(Solution) An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project. The... > Snapessays.com


(Solution) An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project. The...


1. An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project. The company has a tax rate of 30%. This transaction will have what impact on the project’s initial outlay? A. reduce it by $6,000 B. reduce it by $15,000 C. reduce it by $20,000 D. reduce it by $50,000 2. Concentric Corporation has 10 million shares of stock outstanding. Concentric’s after-tax profits are $140 million and the corporation’s stock is selling at a price-earnings multiple of 18, for a stock price of $252 per share. Concentric’s management issues a 40% stock dividend. What is the effect on an investor who owns 100 shares of Concentric before the dividend if Concentric’s price-earnings multiple remains the same after the dividend is paid? A. The investor will own 100 shares worth $35,280. B. The investor will own 100 shares worth $25,200. C. The investor will own 140 shares worth $25,200. D. The investor will own 140 shares worth $35,280. 3. Use the “percent of sales method” of preparing pro forma financial statements to determine the projection for next year’s cost of goods sold. Make the following assumptions: current year’s sales are $27,800,000; current year’s cost of goods sold is $17,528,000; sales are expected to rise by 30%. What is the projection for next year’s cost of goods sold? A. $21,459,200 B. $22,786,400 C. $20,481,000D. $21,138,900 4. Which of the following statements concerning liquidity and debt is true? A. A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term debt. B. The greater the use of short-term debt, the lower the risk of illiquidity. C. Long-term debt is generally less costly than short-term debt. D. The risk of illiquidity does not depend on the mix of short-term versus long-term debt. 5. Which of the following transactions will lower a company’s financial leverage? A. A mortgage loan is obtained and the proceeds are used to pay off existing short-term debt. B. Common stock is sold and the proceeds are used to pay off existing short-term debt. C. Preferred stock is sold and the proceeds are used to pay off existing short-term debt. D. Short-term debt is obtained to get the company through a period of negative net income and cash flow. 6. An increase in flotation costs will most likely result in which of the following? A. smaller dividend payments so that less external equity financing is needed B. larger dividend payments so shareholders are able to earn their required returns C. no change in dividend policies because flotation costs are paid by purchasers of common stock D. larger dividend payments to offset higher taxes paid by investors 7. While Rogue Corporation has been in business for over 50 years, newly developed products pushed the firm’s year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances? A. Substitute a stock dividend for the current cash dividend. B. Look seriously for a merger partner. C. Enter into a long-term stock repurchase program. D. Borrow long-term to pay the current dividend. 8. The president of Smith Brothers, Inc. wants a dividend policy that minimizes the likelihood of decreasing the company’s dividend per share. Which of the following policies should the CEO select? A. regular dividend plus a year-end extra B. constant dividend payout ratio C. stable dollar dividend per shareD. All policies have the same likelihood of a dividend decrease because dividend changes are dependent on changes in earnings. 9. Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the quarter. This quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive quarters of dividend payments. Which of the following is correct? A. The company can omit the dividend; shareholders are always understanding about the riskiness of business. B. The company can use cash generated through prior retention of earnings, or borrowed funds to pay the dividend. C. The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial. D. The company cannot pay dividends this quarter since the company had no earnings. 10. The percent of sales method does not accurately estimate the balances for lumpy assets. Which of the following statements best describes the possible errors? A. If excess capacity exists, the percent of sales method will overestimate asset requirements. B. The percent of sales method consistently overestimates the forecasted balances of lumpy assets. C. The percent of sales method consistently underestimates the forecasted balances of lumpy assets. D. If fixed assets are utilized at full capacity currently, the percent of sales method will underestimate the forecasted fixed asset balance. 11. Which of the following statements is MOST correct concerning the relationship between a company’s cash budget and its income statement? A. If net income is positive, then cash flow could be positive or negative, but if net income is negative, cash flow must also be negative. B. If net income is positive, then cash flow must be positive. C. Cash flow could be positive whether net income is positive or negative. D. If net income is positive for 3 or more months in a row, then cash flow must be positive. 12. All of the following are likely to increase the cost of a company’s short-term financing EXCEPT: A. an increase in the company’s debt rating by Moody’s or Standard and Poors B. taking a loan on a discount basis C. an increase in the compensating balance required D. an increase in the bank’s prime lending rate 13. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. How much will Brown Inc. need to borrow? A. $347,222 B. $312,500 C. $300,000 D. $270,000 14. Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank. Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the effective annual cost of credit? A. 15.47% B. 12.40% C. 14.63% D. 12.83%

 


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