Question 1
A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value iss $10,000. Which of the following statements is most correct? a. The project should be rejected since its return is less than the WACC. b. The project's internal rate of return is greater than 12 percent. c. The project's modified internal rate of return is less than 12 percent d. All of the above answers are correct. e. None of the above answers is correct. 2. (TCO B) The regular payback method has a number of disadvantages, some of which are listed below. Which of these items is not a disadvantage of this method? (Points: 10) a. Lack of an objective, market-determined benchmark for making decisions b. Ignores cash flows beyond the payback period. c.Does not directly account for the time value of money. d. Does not provide any indication regarding a project's liquidity. e. Does not directly account for differences in risk among projects. 3. (TCO B) Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. Question: If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? (Points: 10) 4. (TCO C) Which of the following statements is correct? (Points: 10) a. The characteristics line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. b. The distance of the plot points from the characteristics line is a measure of the stock's discounted value risk. c. "Characteristics line" is another name for the Security Market Line. d. The distance of the plot points from the characteristics line is a measure of the stock's market risk. e. The slope of the characteristic line is the stock's standard deviation. 5. (TCO D) A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 5%, and if investors required rate of return is 10.5%, what is the stock price? (Points: 10) a.$35.39 b.$38.80 c.$37.23 d.$38.18 $39.14 6. (TCO D) Gary Wells Inc. plans to issue perpetual preferred sotck with an annual dividend of $6.50 per share. If the required return on theis preferred stock is 6.5%, at what price should the stock sell? (Points: 10) $90.37 $92.69 $95.06 $97.50 $100.00 7. (TCO E) You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6%, the cost of preferred is 7.5%, and the cost of retained earnings is 13.25%. the firm will not be issuing any new stock. What is its WACC? (Points: 10) 9.48% 9.78% 10.07% 10.37% 10.68% 8. (TCO B, F) The Bingo Corporation is in the process of determining which of the following two projects that they may invest in. The details are provided below: Project A B Cost of Capital 12% 12% Life of project 20 years 20 years Annual cash flow $350,000 $400,000 Initial cost $1,250,000 $1,400,000 Salvage Value $250,000 $110,000 a. What is the payback period? b. What is the net present value of the two projects? c. What is the Internal rate of return of the two projects? d. What is the profitability index? e. Which of the two projects would you choose and which criteria would you use? (Points: 10) 9. (TCO B, F) Sorenson Stores is considering a project that has the following cash flows: Year Cash Flows (end of period) 1 $2,000 2 $3,000 3 $3,000 4 $1,500 The project has a payback of 2.5 years, and the firm's cost of capital is 12%. What is the project's NPV? (Points: 10) $577.68 $765.91 $1,049.80 $2,761.32 $3,765.91 10. (TCO B, F) Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year Cash Flow 0 ($1,000) 1 $300 2 $295 3 $290 4 $285 5 $270 (Points: 10) 11.16% 12.40% 13.78% 15.16% 16.68%
Question 2
1. (Points: 6) Which of the following is recorded in the cash receipts journal? 1. cash received on customer's account 2. cash withdrawn by the owner 3. adjusting entry for depreciation 4. cash purchase of equipment Save Answer 2. (Points: 6) The phase of accounting system installation in which the information needs of people in the organization are taken into account is 1. design 2. implementation 3. analysis 4. installation Save Answer 3. (Points: 6) Which of the following is not an element of Internal Controls? 1. to protect assets from misuse 2. ensure the accuracy of business information 3. to ensure that the company?s policies are in place to maximize profits 4. ensure that laws and regulations are followed Save Answer 4. (Points: 6) A cash purchase of supplies should be recorded in the 1. General journal 2. Cash Receipts journal 3. Purchase journal 4. Cash Payments journal Save Answer 5. (Points: 6) When there are a large number of individual accounts with a common characteristic, it is common to place them in a separate ledger called a(n) 1. creditors ledger 2. accounts payable ledger 3. subsidiary ledger 4. accounts receivable ledger Save Answer 6. (Points: 6) A new curve to e-commerce is that 1. consumers still prefer shopping at malls. 2. vendors are contacting companies via the Internet to increase their sales. 3. businesses are increasing their sales to each other. 4. consumers are researching prices and features online, becoming more informed consumers. Save Answer 7. (Points: 6) When posting the column totals of a cash payments journal, a debit should be posted to 1. Accounts Payable 2. Sales Discounts 3. Cash 4. Unearned Revenue Save Answer 8. (Points: 6) The owner transfers a personal automobile to the company with a fair market value of $12,000. The entry will be made in the 1. cash payments journal 2. cash receipts journal 3. purchases journal 4. general journal Save Answer 9. (Points: 6) Beachside Coffee Shop, in an effort to stream line its accounting system, has decided to utilize a Cash Receipts Journal in its operation. What will be recorded on the post ref column of this transaction? Cash Receipts Journal Date Account Credited Post Ref Cash Dr Bev Revenue Cr Food Revenue Cr Retail Revenue Cr Sales Tax Payable Cr 3/17/09 Cash Sale $137 $137 General Ledger Acct: Customer Acct Cash 10 CCC 345 Acct Receivable 12 FFF 367 Retail Supplies 15 Sales Tax Payable 23 Beverage Revenue 41 Food Revenue 42 Retail Revenue 43 1. 10 2. 15 3. 42 4. ? Save Answer 10. (Points: 6) Beachside Coffee Shop, in an effort to stream line its accounting system, has decided to utilize a Cash Receipts Journal in its operation. What would be recorded as the Post Ref for the Other column, and where on the journal would it appear? Cash Receipts Journal Date Account Credited Post Ref Cash Dr Bev Revenue Cr Food Revenue Cr Sales Tax Pay. Cr Other Cr 3/31/09 5,444 3,089 1,907 55 393 General Ledger Acct: Customer Acct Cash 10 CCC 345 Acct Receivable 12 FFF 367 Retail Supplies 15 Sales Tax Payable 23 Beverage Revenue 41 Food Revenue 42 Retail Revenue 43 1. (367), under the amount on the Other column 2. (12), under the amount on the Other column 3. (?), Post Ref for the total of the Other column 4. (?), on the Post Ref. Column Save Answer 11. (Points: 4) Data will be kept in a database and used for easy retrieval of accounting information. 1. False 2. True Save Answer 12. (Points: 4) Systems analysis is the final phase in the creation or revision of an accounting system. 1. False 2. True Save Answer 13. (Points: 4) The use of subsidiary ledgers is limited to Accounts Payable and Accounts Receivable. 1. False 2. True Save Answer 14. (Points: 4) Computerized accounting typically uses specialized journals. 1. False 2. True Save Answer 15. (Points: 4) Most accounting systems evolve as the business grows and requires changes in their methods for collecting, accumulating, and reporting information. 1. True 2. False Save Answer 16. (Points: 4) Since the concepts, methods, and procedures of a manual accounting system do not apply to a computerized system, there is no need to learn the manual system if one plans to work only for firms that use computerized accounting systems. 1. True 2. False Save Answer 17. (Points: 4) The only individual amount posting done from the Purchase journal is what is listed in the Other Accounts column. 1. False 2. True Save Answer 18. (Points: 4) The purchase of supplies for cash would be recorded in the purchases journal. 1. True 2. False Save Answer 19. (Points: 4) One way to report revenue earned by a company is to present it by the different segments of business. 1. False 2. True Save Answer 20. (Points: 4) Transactions must first be recorded into the general journal before they can be entered into specialized journals. 1. False 2. True Save Answer
Question 3
Problem 18:(Page 523) Source: Foundations of Financial Management (Block,Hirt) The Robinson Corporation has $50 million of bonds outstanding which were issued at a coupon rate of 11 3/4 percent seven years ago. Interest rates have fallen to 10 3/4 percent. Mr. Brooks, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Brooks would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Robinson Corporation has a tax rate of 35 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9.5 percent call premium starting in the sixth year and scheduled to decline b one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the aftertax cost of new debt rounded to the nearest whole number. Should the Robinson Corporation refund the old issue? Question: Study problem 18 starting on page 520. Given a 7% discount rate, calculate the cost savings from lower interest rates Robinson would realize if Robinson refinanced its long term debt. Show work and explain.(Note: just calculate the cost savings from lower interest rates only, don't solve the whole problem.)
Question 4
Directions: Answer all the questions. Be sure to show how you did your calculations. Question #1 The ABC Company manufactures widgets. It competes and plans to grow by selling high-quality widgets at low prices and by delivering them to customers quickly. There are many other companies in the industry producing similar widgets. ABC believes it needs to continuously improve its manufacturing and delivery processes and that having satisfied employees are both critical to its long-term success. a) Based on this information, what type of strategy to you believe ABC is pursuing? Be sure to back up your claim with specific evidence. b) List and justify eight metrics (2 in each of the Balanced Scorecard perspectives) that you believe ABC should include in its Balanced Scorecard. c) ABC calculates the following figures: 2011 operating income $1,850,000 2012 operating income $2,013,000 Growth component $85,000 Price-recovery component ($72,000) Productivity component $150,000 In addition, the market for widgets did not grow in 2012, input process did not change in 2012, and ABC reduced its selling price in 2012. Based on this information, do you believe ABC?s increase in operating income in 2012 is consistent with the strategy you identified in part a? Be sure to justify your answer with specific information. Question #2 Assume the CFO of your organization approaches you to ask your advice about implementing the Balanced Scorecard at your organization. a) List and describe the four perspectives of the Balanced Scorecard. b) What steps would you encourage him or her to take in order to successfully implement the Scorecard? c) What roadblocks would you encourage him or her to avoid in order to successfully implement the Scorecard? Question #3 List and describe two types of costs for each of the four categories of quality costs. Question #4 Consider the following quality cost report: Year 1 Year 2 Year 3 Prevention $950 $1,065 $995 Appraisal $1,250 $1,100 $900 Internal failure $875 $925 $975 External failure $1,400 $1,500 $1,625 Total quality costs $4,475 $4,590 $4,495 Total revenues $25,000 $26,500 $27,775 Year 1 Year 2 Year 3 % of Rev % of Qual Costs % of Rev % of Qual Costs % of Rev % of Qual Costs Prevention 3.80% 21.23% 4.02% 23.20% 3.58% 22.14% Appraisal 5.00% 27.93% 4.15% 23.97% 3.24% 20.02% Internal failure 3.50% 19.55% 3.49% 20.15% 3.51% 21.69% External failure 5.60% 31.28% 5.66% 32.68% 5.85% 36.15% TOTAL 17.90% 100.00% 17.32% 100.00% 16.18% 100.00% Do you believe this firm?s quality initiatives have been successful? Be sure to justify your opinion with specific information from the quality report. Question #5 In your own words, explain the Theory of Constraints. As part of your answer, be sure to mention the basic assumptions underlying it, strengths of the method, and weaknesses of the method. Question #6 a) What is decentralization? b) List and describe three potential benefits and three potential problems with decentralization. Question #7 a) What is a transfer price? b) How can firms use transfer prices strategically? c) What role does GAAP play in how firms determine transfer prices? Question #8 a) What is goal incongruence? b) How can using the metric ?return on investment? for performance evaluation lead to goal incongruence? c) What can a firm do to reduce goal incongruence caused by using ?return on investment? for performance evaluation? Question #9 Consider the following information about a potential project: Investment required $2,000,000 Expected annual project revenue $3,600,000 Expected annual project expenses $3,200,000 Required rate of return 12% Current division return on investment 18% a) Calculate the project?s return on investment. b) Based solely on ROI, is this project in the firm?s best interests? Why or why not? c) Is this project in the division manager?s best interests? Why or why not? d) Perform DuPont Analysis on this project e) What is the project?s residual income?,What time would the assignment be ready?,I think it must be a misunderstanding, the assignment was due today 09/11/12 at 10:00 a.m. eastern time. What time do you have this is due?,OK
Question 5
&B Drilling Company has recently acquired a lease to drill for natural gas in a remote region of southwest Louisiana and southeast Texas. The area has long been known for oil and gas production, and the company is optimistic about the prospects of the lease. The lease contract has a three-year life and allows J&B to begin exploration at any time up until the end of the three-year term. J&B?s engineers have estimated the volume of natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is estimated to be $23 million (regardless of when the property is developed is developed over the next three years). Bases on historical volatilities in the returns of similar investments and other relevant information, J&B?s analysts have estimated that the value of the investment opportunity will evolve over the next three years. The risk-free rate of interest is currently 5%, and the risk-neutral probability of an uptick in the value of the investment is estimated to be 46.26%. A. Evaluate the value of the leasehold as an American call option. What is the Lease worth today? B. As one of J&B?s analysts, what is your recommendation as to when the company should drilling? Can you please show the work on how the attached calculations were computed?
