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Financing, budgeting, preferred stock, leases

Can you help me with the following multiple choice questions?

1). IBM projects operating income of $4 million next year. The company's income tax rate is 40%. IBM presently has 750,000 shares of common stock outstanding which have a market value of $10 per share,no preferred stock & no debt. The company is considering 2 alternatives to finance a new product (1) issue of $6 million of 10% bonds (2) issue of 60,000 new shares of common stock. If IBM issues common stock this year, what will projected EPS be next year? $2.10 / $2.96 / $2.33 / $1.67

2).IBM is undertaking a capital budgeting analysis. The rate on 30 yr US Treasury bonds is 6.3% & the return on the S&P 500 index is 18.5%. If IBM retained earnings is 19.7% calculate its bets: 1.1 / 1.3 / 1.5 / 1.7

3). Determine the dollar value of a 3 yr annuity that would produce the same net present value as the following project if the appropriate discount rae is 15% and inital outflow = 0.

Inital Outflow = $1200
Cash Flow Year 1 = $800
Cash Flow Year 2 = $500
Cash Flow Year 3 = $700

possible answers: $250.38 / $673.94 / $146.28 / $430.82

4). IBM preferred stock pays a $5 in annual dividents per share. If the required rate of return is 13%, how much will someone pay for one share? $38.46 /$26.26 / $65.46 / $46.38

5). Which of the following would cause a lease to be classified as a capital lease? The lease is for 5 or more years / lease is for $1 million or higher / lease permits the lessee to purchase the equipment at the end of the lease for fair mkt value / present value of lease payments calculated at the lessee's typical rate of interest for a similar purchase loan is more than the origingal purchase price of the equipment

6). IBM is projecting sales of $12 million next year. All sales will be credit basis. Present average collection period is 45 days. IBM is considering changing selling terms from net 30 days to 2/10, net 30 in order to speed up the collections of its receivables. Research has shown that one half of the company's customers will take the discount. If IBM offers this discount, how much will it cost IBM next year assuming a 365 day year? $87,000 / $98,000 / $103,000 / $112,000 / $120,000

7). Firm is technically insolvent when: cash outflows in a given period are greater than cash inflows / earnings before interest payments are less than the interest payments / company lacks the necessary liquidity to promply pay its current debt obligations / current ratio is less than 1.0

8). Given a 360 day year, effective annual cost of not taking advantage of the 3/10, net 30 terms offered by a company is: 55.7% / 45.4% / 32.3% / 28.2%

9).If the net present value of a project is positive, the project's IRR --------------- the required rate of return: must be less than / must be greater than / could be greater or less than / cannot be determined without actual cash flows

10). Break even quantity of output results in an EBIT level equal to the following: fixed costs / contribution margin / zero / variable costs

11). After just wining the lottery the winner can choose one of the 3 alternative payouts. Winner can get $100,000 now or $10,000 per year in perpetuity or $50,000 now and $150,000 at the end of 10 yrs. If the apprpriate discount rate is 12% which option should the winner take? $100,000 now / $10,000 perpetuity / $50,000 now & $150,000 in 10 yrs

12). When the cost of capital is increased, the: IRR remains constant / payback period remains the same / discounted payback period increases / both payback period remains the same & discounted paybak period increases or all of the above

13).Trading of negotiable certificates of deposit takes place on the: Chicagp Board of Trade / New York stock exchange / American Stock Exchange or none of the above

14). IBM has return of equity of 20% & a total asset turnover of 4. Assuming debt ratio of 50% & sales of $1,000,000 calculate net income: $25,000 / $50,000 / $75,000 / $100,000

15). When managers make decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should: positively affect profits / increase the market value of the firms common stock / either increase or have no effect on the value of the firm's common stock / accomplish all of the above

Solution Preview

1). IBM projects operating income of $4 million next year. The company's income tax rate is 40%. IBM presently has 750,000 shares of common stock outstanding which have a market value of $10 per share,no preferred stock & no debt. The company is considering 2 alternatives to finance a new product (1) issue of $6 million of 10% bonds (2) issue of 60,000 new shares of common stock. If IBM issues common stock this year, what will projected EPS be next year? $2.10 / $2.96 / $2.33 / $1.67
Projected EPS= Net Income/Number of Shares outstanding
=(4000000*(1-.4))/(750000+60000)
=$2.96
Hence correct answer: =$2.96

2).IBM is undertaking a capital budgeting analysis. The rate on 30 yr US Treasury bonds is 6.3% & the return on the S&P 500 index is 18.5%. If IBM retained earnings is 19.7% calculate its bets: 1.1 / 1.3 / 1.5 / 1.7
Return on equity= Risk free rate+ Beta *(Market Return- Risk free rate)
Hence correct answer: Beta =1.1

3). Determine the dollar value of a 3 yr annuity that would produce the same net present value as the following project if the appropriate discount rae is 15% and inital outflow = 0.

Inital Outflow = $1200
Cash Flow Year 1 = $800
Cash Flow Year 2 = $500
Cash Flow Year 3 = $700

possible answers: $250.38 / $673.94 / $146.28 / $430.82
Hence correct answer: $250.38

4). IBM preferred stock pays a $5 in annual dividends per share. If the required rate of return is 13%, how much will someone pay for one share? $38.46 /$26.26 / $65.46 / $46.38
Value for one share= Dividends/Required rate of return
=5/.13
Hence correct answer: $38.46 per ...

Solution Summary

This discusses tthe concepts such as financing, budgeting, preferred stock, leases

$2.19