Finance Chapter 12 Quiz Questions

QUESTION 1

	In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Last year's sales = S0 $163,000 Last year's accounts payable $45,000 Sales growth rate = g 33% Last year's notes payable $10,000 Last year's total assets = A0* $115,000 Last year's accruals $15,000 Last year's profit margin = PM 25.0% Target payout ratio 20.0%

QUESTION 2

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 25% that was used in the past to 45%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 15% to the new and higher level? All dollars are in millions.

Last year's sales = S0	$900.0	Last year's accounts payable	$100.0
Sales growth rate = g	45%	Last year's notes payable	$15.0
Last year's total assets = A0*	$1,200.0	Last year's accruals	$55.0
Last year's profit margin = PM	30.0%	Initial payout ratio	25.0%

QUESTION 3

In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

		47.50
		49.88
		50.00
		52.50
		55.13

QUESTION 4

The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

		$100,000
		$200,000
		$300,000
		$400,000
		$500,000

QUESTION 5

1. The following data apply to Lagniappe Industries, Inc. (LII):

Value of operations	$750
Short-term investments	$50
Debt	$200
Number of shares	100

2.
The company plans on liquidating the short-term investments and distributing them as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

		$6.06
		$4.96
		$5.23
		$5.50
		$5.78

QUESTION 6

The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Net Income Payout

		$ 898,750 55.63%
		$ 943,688 58.41%
		$ 990,872 61.34%
		$1,040,415 64.40%
		$1,092,436 67.62%

QUESTION 7

The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

		$600,000
		$466,667
		$333,333
		$200,000
		None of the above

QUESTION 8

Blue Mountain Building has operating income of $37.5 million, a tax rate of 40%, and no debt. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $65 per share, and it has 4.5 million shares of stock outstanding. If it moves to a capital structure that has 45% debt and 55% equity (based on market values), its investment bankers believe its weighted average cost of capital would be 12.5%. What would its stock price be if it changes to the new capital structure?

		$34
		$38
		$36
		$42
		$40