- Description
FIN 571 Wk 4 – Practice: Wk 4 Questions
Pollution Busters Inc. is considering a purchase of 10 additional carbon sequesters for $110,000 apiece. The sequesters last for only 1 year before becoming saturated. Then the carbon is sold to the government.
- Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is $126,500 for sure. How would you determine the opportunity cost of capital for this investment?
b-1. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters’ CFO learns that average rates of return from investments on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case?
b-2. If the expected return on the investment is still 15%, but instead depends on the price of carbon (so that it is no longer risk-free), then is the purchase of additional sequesters an attractive investment for the firm?
Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is $126,500 for sure. How would you determine the opportunity cost of capital for this investment?
Opportunity cost of capital for this investment is determined by U.S. Treasuries with 1 year to maturity
Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters’ CFO learns that average rates of return from investments on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case?
Opportunity cost of capital 20
If the expected return on the investment is still 15%, but instead depends on the price of carbon (so that it is no longer risk-free), then is the purchase of additional sequesters an attractive investment for the firm
radio button unchecked Yes
radio button
No
Which of the following are investment decisions, and which are financing decisions?
Which of the following are real assets, and which are financial?
Choose the type of company in each case that best fits the description.
Which of the following statements always apply to corporations? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as in.)
- Unlimited liabilityunchecked
- Limited lifeunchecked
- Ownership can be transferred without affecting operations
- Managers can be fired with no effect on ownership
Which of the following are descriptions of large corporations? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as in.)
- Managers no longer have the incentive to act in their own interests.
- The corporation survives even if managers are dismissed.
- Shareholders can sell their holdings without disrupting the business.
- Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed on any dividends they receive.
Is limited liability always an advantage for a corporation and its shareholders?
Yes
No
Which of the following statements more accurately describes the treasurer than the controller? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as in.)
- Monitors capital expenditures to make sure that they are not misappropriated
- Responsible for investing the firm’s spare cash
- Responsible for arranging any issue of common stock
- Responsible for the company’s tax affairs
We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with that goal?
Shareholders want managers to maximize the MARKET VALUE of their investments. The firm faces a trade-off. Either it can invest its cash in REAL ASSETS or it can give the cash back to shareholders in the form of a dividend and they can invest it in financial assets . Shareholders want the company to invest in real assets only if the expected return is higher than they could earn for themselves. The return that shareholders could earn for themselves is therefore the opportunity cost of capital for the firm.
Here is a simplified balance sheet for Locust Farming:
Locust Farming
Balance Sheet
($ in millions)
Current assets $ 42,532 Current liabilities $ 29,747
Long-term assets 46,848 Long-term debt 27,760
Other liabilities 14,333
Equity 17,540
Total $ 89,380 Total $ 89,380
________________________________________
Locust has 665 million shares outstanding with a market price of $91 a share.
- Calculate the company’s market value added. (Enter your answers in millions.)
- Calculate the market-to-book ratio. (Round your answer to 2 decimal places.)
- How much value as the company created for its shareholders as a percent of shareholders’ equity, that is, the net capital contributed to the firm by its shareholders? (Enter your answer as a percentage rounded to the nearest whole number.)
Here are simplified financial statements for Watervan Corporation:
Home Depot entered fiscal 2014 with a total capitalization of $27,213 million. In 2014, debt investors received interest income of $830 million. Net income to shareholders was $6,345 million. (Assume a tax rate of 35%.)
Calculate the economic value added assuming its cost of capital is 10%.
economic value added = 4163.20
economic value added = after-tax operating income – (cost of capital * total capitalization)
after-tax operating income = (1 – tax rate) * interest expense + net income
(1 – .35) *830 + 6345 = 6884.50
6884.50 – (.10 * 27213) = 4163.20
Here are simplified financial statements for Phone Corporation in a recent year:
Here are simplified financial statements for Phone Corporation in a recent year:
INCOME STATEMENT
(Figures in $ millions)
Net sales $ 12,400
Cost of goods sold 3,660
Other expenses 4,137
Depreciation 2,278
Earnings before interest and taxes (EBIT) $ 2,325
Interest expense 645
Income before tax $ 1,680
Taxes (at 30%) 504
Net income $ 1,176
Dividends $ 796
________________________________________
BALANCE SHEET
(Figures in $ millions)
End of Year Start of Year
Assets
Cash and marketable securities $ 796 $ 150
Receivables 1,982 2,330
Inventories 147 198
Other current assets 827 892
Total current assets $ 3,037 $ 3,570
Net property, plant, and equipment 19,893 19,835
Other long-term assets 4,136 3,690
Total assets $ 27,066 $ 27,095
Liabilities and shareholders’ equity
Payables $ 2,484 $ 2,960
Short-term debt 1,379 1,533
Other current liabilities 771 747
Total current liabilities $ 4,634 $ 5,240
Long-term debt and leases 9,010 8,265
Other long-term liabilities 6,098 6,069
Shareholders’ equity 7,324 7,521
Total liabilities and shareholders’ equity $ 27,066 $ 27,095
________________________________________
Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Chik’s Chickens has accounts receivable of $7,083. Sales for the year were $10,600. What is its average collection period?
In the past year, TVG had revenues of $2.98 million, cost of goods sold of $2.48 million, and depreciation expense of $172,960. The firm has a single issue of debt outstanding with book value of $1.12 million on which it pays an interest rate of 8%. What is the firm’s times interest earned ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
In the past year, TVG had revenues of $3.09 million, cost of goods sold of $2.59 million, and depreciation expense of $133,760. The firm has a single issue of debt outstanding with book value of $1.09 million on which it pays an interest rate of 8%. What is the firm’s times interest earned ratio?
Salad Daze maintains an inventory of produce worth $560. Its total bill for produce over the course of the year was $80,000. How old on average is the lettuce it serves its customers?
Assume a firm’s inventory level of $18,000 represents 24 days’ sales. What is the inventory turnover ratio?
A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $1.03 million. Current assets are $230,000, and the current ratio is 2.0. The only current liabilities are notes payable. What is the total debt ratio?
Last year Electric Autos had sales of $100 million and assets at the start of the year of $150 million. If its return on start-of-year assets was 15%, what was its operating profit margin?
22.38%
Last year Electric Autos had sales of $100 million and assets at the start of the year of $150 million. If its return on start-of-year assets was 15%, what was its operating profit margin?
22.5%
A firm has a debt-to-equity ratio of .84 and a market-to-book ratio of 3.0. What is the ratio of the book value of debt to the market value of equity?
Torrid Romance Publishers has total receivables of $3,120, which represents 20 days’ sales. Total assets are $94,900. The firm’s operating profit margin is 5.5%. Find the firm’s ROA and asset turnover ratio.
Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 2.
- What is its ROA?
- If its debt-equity ratio is 1, its interest payments and taxes are each $8,700, and EBIT is $23,500, what is its ROE?