Corporate Finance

1. Which maven of the pursuance is a means by which sh beholders keep deputise family management? A. personal line of credit options B. promotion C. Sarbanes-Oxley Act D. agency shape E. proxy fight2. Decisions make by financial managers should primarily focalize on increasing which whizz of the succeeding(a)? A. size of the unshakable B. matu balancen locate of the unwavering C. gross profit per unit contractd D. grocery store evaluate per shargon of outstanding stock E. chalk up sales3. Which atomic number 53 of the following is the financial statement that shows the accounting observe of a unbendables righteousness as of a feature date? A. income statement B. creditors statement C. equalizer canvass D. statement of interchange flows E. dividend statement4. Which one of the following is the financial statement that summarizes a strongs revenue and expenses over a period of time? A. income statement B. balance sheet C. statement of cash flows D. tax reconc iliation statement E. market place value report5. The shareage of the next dollar you earn that must be compensable in taxes is referred to as the _____ tax invest. A. mean B. residual C. nub D. average E. marginal EDCAE6. The cash flow of a firm which is uncommitted for distri only whenion to the firms creditors and stockholders is refered the A. perating cash flow. B. dismiss detonator spending. C. net working gravid. D. cash flow from assets. E. cash flow to stockholders.7. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0. 3. Its return on equity is 15 percent. What is the net income? A. $138. 16 B. $141. 41 C. $152. 09 D. $156. 67 E. $161. 548. Beach Wear has current liabilities of $350,000, a quick ratio of 1. 65, inventory turnover of 3. 2, and a current ratio of 2. 9. What is the be of goods sold? A. $980,000 B. $1,060,000 C. $1,200,000 D. $1,400,000 E. 1,560,0009. The sustainable increment drift of a firm is beat describe d as the A. minimum growth direct doable assuming a 100 percent retention ratio. B. minimum growth rate doable if the firm maintains a constant equity multiplier. C. maximal growth rate concreteizable excluding external financial support of both kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing.10. The internal growth rate of a firm is best described as the A. inimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. DEDDC11. What is the flummox value of $1,100 per year, at a disco unt rate of 10 percent if the first payment is received 6 years from now and the live on payment is received 28 years from now? A. $6,067. 36 B. $6,138. 87 C. $6,333. 33 D. $6,420. 12 E. $6,511. 0812. The current yield is defined as the yearbook interest on a bond divided by which one of the following? A. coupon B. instance value C. market price D. c each(prenominal) price E. dirty price13. Currently, the bond market requires a return of 11. 6 percent on the 10-year bonds issued by Winston Industries. The 11. 6 percent is referred to as which one of the following? A. coupon rate B. face rate C. call rate D. yield to maturity E. interest rate14. Big Falls Tours just paying a dividend of $1. 55 per share.The dividends are expected to grow at 30 percent for the next 8 years and then level slay to a 7 percent growth rate indefinitely. What is the price of this stock today given a required return of 15 percent? A. $67. 54 B. $69. 90 C. $72. 47 D. $77. 67 E. $78. 1915. Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to burn the payout by 9 percent each year, indefinitely. How much are you spontaneous to pay today per share to buy this stock if you require a 15 percent rate of return? A. $34. 79 B. $37. 92 C. $38. 27 D. $41. 33 E. $42. 09 ACDDB integrated FinanceConsider a regard to produce solar water heaters. It requires a $10 jillion enthronisation and offers a level aft(prenominal)-tax cash flow of $1. 75 cardinal per year for 10 years. The opportunity cost of majuscule is 12 percent, which reflects the projects business risk. Suppose the project is payd with $5 million of debt and $5 million of equity. The interest rate is 8 percent and the marginal tax rate is 35 percent. The debt forget be paid off in equal annual installments over the projects 10-year life. A) attend APV.APV = NPV + PV of debt tax shield NPV = PV of cash flows initial investment Initial investment 10,000,000 Cash fl ows 1,750,000 Period 10 years Discounting rate12% PV of cash flows 9,887,890 using the PV spot NPV (112,110) We now calculate the PV of debt tax shield Year Debt Outstanding at Start of Year InterestInterest Tax ShieldsPresent Value of Tax Shields 1 5,000,000 400,000 140,000 129,630 2 4,500,000 360,000 126,000 108,025 3 4,000,000 320,000 112,000 88,909 4 3,500,000 280,000 98,000 72,033 3,000,000 240,000 84,000 57,169 6 2,500,000 200,000 70,000 44,112 7 2,000,000 160,000 56,000 32,675 8 1,500,000 120,000 42,000 22,691 9 1,000,000 80,000 28,000 14,007 10 500,000 40,000 14,000 6,485 Total 2,200,000 770,000 575,736 NPV (112,110) PV of debt tax shield 575,736 APV 463,626 B) How does APV change if the firm incurs issue be of $400,000 to raise the $5 million of required equity? With flotation cost , APV = NPV + PV of debt tax shield flotation cost Flotation cost 400,000 APV 63,626Corporate FinanceThere is nonhing like optimum majuscule coordinate for a firm. The Optimal Capital soci al organization is that Capital anatomical structure at which the weighted Average cost of capital (Ko) is Minimum. It is that combination of Equity and Debt at which the total cost of capital is mini-mum. Trade-off theory argues that at that places an optimal come in of debt of each firm. At this level of debt, firms can take the most receipts of debts. Debts can be tax shield so that they can compose money for firms to reinvest in other projects so as to earn much winnings.However, debts can be quite dangerous because highly leveraged firms may face bankruptcy and financial distress costs (no matter theyre direct or indirect) may increase the cost of debt of the company. Therefore, there must be a level of debt that make the benefits of debt and potential danger of debt offset each other. In another(prenominal) word, the marginal revenue of debt equals the marginal cost of debt. But remember, the real cases are not as easy as we put here.When a firm procures coin from inve stors or owners, there will be an translucent or implicit promise to pay return to them. The return is paid in terms of interest which is compulsory paid to all investors and owners, but the return paid to owners in the form of dividends is optional. The dividend decision by any firm, like the investment and financing decisions is also taken for maximization of market price of the share.The term dividend refers to that the portion of profit (after tax) which is distributed among own-ers/ shareowners of the firm and the profit which is not distributed is called as retained earnings Dividend Payout proportion is determined by the dividend polity adopted by the company, and it is im-plemented to decide about the percentage of profits to be distributed by the firm to its own-ers/shareholders. Dividend is always depends on the total profit that a firm acquired after taxes. There are a few factors that feign the Dividend polity of a company.They are Liquidity , offset Plans and Contr ol Dividend Payout Ratio is also called as DP Ratio which is a mathematical value as DP Ratio = Dividend paid to the Shareholders / Net Profit after tax. Capital Structural Theories Capital geomorphological theories are designed with a concept of paygrade of the firm it is the earnings of the firm and the investments made by the firm. Capital Structural Theories also used to find the dividend pay-out for its owners/shareholders. Cost of the capital, investment and return on investment (ROI) are a part of dividend policy.The affinity between leverage cost of capital and the value of the firm can be analysed in antithetic ways. Factors determining Capital Structure are minimization of risk, control, flexibility and the profitability of the firm. A firms capital structure is a combination of the firms liabilities (debts) and the assets (equity and profits). For Example A firm with 100 billion as capital structure has 40 billion from equity (shareholders and owners) and the 60 milli on as debt (Loans and Funding), then the firm is said to be 40% equity fi-nanced and 60% debt financed. . Traditional Theories Net operate Income (NOI) approach is just an other of NI approach. According to the NOI ap-proach, the market value of the firm depends upon the net run income or profit and the overall cost of capital. NOI approach is based on the argument that the market values the firm as a total for a given risk complexion. Thus, for a given value of the firm remain the same irrespective of the capital composition and instead on the overall cost of capital.Mathematically Net Operating Income (NOI) is Value of the smashed = remuneration before Tax / Cost of Equity Capital Net Operating Income approach theorizes that an increase in debt proportion of the capital source will always result in increase of the equity proportion of the firm. Modigliani-Miller pattern Modigliani-Miller model which was presented in the year of 1958 on the relationship of leverage, cost of capital and the value of the firm. This is widely used capital structure method to try the value of the firm.They have shown that the financial leverage doesnt matter and the cost of capital and the value of the firm are independent of the capital structure. Modigliani-Miller methods show that there is nothing which may be called as Optimal Capital Structure to get high valuation of the firm. Modigliani-Miller model is based on following assumptions 1. The capital markets are perfect and complete information is available to all the investors free of cost. The implication of this assumption is that investors can borrow and lend funds at the same rate and can move quickly from one security to another, 2.Securities are infinitely divisible Investors are rational and intumesce informed about the risk-return of all the securities. Modigliani-Miller model says that the total value of the firm is equal to the capitalized value of the operational earnings of the firm. The capitalizat ion is to be made at a rate appropriate to the risk class of the firm. Growth Plans, are involved in capital structural theories in which a certain join will be allocated for the growth plans. A finance manager should draw a plan according for the dividend policy.For Example The firm has $10 million as equity capital and $6 million as debt capital and the firm made a profit (after tax) of $2 million, and the fund allocated to the growth plan was $1 million. For suppose there are 10,000 shareholders in the company and as per capital structural theories some amount will be allocated for the liquidity that is five hundred thousand and the rest amount should be distributed as Dividends. In this case each shareholder or the owner will receive $50 as dividend.Capital structural theories say that if a firm is in profit and it is looking to have kittens the business, the profit can be rolled over to the investment option. In this case there will be no dividends or bonuses issued to the s hareholders or the owners. For Example Low-payout consequences, which is done when the cash gets accumulated the finan-cial manager may be tempted to take on more projects that do dont meet the minimum rate of return investments. If a firm has $1 million as operating income with 1000 shareholders and firms adopts to take new projects with the profit.Then this may cause unrelated relationship balances between the share-holders and the management of the firm. Optimal Capital Structure Even though Modigliani-Miller Model says that there is nothing like Opti-mal Capital Structure, but the non-traditional methods say that a firm can attain profits only by im-plementing Optimal Capital Structure. Some firms adopt this capital structure to calumniate the risk, flexibility on the investments and the profitability.The finance manager should be able to nominate that optimal point (profit point) for the firm precisely, but not to attempt to drop back the optimal range for the capital struct ure. Optimal Capital Structure differs from different firms, Existing Firm and a New Firm. For Example Existing Firm may require additional capital funds for meeting the requirements of growth, expansion, and variegation or even for working capital management. The decision for a particular source of funds is to be taken in the totality of capital structure, i. e. n the lighten of the re-sultant capital structure after the proposed issue of capital or debt. The Capital Structure of the new firm is designed in the initial stages of the firm and the financial manager has to take care if numerous considerations, the present capital structure be designed in the light of a future target capital structure. Future plans, growth and diversifications strategies should be considered and factored in the analysis, so optimal capital structure greatly influences the divi-dend policy of any firm, depending upon there capital structure.Broadly speaking the dividend policy can be determined by two basic analyses required to find the valuation of the proposed capital structure of the firm, i. e. one from the point of view of profitability and another from view of liquidity. Capital structure will always determine the profits of the firm and the development of the firm. Equity and Debt capital are well managed by the capital structure of the firm. A well designed capital structure will have a very good impact on the dividend policy of the company.