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Corporate Finance and Financial Management: Problem Set

A corporate finance problem set exploring financial management and corporate decision-making.

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    Corporate Finance and Financial Management: Problem Set, page 1Corporate Finance and Financial Management: Problem SetQuestion 11.Jefferson City Computers has developed a forecasting model to estimate its AFN for theupcoming year. All else being equal, which of the following factors is most likely to leadtoanincreaseof the additional funds needed (AFN)?AnswerA sharp increase in its forecasted sales.A sharp reduction in its forecasted sales.The company reduces its dividend payout ratio.The company switches its materials purchases to a supplier that sells on terms of 1/5,net 90, from a supplier whose terms are 3/15, net 35.The company discovers that it has excess capacity in its fixed assets.3.3333pointsAnswer:A sharp increase in itsforecasted sales.Question 21.Mid-State BankCorprecently declared a 7-for-2 stock split. Prior to the split, the stocksold for $80 per share. If the firm's total market value is unchanged by the split, what willthe stock price be following the split?Answer$20.63$21.71$22.86$24.00$25.203.3333pointsAnswer:$22.86Question 31.Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity.Itsforecasted net income is $550,000, and its board of directors has decreed that no newstock can be issued during the coming year. If the firm follows the residual dividendmodel, what is the maximum capital budget that is consistent with maintaining the targetcapital structure?Answer

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    Corporate Finance and Financial Management: Problem Set, page 2

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    Corporate Finance and Financial Management: Problem Set, page 3$673,652$709,107$746,429$785,714$825,0003.3333pointsAnswer:$709,107Question 41.Which of the following statements is CORRECT?AnswerIf a firm follows the residual dividend model, then a sudden increase in the number ofprofitable projects would be likely to lead to a reduction of the firm's dividend payoutratio.The clientele effect explains why so many firms change their dividend policies sooften.One advantage of adopting the residual dividend model is that this policy makes iteasier for a corporation to attract a specific and well-identified dividendclientele.New-stock dividend reinvestment plans are similar to stock dividends because theyboth increase the number of shares outstanding but don't change the firm's totalamount of book equity.Investors who receive stock dividends must pay taxes on the value of the new sharesin the year the stock dividends are received.3.3333pointsAnswer:If a firm follows the residual dividend model, then a suddenincreasein the number of profitable projects would be likely to lead to a reduction ofthe firm's dividend payout ratio.Question 51.Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keepsinventory equal to 50% of itsmonthly COGS on hand at all times. Using a 365-day year,what is its inventory conversion period?Answer11.7 days13.0 days14.4 days

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    Corporate Finance and Financial Management: Problem Set, page 415.2 days16.7 days3.3333pointsAnswer:12.0 daysQuestion 61.Which of the following isNOTa situation that might lead a firm to increase its holdingsofshort-term marketable securities?AnswerThe firm must make a known future payment, such as paying for a new plant that isunder construction.The firm is going from its peak sales season to its slack season, so its receivables andinventories will experience a seasonal decline.The firm is going from its slack season to its peak sales season, so its receivables andinventories will experience seasonal increases.The firm has just sold long-term securities and has not yet invested the proceeds inoperating assets.The firm just won a product liability suit one of its customers had brought against it.3.3333pointsAnswer:The firm has just sold long-term securities and has not yet investedthe proceeds in operating assets.Question 71.Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock soldfor $120 per share. If the firm's total market value increased by 5% as a result ofincreased liquidity and favorable signaling effects, what was the stock price following thesplit?Answer$29.93$31.50$33.08$34.73$36.473.3333pointsAnswer:$31.50

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    Corporate Finance and Financial Management: Problem Set, page 5Question 81.Dewey Corporation has the following data, in thousands. Assuming a 365-day year, whatis the firm's cashconversion cycle?Annual sales =$45,000Annual cost of goods sold =$31,500Inventory =$4,000Accounts receivable =$2,000Accounts payable =$2,400Answer25 days28 days31 days35 days38 days3.3333pointsAnswer:31 daysQuestion 91.Which of the following statements is CORRECT?AnswerAny forecast of financial requirements involvesdetermining how much money thefirm will need, and this need is determined by adding together increases in assets andspontaneous liabilities and then subtracting operating income.The AFN equation for forecasting funds requirements requires only a forecast of thefirm's balance sheet. Although a forecasted income statement may help clarify theresults, income statement data are not essential because funds needed relate only tothe balance sheet.Dividends are paid with cash taken from the accumulated retained earnings account,hence dividend policy does not affect the AFN forecast.A negative AFN indicates that retained earnings and spontaneous capital are far morethan sufficient to finance the additional assets needed.If assets and spontaneously generated liabilities are not projected to grow at the samerate as sales, then theAFN method will provide more accurate forecasts than theprojected financial statement method.3.3333pointsAnswer:Anegative AFN indicates that retained earnings and spontaneouscapital are far more than sufficient to finance the additional assets needed.

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