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Question
Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets:
| 2020 | 2019 | |
| Common stock | $2,000 | $1,000 |
| Retained earnings | 2,000 | 2,340 |
| Total common equity | $4,000 | $3,340 |
The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
a. The company's net income in 2019 was higher than in 2020.
b. The company issued common stock in 2020.
c. The market price of the company's stock doubled in 2020.
d. The company had positive net income in both 2019 and 2020, but the company's net income in 2019 was lower than it was in 2020.
e. The company has more equity than debt on its balance sheet.
Answer
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Related questions
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Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
a. True
b. False
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Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?
a. −$5.10
b. $19.90
c. $20.90
d. $22.50
e. $27.60
Q:
Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?
a. The options with the $25 strike price will sell for less than the options with the $35 strike price.
b. The options with the $25 strike price have an exercise value greater than $5.
c. The options with the $35 strike price have an exercise value greater than $0.
d. If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
e. The options with the $25 strike price will sell for $5.
Q:
Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
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c. If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
d. If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
e. The price of these call options is likely to rise if XYZ's stock price rises.
Q:
The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
a. True
b. False
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Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
a. 1 U.S. dollar = 0.6235 Canadian dollars
b. 1 U.S. dollar = 0.6265 Canadian dollars
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d. 1 U.S. dollar = 1.5961 Canadian dollars
e. 1 U.S. dollar = 1.6039 Canadian dollars
Q:
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Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
a. True
b. False
Q:
Which of the following is NOT a reason why companies move into international operations?
a. To develop new markets for the firm's products.
b. To better serve their primary customers.
c. Because important raw materials are located abroad.
d. To increase their inventory levels.
e. To take advantage of lower production costs in regions where labor costs are relatively low.
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Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?
a. 1.12
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c. 1.82
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Q:
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Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
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a. True
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a. True
b. False
Q:
On average, a firm collects checks totaling $250,000 per day. It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm. Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes. The lockbox system would be a good buy if it costs $25,000 annually.
a. True
b. False
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a. True
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As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
a. True
b. False
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Because money has time value, a cash sale is always more profitable than a credit sale.
a. True
b. False
Q:
A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.
a. True
b. False
Q:
Changes in a firm's collection policy can affect sales, working capital, and profits.
a. True
b. False
Q:
Which of the following statements is CORRECT?
a. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
b. Well-diversified stockholders do not need to consider market risk when determining required rates of return.
c. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
d. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
e. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
Q:
The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
a. True
b. False
Q:
A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
a. Increase the estimated NPV of the project to reflect its greater risk.
b. Reject the project, since its acceptance would increase the firm's risk.
c. Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
d. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
e. Increase the estimated IRR of the project to reflect its greater risk.
Q:
Wansley Enterprises is considering a new project. The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?
a. The proposed new project would increase the firm's corporate risk.
b. The proposed new project would increase the firm's market risk.
c. The proposed new project would not affect the firm's risk at all.
d. The proposed new project would have less stand-alone risk than the firm's typical project.
e. The proposed new project would have more stand-alone risk than the firm's typical project.
Q:
Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:
Project X Project Y
Expected NPV $500,000 $500,000
Standard deviation (σNPV) $200,000 $250,000
Project beta (vs. market) 1.4 0.8
Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.
Which of the following statements is CORRECT?
a. Project X has more corporate (or within-firm) risk than Project Y.
b. Project X has more market risk than Project Y.
c. Project X has the same level of corporate risk as Project Y.
d. Project X has less market risk than Project Y.
e. Project X has more stand-alone risk than Project Y.
Q:
Garden-Grow Products is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
Project cost of capital (r) 10.0%
Net investment in fixed assets (basis) $75,000
Required new working capital $15,000
Straight-line deprec. rate 33.333%
Sales revenues, each year $75,000
Operating costs (excl. deprec.), each year $25,000
Tax rate 25.0%
a. $30,069
b. $31,573
c. $33,152
d. $34,809
e. $36,550
Q:
Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
Cost of capital 10.0%
Pre-tax cash flow reduction for other products (cannibalization) $5,000
Investment cost (depreciable basis) $80,000
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,500
Annual operating costs (excl. deprec.) $25,000
Tax rate 25.0%
a. $6,196
b. $6,522
c. $6,848
d. $7,190
e. $7,550
Q:
Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
a. True
b. False
Q:
Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
a. True
b. False