finance data bank
Wolfpack Multimedia follows a strict
residual distribution policy (with all distributions
in the form of dividends). Wolfpack forecasts that its net income will be $12 million this year. The company has no depreciation expense so its net cash flow is $12 million, and its target capital structure consists of 70 percent equity and 30 percent debt. Wolfpack's capital budget is $10
million. What is the company's dividend payout ratio?
a. 16.67% b. 41.67% c. 11.67% d. 0.00% e. 58.30%
Albany Motors recently completed a
3-for-1 stock split. Prior to the split, the company had 10 million shares
outstanding and its stock price was $150 per share. After the split, the total
market value of the company's stock equaled $1.5 billion. What was the price of
the company's stock following the stock split?
a. $ 15
b. $ 45
c. $ 50
Loiselle Graphics recently announced a
3-for-1 stock split. Prior to the split, the company's stock was trading at $90
per share. The split had no effect on the wealth of the company's investors.
What will be the new stock price?
a. $270 b. $ 45 c. $180 d. $ 60 e. $ 30
Computing's stock was trading at $150
per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 5
percent increase in Tarheel's market capitalization. (Market capitalization
equals the stock price times the number of shares.) What was Tarheel's price
after the stock split?
a. $472.50 b. $ 50.00 c. $ 47.62 d. $428.57 e. $ 52.50
Flavortech Inc. expects EBIT of
$2,000,000 for the current year. The firm's capital structure consists of 40
percent debt and 60 percent equity, and its marginal tax rate is 40 percent.
The cost of equity is 14 percent, and the company pays a 10 percent rate on its
$5,000,000 of long-term debt. One million shares of common stock are
the next year, the firm expects to fund one large positive NPV project costing $1,200,000,
and it will fund this project in accordance with its target capital structure. If the firm follows a residual distribution policy (with all distributions in the form of dividends) and has no other projects, what is its expected dividend payout ratio?
a. 100% b. 60% c. 40% d. 20% e. 0%
Driver Corporation has plans calling
for a capital budget of $60 million. Its optimal capital structure is 60
percent equity and 40 percent debt. Its earnings before interest and taxes
(EBIT) were $98 million for the year. The firm has $200 million in assets, pays
an average of 10 percent on all its debt, and faces a marginal tax rate of 35
percent. If the firm maintains a residual distribution policy (with all
distributions in the form of dividends) and will keep its optimal capital
structure intact, what will be the amount of
the dividends it pays out after financing its capital budget?
a. $22.5 million
b. $59.4 million
c. $60.0 million
d. $30.0 million
e. $ 0
Your company has decided that its
capital budget during the coming year will be $20 million. Its optimal capital
structure is 60 percent equity and 40 percent debt. Its earnings before
interest and taxes (EBIT) are projected to be $34.667 million for the year.
company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent. If the company follows the residual distribution policy (with all distributions in the form of dividends) and maintains the same capital
structure, what will its dividend payout ratio be?
a. 15% b. 20% c. 25% d. 30% e. 35%
Plato Inc. expects to have net income
of $5,000,000 during the next year. Plato's target capital structure is 35
percent debt and 65 percent equity. The company's director of capital budgeting
has determined that the optimal capital budget for the coming year is
$6,000,000. If Plato follows a residual distribution policy (with all
distributions in the
form of dividends) to determine the coming year's dividend, then what is Plato's payout ratio?
a. 38% b. 42% c. 58% d.33% e. None of the answers above is correct.
Brock Brothers wants to maintain its
capital structure that is 30 percent debt, and 70 percent equity. The company
forecasts that its net income this year will be $1,000,000. The company follows
a residual distribution policy (with all distributions in the form of
dividends), and anticipates a dividend payout ratio of 40 percent. What is the
size of the company's capital budget?
a. $ 600,000 b. $ 857,143 c.$1,000,000 d. $1,428,571 e. $2,000,000
The following facts apply to your
Target capital structure: 50% debt; 50% equity.
EBIT: $200 million.
Tax rate: 40%.
Cost of new and old debt: 8%.
Based on the residual distribution policy (with all distributions in the form of dividends), the payout ratio is 60 percent. How large (in millions of dollars) will the capital budget be?
a. $ 43.2 b. $ 50.0 c. $ 64.8 d. $ 86.4 e. $108.0
Which of the following is generally NOT
true and an advantage of going public?
a. Facilitates stockholder diversification.
b. Increases the liquidity of the firm's stock.
c. Makes it easier to obtain new equity capital.
d. Establishes a market value for the firm.
Which of the following is generally NOT true and an advantage of going public?
e. Makes it easier for owner-managers to engage in profitable self-dealings.
Which of the following statements about
listing on a stock exchange is most CORRECT?
a. Listing is a decision of more significance to a firm than going public.
b. Any firm can be listed on the NYSE as long as it pays the listing fee.
c. Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
d. Listing reduces the reporting requirements for firms, because listed firms file reports with
the exchange rather than with the SEC.
e. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.
Which of the following statements is
a. In a private placement, securities are sold to private (individual) investors rather than to institutions.
b. Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
c. Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
d. The SEC requires that all private placements be handled by a registered investment banker.
e. Private placements can generally bring in funds faster than is the case with public offerings.
Which of the following statements is
a. If new debt is used to refund old debt, the correct discount rate to use in the refunding
analysis is the before-tax cost of new debt.
b. The key benefits associated with refunding debt are the reduction in the firm's debt ratio
and the creation of more reserve borrowing capacity.
c. The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
d. If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
e. Suppose a firm is considering refunding and interest rates rise during time when the analysis
is being done. The rise in rates would tend to lower the expected price of the new bonds,
which would make them cheaper to the firm and thus increase the expected interest
Which of the following factors would
increase the likelihood that a company would call its
outstanding bonds at this time?
a. The yield to maturity on the company's outstanding bonds increases due to a weakening of
the firm's financial situation.
b. A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
c. The flotation costs associated with issuing new bonds rise.
d. The firm's CFO believes that interest rates are likely to decline in the future.
e. The firm's CFO believes that corporate tax rates are likely to be increased in the future.
Which of the following statements
concerning common stock and the investment banking
process is NOT CORRECT?
a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
b. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
c. Listing a large firm's stock is often considered to be beneficial to stockholders because the
increases in liquidity and reputation probably outweigh the additional costs to the firm.
d. Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer.
e. The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.
Which of the following statements is
a. When a corporation's shares are owned by a few individuals who own most of the stock or are
part of the firm's management, we say that the firm is "closely, or privately, held."
b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
c. Publicly owned companies have sold shares to investors who are not associated with
management, and they must register with and report to a regulatory agency such as the SEC.
d. When stock in a closely held corporation is offered to the public for the first time, the
transaction is called "going public," and the market for such stock is called the new issue market.
e. It is possible for a firm to go public and yet not raise any additional new capital.
Tuttle Buildings Inc. has decided to go
public by selling $5,000,000 of new common stock. Its
investment bankers agreed to take a smaller fee now (6% of gross proceeds versus their normal
10%) in exchange for a 1-year option to purchase an additional 200,000 shares at $5.00 per
share. The investment bankers expect to exercise the option and purchase the 200,000 shares
in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is
a chance that the stock price will actually be $12.00 per share one year from now. If the $12
price occurs, what would the present value of the entire underwriting compensation be?
Assume that the investment banker's required return on such arrangements is 15%, and ignore
Europa Corporation is financing an
ongoing construction project. The firm will need $5,000,000
of new capital during each of the next 3 years. The firm has a choice of issuing new debt or
equity each year as the funds are needed, or issue only debt now and equity later. Its target
capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years,
when the project has been completed. Debt flotation costs for a single debt issue would be
1.6% of the gross debt proceeds. Yearly flotation costs for 3 separate issues of debt would be
3.0% of the gross amount. Ignoring time value effects, how much would the firm save by raising
all of the debt now, in a single issue, rather than in 3 separate issues?