Columbia BBA3301 - Analyzing the cash flow Statement

Question 1

1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

What years did Goggle generate positive cash flow from its operations?

Goggle has generated positive cash flow from its operations during the years 2007 and 2008.

Goggle has generated positive cash flow from its operations during the years 2008 and 2009.

Goggle has generated positive cash flow from its operations during the years 2009 and 2010.

Goggle has generated positive cash flow from its operations during the years 2008, 2009, and 2010.

2 points

Question 2

1. When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________.

agency problem

ownership problem

management problem

moral problem

2 points

Question 3

1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

How much did Goggle invest in new capital expenditures over the period? (Round to the nearest integer.)

The amount that Google invested in new capital expenditures over the period is $15,930 million.

The amount that Google invested in new capital expenditures over the period is $14,710 million.

The amount that Google invested in new capital expenditures over the period is $16,290 million.

The amount that Google invested in new capital expenditures over the period is $11,030 million.

2 points

Question 4

1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below.

Based solely on the cash flow statements for 2008 through 2010, select the statement that best describes the major activities of Goggle's management team over the period.

Google's management team has been investing heavily in working capital and financing them with the issuance of stocks and internally generated funds.

Google's management team has been investing heavily in capital expenditures and financing them with the issuance of stocks and internally generated funds.

Google's management team has been spending heavily in paying cash dividends and financing them with the issuance of stocks and internally generated funds.

Google's management team has been investing heavily in capital expenditures and financing them with the issuance of debt and internally generated funds.

2 points

Question 5

1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

Describe Goggle's main source of financing in the financial markets over the period.

Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $985 million.

Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $10 million.

Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $8,034.

Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $985 million.

2 points

Question 6

1. (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.

a. Given the information in the table, what is the expected rate of return for stock B?

b. What is the standard deviation of stock B?

c. What is the expected rate of return for stock A?

d. Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)

e.

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10 points

Question 7

1. (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $380,000 due in 30 years. In other words, they will need $380,000 in 30 years. Toni Flanders, the company's CEO, is scrambling to discount the liability to the present to assist in valuing the firm's stock. If the appropriate discount rate is 9 percent, what is the present value of the liability?

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10 points

Question 8

1. (Annuity payments) Ford Motor Company's current incentives include 5.7 percent APR financing for 72 months or $1,100 cash back on a Mustang. Let's assume Suzie Student wants to buy the premium Mustang convertible, which costs $34,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,100 cash back, Suzie can borrow from the VTech Credit Union at 7.7 percent APR for 72 months.

a. If Suzie chooses 5.7 percent APR financing for 72 months to buy the premium Mustang convertible, which costs $34,000 = PMT(62.632529), what will her monthly payment be? (Round to the nearest cent.)

b. If Suzie chooses $1,100 cash back to buy the premium Mustang convertible and borrows $32,900 from the VTech Credit Union at 7.7 percent APR for 72 months, how much will her monthly payment be?

c. Which option should Suzie Student choose?

d.

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10 points

Question 9

1. (Review of financial statements) Prepare a balance sheet and income statement for the Warner Company from the scrambled list of items found here in order to answer the question below. The statements do not need to be submitted, only your response to the question.

What can you say about the firm's financial condition based on the prepared financial statements?

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10 points

Question 10

1. (Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 12 percent interest. The market's required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.

a. What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)

b. What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)

c. Should you purchase the bond at the current market price?

d.

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10 points

Question 11

1. (Cost of debt) Sincere Stationery Corporation needs to raise $451,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 11.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 9.6 percent.

a. Compute the market value of the bonds.

b. How many bonds will the firm have to issue to receive the needed funds?

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

d.

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10 points

Question 12

1. (Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.54 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years.

a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to 2 decimal places.)

b. Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 4.2 percent, and Hetterbrand's beta is 0.78. What is your estimate of the firm's cost of common equity using this method? (Round to 2 decimal places.)

c.

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10 points

Question 13

1. (Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:

a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.9 percent that is paid semiannually: the bond is currently setting for a price of $1,129 and will mature in 10 years. The firm's tax rate is 34 percent. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company?

b. A new common stock issue that paid a $1.74 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 9.7 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.88.

c. A preferred stock paying an 8.3 percent dividend on a $120 par value. The preferred shares are currently setting for $153.18.

d. A bond setting to yield 12.9 percent for the purchaser of the bond: the borrowing firm faces a tax rate of 34 percent.

e.

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10 points

Question 14

1. (Weighted average cost of capital) In the spring of last year, Tempe Steel learned that the firm would need to re-evaluate the company's weighted average cost of capital following a significant issue of debt. The firm now has financed 33 percent of its assets using debt and 57 percent using equity. Calculate the firm's weighted average cost of capital where the firm's borrowing rate on debt is 7.9 percent, it faces a 34 percent tax rate, and the common stockholders require a 19.7 percent rate of return.