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-:( 15) ( ) ( ) :

(
) The prime goal of financial managers is to maximize the profit of the
firm.
(
) In common size analysis all balance sheet items are divided by sales
and all income statement items are divided by total assets.
(
) The higher a firm's sales growth rate, the greater will be its need for
additional financing.
(
) The greater the probability the actual return will be far bellow the
expected returns the greater the stand-done risk associated with an
asset.
(
) Market risk can be eliminated by diversification.
(
) Diversification may result in lower risk for multinational companies
and globally diversified portfolios.
(
) The value of a bond is found as the future value of annuity plus the
present value of the principal.
(
) A firm owners may decide to use a relatively large amount of debt to
constrain the managers. This may force managers to be more careful
and less wasteful with shareholder money.
(
) A firm's optimal capital structure is the mix of-debt and equity that
minimize the stock price.
(
) The Cash conversion cycle model focuses on the length of time
between when the company makes payments and when it receives
Cash inflows.
(
) A Policy that strives for Zero Working capital generates cash and
speeds up production and helps businesses operate more efficiently.
(
) Net float is the amount of funds associated with checks written by
affirm that are still in Process and hence have not yet been deducted
from the firm's bank account.
(
) Ordering costs can be divided into three types: Carrying costs,
inventory costs, and stock- out costs.
(
) Notes receivable is the largest Catogory of shot term financing.
(
) Commercial papers is secured short term debt issued by Large.
Financially strong corporations.
1

(1) The following data apply to A.L. Kaiser & Company (millions of dollars):
Cash and marketable securities
Fixed assets
Sales
Net income
Quick ratio
Current ratio
DSO
ROE

$100.00
$283.50
$1,000.00
$50.00
2.0x
3.0x
40 Days
12%

Kaiser has no preferred stock-only common equity, current liabilities, and long-term
debt.
a. Find Kaiser's (1) accounts receivable (A/R), (2) current liabilities, (3) current
assets, (4) total assets (5) ROA, (6) common equity, and (7) long-term debt.
b. In part a, you should have found Kaisers accounts receivable (A/R) =
million.
If Kaiser could reduce its DSO from 40 days to 30 days while holding other things
constant, how much cash would it generate? If this cash were used to buy back
common stock (at book value), thus reducing the amount of common equity, how
would affect (1) the ROE, (2) the ROA, and (3) the total debt/total assets ratio?

(2) ECRI Corporation is a holding company with for main subsidiaries. The percentage
of its business coming from each of the subsidiaries, and their respective betas, are as
follows:
Subsidiary

Percentage of business

Electric utility
Cable Company
Real estate
International/special project

60%
25
10
5

Beta
0.70
0.90
1.30
1.50

a. What is the holding company's beta?

1- 0.75
2- 0.85
3- 0.95
4- 0.99
b. Assume that the risk-free rate is 6 percent and the market risk premium is 5
percent. What is the holding company's required rate of return?
1- 9.25%
2- 10.25%
3- 11.25%
4- 12.25%
c. ECRI is considering a change in its strategic focus, it will reduce its reliance on
the electric utility Subsidiary, so the percentage of it business from this Subsidiary
will be 50 percent. At the same time, ECRI will increase its reliance on the
international/special projects division, so the percentage of its business from that
Subsidiary will rise to 15 percent. What will be the shareholders' required rate of
return if they adopt these changes?
1- 9.65%
2- 10.65%
3- 11.65%
4- 12.65%
2

(3) Ewald Company's current stock price is $36, and its last divided was $2.40. In view
in Ewald's strong financial position and its consequent low risk, its required rate of
return is only 12 percent. If dividends are expected to grow at constant rate, g, in the
future, and if Ks is expected to remain at 12 percent, what is Ewald's expected stock
price 5 years from now?
1- $45.95
2- $46.95
3- $47.95
4- $48.95

(4) Longstreet Communications Inc. (LCI) has the following capital structure, which is
considers to be optimal:
Debt
Preferred
Common stock
Total capital

25%
15
60
100%

LCI's tax rate is 40 percent and investors expect earnings and dividends to grow at
constant rate of 9 percent in the future. LCI paid a dividend of $3.60 per share last year
(D), and
its stock currently sales at a price of $60 per share. Treasury bonds yield 11
0
percent; an average stock has a 14 percent expected rate of return; and LCI's beta is 1.51.
These terms would apply to new security offerings:
Preferred: new preferred could be sold to the public at a price of $100 per share, with
a dividend of $11. Flotation costs of $5 per share would be incurred.
Debt: Debt could be sold at interest rate of 12 percent.
a. find the component costs of debt, preferred stock, and common stock. Assume LCI
does not have to issue any additional shares of common stock.
1- 12%, 11.6%, 15.5%
2- 12%, 11%, 15%
3- 12%, 11.6%, 15%
4- 12%, 11%, 15.5%
b. What is the WACC?
1- 10.8%.
2- 11.8%
3- 12.8%
4- 13.8%

(5) The Rogers Company is currently in this situation: (1) EBIT = $4 million; (2) tax
rate, T = 35%; (3) value of debt, D = $2 million;
(4) Kd
d
s = 10%; (5) Ks = 15%; and (6)
shares of stock outstanding, n = 600,000. The firm's market is stable, and it expects no
growth, so all earnings are paid out as dividends. The debt consist of perpetual bonds.
a. What is the total market value of the firm's stock, S, its price per share, Po, and the
firm's total market value, V?
1- 16,466,667
2- 17,466,667
3- 18,466,667
4- 19,466,667
b. What is the firms weighted average cost of capital?
1- 12.08%.
2- 13.08%
3- 14.08%
4- 15.08%
c. The firm can increase its debt by $8 million, to a total of $10 million, using the new
debt to buy back and retire some of its shares. Its interest rate on the all debt will be
12 percent (it will have to call and refund the old debt), and its cost of equity will rise
from 15 to 17 percent.
EBIT will remain constant. Should the firm change its capital structure? And Why?
3

(6) The Upton Company is setting up a new checking account with Howe National
Bank. Upton plans to issue checks in the amount of $1 million each day and to deduct
them from its own records at the close of business on the day they are written, On
average, the bank will receive and clear the checks at 5 P.M. the third day after they are
written, for example, a check written on Monday will be cleard on Thursday afternoon.
The firm's agreement with the bank requires it to maintain a $500,000 average
compensating balance, this is $250,000 greater than the cash balance the firm would
otherwise have on deposit. It makes a $500,000 deposit at the time it opens the account.
a. Assuming that the firm makes deposits at 4 P.M. each day (and the bank includes
them in that day's transactions), how much must it deposit daily in order to maintain a
sufficient balance once it reaches a steady state? Indicate the required deposit on Day1,
Day2, Day3, if any, and each day thereafter, assuming that the company will write
checks for $1 million on Day 1 and each day thereafter.
1- $500,000
2- $1,000,000
3- $1,500,000
4- $ 2,000,000
b. How many days of float does Upton have?
1- one day.
2- Two days
3- Three days
4- four days
c. What ending daily balance should the firm try to maintain (1) on the bank's records
and (2) on its own records?
1- $ 500,000 and $ 2,500,000
2- $ 500,000 and $1,500,000
3- $ 1,500,000 and $ 500,000
4- $ 2,500,000 and $ 2,500,000

(7) if you know that capital budget is 600,000 and target capital structure 4% debt, and
60%eguity. The forcasted net income 400,000.
A. How much of the income should be pay out as dividends according to residual model
and how much you finance?
B. if the profit falls down 50%, How much should be the payout and how do you finance
your budget.
C. if the profit qoes up 505 How much should be the pay out, and the finance of the
budget?

) (8 2004/12/31 -:
500,000
300,000
200000
300000300000
150000 . ).(%20
.1
) (%10 )(%12
.2 250000 350000

.3

(9) Explain the deference between bird on hand theory and Tax preference theory.
Stock price

Cost of equal

Dividends

Dividends

(10) What is the difference between AFN formula and the Percent of rates method?

(11) What are the factors that affected WACC?

(12) What is the advantages and disadvantages of stock repurchase?