A leader in your firm has been studying the foreign exchange market for a number of years and believes that she can predict several of the foreign currency exchange rates relative to the U.S. dollar. The firm has $500,000 to invest in the spot, forward, or options markets. Assume the spot rate is $1.3435 to the euro, and the forward rate for 12 months is $1.3705 to the euro.
However, this leader is sure that the exchange rate in 12 months will be $1.41 to the euro. Explain how she can speculate on the belief that the euro will be $1.41 in 12 months. Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved. Also, recommend whether this speculative investment or another investment with similar or higher returns at lower risk should be selected.
3. Internal common equity where the current market price of the common stock is $45.50. The expected dividend this coming year should be $4.00, increasing thereafter at a 6% annual growth rate. The corporation’s tax rate is 34%. What is the cost of common equity?
4. A preferred stock paying a 10% dividend on a $100 par value. If a new issue is offered, flotation costs will be 10% of the current price of $115. What is the cost of preferred equity?
5. The capital structure for the Shelby Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 5% after
tax cost of debt, a 12% cost of preferred stock, and a 20% cost of common stock, what is the firm’s weighted cost of capital?
Preferred Stock $ 350,000
Common Stock $4,350,000
6 A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%. A new issue would have a flotation cost of 6% of the market value. The bonds mature in 10 years. The firm’s average tax rate is 30% and its marginal tax rate is 34%.The current price is $989. What is after tax cost of debt?
7. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend/earnings ratio of 30%. The price of this stock is now $28, but 5% flotation costs are anticipated. What is the cost of new common equity?
8. Internal common equity where the current market price of the common stock is $43.50. The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is 34%. What is the cost of common equity
9. A preferred stock paying a 10% dividend on a $125 par value. If a new issue is offered, flotation costs will be 12% of the current price of $150. What is the cost of preferred equity?
10. The capital structure for the Memphis Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 6% after
tax cost of debt, a 13.5% cost of preferred stock, and a 19% cost of common stock, what is the firm’s weighted cost of capital?
Capital Structure ($000)
Preferred Stock $ 250
Common Stock $3,700
1. Cridwell Company’s selling and administrative expenses for last year totaled $210,000. During the year,
the company’s prepaid expense account balance increased by $18,000, and accrued liabilities increased by
$12,000. Depreciation charges for the year were $24,000. Based on this information, selling and administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows
2. The net cash provided by (used by) operations for the year was
3. A weakness of the internal rate of return method for screening investment projects is that it
A. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
B. doesn’t consider the time value of money.
C. doesn’t take into account all of the cash flows from a project.
D. implicitly assumes that the company is able to reinvest cash flows from the project at the company’s discount rate.
4. Products A, B, and C are produced from a single raw material input. The raw material costs $90,000,
from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period.
Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be
A. processed further, since this will increase profits by $2,500 each period.
B. sold at the split-off point, since further processing will result in a loss of $2,500 each period.
C. processed further, since this will increase profits by $12,500 each period.
D. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
5. Centerville Company’s debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are
$170,000, and working capital is $80,000. Centerville’s long-term liabilities must be
6. Larkins Company’s price-earnings ratio on December 31, Year 2 was closest to:
7. Brittman Corporation makes three products that use the current constraint-a particular type of machine.
Data concerning those products appear below:
IP NI YD
Selling price per unit $183.57 $207.74 $348.15
Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product.
Up to how much should the company be willing to pay to acquire more of the constrained resource?
Variable cost per unit $144.42 $155.04 $269.50
Minutes on the constraint 2.90 3.40 5.50
A. $13.50 per minute
B. $39.15 per unit
C. $78.65 per unit
D. $15.50 per minute
8. The net cash provided by (used by) investing activities for the year was
9. VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company’s acidtest ratio would most likely
A. be impossible to determine without more information.
D. be unchanged.
D. $76.67.11. The net cash provided by (used by) financing activities for the year was
12. Larkins Company’s dividend payout ratio for Year 2 was closest to:
13. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300
as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental
effect on the company’s overall profit of reworking and selling the material rather than selling it as is as
14. Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the
The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage
value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.
The simple rate of return would be closest to
Purchase cost $50,000
Annual cost savings $15,000
Life of the machine 8 years
15. An increase in the market price of a company’s common stock will immediately affect its
A. dividend yield ratio.
B. debt-to-equity ratio.
C. dividend payout ratio.
D. earnings per share of common stock.
off, this would
A. increase net working capital.
B. decrease the acid-test ratio.
C. decrease the current ratio
D. increase the acid-test ratio.17. Larkins Company’s dividend yield ratio on December 31, Year 2 was closest to:
18. Which of the following would be considered a “use” of cash for the purpose of constructing a statement
of cash flows?
A. Selling the company’s own common stock to investors
B. Purchasing equipment
C. Issuing long-term debt
D. Amortizing a patent
19. The Clemson Company reported the following results last year for the manufacture and sale of one of
its products known as a Tam.Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product isn’t dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company. Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be a
Sales (6,500 Tams at $130 each) $845,000
Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net operating loss $(55,000)
A. $70,000 increase.
B. $55,000 decrease.
C. $65,000 decrease.
D. $90,000 decrease.
20. Fonics Corporation is considering the following three competing investment proposals:
Aye Bee Cee
Using the project profitability index, how would the above investments be ranked (highest to lowest)?
Initial investment required $62,000 $74,000 $95,000
Net present value $10,000 $8,000 $12,000
Internal rate of return 15% 17% 18%
A. Bee, Cee, Aye
B. Aye, Cee, Bee
C. Aye, Bee, Cee
D. Cee, Bee, Aye