MGFB10H3 Study Guide - Quiz Guide: Net Present Value, Neuropeptide Y
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Jackson Resources is evaluating 4 major projects which have either two or three year lives. The company has raised all of its capital in the form of equity and has never borrowed money. This is partly due to the success of the business in generating income and partly due to an insistence by the dominant managing director that borrowing is to be avoided if at all possible. Shareholders in Jackson resources regard the company as relatively risky, given its existing portfolio of projects. Other company's share in this risk class have generally given a return of 16% per annum and this is taken as the opportunity cost of capital for the investment projects. The risk level for the proposed projects is the same as that of the existing range of activities.
Years | ||||
Projects (Dollars) | T0 | T1 | T2 | T3 |
A | -5266 | 2500 | 2500 | 2500 |
B | -8000 | 0 | 0 | 10000 |
C | -2100 | 200 | 2900 | 0 |
D | -1975 | 1600 | 800 | 0 |
Ignore taxation and inflation.
1.1 The managing diretor has been on a one-day intensive course to learn about project appraisal techniques. Unfortunately, during the one slot given over to NPV he had to leave the room to deal with a business crisis, and therefore does not understand it. He vaguely understands IRR and insists that you use this to calculate which of the 4 projects should be proceeded with, if there are no limitations on the number which can be undertaken. (10 marks)
1.2 Sate which is the best project if they are mutually exclusive (i.e accepting one excludes the possibility of accepting others) using IRR. (3 marks)
1.3 Use the NPV decision rule to rank the projects and explain why, under conditions of mutual exclusivity, the selected project differs from that under (1.2 above)... (4 marks)
1.4 Write a report for the managing director, detailing the value of the net present value method for shareholder wealth enhancement and explaining why it may be considered of greater use than IRR. (8 marks)
You have the following expectations about market returns and interest rates on T-bills:
T-Bill Rate | Market Rate | ||||
Probability | RF | Probability | MR | ||
0.1 | 0.02 | 0.1 | -0.1 | ||
0.2 | 0.03 | 0.3 | 0.15 | ||
0.4 | 0.06 | 0.3 | 0.33 | ||
0.2 | 0.08 | 0.2 | 0.30 | ||
0.1 | 0.10 | 0.1 | 0.40 |
The Biqing Company owns and operates the town's only gas station. The dividend just paid (i.e., D0) was $2, but since competition in the gas industry is expanding rapidly, you expect the dividend to remain constant (NOT THE DIVIDEND GROWTH RATE) for the next five years, after which time dividends will increase at a 6% rate (so dividend growth rate is positive 0.06) indefinitely thereafter. The beta of Biqing Company is 1.3.
What rate of return should you require on the stock of Biqing Company? Hint: Using CAPM.
answer: ___________
Assume your answer to that question is 20%. How much would you be willing to pay for a share of Biqing Company's stock?
answer: __________
How would your answer to that 20% question change if you only intended to hold the stock for five years?
a. It will increase;
b. It will decrease;
c. It remains the same as
d. No enough information to determine.
QUESTION 1
Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
a. | $6,000,000 | |
b. | $3,000,000 | |
c. | $2,000,000 | |
d. | $1,000,000 |
8.3 points
QUESTION 2
What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
a. | 2.65 | |
b. | 2.1 | |
c. | 1.1 | |
d. | 1.2 |
8.3 points
QUESTION 3
A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
a. | $20,000 | |
b. | $ 5,000 | |
c. | $10,000 | |
d. | $15,000 |
8.3 points
QUESTION 4
If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must
a. | increase its equity multiplier | |
b. | increase sales and increase assets | |
c. | decrease its equity multiplier | |
d. | reduce sales and increase assets |
8.3 points
QUESTION 5
The sales-to-inventory ratio:
a. | is technically inferior to other commonly used ratios. | |
b. | is superior to the inventory turnover ratio. | |
c. | as a determination of financial performance, is good comparison tool. | |
d. | was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole. |
8.5 points
QUESTION 6
Primary sources of comparative financial data include
a. | Dun and Bradstreet | |
b. | Richard Moore, Inc. | |
c. | Framingham Financial Library | |
d. | New York Times |
8.3 points
QUESTION 7
____ indicate the ability of the firm to meet its short-term financial obligations
a. | Leverage ratios | |
b. | Profitability ratios | |
c. | Activity ratios | |
d. | Liquidity ratios |
8.3 points
QUESTION 8
If a firmâs common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
a. | on total assets as a percentage of long-term liabilities. | |
b. | on cost of goods sold as a percentage of sales. | |
c. | on taxes paid as a percentage of stockholdersâ equity. | |
d. | on expenses as a percentage of current assets. |
8.3 points
QUESTION 9
The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.
a. | payout | |
b. | earnings | |
c. | return on earnings | |
d. | dividend yield |
8.3 points
QUESTION 10
The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:
a. | based on the company's accounting information system (AIS) | |
b. | constructed in conformity with generally accepted accounting principles | |
c. | developed using management's choice of accounting enhancement techniques | |
d. | an accurate picture of the company's market position |
8.3 points
QUESTION 11
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
a. | liquidity | |
b. | profitability | |
c. | size | |
d. | risk |
8.3 points
QUESTION 12
The type of ratio that indicates the firmâs ability to provide adequate returns in the form of dividends and share price appreciation is:
a. | Profitability ratios | |
b. | Asset management ratios | |
c. | Financial leverage management ratios | |
d. | Liquidity ratios |
8.5 points
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