10 Jan (Cost of debt) Temple-Midland,

BBA 3301 Unit VIII Final Exam

Question 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

(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 3

(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 4

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 5

(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 6

(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.
Given the information in the table, what is the expected rate of return for stock B?
What is the standard deviation of stock B?
What is the expected rate of return for stock A?
Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)
Question 7

(DuPont analysis) Dearborn Supplies has total sales of $150 million, assets of $109 million, a return on equity of 30 percent, and a net profit margin of 7.6 percent. What is the firm’s debt ratio?
Question 8

(Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years.
If your required rate of return is 9.30 percent, what is the value of the stock for you?
Should you make the investment?
Question 9

(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?

Question 10

(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.
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.)
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?
Which option should Suzie Student choose?
Question 11

(Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for $36.02 a share and pays $3.48 in dividends annually. What is the firm’s cost of capital for the preferred stock?
Question 12

(Cost of debt) Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 8.1 percent annual interest and matures in 15 years. Investors are willing to pay $948 for the bond and Temple faces a tax rate of 32 percent. What is Temple’s after-tax cost of debt on the bond?
Question 13

(Weighted average cost of capital) The target capital structure for Jowers Manufacturing is 52 percent common stock, 10 percent preferred stock, and 34 percent debt. If the cost of common equity for the firm is 20.8 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 10.4 percent, what is Jowers’ cost of capital? The firm’s tax rate is 34 percent.
Question 14

(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $440 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing, but Templeton plans to borrow $340 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? (Round to one decimal place.)
What is the appropriate weight of debt?
What is the appropriate weight of common equity?
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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.

Question 2

(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:

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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.

Question 3

(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.

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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.

Question 4

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

Question 5

(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:

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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.

Question 6

(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.
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Given the information in the table, what is the expected rate of return for stock B?
What is the standard deviation of stock B?
What is the expected rate of return for stock A?
Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)
Question 7

(DuPont analysis) Dearborn Supplies has total sales of $150 million, assets of $109 million, a return on equity of 30 percent, and a net profit margin of 7.6 percent. What is the firm’s debt ratio?
Question 8

(Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years.
If your required rate of return is 9.30 percent, what is the value of the stock for you?
Should you make the investment?
Question 9

(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.
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What can you say about the firm’s financial condition based on the prepared financial statements?

Question 10

(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.
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.)
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?
Which option should Suzie Student choose?
Question 11

(Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for $36.02 a share and pays $3.48 in dividends annually. What is the firm’s cost of capital for the preferred stock?
Question 12

(Cost of debt) Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 8.1 percent annual interest and matures in 15 years. Investors are willing to pay $948 for the bond and Temple faces a tax rate of 32 percent. What is Temple’s after-tax cost of debt on the bond?
Question 13

(Weighted average cost of capital) The target capital structure for Jowers Manufacturing is 52 percent common stock, 10 percent preferred stock, and 34 percent debt. If the cost of common equity for the firm is 20.8 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 10.4 percent, what is Jowers’ cost of capital? The firm’s tax rate is 34 percent.
Question 14

(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $440 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing, but Templeton plans to borrow $340 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? (Round to one decimal place.)
What is the appropriate weight of debt?
What is the appropriate weight of common equity?