Falcon Financial Services is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a moderate (or maturity matching) working capital financing policy, what is the most likely total of long-term financing (that is, long-term debt plus equity capital)?
A. $320,000
B. $260,642
C. $304,000
D. $274,360
E. $288,800
The use of financial leverage by the firm has a potential impact on which of the following?
(1) The risk associated with the firm’s operations
(2) The risk experienced by the stockholders
(3) The return required by the stockholders
(4) The variability of net income
A. 1, 2, 3, 4
B. 2, 3, 4
C. 1, 3, 4
D. 1, 2, 3
E. 1, 2, 4
Falcon Media wants to reduce its cash conversion cycle. Which of the following actions should it take?
A. Sell common stock to retire long-term bonds.
B. Increase average inventory without increasing sales.
C. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
D. Sell long-term bonds and use the proceeds to buy back some of its common stock.
E. Take steps to reduce the days sales outstanding.
You are evaluating two mutually exclusive projects with the following net cash flows:
Year Project X Project Z
0 ($100,000) ($100,000)
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000
If both Porject X and Z require a 15% rate of return, which project would you choose?
A. Project Z, since it has the higher NPV.
B. Project X, since it has the higher IRR.
C. Neither project should be chosen.
D. Project X, since it has the higher IRR.
E. Project X, since it has the higher NPV.
Which of the following would decrease the NPV of a project being considered, other things held constant?
A. A decrease in the cost of capital for the project
B. A decrease in net working capital in year 1
C. Making the initial investment in the first year rather than spreading it over the first 3 years
D. All of the above would increase the NPV of a project
E. A shift from straight line to MACRS depreciation method
Your company is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the MACRS 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 operating life. What is the project’s Year 4 cash flow?
Equipment cost (depreciable basis) $70,000
Sales revenues, each year $42,500
Operating costs (excluding depreciation) $25,000
Tax rate 35.0%
A. $14,432
B. $13,090
C. $11,814
D. $12,436
E. $13,745
Falcon Ski Corp.has the following data, in thousands. Assuming a 365-day year, what is the firm’s =?
Annual sales $45,000
Annual cost of goods sold $31,500
Inventory $4,000
Accounts receivable $2,000
Accounts payable $2,400
A. 31 days
B. 35 days
C. 38 days
D. 28 days
E. 25 days
Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors’ capital (ROIC) of 12%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L’s debt has an after-tax cost of 8%. Both firms have positive net income and a 35% tax rate. Which of the following statements is CORRECT?
A. Firm L has a lower ROE than FIrm U.
B. Firm L has a lower ROA than Firm U.
C. Firm L has a higher times interest earned ratio.
D. Firm L has a higher EBIT than Firm U.
E. The two companies have the same times interest earned ratio.
