FIN201 Midterm - Summer Term 21 - PDF

FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 An agreement between a company and a labour union that represents most of its employees would be most appropriately considered part of a company s: 1. legal infrastructure 2. contractual infrastructure 3. organizational infrastructu...

FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 An agreement between a company and a labour union that represents most of its employees would be most appropriately considered part of a company s: 1. legal infrastructure 2. contractual infrastructure 3. organizational infrastructure 4. governmental infrastructure A firm is currently an unlevered firm with an expected return of 10%. The firm expects that the future EBIT will be $650,000 and the firm's tax rate is 40%. The firm is considering the use of $2,200,000 debt. Based on MM 1963, the value of the firm with leverage is: 1. "$4,550,000" 2. "$4,780,000 " 3. "6,444" 4. "$4,225,000 " = [650,000 * (1-40%) + (40%*220,000)]/10% = $4,780,000 According to the financial planning model, outputs would include such items as: 1. sales growth forecasts. 2. the firm's current financial statements. 3. a pro forma statement of sources and uses of cash. 4. a percentage of the sales planning model. FIN201 - MIDTERM BLUE 72 pg. 1  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 A _________ debt that has first claim on specified collateral in the event of default. 1. Secured Loans. 2. Commercial Paper. 3. Term loan 4. Treasury bills. The optimal capital structure maximizes expected earnings per share and maximizes the price per share of common stock. 2. minimizes the interest rate on debt and maximizes expected earnings per share. 3. None of these 4. maximizes firm value and minimizes the weighted average cost of capital. A firm plans to pay annual dividends of SAR 7 per share in perpetuity and shareholders expect an 8% rate of return. Assume 1,000,000 shares outstanding. What are the total dividends paid each period, and what is the present value of each share? (7/8%) 1. 8.75 2. 87.5 3. 56 4. 0.56 Explain: Total dividends Paid = 1,000,000 * 7 = SAR 7,000,000 FIN201 - MIDTERM BLUE 72 pg. 2  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 Present value of each share = SAR 7/8% = 87.5 Which of the following methods that corporations are followed when buying back stock from their shareholders. 1. initial public offering. 2. Auction. 3. fund mutual. 4. indirect negotiation. The theory that deals with conflicts of interest between a company's owners and its creditors is most appropriately called: 1. stakeholder theory. 2. structure theory. 3. shareholder theory. 4. efficient hypothesis theory What was the sales volume in the current quarter if beginning accounts receivable, at SAR 6,000, was SAR 2,000 higher than ending, and SAR 30,000 was collected? 1. SAR 26000. 2. SAR 32000. 3. SAR 28000. 4. SAR 20000. Explain: = SAR 30,000 – SAR 6,000 + SAR 4,000 FIN201 - MIDTERM BLUE 72 pg. 3  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 = SAR 28,000 Ending Accounts Receivable = Beginning Accounts Receivable+Sales.-Collections According to net working capital, which of the following statement is correct. 1. negative during the inventory period of the cash conversion cycle. 2. net working capital equals the amount of current assets. 3. net working capital not equal to the amount of current assets. 4. positive to provide liquidity during the cash conversion cycle. Which of the following statements regarding Modigliani and Miller's propositions (Assuming perfect capital markets and homogenous expectations) is most accurate? 1. The cost of equity increases as the firm increases its financial leverage. 2. None of these 3. The use of debt financing increases the firm s weighted average cost of capital. 4. 4. Firm value is maximized with a capital structure consisting of 100% equity AL-SALAM financial planners have projected a growth rate of 14% for the coming year. Currently, it has assets of SAR 10,000,000 and retained earnings of SAR 600,000. How much external financing will the firm need? 1. "SAR 800,000." 2. "SAR 880,000" 3. "SAR 9,400,000" 4. "SAR 9,916,000" FIN201 - MIDTERM BLUE 72 pg. 4  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 Required External Financing=(Growth Rate × Assets)-Reinvested Earnings (0.14*10000000)-600000=800000 For which two of a company's stakeholders does information asymmetry most likely make monitoring more difficult? 1. Employees and managers 2. Employees and shareholders 3. Suppliers and employees 4. Managers and shareholders Short-term financial planning focus on managing a firm's current assets and liabilities dividend policies. Appropriate debt ratios Financing that must be obtained If a firm adds an asset base of SAR 2 million recently added SAR 100,000 to retained earnings after a dividend payment of $50,000, then its internal growth rate is: 1. 2.50% 2. 7.50% 3. 3. 3.33%. 4. 5.00% ( 100000/2million) Internal growth rate = Return on Assets * retention ratio Net Income = Addition to retained earnings during the period + Dividends = 100000 +50000 FIN201 - MIDTERM BLUE 72 pg. 5  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 Net Income = 150000 Retention ratio = 100000 / 150000 = 0.67 Return on Assets = Net Income / Total Assets = 150000 / 2000000 = 7.5% Internal growth rate = 7.5%*0.67 = 5 Firms pay regular cash dividends to their 1. common shareholders. 2. convertible bondholders. 3. fixed-rate bondholders. 4. preferred bondholders. The type of resolution most likely to require a supermajority of shareholder votes for passage is a resolution to: (acquire a company) 1. cumulative voting 2. majority voting staggered voting 3. 4. None of these. Suppose the value added of debt is $900,000, the value of the firm after recapitalization is: FIN201 - MIDTERM BLUE 72 pg. 6  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. "$14,900,000 " 2. "$13,100,000 " 3. "$20,500,000 " 4. "$ 23,400,000" Which of the following is NOT a reason for preparing a financial plan contingency planning. choosing the optimal plan. considering options. forcing consistency A firms beta is 1.5, Treasury bills currently yield free risk 5%, the market risk premium is 5%, and the return on the market is 10%. What is the firms cost of equity? 1. 16.50% 2. 13.00% 3. 18.00% 4. 12.50% Explain: = 5% + 1.5 * (10%-5%) FIN201 - MIDTERM BLUE 72 pg. 7  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 = 12.5% If the shareholders of an acquired firm capture all the merger's gain, then the. 1. EPS will increase. 2. cost of the merger is zero. 3. NPV of the merger is zero. 4. acquiring firm retains all merger benefits. One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer: 1. pays a much higher premium than option buyers. 2. has increased rather than reduced risk. 3. can lose no more than the initial premium. 4. "has an obligation to purchase, not a choice." When Saudi Aramco acquired a 70 percent majority stake in SABIC, the combination would be termed a. 1. vertical merger. 2. spin-off by the national homebuilding firm. FIN201 - MIDTERM BLUE 72 pg. 8  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 3. conglomerate merger. 4. horizontal merger. Which of the following is NOT correct concerning a proposed merger of firms? The acquired firm will cease to exist. Shareholder approval to merge is not required. Mergers are sometimes combinations of equals. Shareholders of the acquired firm may receive securities in the acquiring firm. What is the sustainable growth rate for a firm with a net income of $2.5 million, cash dividends of $1.5 million, and return on equity of 18%? 1. 7.20% 2. 5.40% 3. 10.80% 4. 3.00% Explain: = (18% *(1-(1.5/2.5)))/ (1-(1-(1.5/2.5))) = 7.76% Which of the following would NOT you expect to have more impact on a dividend-based stock valuation model? 1. Extra dividend 2. Regular dividend 3. Special dividend 4. A and B FIN201 - MIDTERM BLUE 72 pg. 9  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 The purpose of a Sinking Fund is to. 1. a fund that establishes to retire debt before maturity. 2. take advantage of the tax break on preferred stock. 3. reduce the par value of the stock over time. 4. allow risky corporations to avoid bankruptcy. Financial futures are available to protect against all the following except: 1. currency swap risk. 2. interest rate risk. 3. exchange rate risk. 4. level of equity prices. An Al-SALAM company pays 15% on its debt if it has a 35% tax bracket. What is the after-tax cost of debt? 20.25% 12.17% 9.75% ( 1- 35%)*15% 5.25% Alfa corp has a capital structure that is based on $25 million in outstanding debt with a required return of 8%, 115 million in equity shares with a required return of 12%, and a tax rate of 35%? FIN201 - MIDTERM BLUE 72 pg. 10  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. 10.35% 2. 10.64% 3. 10.40% 4. 10.78% What is the market value placed on a firm in which an entrepreneur invests SAR 1,500,000 million and a venture capitalist invests SAR 4 million in first-stage financing for a 50% interest in the firm? ( 4m/50%) 1. "SAR 8000,000" 2. "SAR 3000,000" 3. "SAR 11,000,000" 4. "SAR 2,500,000" A proposed project has a positive NPV when evaluated at the firm's cost of capital. If the firm uses debt in its capital structure, does the project remain acceptable after evaluation with the WACC? 1. There is no relation between WACC and positive NPV. 2. There will be no change in the project's NPV. 3. "No, using the WACC will decrease the NPV." 4. "Yes, using the WACC will increase the NPV." Supposed Saudi Constructioneers Ltd. (Saudico) is concerned about volatile commodity prices (e.g., metals products) and they use option contracts to alter their risks. What is the worst-case scenario for a seller of put options on Hadeed with a strike price of $2.25 per ton? Losses can be unlimited if prices drop sufficiently. FIN201 - MIDTERM BLUE 72 pg. 11  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 If Hadeed prices rise above $2.25 the option premium will be lost. Losses can be unlimited if prices rise sufficiently. If Hadeed prices drop below $2.25 the option premium will be lost. Financial futures primary purpose is to. 1. protect against swings in interest rates or prices of financial assets. 2. translates one currency into another. 3. benefit from increases in interest rates. 4. guarantee the repayment of loan principal. Option Value is described as. 1. is a function of the buying price and the selling price. 2. the value that determines after the time of the option contract. 3. the value that determines before the time of the option contract. 4. the value at expiration is a function of the stock price and the exercise price. The basic difference between speculators and hedgers in futures contracts is that speculators. 1. are concerned only with long-term price movements. 2. will profit regardless of the direction of price change. 3. take a position in more than one commodity at a time. 4. are not protecting their commodity holdings. If the total assets of a firm are unaffected by a stock dividend, then. FIN201 - MIDTERM BLUE 72 pg. 12  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. stock dividends should be preferred by corporations over cash dividends. 2. only bondholders benefit from stock dividends. 3. the stock should retain the same price per share. 4. none of these. One of the following statements is correct? 1. a callable and convertible bond will have the same price. 2. it depends on the financial market. 3. a convertible bond will be priced more than a callable bond. 4. a convertible bond will be priced less than a callable bond. FIN201 - MIDTERM BLUE 72 pg. 13  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 The ideal position for net working capital (NWC) is. 1. negative during the inventory period of the cash conversion cycle. 2. equal to the amount of current assets. 3. present only during slack periods of the year 4. positive to provide liquidity during the cash conversion cycle. What is the inventory period for a firm with an annual cost of goods sold of $11 million, $1.5 million in inventory, and a cash conversion cycle of 75 days? (1.5/11/365) 1. 68.44 days 2. 18.75 days 3. 49.77 days 4. 6.56 days A firm that follows ___________ is a firm that uses the length of the financing which directly related to the life of the asset being financed. 1. policy of maturity matching. 2. minimum working capital strategy 3. matched depreciation strategy. 4. restrictive financing strategy. MMs Proposition 1 states to. FIN201 - MIDTERM BLUE 72 pg. 14  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. illustrates that a value of a firm is affected by its capital structure. 2. explains that the cost of the required return on the common stock directly relates to the debt-to-equity ratio. 3. illustrates that a value of a firm is unaffected by its capital structure. 4. the cash flows to stockholders have two types of risks business risk and financial risk. A __________ stock that has been repurchased by the company and held in its treasury. Issued Shares. Treasury Stock. Stock Split. Outstanding Shares. A firm's dividend policy involves a trade-off between. 1. a large asset base and a small asset base. 2. all of these 3. high share price versus low share price. 4. internal versus external financing of investment. Which of the following is not a source of cash? 1. Reduction in accounts receivable 2. Depreciation 3. Net income 4. Repayment of a bank loan FIN201 - MIDTERM BLUE 72 pg. 15  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 ABC company has decided recently to be issued 10 million new shares at SAR 18 per share; the par value of each is SAR 1.80. What is the value of additional paid-in capital (APIC)? 1. "increase by 162,000,000" 2. "increase by 180,000,000" 3. "increase by 18,000,000" 4. "decrease by 162,000,000" Answer APIC = (10,000,000 × 18) − (10,000,000 × 1.80)=162000000SAR Or in another way SAR 18 – SAR 1.80) * 10,000,000 = SAR 162,000,000 When a firm issues new security to the public, some costs appear called. 1. Marginal cost 2. Flotation costs. 3. Fixed costs. 4. Spread costs. FIN201 - MIDTERM BLUE 72 pg. 16  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 Assume an underwriter charges the public SAR 50 per share for a new issue after having promised the issuer SAR 48 per share. What is the spread for this deal? SAR 50.00 SAR 1.00 SAR 2.00. SAR 48.00. SAR 50 – SAR 48 = SAR 2.00 A public offer to purchase the shares of existing stockholders in order to take the firm over is called a. 1. spin-off. 2. tender offer. 3. carve-out. 4. divestiture. The payoffs from holding a call option can be replicated by. 1. borrow money to invest in the stock. 2. borrow money to buy a put option. 3. simultaneously sell a call and buy a put. 4. simultaneously buy a share and buy a put. According to M&M Proposition 1, which of the following is correct? FIN201 - MIDTERM BLUE 72 pg. 17  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. the real investment policy of the firm is affected by its capital structure decisions. 2. there are no taxes. 3. Transactions have costs. 4. "to gain information, there is some cost." What is the present value of the tax shields for a firm that expects a perpetual debt level of SAR12 million at an interest rate of 8% and a tax rate of 35%? 1. "SAR 12,000,000." 2. "SAR 960,000." 3. "SAR 4,200,000." "SAR 336,000." Explain: = (8% * SAR 12,000,000 * 35%)/8% = SAR 4,200,000 Which of the following statements is correct regarding the costs of the security issue? Both have no costs Debt is cheaper to issue than equity. Both have the same cost level. Equity is cheaper to issue than debt. Financial plans covering a short planning horizon rarely extend beyond. FIN201 - MIDTERM BLUE 72 pg. 18  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 1. 5 years. 2. none of these 3. 2 years. 4. 1 year. Which of the following statements is correct concerning the internal growth rate? 1. It cannot be less than the sustainable growth rate. 2. It is maximized when the plow-back ratio equals zero. 3. It decreases as total assets decrease. 4. It is maximized when the payout ratio equals zero. Tesla, Inc. has issued long-term bonds with a present value of $20 million and a yield of 8%. It currently has 10 million shares outstanding, trading at $20 each, offering an expected return of 14%. What is the firm s cost of capital? 1. 13.45% 2. 13.43% 3. 13.60% 4. 3% Explain: D= 20 million E= 10,000,000* 20 = 200 million V= D+E = 220 million FIN201 - MIDTERM BLUE 72 pg. 19  FIN201 – MIDTERM – SUMMER TERM – 21- REVIEWED BY BLUE 72 Rassets = ( 20$\220$)*0.08+(200$\220$)*0.14= 13.45 A firm's sustainable growth rate represents the. 1. highest growth rate based solely on internal financing 2. highest growth rate without decreasing the dividend. 3. possible growth without jeopardizing net working capital 4. percentage change in sales times the profit margin The price at which the underlying security can be purchased (call option) or sold (put option) is known as. options price. exercise price. market price. contract price. FIN201 - MIDTERM BLUE 72 pg. 20