FINA 463
Exam 2: 50 Multiple Choice Questions
100 Points
美国金融代考 XYZ stock recently paid a dividend of $2.50 per share. The dividend is expected to grow at a rate of 8% next year and 6% the following year.
Instructions: 美国金融代考
A.You must enter your answers into the D2L online exam. To access the exam from the D2L home page for the course, click on “Assessments,” then “Quizzes,” then “Exam 2.” Other forms of exam submission will not be accepted.
B.The due date for completing the exam matches with the end of the final exam period, Tuesday May 5, at 12:15 p.m. You will lose access to the exam at that time. Scoring is based on the last answer submitted and you can continue to change your answers until the exam closes.
C.The exam is considered a “take-home” and you are welcome to work with other students on the exam. You may also ask questions about the exam in class. I will provide “hints” but will not provide final answers to your questions.
Answer questions (1) through (4) based on the following information:
| Company | Company | Company | Company | |
| A | B | C | D | |
| Sales | $4,000.00 | $3,500.00 | $4,900.00 | $3,100.00 |
| -Cost of goods sold | -3,200.00 | -2,700.00 | -4,100.00 | -2,300.00 |
| -Operating expenses | -550.00 | -500.00 | -600.00 | -475.00 |
| EBIT | $250.00 | $300.00 | $200.00 | $325.00 |
| -Interest expense | -105.00 | -96.00 | -63.00 | -69.00 |
| EBT | $145.00 | $204.00 | $137.00 | $256.00 |
| -Taxes | -43.50 | -61.20 | -41.10 | -76.80 |
| Net income | $101.50 | $142.80 | $95.90 | $179.20 |
| -Dividends | -30.45 | -57.12 | -19.18 | -107.52 |
| To retained earnings | $71.05 | $85.68 | $76.72 | $71.68 |
| 美国金融代考 | ||||
| Other information: | ||||
| Total assets | $2,200 | $2,000 | $2,500 | $2,000 |
| Stockholders’ equity | $700 | $800 | $1,600 | $1,300 |
1.Which company has done the best job in controlling total expenses?
a.A
b.B
c.C
d.D
2.Which company has most efficiently used its assets to generate sales?
a.A
b.B
c.C
d.D
3.Which company has the heaviest reliance on debt as a funding source?
a.A
b.B
c.C
d.D
4.Which company’s earnings should be expected to grow at the fastest rate?
a.A
b.B
c.C
d.D
Answer questions (5) through (7) based on the following information:
Total assets $1,000
Debt-to-equity ratio 0.5
ROE 18%
Asset turnover 2.0
5.What is the company’s ROA?
a.33%
b.10%
c.12%
d.5%
6.What is the company’s profit margin? 美国金融代考
a.5%
b.6%
c.67%
d.33%
7.What is the company’s debt ratio?
a.25
b.1/3
c.5
d.2/3
Answer questions (8) through (10) based on the following information:
XYZ stock recently paid a dividend of $2.50 per share. The dividend is expected to grow at a rate of 8% next year and 6% the following year. After two years, the dividend will grow at a rate of 4% in perpetuity. The required return is 13% and the stock is currently selling at a price of $32.23 per share.
8.What is XYZ stock’s intrinsic value?
a.$30.53
b.$31.45
c.$33.07
d.$34.22
9.What is XYZ stock’s expected return?
a.46%
b.86%
c.03%
d.27%
10.What will be the value of XYZ stock 5 years from today?
a.$33.07
b.$34.45
c.$36.82
d.$37.20
Answer questions (11) and (12) based on the following information.
Hi-Gro recently paid a dividend of $3.00. The dividend is expected to have an initial growth rate of 15% and growth is expected to decline linearly over 30 years to 3%. The required return is 14% and Hi-Gro’s market price is $80 per share.
11.What is Hi-Gro’s intrinsic value per share?
a.$76.45
b.$77.18
c.$78.42
d.$78.93
12.What is Hi-Gro’s expected return?
a.97%
b.33%
c.61%
d.18%
13.Which of the following statements about dividend reinvestment plans (DRIPs) is true?
a.Shareholders can avoid taxes by reinvesting dividends via a DRIP.
b.Dividend reinvestment plans are only used by smaller companies.
c.When dividends are only sufficient to purchase a fractional share, excess dividends are paid out in cash.
d.Since firms can avoid floatation costs on new issues, they are often willing to sell shares through plans at a discount to the market price. 美国金融代考
14.Which of the following is nota common method of share repurchase?
a.Purchasing shares through a tender offer.
b.Purchasing shares in the open market.
c.Calling shares through random identification.
d.Purchasing shares using a Dutch auction.
15.Which of the following dates occurs last?
a.ex-dividend date
b.record date
c.dividend declaration date
d.cum-dividend date
16Which of the following dates is the last date an investor can buy shares and still be eligible to receive the next dividend payment on those shares?
a.ex-dividend date
b.record date
c.dividend declaration date
d.cum-dividend date
17.ABC stock sells for $102 a share and pays a per share dividend of $2. Bob owns 100 shares and prefers a per share dividend of $5. According to the Modigliani-Miller Dividend Irrelevance Theory, how many shares would Bob need to sell on the ex-dividend date to create his desired income stream?
a.1 share
b.2 shares
c.3 shares
d.4 shares
18.Which investor group would prefer a company retain more of its earnings?
a.Investors who act according to the Bird-in-the-Hand Theory.
b.Investors who act according to the Dividend Irrelevance Theory.
c.Investors who act according to Signaling Theory.
d.Investors who act according to Tax Preference Theory.
Answer questions (19) and (20) based on the following information.
The Dillon Company is planning a $1 million share repurchase. Its current stock price is $80 per share, and there are 800,000 shares outstanding prior to the repurchase. Earnings per share without the repurchase would be $4 per share.
19.Assuming the P/E ratio doesn’t change, what would be the share price following the repurchase if the repurchase is funded using excess cash?
a.$80.99
b.$81.27
c.$82.04
d.$82.19
20.Instead of using excess cash, now assume the company funds the repurchase by borrowing at a before-tax rate of 4%. 美国金融代考
The tax rate is 30%. Assuming the P/E ratio doesn’t change, what would be the share price following the repurchase?
a.$80.16
b.$80.29
c.$80.41
d.$80.56
Answer questions (21) and (22) based on the following information.
Assume a company will repurchase $200,000 of its common shares using excess cash. Information prior to the repurchase:
a.Cash $500,000
Other assets $3,500,000
Debt $2,000,000
Equity $2,000,000
Net income $600,000
21.What will be the return on assets (ROA) following the repurchase?
a.15%
b.23%
c.54%
d.79%
22.What will be the debt-to-equity ratio following the repurchase? 美国金融代考
a.0
b.11
c.17
d.21
23.Index rates of return are calculated assuming dividends are reinvested on the _____.
a.ex-dividend date
b.declaration date
c.date of record
d.payment date
24.Pursuit Inc. pays a current dividend of $1 per share and has a current share price of $25. What constant growth rate justifies the current share price if the required return is 15%?
a.93%
b.09%
c.44%
d.58%
25.A company’s $25 par perpetual preferred stock pays a dividend of $1.75 and has a required return of 9%.
Earnings and dividends are expected to grow at a constant rate of 4%. If the market price per share for the preferred stock is $18, it is _____ per share.
a.undervalued by $1.44
b.undervalued by $6.56
c.overvalued by $1.44
d.undervalued by $18.40
Answer questions (26) through (29) based on the following information for LMN Corporation.
| Balance Sheets | ||
| Year ended: | 2019 | 2018 |
| Assets | ||
| Cash and equivalents | $320 | $295 |
| Accounts receivable | 750 | 660 |
| Inventories | 560 | 480 |
| Total current assets | 1,630 | 1,435 |
| Gross fixed assets | 3,275 | 2,700 |
| Accumulated depreciation | (1,200) | (900) |
| Net fixed assets | 2,075 | 1,800 |
| Total assets | $3,705 | $3,235 |
| 美国金融代考 | ||
| Liabilities and shareholders’ equity | ||
| Accounts payable | $390 | $370 |
| Notes payable | 250 | 240 |
| Accrued taxes and expenses | 180 | 140 |
| Total current liabilities | 820 | 750 |
| Long-term debt | 1,200 | 1,108 |
| Total long-term debt | 1,200 | 1,108 |
| Common stock | 505 | 505 |
| Additional paid-in capital | 302 | 302 |
| Retained earnings | 878 | 570 |
| Total shareholders’ equity | 1,685 | 1,377 |
| Total liabilities and shareholders’ equity | $3,705 | $3,235 |
| Income Statement | |
| Year ended: | 2019 |
| Total revenues | $4,420 |
| Operating costs and expenses | 3,250 |
| EBITDA | 1,170 |
| Depreciation expense | 300 |
| Operating income (EBIT) | 870 |
| Interest expense | 90 |
| Income before tax | 780 |
| Taxes (at 40 percent) | 312 |
| Net income | 468 |
| Dividends | 160 |
| Change in retained earnings | $308 |
|
|
|
26.Calculate free cash flow to the firm (FCFF) for the LMN Corporation.
a.$83
b.$137
c.$145
d.$177
27.Calculate free cash flow to equity (FCFE) for the LMN Corporation.
a.$83
b.$137
c.$168
d.$185
28.Calculate cash provided by operating activities for the LMN Corporation.
a.$458
b.$598
c.$658
d.$708
29.Calculate cash provided by financing activities for the LMN Corporation.
a.-$58
b.-$68
c.-$108
d.-$160
30.A company has a negative cash flow from operating activities. What could explain this negative cash flow? 美国金融代考
a.A credit sale of finished goods inventory.
b.A purchase of new equipment.
c.A sudden decrease in accruals.
d.The payment of dividends.
31.Assume a company arranges a $1,500,000 term loan at a rate of 6%. What will be the change in free cash flow to equity (FCFE) from this change? Assume the company’s tax rate is 30%.
a.+$1,410,000
b.+$1,437,000
c.+$1,500,000
d.+$1,563,000
32.Which of the following is nota source of cash?
a.Issuing commercial paper.
b.Collecting accounts receivable.
c.Issuing common shares.
d.Depreciation expense.
33.Which of the following statements is false?
a.FCFE is often referred to as levered free cash flow.
b.Issuing shares increases FCFE while repurchasing shares decreases FCFE.
c.FCFE models provide a more direct approach to estimating equity values than do FCFF models.
d.Raising the target debt ratio results in a higher FCFE.
34.Bill Bosworth is working on a single-stage FCFE model and has made the following forecasts for next year:
a.NI = $400
b.Dep = $60
c.FCInv = $200
d.WCInv = $75
He expects the company that he is analyzing will be financed entirely by debt and common equity and it has a target debt ratio of 40%. How much financing is Bosworth expecting the common shareholders to provide in the next year? 美国金融代考
a.$86
b.$120
c.$129
d.$165
35.Assume a company has a variable-rate note payable that is linked to LIBOR. An increase in LIBOR would affect _____.
a.free cash flow to the firm (FCFF) and free cash flow to equity (FCFE)
b.free cash flow to the firm (FCFF) but not free cash flow to equity (FCFE)
c.free cash flow to equity (FCFE) but not free cash flow to the firm (FCFF)
d.neither free cash flow to the firm (FCFF) nor free cash flow to equity (FCFE)
36.You are given the following information for Magnolia Company: 美国金融代考
Net income €31,000
Depreciation expense €4,200
Beginning inventories €13,400
Ending inventories €16,400
Beginning accounts receivable €10,000
Ending accounts receivable €8,600
Beginning accounts payable €9,800
Ending accounts payable €13,000
What account is the largest use of cash?
a.Depreciation expense
b.Inventories
c.Accounts receivable
d.Accounts payable
Answer questions (37) and (38) based on the information below for Micro Chef.
| Statement of Cash Flows | |
| Year ended: | 2019 |
| Operating activities | |
| Net Income | $312 |
| Adjustments | |
| Depreciation expense | 125 |
| Changes in working capital | |
| Accounts receivable | (60) |
| Inventories | (100) |
| Accounts payable | 43 |
| Accrued taxes and expenses | 25 |
| Cash provided by operating activities | $345 |
| Investing activities | |
| Purchases of fixed assets | (250) |
| Cash provided by investing activities | ($250) |
| Financing activities | |
| Notes payable | 25 |
| Long-term financing issuances | 125 |
| Common stock dividends | (140) |
| Cash provided by financing activities | $10 |
| 美国金融代考 | |
| Cash and equivalents increase (decrease) | 105 |
| Cash and equivalents at beginning-of-year | 200 |
| Cash and equivalents at end-of-year | $305 |
| Other information: | |
| Interest expense | $50 |
| Tax rate | 40% |
37.What is free cash flow to equity (FCFE) for Micro Chef?
a.$200
b.$215
c.$225
d.$245
38.What is free cash flow to the firm (FCFF) for Micro Chef?
a.$105
b.$125
c.$130
d.$135
Zeebadee Inc. wants to forecast free cash flow to equity (FCFE) using the percent-of-sales method. Prior year sales were $10,000. Answer questions (39) through (41) based on the following information.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales growth | 8.00% | 14.00% | 12.00% | 10.00% | 6.00% |
| Profit margin | 8.00% | 10.00% | 12.00% | 12.00% | 11.00% |
| Net FCInv (% of Sales) | 8.00% | 8.00% | 8.00% | 6.00% | 3.00% |
| WCInv (% of Sales) | 3.00% | 3.00% | 3.00% | 2.00% | 1.00% |
| DR | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% |
39.What is the sales forecast for Year 3?
a.$12,597.12
b.$13,244.82
c.$13,502.63
d.$13,789.44
40.What is net borrowing in Year 4? 美国金融代考
a.$364.04
b.$386.66
c.$406.30
d.$455.05
41.What is FCFE in Year 5?
a.$970.78
b.$1,005.47
c.$1,224,62
d.$1,318.44
42.True or False? Free cash flow to the firm (FCFF) is often referred to as unlevered free cash flow.
a.True
b.False
43.True or False? Free cash flow models have largely replaced dividend discount models in terms of popularity of use by security analysts.
a.True
b.False
Answer questions (44) and (45) based on the following information.
Matthew Wyatt is evaluating Euro Stores, Inc. (ESI) by using the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) valuation models. He has collected the following information:
- In the most recent period, ESI had net income of €320 million, depreciation of €90 million, fixed capital investment of €190 million, and working capital investment of €45 million.
- ESI has a target debt ratio of 30 percent.
- Interest expense in the most recent period is €420 million and the market value of debt is €6,000 million.
- The before-tax cost of debt is 6% and the cost of equity is 14%. The tax rate is 30%.
- ESI has 10 million shares outstanding. 美国金融代考
- FCFF is expected to grow at 6% and FCFE is expected to grow at 7% into perpetuity.
44.Using the FCFF valuation model, estimate the per-share intrinsic value of equity.
a.$365.43
b.$382.49
c.$527.45
d.$982.49
45.Using the FCFE valuation model, estimate the per-share intrinsic value of equity.
a.$345.23
b.$360.08
c.$375.26
d.$382.49
Answer questions (46) and (47) based on the following information.
Cleanlab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It recently reported earnings per share of $2.55 and expects earnings growth of 8% a year for the next two years and 4% a year after that. The capital expenditure per share was $2.15, depreciation was $1.05 per share, and working capital expenditure was $0.25 per share and all three are expected to grow at the same rate as earnings. The firm has a target debt ratio of 40%, the stock’s beta is 1.20, the risk-free rate is 3.0% and the equity risk premium is 6%.
46.Calculate intrinsic value per share for Cleanlab Inc. using the FCFE model.
a.$31.41
b.$32.22
c.$32.97
d.$33.41
47.Assume rather than earnings growth remaining constant at 4% after Year 2 that it instead declines linearly from 8% to 4% over the next 10 years and then remains at 4% into perpetuity. Calculate intrinsic value per share for Cleanlab Inc. using the FCFE model based on this new assumption.
a.$34.99
b.$36.80
c.$37.95
d.$38.33
48.True or False? Discounting free cash flow to equity (FCFE) rather than dividends typically leads to higher estimates of intrinsic value.
a.True
b.False
Answer questions (49) and (50) based on the information presented below. 美国金融代考
Camberly-Klark, a household product manufacturer, has 300 million common shares outstanding, trading at $50 per share. It recently reported yearly earnings per share of $4.00. The firm reported depreciation of $360 million in and capital expenditures of $625 million. The ratio of capital expenditures to depreciation is expected to remain constant and working capital needs are negligible. Camberly-Klark had debt outstanding of $10.0 billion, and intends to maintain its current financing mix of debt and common equity to finance future investment needs. The firm is expected to grow at 4% a year in perpetuity. The stock has a beta of 1.20, the equity risk premium is 6%, and the risk-free rate is 3%.
49.Calculate intrinsic value per share for Camberly-Klark using the free cash flow to equity (FCFE) model.
a.$55.97
b.$58.21
c.$59.95
d.$61.03
50.Assume that in an effort to block a takeover attempt that Camberly-Klark sells assets and uses the proceeds from that sale and excess cash to buy back 100 million common shares at the price of $50 per share. Calculate intrinsic value per share for Camberly-Klark using the free cash flow to equity (FCFE) model. Assume that Camberly-Klark will maintain the financing mix it secures following the share buyback.
a.$86.09
b.$87.31
c.$89.53
d.$90.97
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