Final Cheat Sheet

docx

School

California State University, Fullerton *

*We aren’t endorsed by this school

Course

321

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by DeanUniverse9803

1. Perpetuity is a stream of equal cash flows that occur at regular intervals and last forever. TRUE 2. Opportunity cost of capital is the average of expected returns from all similar investments (in terms of risk and term) available in the market. FALSE 3. A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly, and vice versa. TRUE 4. Free cash flow is the cash left available to pay equity investors, after the firm has met all operational needs, tax obligations, and debt obligations. FALSE 5. When we apply the discounted free cash flow model to value a stock, we should use a firm's equity cost of capital (r E ) as a discount rate, because we are interested in knowing the firm’s stock price. FALSE 6. The “comparable” (multiples) method tends to generate a more accurate valuation than the DCF method and is especially reliable when the entire industry is overvalued. FALSE 7. An investment pays you $20,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 4% per year? PV = $19,230.76 + $9,245.56 + $8,889.96 + $8,548.04 + 8219.27 = $54,133.60 8. A perpetuity will pay $ 800 per year, starting four years after the perpetuity is purchased (i.e., the first payment is to be made at time=4 ). What is the present value of this perpetuity on the date that it is purchased, given that the interest rate is 8%? 800/.08= 10,000 10000/(1+r)^N-1= 10000/(1+.08)^(4-1)= 10000/(1.08)^3= 7938.3 9. Clayton is a three -year-old boy (i.e., age 3) and he will go to college at age 18 (i.e., at t=15 ). Annual tuition at his dream college will be $50,000. Assume that Clayton will spend 4 years in college and that the interest rate will remain at 7% in the future. You will pay the tuition at the beginning of each college year (i.e., the first tuition is due in 15 years at t=15 , and so on). What is the present value of four years of college tuitions, evaluated today (i.e., at t=0 )? Pv = (50000*(1-(1+.07) ^-4)/.07*1)/ (1+.07)^14 = 65680 10. Clarissa wants to fund a growing perpetuity that will pay $6,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 6% per year. Given that the interest rate is 10%, how much does she need to fund this perpetuity? $ 6,000 / (10%-6%) = $6,000/4% = $150,000 11. A rich donor gives a hospital $100,000 one year from today. Each year after that, the hospital will receive a payment 5% larger than the previous payment, with the last payment occurring in ten years' time. What is the present value (PV) of this donation, given that the interest rate is 9%? PV = 100000/(9%-5%)*(1-((1+5%)/(1+9%))^10) 12. Jenny is considering opening an IRA in preparation for her retirement . She plans to save $9,500 per year with the first investment made one year from now (at t=1 ). Her retirement account earns 7% per year on her investments and she plans to retire in 25 years, immediately after making the last (25th) $9,500 investment. How much will she have in her retirement account on the day of her retirement? = 9500*((1+.07) ^25-1)/.07= 600865.9 13. Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughter's first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to= FV of a growing annuity $2400 × (1 + 0.09)^18 =160,463 14. Dan buys a property for $250,000 . He is offered a 20-year loan by the bank, at an interest rate of 6% per year. What is the annual loan payment Dan must make? N = 20, I = 6, PV = 250,000, FV = 0, solve for payment and get 21,796 15. Jenny is considering opening an IRA in preparation for her retirement. She plans to save $9,000 per year with the first investment made one year from now (at t =1). She plans to retire in 25 years, immediately after making the last (25th) $9,000 investment. If she hopes to retire having $1,000,000 saved in her retirement account, what is the minimum annual return that her retirement account must earn for the next 25 years? 1000000= 9000* ((1+r%) ^25-1)/(r%) 1000000/9000= ((1+r%) ^25-1)/ (r%) = 10.81 16. Jenny has just retired with $1,000,000 saved in her retirement account. She decides to withdraw $60,000 per year in retirement with the first withdrawal one year after retiring (at time=1 ). How many years will it take until she exhausts her savings? Assume that her savings will continue to earn 3% in retirement. 1000000 = $60000[ 1-(1+0.03)^-n /0.03] = 23.45 17. Which of the following is(are) the main assumption(s) of the Capital Asset Pricing Model (CAPM)? Choose ALL that applies. ? 18. Which of the following statements regarding the beta in the CAPM is FALSE ? Although individual security's beta is easy to obtain, it is hard to compute a beta of a portfolio. 19. Suppose Intel stock has a beta of 1.73, whereas Boeing stock has a beta of 0.8. If the risk-free interest rate is 6.3% and the expected return of the market portfolio is 11.7%, according to the CAPM, a. What is the expected return of Intel stock ? i. 6.3 + 1.73 * (11.7-6.4) = 15.6 b. What is the expected return of Boeing stock ? i. 6.3% +0.8*(11.7%−6.3%) = 10.6% c. What is the beta of a portfolio that consists of 70% Intel stock and 30% Boeing stock? i. 1.73 * 70% +.8 * 30 = 1.45 d. What is the expected return of a portfolio that consists of 70% Intel stock and 30% Boeing stock ? i. .7 * 15.6 + .3 * 10.6 = 14.13 % 20. At the beginning of 2007 (the year the iPhone was introduced), Apple's beta was 1.1 and the risk-free rate was about 5.3%. Apple's price was $82.57. Apple's price at the end of 2007 was $197.71. If you estimate the market risk premium to have been 6.9%, did Apple's managers exceed their investors' required return as given by the CAPM? Yes a. Expected return = 5.3%+1.1 × 6.9%= 12.89% Realized Return = 197.71 - 82.57/ 82.57= 139.45 % 21. Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13% and a cost of preference stock of 9%. The market values of its debt, preference stock and equity are $10 million, $3 million and $15 million, respectively, and its tax rate is 35%. What is this firm’s WACC? WACC = [3/(10+3+15) * 9%] + [15/(10+3+15) * 13%] + [10/(10+3+15) * 7% * (1-0.35)] = 9.55 22. River Rocks, whose WACC is 12.1%, is considering an acquisition of Raft Adventures (whose WACC is 15.2%). What is the appropriate discount rate for RiverRocks to use to evaluate this acquisition? Raft Adventures' WACC is the most appropriate discount rate to account for the risk of Raft Adventures' cash flows. 23. Summit Systems will pay a dividend of $1.50 this year. If you expect Summit's dividend to grow by 6.0% per year, what is its price per share if the firm's equity cost of capital is 11.0%? a. Price of Share = Next Expected Dividend / (required return - growth rate)1.50 / (0.11 - 0.06) =$30. 24. CX Enterprises has the following expected dividends: $1 in on year, $1.15 in two years, and $1.25 in three years, after that, its dividends are expected to grow at 4% per year forever (so that year 4's dividend will be 4% more than $1.25 and so on). if CX's equity cost of capital is 12%, what is the current price of its stock? a. Value after year 3= (D3*Growth rate)/(Equity cost of capital-Growth rate)= (1.25*1.04)/(0.12-0.04)=16.25. Hence current price= Future dividend and value*Present value of discounting factor (rate%, time period) =1/1.12+1.15/1.12^2+1.25+16.25/1.12^3+ =$14.27(Approx). 25. Andyco, Inc. has the following balance sheet and an equity market to book ratio of 1.8. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation? If the assets is $1100, Debt is $500 and Equity is $600.

a). What is the weight for the debt in %? (Enter as percent rounded to two decimal places). Weight for Debt = Debt / (FMV Equity + Debt) = 500 / (1,080 + 500) = 0.316456. Weight for Equity = FMV Equity / (Debt + FMV Equity)= = 1,080 / (500 + 1,080) = 0.683544 26. Which of the following statements is FALSE regarding the discounted free cash flow model? It takes the perspective of a sole owner of the company who holds all of the firm’s equity, but not debt. 27. Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.4 million . Its depreciation and capital expenditures will both be $288,000, and it expects its capital expenditures to always equal its depreciation. its working capital will increase by $45,000 over the next year. Its tax rate is 40%. If its WACC is 11% and its FCFs are expected to increase at 4% per year in perpetuity, what is its enterprise value? a. Free Cash Flow=EBIT×(1−Tax Rate)+Depreciation−Capital Expenditures−Increases in Net Working Capital i. 2,400,000*(1-.4) +288,000-28,000-45000= 1655000 ii. What is its enterprise value =FCF next year/(WACC-g) =1655000/(.11-.04)= 23642857.14 28. The present value of JECK Co.'s expected free cash flow is $100 million . If JECK has $27 million in debt, $8 million in cash, and 2 million shares outstanding, what is its share price? a. Enterprise Value = Value of Equity - Value of debt + Value of cash. Value of Equity = Enterprise vale - Value of debt + Value of cash = 100 million - 27 million + 8million = 81 million. Share price = Value of Equity/No. of outstanding shares = 81 million/2 million = $40.50 29. You are evaluating the stock price of Kroger, a grocery store chain . It has forward earnings per share of $3. You notice that its competitor Safeway has a P/E ratio of 13. What is a good estimate of Kroger's stock price? a. Stock Price = PE Ratio x Earnings per share 13 x 3 = 39 hence, estimated stock price is 39 30. CSH has EBITDA of $5 million . You feel that an appropriate EV/EBITDA ratio for CSH is 9. CSH has $10 million in debt, $2 million in cash, and 800,000 shares outstanding. What is your estimate of CSH's stock price? The estimate of CSH's stock price is a. EV/EBITDA = 9 EV=45 mil Net worth = 45mil - 10 mil + 2mil = 37 mil Stock Price = 37 000 000 / 800000 = 46.25 $ 31. Suppose Rocky Brands has earnings per share of $2.232.23 and EBITDA of $30.830.8 million. The firm also has 5.15.1 million shares outstanding and debt of $140140 million (net of cash). You believe Deckers Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Deckers has no debt. If Deckers has a P/E of 13.213.2 and an enterprise value to EBITDA multiple of 7.67.6, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be moreaccurate? a. The value of Rocky Brands stock using the P/E ratio is? (Round to one decimal place.) i. Stock Price= 2.23*13.2= 29.436 value = 29.436* 5.15 mil = 151.5954 b. The value of Rocky Brands stock using the EBITDA ratio is ?. (Round to one decimal place.)Which estimate is likely to be more accurate? i. Value of rocky’s brand by using ebitda= Estimate value = (EBITDA x EBITDA MULTIPLE)- debt. (30.83mil x 7.6)7 = 236.466 236.466-140.14= 96.326 ii. Rocky brands’ stock value by using ebitda= 96.326/5.15=. 18.7 or value of rockys brand/ shares outstanding iii. Estimation using EBITDA is most appropriate. 32. Heavy Metal Corporation is expected to generate the following free cash flows over the next three years. Thereafter, the free cash flows are expected to grow at the industry average of 2% per year (so that Year 4 FCF is 2% larger than Year3 FCF, and so on). Using the discounted free cash flow model and a WACC of 10%, estimate the current enterprise value (EV 0 ) of Heavy Metal. a. enterprise value= 52.1 /(1.136)^1 + 68.6/(1.136)^2 + 78.3/(1.136)^3+74.4/(1.136)^4+81.1/(1.136)^5 + ((81.1*(1.044))/(0.136-0.044))/(1.136)^5 = $726.43 million. enterprise value = market capitalization + debt - excess cash. Midterm 2 1. Which of the following statements is NOT true regarding angel investors? They are typically arranged as limited partnerships. 2. Which of the following statements is NOT true regarding venture capital firms/capitalists? They might invest for strategic objectives in addition to the desire for investment returns. 3. Which of the following is NOT one of the benefits of obtaining VC money? Securing funding from a quality venture capital firm can send a strong signal to the market. 4. You have started a company and are in luck —a venture capitalist has offered to invest. You own 100% of the company with 4.62 million shares. The VC offers $1.03 million for 830,000 new shares. a. What is the implied price per share ? Price= VC offer/ number of shares = 1,030,000 / 830,000. =. 1.24 per share b. What is the post-money valuation ? Post money valuation= implied price per share x New total number of shares = 1.24. x (4,620,000+830000) = 6,758,000 c. What fraction of the firm will you own after the investment ? Fractional ownership= original # of shares/ New total shares= 4620000/ 5450000= .8477 5. Which of the following is NOT a reason why an IPO is attractive to the managers of a private company? It reduces the complexity of requirements regulating the company’s management. 6. The firm you founded currently has 12 million shares , of which you own 4 million. You are considering an IPO where you would sell 2 million shares for $27 each. If all of the shares sold are primary shares , how much will the firm raise ? 2 mil x 27 = 54 mil What will be your percentage ownership of the firm after the IPO? Your ownership = # of shares you own/ total # of shares 4 mil / 14 mil= 28.6 7. Which of the following statements regar ding best efforts IPOs is FALSE? If the entire issue doesn’t sell out, the underwriter is on hook. 8. Which of the following statements is FALSE regarding the IPO procedures? The quiet period begins when the registration statement is filed and ends when the final prospectus is filed. 9. You obtain the following information from the final prospectus (Form 424B4) filed with the Securities and Exchange Commission (SEC) before Alibaba Group's IPO. 10. Both the payments to debtholders (lenders ) and equity-holders (shareholders) are liabilities of the firm, and both kinds of investors can legally claim the assets of the firm when the firm fails to make the promised payments. FALSE 11. Which of the following statements regarding the private debt market is FALSE? The public debt market is larger than the private debt market. 12. Which of the following statements is false? Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt. 13. Suppose a firm is in default. The firm sold off all valuable assets (including collaterals) and raised total proceeds of $160 million. 14. The following table lists different classes of debt and the outstanding claim amount for each class. What would be the recovery rate for the Subordinated Unsecured debt holders? Secured-100 mill, senior 100, subordinated-100, = 0%

15. The table below shows the YTM on a number of four-year, zero-coupon securities. What is the credit spread on a four-year, zero-coupon corporate bond with a BBB rating ? Bbb corp- treasury= 6.8-5.2= 1.6 16. Bond credit rating depends on the risk of bankruptcy as well as the priority of the bond in the event of bankruptcy. TRUE 17. Gepps Cross Industries issues debt with a maturity of 25 years. In the case of bankruptcy, holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt. Which of the following best describes this type of corporate debt ? A debenture 18. The Sisyphean Company has a bond outstanding with a face value of 5000 that reaches maturity in 5 years. Coupon rate is 8.1% and YTM is 10%, the bond will trade at ? A discount since coupon rate < YTM. 19. Luther Industries needs to raise $25 millio n to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and an annual coupon rate of 7.40%. The following summarizes the YTM for similar ten-year corporate bonds of various credit ratings. What rating must Luther receive on these bonds if they want bonds to be issued at par ? Bbb rating is 7.4, so BBB rating. We want to match coupon rat 20. Even in a setting where there is no risk that a firm will default, leverage does increase the risk of equity. TRUE 21. Which of the following is an assumption(s) of the Modigliani & Miller’s perfect capital markets? Choose ALL that apply. No taxes, no bankruptcy or financial distress, perfect competition 22. Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all−equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. According to MM Proposition I, the stock price for Firm X is closest to (24-12)/2 = 6 23. Hardmon Enterprises is currently an all-equity firm with an expected return of 12.9%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a . Suppose Hardmon borrows to the point that its debt -equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? Expected Return on Equity of leveraged Firm= Expected return on unlevered firm + Debt/Equity (Expected return on Unlevered Capital-Cost of debt) = .129+.5 (.129-.04) = 17.35 b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 6%. What will be the expected return of equity in this case? . 129+ 1.5 (.129-.06) = 23.25 24. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument? False, because returns are higher because risk is higher, and the return fairly compensates for the risk 25. The expected direct costs of bankruptcy are too small relative to the tax advantage of debt to have impact on capital structure decision. TRUE 26. Milton Industries expects free cash flows of $22 million each year. Milton's corporate tax rate is 37%, and its unlevered cost of capital is 17%. Milton also has outstanding debt of $63.41 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage ? Free cash flow / unlevered cost of capital = 22 mil / .17 = 129.41 b. What is the value of Milton Industries with leverage ? 129.41 + .37 x 63.41 = 152.87 27. Assume that Microsoft has a total market value of $310 billio n and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13.7% of its current market value, what is the present value of the tax shield it will create? = 35 * (310 * 13.7) = 14.86 28. Summit Builders has a market debt-equity ratio of 1.85 , a corporate tax rate of 37%, and pays 10% interest on its debt. By what amount does the interest tax shield from its debt lower Summit's WACC? 1.85/(1+1.85)= .649 -.649* .1 * .37 = 2.4 29. Firms in industries such as real estate tend to have low distress costs because of a large proportion of tangible assets. True 30. The Tradeoff Theory suggests that a firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress. 31. Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists? The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return. 32. You obtain the following information from the final prospectus (Form 424B4) filed with the Securities and Exchange Commission (SEC) before Alibaba Group's IPO. "This is the initial public offering of Alibaba Group. We are offering 123,076,931 American Depositary Shares, or ADSs, and the selling shareholders named in this prospectus, including Yahoo, one of our principal shareholders, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, are offering, in the aggregate, 197,029,169 ADSs. Total number of ADSs to be offered is 320,106,100 shares. Each ADS represents one ordinary share. The initial public offering price of the ADSs is US$68.00 per ADS. Prior to this offering, there has been no public market for our ADSs or ordinary shares. Our ADSs have been approved for listing on the New York Stock Exchange under the symbol BABA. The underwriting discounts and commissions given to our underwriters were $0.816 per ADS. We, Yahoo, Jack Ma and Joe Tsai have granted the underwriters the right to purchase up to an aggregate of 48,015,900 additional ADSs to cover over-allotments.” A. What is the percentage of the offering that comprised primary shares ? 100% B. Alibaba’s stock (NYSE:BABA) closed at $89.89 after the first trading day. What was the magnitude of underpricing ( in percentage terms )? How does this compare to a typical (U.S. average) IPO underpricing magnitude? 32.2%, larger than a typical IPO underpricing magnitude. Chapter 17 1. Which of the following statements is FALSE ? Most companies that pay dividends pay them semiannually. 2. ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days for the new owners of a share of stock to be registered. a. When was the ex-dividend day? April 1 b. When was the last day an investor could purchase ABC stock and still get the dividend payment? March 31 3. In a perfect capital market , when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex- dividend. True 4. With perfect capital markets , an open market repurchase increases the stock price as the number of outstanding shares is decreased. False 5. Suppose a firm does not pay a dividend but repurchases stock using $28 millions of cash, the market value of the firm decreases by? 28 million 6. A firm has $300 million of assets that includes $40 million of cash and 10 million shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new price per share? 300/10= 30, 30mil/ 30= 1 mil 10mil- 1mil= 9 mil 300mil- 30 mil = 270 mil 270/9 = 30 7. When a firm repurchases shares , the supply of shares is ________, but at the same time, the value of the firm's assets ________. Reduced, declines 8. Homemade dividend refers to the process by which an investor ________. Can sell shares to create a dividend policy to suit his preferences. 9. Which of the following statements is false? In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex−dividend price if a dividend were paid instead. 10. Omicron Technologies has $60 million in excess cash and no debt . The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend. a. The amount of the special dividend is closest to: 60/ 12 mn shares = 5 b. Assume that Omicron uses the entire $60.00 million in excess cash to pay a special dividend. Omicron's ex-dividend price is closest to: 48/.09 = 533.33 533.33+60= 593.33 593.33/12= 49.44 60 mil /49.44= 1,213,483.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

12,000,000-1,213,483 = 10,786,517 dividend = 48 mil/ 10,786,517 = 4.45 c. Assume that Omicron uses the entire $60 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest to: 48/ . 1 = 480 480/ 12 = 40 60/ 40 = 1.5 12-1.5 = 10.5 11. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 8% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $5 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock a. Assume that you own 2,500 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to 40/ .08 = 500 500 + 50 = 550 550 / 10 = 55 2500* 5 = 12500 12500/ 55 = 227.27 b. Assume that you own 2500 shares of Omicron stock, and that Omicron uses the entire $50 million to pay a special dividend. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy to undo the special cash dividend that Omicron paid is closest to: 40 mil / .09 = 444.44 444.44+ 50 = 494.44 494.44/ 10= 49.44 50/10 = 5 2500* 5 = 12500 12500/ 49.44 = 252.81 which is closest to 281.25. 12. Long−term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends. TRUE 13. The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only. FALSE 14. Different investor groups have differing tax preferences that create clientele effects in which dividend policy of a firm is optimized for the tax preferences of its investors. TRUE 15. Share repurchases have a tax advantage over dividends because ________. Capital gains can be deferred by long-term investors 16. The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the ________. Dividend puzzle. 17. When a firm pays out a dividend , the share price ________, and when it conducts a share repurchase at the market price, the share price ________. Decrease, is unchanged 18. Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________. All of the above 19. Which of the following statements is FALSE ? Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 20. Which of the following statements is FALSE? Firms that use dividends will have to pay a lower after−tax return to offer their investors the same pretax return as firms that use share repurchases. 21. The practice of maintaining relatively constant dividends is called ________. Dividend smoothing 22. The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the ________ hypothesis. Signaling 23. Empirical evidence about the behavior of fin ancial managers suggests that firms ________ repurchase activity and they ________ dividend payments. Do not smooth, smooth 24. AMC Corporation currently has an enterprise value of $370 million and $120 million in excess cash. The firm has 15 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come out that will change AMC's enterprise value to either $570 million or $170 million. Suppose AMC management expects good news to come out. If management wants to maximize AMC's ultimate share price, will they undertake the repurchase before or after the news comes out? When would management undertake the repurchase if they expect bad news to come out? What effect would you expect an announcement of a share repurchase to have on the stock price? a. To maximize its share price , when will AMC prefer to repurchase shares? Before good news and after bad news comes out b. Given your answer above , what effect would you expect an announcement of a share repurchase to have on the stock price? An announcement of a share repurchase implies that management expects good news to come out or that any bad news has already come out, both of which could have a positive impact on the stock price. 25. Because ________ are seen as an implicit commitment , they send a ________ signal of financial strength to shareholders. Regular dividends, strong 26. The financial manager should. Try to maximize the after-tax payout to the shareholders, for a given payment amount. Chapter 18 12. Long term financial planning helps a financial manager in budgeting but has little to do with understanding how the business operates. FALSE 13. Long term financial planning allows a financial manager to understand the business by ________ between sales, costs, capital investments and financing. Identifying linkages 14. If a firm is planning an expansion or changes in how it manages its inventory, long term financial planning can help determine the impact on the firm's ________. All of the above 15. Building a model for long−term forecasting reveals points in the future where the firm will have. All of the above 16. While the assets and accounts payable of a firm may reasonably be expected to grow with sales, ________ will not naturally grow with sales. Long term debt 17. ________ is the amount of additional external financing needed to fund planned increases in assets. Net new financing 18. The asset and liability side of a pro forma balance sheet projection will not balance, in general, unless we make assumptions about how ________ and ________ will grow with sales. Debt, equity 19. The amount of dividends a company pays will affect the ________ it has to finance future growth. Retained earnings 20. Your company has sales of $90,700 this year and cost of goods sold of $67,500. You forecast sales to increase to $112,500 next year. Using the percent of sales method, forecast next year's cost of goods sold. 67500/ 90 700 = 74.42 112500*74.42 = 83,723 21. For the next fiscal year, you forecast net income of $49,400 and ending assets of $504,100. Your firm's payout ratio is 9.7%. Your beginning stockholders' equity is $296,000 and your beginning total liabilities are $119,500. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,000. What is your net new financing needed for next year? a. 49,500(1-.097)= 44,608 296,000+ 44,608 = 340, 608 119,500 + 10,000 = 129,500 129,500+ 340,608 = 470,108 504100- 470,108 = 33,992 22. Global Corp. expects sales to grow by 8% next year. Assume that Global pays out 50% of its net income. Using the percent of sales method and the data provided in the following statements forecast stockholders' equity. a. (10.4/186.7)* 186.7 * (1+.08) = 11.23 11.23-7.7 = 3.53 3.53* .26 = -.92 3.53 - .92 = 2.61 2.61- .5* 2.61 = 1.31 22.2 +1.31 = 23.51. 23. Global Corp. expects sales to grow by 8% next year . Assume that Global pays out 50% of its net income. Global developed the pro forma financial statements given below. If the new financing must all be in the form of long-term debt, what is the amount of net new financing needed for Global? Global's current statements are in the following data table. = total forecasted long-term debt – total current long-term debt 122.72 – 113.2 = 9.52 aka long term debt – long term debt through table link function 23. Global Corp. expects sales to grow by 8% next year . Using the percent of sales method and the data provided in the given tables, forecast Forecasted sales = current sales * (1+ sales growth rate) = 186.7 mil * (1+.08) = 201.6 mil a. Costs except depreciation i. Forecasted costs except depreciation = (current acct value / current sales) * Forecasted sales = (175.1 / 186.7) * 201.6 = 189.1 b. Depreciation i. (1.2 mil / 186.7 mil ) *201.6 mil = 1.3 mil c. Net income i. = forecasted sales – forecasted COGS – forecasted depreciation – interest expense – taxes = 201.6 – 189.1 – 1.3 – 7.7 - .9 = 2.6 d. Cash i. (Cash/ current sales) * forecasted sales = 23.2/ 186.7 * 201.6 = 25.1 e. Accounts receivable