week 8 and 9 ch 14-16hmwk fin 534

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					Ch 16




 Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points
for this homework assignment.


1. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data
show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):
                                     Peak    Off-Peak
Cash                                  $ 50 $ 30
Marketable securities                    0      20
Accounts receivable                     4        20
Inventories                            100       50
Net fixed assets                        500     500
Total assets                           $690 $620

Payables and accruals                    $ 30    $ 10
Short-term bank debt                       50       0
Long-term debt                           300      300
Common equity                           310       310
Total claims                            $690     $620


From this data we may conclude that
a. Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities.
b. Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some
of its permanent assets with short-term discretionary debt.
c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its
short-term needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or conservatism of the
company's current asset financing policy.
e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's
current asset financing policy.


2. Which of the following statements is CORRECT?
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10%
annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash
sales can be used to finance the 10% growth rate.
b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep
accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its
DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash
sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio
must also have a high payables-to-sales ratio.

e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
3. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from
$320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity
matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus
equity capital?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000


4. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly
profitable but has been experiencing cash shortages due to its high growth rate. As one part of your
analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a
365-day year, what is the firm’s present cash conversion cycle?
Average inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days


5. Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies
on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would
be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without
adverse effects. What would be the effective annual percentage cost of funds raised by this action?
(Assume a 365-day year.)
a. 10.59%
b. 11.15%
c. 11.74%
d. 12.36%
e. 13.01%
chapter 15




 Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points
for this homework assignment.




1. Which of the following statements best describes the optimal capital structure?
a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the
company’s earnings per share (EPS).
b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the
company’s stock price.
c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the
company’s cost of equity.
d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the
company’s cost of debt.
e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the
company’s cost of preferred stock.



2. Which of the following statements is CORRECT?
a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained
earnings is not zero, its cost is generally lower than the after-tax cost of debt.
b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital
structure that maximizes its stock price.
c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital
structure that maximizes its earnings per share.
d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce
its WACC.
e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted
tradeoff theory would suggest that firms should increase their use of debt.


3. Which of the following statements is CORRECT?
a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of
fixed costs.
b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure
decisions.
c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low
business risk, assuming all else equal.
d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by
increasing its use of debt.
e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its
optimal capital structure will decrease the costs of both debt and equity financing.
4. Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and
business risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s basic
earning power ratio (BEP) exceeds its cost of debt (r d). Which of the following statements is CORRECT?
a. Company HD has a higher return on assets (ROA) than Company LD.
b. Company HD has a higher times interest earned (TIE) ratio than Company LD.
c. Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the
standard deviation of ROE, is also higher than LD’s.
d. The two companies have the same ROE.
e. Company HD’s ROE would be higher if it had no debt.




5. Which of the following statements is CORRECT?
a. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do
vary among firms within a given industry.
b. Electric utilities generally have very high common equity ratios because their revenues are more
volatile than those of firms in most other industries.
c. Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their
earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
d. Wide variations in capital structures exist both between industries and among individual firms within
given industries. These differences are caused by differing business risks and also managerial attitudes.
e. Since most stocks sell at or very close to their book values, book value capital structures are almost always
adequate for use in estimating firms' costs of capital.



Chapter 14


 Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points
for this homework assignment.


1. Which of the following statements about dividend policies is CORRECT?
a. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more
certain than capital gains. They call this the ―bird-in-the hand‖ effect.
b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a
lower rate than gains on stock repurchases.
c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on
the dividends that they choose to reinvest.
d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend
policy.
e. The clientele effect suggests that companies should follow a stable dividend policy.



2. Which of the following statements is CORRECT?
a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors
who want to increase their ownership in the company.
b. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes
on the dividends credited to their account.
c. Stock repurchases can be used by a firm that wants to increase its debt ratio.
d. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund
over the next few years, provided investors are aware of these investment opportunities.
e. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and
increases the shares outstanding.

3. Which of the following statements is CORRECT?
a. When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1
split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price
will be higher than if the 3-for-1 split had been used.
b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to
boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.

c. Stock splits create more administrative problems for investors than stock dividends, especially
determining the tax basis of their shares when they decide to sell them, so today stock dividends are
used far more often than stock splits.

d. When a company declares a stock split, the price of the stock typically declines—by about 50% after a
2-for-1 split—and this necessarily reduces the total market value of the equity.
e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split
of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say
$2 per share—then it can declare a ―reverse split‖ of say 1-for-25 so as to bring the price up to somewhere
around $50 per share.



4. Which of the following statements is CORRECT?
a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects
is likely to reduce the firm’s dividend payout.
b. The clientele effect can explain why so many firms change their dividend policies so often.
c. One advantage of adopting the residual dividend policy is that this policy makes it easier for
corporations to develop a specific and well-identified dividend clientele.
d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the
number of shares outstanding but don’t change the firm’s total amount of book equity.
e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the
stock dividends are received.


5. DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and
75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can
finance without issuing new stock, but its board of directors had decreed that it cannot issue any new
shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget
would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus
the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to
75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held
constant, and (3) the debt ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget
                                                  Increase Debt           Lower Payout Do Both to
                                                   to 75%                 to 20%
                                                      ___________________
                                                       a. $114.0         $73.3           $333.9
                                                       b. $120.0         $77.2           $351.5
                                                       c. $126.4         $81.2           $370.0
                                                       d. $133.0         $85.5           $389.5
                                                       e. $140.0          $90.0          $410.0

				
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