Question 1: If the CEO of a firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to get a BETTER GRADE? In all cases, assume that other things are held constant.
- The division's total assets turnover ratio is below the average for other firms in the industry.
- The division's DSO (days' sales outstanding) is 40, whereas the average for competitors is 30.
- The division's inventory turnover is 6, whereas the average for competitors is 8.
- The division's debt ratio is above the average for other firms in the industry.
- The division's basic earning power ratio is above the average of other firms in the industry.
Question 2: McGwire Company's pension fund projects that most of its employees will take advantage of an early retirement program the company plans to offer in five years. Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years. When these instruments were originally issued, they were 12% coupon, 30-year U.S. Treasury bonds. The stripped Treasuries are currently priced to yield 10%. Their total maturity value is $6,000,000. What is their total cost (price) to McGwire today?
- 553,776
- $5,142,600
- $3,404,561
- $4,042,040
- $3,725,528
Question 3: A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock's expected price seven years from today?
Question 4: The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm's WACC is 14% and its tax rate is 40%, what is the project's IRR?
Question 5: Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales, and its fixed costs equal $1,000. If the company's sales increase 10%, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?