios will change.
e. Accounts payable and accruals are tied directly to sales.
The capital intensity ratio is generally defined as follows:
a. Sales divided by total assets, i.e., the total assets turnover ratio.
b. The ratio of current assets to sales.
increases
in accounts payable, accrued wages, and
accrued taxes.
negative.
d. Higher sales usually require higher asset levels, and this leads to what we
call AFN. However, the AFN will be zero if the firm chooses to retain all of its
profits, i.e., to have a zero dividend payout ratio.
e. If a firm increases its dividend payout ratio in anticipation of higher
earnings, but sales and earnings actually decrease, then the firm's actual
AFN must, mathematically, exceed the previously calculated AFN.
Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the
company's operations next year, and he wants you to forecast the firm's
additional funds needed (AFN). The firm is operating at full capacity. Data for
use in your forecast are shown below. Based on the AFN equation, what is the
AFN for the coming year? Dollars are in millions.
Last year's sales = S 0
$350 Last year's
accounts
payable
Sales growth rate = g 30% Last year's
notes
payable
Last year's total
assets = A
0
$500 Last year's
accruals
Last year's profit
margin = PM
5% Target payout ratio 60%
a. $119.
b. $108.
c. $113.
d. $125.
e. $102.
Which of the following is NOT one of the steps taken in the financial planning
process?
a. Determine the amount of capital that will be needed to support the plan.
b. Monitor operations after implementing the plan to spot any deviations and
then take corrective actions.
c. Consult with key competitors about the optimal set of prices to charge,
i.e., the prices that will maximize profits for our firm and its competitors.
d. Forecast the funds that will be generated internally. If internal funds
are insufficient to cover the required new investment, then identify
sources from which the required external capital can be raised.
e. Develop a set of forecasted financial statements under alternative
versions of the operating plan in order to analyze the effects of different
operating procedures on projected profits and financial ratios.
The term "additional funds needed (AFN)" is generally defined as follows:
a. The amount of internally generated cash in a given year minus the
amount of cash needed to acquire the new assets needed to support
growth.
b. Funds that are obtained automatically from routine business transactions.
c. A forecasting approach in which the forecasted percentage of sales for
each balance sheet account is held constant.
d. Funds that a firm must raise externally from non-spontaneous
sources, i.e., by borrowing or by selling new stock to support
operations.
e. The amount of assets required per dollar of sales.
Which of the following statements is CORRECT?
a. Perhaps the most important step when developing forecasted financial
statements is to determine the breakdown of common equity between
common stock and retained earnings.
b. The AFN equation produces more accurate forecasts than the
forecasted financial statement method, especially if fixed assets are
lumpy, economies of scale exist, or if excess capacity exists.
c. The first, and perhaps the most critical, step in forecasting financial
requirements is to forecast future sales.
d. Forecasted financial statements, as discussed in the text, are used
primarily as a part of the managerial compensation program, where
management's historical performance is evaluated.
e. The capital intensity ratio gives us an idea of the physical condition of the
firm's fixed assets.
The Besnier Company had $250 million of sales last year, and it had $75 million
of fixed assets that were being operated at 80% of capacity. In millions, how
large could sales have been if the company
had operated at full capacity?
a.
.1 b.
.5 c.
e. 54.30%
Sales $
Fixed assets (not used in calculations) $
% of capacity utilized 60%
Sales at full capacity = Actual sales/% of
capacity
used = 67
Additional sales without adding FA = Full
capacity sales - Actual sales =
Percent growth in sales = Additional sales/Old sales = 66. 67 %
Last year National Aeronautics had a FA/Sales ratio of 40 %, comprised of $2 50
million of sales and
$100 million of fixed assets. However, its fixed assets were used at only 50%
of capacity. Now the company is developing its financial forecast for the
coming year. As part of that process, the company wants to set its target Fixed
Assets/Sales ratio at the level it would have had had it been operating at full
capacity. What target FA/Sales ratio should the company set?
Select the correct answer.
a. 20.0%
b. 19.7%
c. 20.9%
d. 20.3%
e. 20.6%
Last year Baron Enterprises had $350 million of sales, and it had $270 million of
fixed assets that
were used at 65% of capacity last year. In millions, by how much could
Baron's sales increase before it is required to increase its fixed assets?
a.
46 b.
c. $170.
d. $207.
e. $179.
Sales $
Last year's total
assets = A 0
Last year's
accruals
Last year's profit
margin = PM
20.0% Target payout ratio 25.0%
a. $ 15 , 200
b. $ 17 , 640
c. $ 16 , 000
d. $ 16 , 800
e. $ 14 , 440
Last year Baron Enterprises had $525 million of sales, and it had $
million of fixed assets that were used at 65% of capacity last year. In
millions, by how much could Baron's sales increase before it is required to
increase its fixed assets?
Select the correct answer.
a.
.7 b.
.7 c.
d. $292.
e. $287.
A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the
additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
a. The company's profit margin increases.
b. The company previously thought its fixed assets were being operated at
full capacity, but now it learns that it actually has excess capacity.
c. The company begins to pay
employees monthly rather than
weekly. d. The company increases its
dividend payout ratio.
e. The company decides to stop taking discounts on purchased materials.
You have been asked to forecast the additional funds needed (AFN) for
Houston, Hargrove, & Worthington (HHW), which is planning its operation for
the coming year. The firm is operating at full capacity. Data for use in the
forecast are shown below. However, the CEO is concerned about the impact of
a change in the payout ratio from the 10% that was used in the past to 50%,
which the firm's investment bankers have recommended. Based on the AFN
equation, by how much would the AFN for the coming year change if HHW
increased the payout from 10% to the new and higher level? All dollars are in
millions.
Last year's sales =
S
0
$300.0 Last year's
accounts
payable
Sales growth rate =
g
40% Last year's
notes
payable
Last year's total
assets = A 0
$500.0 Last year's
accruals
North Construction had $850 million of sales last year, and it had $425 million
of fixed assets that were used at only 70% of capacity. What is the maximum
sales growth rate North could achieve before it had to increase its fixed assets?
Select the correct answer.
a. 47.76%
b. 37.96%
c. 45.31%
d. 50.21%
e. 42.86%
Which of the following statements is CORRECT?
a. If equipment is expected to be sold for more than its book value at the
end of a project's life, this will result in a profit. In this case, despite taxes on
the profit, the end-of-project cash flow will be greater than if the asset had
been sold at book value, other things held constant.
b. It is unrealistic to believe that any increases in net working capital
required at the start of an expansion project can be recovered at the
project's completion. Working capital like inventory is almost always used
up in operations. Thus, cash flows associated with working capital should
be included only at the start of a project's life.
c. Changes in net working capital refer to changes in current assets and
current liabilities, not to changes in long-term assets and liabilities.
Therefore, changes in net working capital should not be considered in a
capital budgeting analysis.
d. Only incremental cash flows are relevant in project analysis, the proper
incremental cash flows are the reported accounting profits, and thus
reported accounting income should be used as the basis for investor and
managerial decisions.
e. If an asset is sold for less than its book value at the end of a project's
life, it will generate a loss for the firm, hence its terminal cash flow will be
negative.
Laramie Labs uses a risk-adjustment when evaluating projects of different risk. Its
overall (composite) WACC is 10%, which reflects the cost of capital for its average
asset. Its assets vary widely in risk, and Laramie evaluates low-risk projects with
a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The
company is considering the following projects:
Projec
t
Risk Expected
Return
A High 15
B Avera
ge
C High 11
D Low 9%
E Low 6%
Which set of projects would maximize shareholder wealth?
a. A, B, and D.
b. A, B, and C.
c. A, B, C, and D.
d. A, B, C, D, and E.
e. A and B.
Erickson Inc. is considering a capital budgeting project that has an expected
return of 25% and a standard deviation of 30 %. What is the project's coefficient
of variation?
a. 1.
b. 1.
c. 1.
d. 1.
e. 1.
Expected return 25.
Standard deviation 30.
Coefficient of variation
= Std dev/Expected
return =
deprec. (constant)
Variable op. cost/unit, Year
Annual depreciation rate 33.333%
Expected inflation 4.00%
Tax rate 35.0%
a. $16,
b. $13,
McLeod Inc. is considering an investment that has an expected return of 15%
and a standard
deviation of 10%. What is the investment's coefficient of variation?
a. 0.
b. 0.
c. 0.
d. 0.
e. 0.
Expected return 15.0%
Standard deviation 10.0%
Coefficient of variation = Std
dev/Expected return =
Collins Inc. is investigating whether to develop a new product. In evaluating
whether to go ahead with the project, which of the following items should NOT be
explicitly considered when cash flows are
estimated?
a. The project will utilize some equipment the company currently owns but
is not now using. A used equipment dealer has offered to buy the
equipment.
b. The new product will cut into sales of some of the firm's other products.
c. The company has spent and expensed for tax purposes $3 million on
research related to the new detergent. These funds cannot be recovered,
but the research may benefit other projects that might be proposed in the
future.
d. If the project is accepted, the company must invest $2 million in working
capital. However, all of these funds will be recovered at the end of the
project's life.
e. The company will produce the new product in a vacant building that was
used to produce another product until last year. The building could be sold,
leased to another company, or used in the future to produce another of the
firm's products.
Which of the following factors should be included in the cash flows used to
estimate a project's NPV?
c. $15,
d. $14,
e. $13,
(cannibalization)
Investment cost (depreciable basis) $80,
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,
Annual operating costs (excl. deprec.) $25,
Tax rate 35.0%
a. $4,
b. $4,
c. $4,
d. $3,
e. $3,
Your new employer, Freeman Software, is considering a new project whose data
are shown below. The equipment that would be used has a 3-year tax life, and
the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%,
and 7.41% for Years 1 through 4. Revenues and other operating costs are
expected to be constant over the project's 10 - year expected life. What is the
Year 1 cash flow?
Equipment cost (depreciable
basis)
Sales revenues, each year $60,
Operating costs (excl. deprec.) $25,
Tax rate 35.0%
a. $36,
b. $33,
c. $35,
d. $31,
e. $30,
Equipment cost $65,
Depreciation rate 33.
Sales revenues $60,
(excl. deprec.)
