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Luemas Corporation recently reported the following income statement for 2004


Luemas Corporation recently reported the following income statement for 2004

Posted On : 05-05-2012
  Luemas Corporation recently reported the following income statement for 2004

A+ Answers to the below questions

Luemas Corporation recently reported the following income statement for 2004 (numbers are in millions of dollars):

Sales                              $12,500

Total operating costs           5,700

EBIT                               $6,800

Interest                           150

Earnings before tax (EBT)    $6,650

Taxes (40%)                     2,660

Net income available to        

common shareholders          $3,990


The company forecasts that its sales will increase by 8 percent in 2005 and its operating costs will increase in proportion to sales. The company's interest expense is expected to remain at $150 million, and the tax rate will remain at 40 percent. The company plans to pay out 70 percent of its net income as dividends, the other 30 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for 2005?


      a.    $1,295

      b.    $1,540

      c.     $1,679

      d.    $2,790


The lease analysis should compare the cost of leasing to the


      a.    Average cost of all fixed charges.

      b.    Cost of owning using the weighted average cost of capital for the firm.

      c.     Cost of owning using debt.

      d.    Cost of owning using equity.

Suppose a company's projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company's weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million? (Hint: Please consider FCF vs FCF1.)


      a.    $8,333 million

      b.    $530 million

      c.     $10,000 million

      d.    $4,545 million

The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income? (Hint: Same net income will be when each output level is equal to the other; ie, when Total CostMethod 1 = Total CostMethod 2.)

      a.    10,000 decks

      b.    20,000 decks

      c.     5,000 decks

      d.    15,000 decks

Stanley Corporation is considering a five-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and is amortized over five years with end-of-year payments. Stanley can also lease the equipment for an end-of-year payment of $1,790,000. What is the difference in the actual out-of-pocket cash flows between the two payments, that is, by how much (in thousands of dollars) does one payment exceed the other? (Hint: Use Financial Calculator to figure the loan payments; use 10% as the interest rate; do not discount further for tax effects.)

      a.    $251.0

      b.    $125.5

      c.     $90.0

      d.    $207.2

American Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. American's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16 percent. Eastern has 4 million shares outstanding. Eastern's current price is $16.25. What is the maximum price per share that American should offer?


      a.    $16.97

      b.    $18.13

      c.     $17.42

      d.    $16.25

In 1985, a particular Japanese imported automobile sold for 1,476,000 yen or $8,200. If the car still sells for the same amount of yen today but the current exchange rate is 144 yen per dollar, what is the car selling for today in U.S. dollars?

      a.    $5,964

      b.    $12,628

      c.     $10,250

      d.    $8,200

Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

      a.    Increase the dividend payout ratio for the upcoming year

      b.    Increase the percentage of debt in the target capital structure

      c.     Increase the proposed capital budget

      d.    Reduce the amount of short-term bank debt in order to increase the current ratio

      e.    Reduce the percentage of debt in the target capital structure

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC if all the equity used is from retained earnings?

      a.    7.07%

      b.    7.36%

      c.     7.67%

      d.    7.98%

      e.    8.29%

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

      a.    A project's IRR increases as the WACC declines.

      b.    A project's NPV increases as the WACC declines.

      c.     A project's MIRR is unaffected by changes in the WACC.

      d.    A project's regular payback increases as the WACC declines.

      e.    A project's discounted payback increases as the WACC declines.


Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV?

Old WACC: 8.00% New WACC: 11.25%

Year 0 1 2 3

Cash flows -$1,000 $410 $410 $410

      a.    - $59.03

      b.    - $56.08

      c.     - $53.27

      d.    - $50.61

A company is considering a new project. The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

      a.    All sunk costs that have been incurred relating to the project.

      b.    All interest expenses on debt used to help finance the project.

      c.     The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.

      d.    Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.

      e.    Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows.

Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected life. What is the Year 1 cash flow?

Equipment cost (depreciable basis) $65,000

Sales revenues, each year $60,000

Operating costs (excl. deprec.) $25,000

Tax rate 35.0%


      a.    $30,258

      b.    $31,770

      c.     $33,359

      d.    $35,027

      e.    $36,778

The term “additional funds needed (AFN)” is generally defined as follows:

      a.    Funds that are obtained automatically from routine business transactions.

      b.    Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.

      c.     The amount of assets required per dollar of sales.

      d.    The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.

      e.    A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). 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? Dollars are in millions.

Last year’s sales = S $350 Last year’s accounts payable $40

Sales growth rate = g 30% Last year’s notes payable $50

Last year’s total assets = A* $500 Last year’s accruals $30

Last year’s profit margin = PM 5% Target payout ratio 60%

      a.    $102.8

      b.    $108.2

      c.     $113.9

      d.    $119.9

      e.    $125.9

Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

      a.    40.61%

      b.    42.75%

      c.     45.00%

      d.    47.37%

      e.    49.74%

Which of the following is NOT a reason why companies move into international operations?

      a.    To take advantage of lower production costs in regions where labor costs are relatively low.

      b.    To develop new markets for the firm's products.

      c.     To better serve their primary customers.

      d.    Because important raw materials are located abroad.

      e.    To increase their inventory levels.

Assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase. PP then sells the T-bills and uses the proceeds to repurchase stock. How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase?

      a.    7,500; $71.49

      b.    7,000; $59.57

      c.     6,500; $51.06

      d.    6,649; $53.33

      e.    6,950; $58.78



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