Which is CORRECT? O Agency costs rise with the increases in the employee ownerships of that firm O A takeover firm usually offers a higher price than the intrinsic value of the target firm O A higher tax rate increases the cost of corporate borrowing O Terminal value is the present value at the terminal year of cash flows beyond the last year of forecasting

Which is CORRECT? O Agency costs rise with the increases in the employee ownerships of that firm O A takeover firm usually offers a higher price than the intrinsic value of the target firm O A higher tax rate increases the cost of corporate borrowing O Terminal value is the present value at the terminal year of cash flows beyond the last year of forecasting

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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Which of the following situation in which the quality of the company’s pay-out to shareholders may decline a. Decrease in cash position b. Increase in positive NPV investment opportunities c. Increase in capital gains tax d. Decrease in marginal tax rate on dividends Which of the following concepts tells us that dividends are to be paid only when the capital budget has been already supplied? a. Gordon Growth model b. Dividend irrelevance theory c. Retain Earnings break-point principle d. Residual Dividend Model
A discounted cash flow approach to valuing a firm, using the weighted average cost of capital as a discount rate, makes sense to use when: a. Financial structure and risk of the investment are relatively stable over time. b. The risk of bankruptcy is high. c. A firm is expected to go through a transition that calls for a high use of debt that will be paid down over a few years. d. Non-GAAP accounting is being used. e. All of the above.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? 1. b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. 2. d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. 3. e. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash. 4. a. Use cash to increase inventory holdings. 5. c. Use cash to repurchase some of the company's own stock.
Consider the effect that corporate profit taxes have on investing. Look back at Figure 15.4. Suppose that the r line is the rate of return a firm earns before taxes. If corporate profit taxes are imposed, the firm’s after-tax returns will be lower (and the higher the tax rate, the lower the after-tax returns). If the firm’s decisions about R&D spending are based on comparing after-tax returns with the interest-rate cost of funds, how will increased corporate profit taxes affect R&D spending? Does this effect modify your views on corporate profit taxes? Discuss.
Suppose a company ABC is forecasting an increase in sales. By using AFN model of forecasting which of the following statement would decrease the additional fund requirement of the company? the company has low profit margin The company is operating at full capacity the company has low dividend payout ratio ☐ The increase in sales growth percentage will be high
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True or False The cash conversion cycle is the sum of the inventory conversion period, the receivables collection period, and the days payables outstanding. * True False The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget. * True False A firm's goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to increase their dependence on costly external financing. * True False The larger the investment a firm makes in its current assets, the higher its carrying costs will be. * True False Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC). * True False Short-term financial policies that are flexible with regard to current assets includes keeping large balance of short-term debt. * True False Costs that fall with increases in the level of investment in current assets are called shortage costs. *…
All else the same, which of the following management decisions would help alleviate the problem of a buildup of excess cash? O Increase credit terms to customer; i.e. allow them more time to pay Borrow short term to increase the size of the Interest Tax Shield O Reduce credit terms to customers: i.c. make them pay sooner O Reduce the dividend payout ratio to crcate higher levels of retained earnings In evaluating the accuracy of your forecast, which of the following might be indicative of the need for a revised forecast? O The company's Dividend Payout Ratio is likely too high in the forecast period O The growth rate of Sales is trending toward 4-5% over the forecast period O The ratio of Sales/(Invested Capital) is much higher in the forecast period than in the Historical period from which you derived your forecast O The firm's Forecast D/E ratio is holding steady over the course of the forecast An effective financial plan can be either static or dynamic (True or False) O True False
Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies. Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios they focus on? Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method? A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified and the associated costs and revenues have been…
Which one of the following is true? O The change in cash position is a linear relationship to production. O As the level of inventory increases, the required sales growth increases. If the sales are lower than the sales growth break-even point, the firm will run out of working capital. O As the level of inventory increases, the required sales growth decreases.
QUESTION 16 What must occur to make using net cash flows into the firm result in the same estimate of value as using dividends paid out of the firm? OA. the firm must pay an increasing dividend payment each year OB. The cost of equity must be greater than the overall WACC OC. the firm must generate a rate of return on reinvested free cash flow equal to the discount rate used by the investor D. All of the above must occur
Which of the following decreases the cash holding A.The rising commodity prices increases the value of law material inventoriesby 10% B.A manufacturer decreases production in anticipation of a decrease in demand C.THe frim repurchases its own stocks D.THe corporation has decided to give their customer less time in paying their purchases