The Atchison, Topeka &Santa Fe Railway (ATSFR) is currently all equity financed, but it is considering a leveraged capital structure. Selected financial information for ATSFR is provided in the table below. Assume that ATSFR generates perpetual annual EBIT at a constant level. Assume that all cash flows occur at the end of the year and […]
What is the profitability index of a project that has a current cost of $100,000 and expected cash flows of $50,000 at the end of each of the next 7 years if the cost of capital is 20%? A) .001 B) .018 C) 1.80 D) 1.18 E) 1.25 ANSWER C
What is the optimal capital structure? A) The capital structure that frees up the most cash flow B) The capital structure that makes management the most money C) The capital structure that produces the highest firm value D) The capital structure that keeps the most control within the company ANSWER C
Giant Koala Stores Inc has forecasted sales for July and August in the top row of the table. Giant Koala makes 85% of its sales for cash and the remainder on credit. The credit sales are collected one month after the sale. What are Giant Koala’s forecasted total cash inflows in August? Sales Forecast and […]
An annuity contract will pay you $4,000 a year (end of year) for the next three years. Or, you can choose to receive $12,610 at the end of the third. Assuming that you can earn 8% on investments, you should A) choose to receive the $4,000 annuity payments. B) choose to receive the $12,610 payment. […]
What is the Profitability Index of the Airbus A380 project? The Airbus A380 is the largest civilian aircraft ever built. It can carry 555 passengers on two decks. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2008. Assume that Airbus will produce 60 aircraft per year for five […]
The market risk premium: A) varies over time as both the risk-free rate of return and the market rate of return vary. B) plus the risk-free rate of return equals the cost of capital for any firm with a beta of zero. C) is equal to one percent for a risk-free asset. D) is equal […]
Which of the following is NOT a conclusion drawn from M&M’s Propositions 1 and 2? A) Firm value is determined by the left hand of the balance sheet, the firm’s assets, and the cash flow generated by them. B) A firm can change its market value by splitting its cash flows into different streams. C) […]
Windy City Kite Company has prepared sales forecasts for the beginning of Year 3 as shown in the top row of the table. Half of Windy City’s kite sales are cash and the other half are credit. Windy City collects credit sales the month following the credit sale. What are Windy City’s total cash inflows […]
The cost of equity for a firm is: A) determined by directly observing the rate of return required by equity investors. B) based on estimates derived from financial models. C) equivalent to a leveraged firm’s cost of capital. D) equal to the risk-free rate of return plus the market risk premium. E) equal to the […]
