Corporate Finance

1. Which one of the pursual is a means by which servingholders can replace company commission? A. stock options B. promotion C. Sarbanes-Oxley Act D. theatrical performance play E. proxy fight2. Decisions made by financial tutors should primarily focus on increase which one of the following? A. size of the unswerving B. growth enume order of the hard C. gross profit per unit produced D. market hold dear per sh be of outstanding stock E. total sales3. Which one of the following is the financial control that shows the accounting value of a buckrams equity as of a particular date? A. income statement B. creditors statement C. balance sheet D. statement of hard cash flows E. dividend statement4. Which one of the following is the financial statement that summarizes a sures revenue and expenses over a period of time? A. income statement B. balance sheet C. statement of cash flows D. evaluate reconciliation statement E. market value report5. The percentage of the next dolla r you earn that mustiness be nonrecreational in taxes is referred to as the _____ tax rove. A. mean B. residual C. total D. average E. borderline EDCAE6. The cash flow of a firm which is available for distribution to the firms creditors and stockholders is grouseed the A. perating cash flow. B. profits corking spending. C. net working groovy. D. cash flow from assets. E. cash flow to stockholders.7. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity proportionality of 0. 3. Its kick the bucket on equity is 15 percent. What is the net income? A. $138. 16 B. $141. 41 C. $152. 09 D. $156. 67 E. $161. 548. bound Wear has current liabilities of $350,000, a quick ratio of 1. 65, inventory turnover of 3. 2, and a current ratio of 2. 9. What is the cost of goods sold? A. $980,000 B. $1,060,000 C. $1,200,000 D. $1,400,000 E. 1,560,0009. The sustainable growth rate of a firm is best described as the A. negligible growth rate accomplishable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding immaterial finance of any kind. D. maximum growth rate achievable excluding any external equity financing temporary hookup maintaining a constant debt-equity ratio. E. maximum growth rate achievable with numberless debt financing.10. The internal growth rate of a firm is best described as the A. inimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. DEDDC11. What is the present value of $1,100 per year, at a discount rate of 10 percent if the first payment is received 6 age from now and the last payment is received 28 years from now? A. $6,067. 36 B. $6,138. 87 C. $6,333. 33 D. $6,420. 12 E. $6,511. 0812. The current yield is defined as the annual interest on a tie down divided by which one of the following? A. coupon B. face value C. market price D. accost price E. dirty price13. Currently, the bond market requires a go across of 11. 6 percent on the 10-year bonds issued by Winston Industries. The 11. 6 percent is referred to as which one of the following? A. coupon rate B. face rate C. call rate D. yield to maturity E. interest rate14. Big Falls Tours just paid a dividend of $1. 55 per sh atomic number 18.The dividends argon expected to grow at 30 percent for the next 8 years and accordingly level off to a 7 percent growth rate indefinitely. What is the price of this stock right away given a required return of 15 percent? A. $67. 54 B. $69. 90 C. $72. 47 D. $77. 67 E. $78. 1915. Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to overthrow the payout by 9 percent each year, indefinitely. How much are you leading to pay today per share to buy this stock if you require a 15 percent rate of return? A. $34. 79 B. $37. 92 C. $38. 27 D. $41. 33 E. $42. 09 ACDDBCorporate FinanceConsider a project to produce solar water supply heaters. It requires a $10 one thousand thousand investment and offers a level afterwards-tax cash flow of $1. 75 million per year for 10 years. The opportunity cost of superior is 12 percent, which reflects the projects business risk. Suppose the project is financed with $5 million of debt and $5 million of equity. The interest rate is 8 percent and the marginal tax rate is 35 percent. The debt will be paid off in equal annual installments over the projects 10-year life. A) suppose APV.APV = NPV + PV of debt tax shield NPV = PV of cash flows sign investment Initial Investment 10,000,000 Cash flows 1,750,000 Period 10 years Discounti ng rate12% PV of cash flows 9,887,890 using the PV function NPV (112,110) We now calculate the PV of debt tax shield Year Debt great at Start of Year InterestInterest Tax ShieldsPresent Value of Tax Shields 1 5,000,000 400,000 140,000 129,630 2 4,500,000 360,000 126,000 108,025 3 4,000,000 320,000 112,000 88,909 4 3,500,000 280,000 98,000 72,033 3,000,000 240,000 84,000 57,169 6 2,500,000 200,000 70,000 44,112 7 2,000,000 160,000 56,000 32,675 8 1,500,000 120,000 42,000 22,691 9 1,000,000 80,000 28,000 14,007 10 500,000 40,000 14,000 6,485 Total 2,200,000 770,000 575,736 NPV (112,110) PV of debt tax shield 575,736 APV 463,626 B) How does APV change if the firm incurs issue costs of $400,000 to raise the $5 million of required equity? With flotation cost , APV = NPV + PV of debt tax shield flotation cost Flotation cost 400,000 APV 63,626Corporate FinanceThere is nothing akin optimum capital social structure for a firm. The optimal capital letter structure is that capital Struc ture at which the weighted Average cost of capital (Ko) is Minimum. It is that combination of Equity and Debt at which the total cost of capital is mini-mum. Trade-off theory argues that at that places an optimal amount of debt of each firm. At this level of debt, firms can take the just close advantage of debts. Debts can be tax shield so that they can save money for firms to reinvest in other projects so as to earn more(prenominal) profits.However, debts can be quite endangermentous because extremely leveraged firms may face bankruptcy and financial distress costs (no matter theyre direct or indirect) may increase the cost of debt of the company. Therefore, there must be a level of debt that make the benefits of debt and potential danger of debt offset each other. In another word, the marginal revenue of debt equals the marginal cost of debt. But remember, the substantive subjects are not as easy as we put here.When a firm procures cash from investors or owners, there wi ll be an explicit or implicit promise to pay return to them. The return is paid in terms of interest which is compulsory paid to all investors and owners, but the return paid to owners in the form of dividends is optional. The dividend decision by any firm, like the investment and financing decisions is also taken for maximization of market price of the share.The term dividend refers to that the portion of profit (after tax) which is distributed among own-ers/shareholders of the firm and the profit which is not distributed is called as retained earnings Dividend Payout Ratio is determined by the dividend policy adopted by the company, and it is im-plemented to decide more or less the percentage of profits to be distributed by the firm to its own-ers/shareholders. Dividend is always depends on the total profit that a firm acquired after taxes. There are a few factors that affect the Dividend policy of a company.They are Liquidity , Growth Plans and Control Dividend Payout Ratio is also called as DP Ratio which is a mathematical value as DP Ratio = Dividend paid to the Shareholders / Net Profit after tax. Capital geomorphologic Theories Capital structural theories are designed with a concept of valuation of the firm it is the earnings of the firm and the investments made by the firm. Capital Structural Theories also used to engender the dividend pay-out for its owners/shareholders. make up of the capital, investment and return on investment (ROI) are a part of dividend policy.The relationship between leverage cost of capital and the value of the firm can be analysed in different ways. Factors determining Capital Structure are minimization of risk, control, flexibility and the profitability of the firm. A firms capital structure is a combination of the firms liabilities (debts) and the assets (equity and profits). For Example A firm with 100 billion as capital structure has 40 billion from equity (shareholders and owners) and the 60 million as debt (Loans an d Funding), then the firm is said to be 40% equity fi-nanced and 60% debt financed. . tralatitious Theories Net Operating Income (NOI) approach is just an opposite of NI approach. According to the NOI ap-proach, the market value of the firm depends upon the net operating income or profit and the overall cost of capital. NOI approach is based on the product line that the market values the firm as a whole for a given risk complexion. Thus, for a given value of the firm remain the same irrespective of the capital composition and instead on the overall cost of capital.Mathematically Net Operating Income (NOI) is Value of the Firm = Earnings before Tax / Cost of Equity Capital Net Operating Income approach governs that an increase in debt proportion of the capital get-go will always result in increase of the equity proportion of the firm. Modigliani-Miller Model Modigliani-Miller model which was presented in the year of 1958 on the relationship of leverage, cost of capital and the value of the firm. This is widely used capital structure method to analyze the value of the firm.They have shown that the financial leverage doesnt matter and the cost of capital and the value of the firm are independent of the capital structure. Modigliani-Miller methods show that there is nothing which may be called as Optimal Capital Structure to get high valuation of the firm. Modigliani-Miller model is based on following self-confidences 1. The capital markets are perfect and complete information is available to all the investors free of cost. The implication of this assumption is that investors can borrow and lend funds at the same rate and can move readily from one security to another, 2.Securities are infinitely divisible Investors are rational and well informed about the risk-return of all the securities. Modigliani-Miller model says that the total value of the firm is equal to the capitalized value of the operating earnings of the firm. The capitalization is to be made at a rate appropriate to the risk class of the firm. Growth Plans, are involved in capital structural theories in which a certain amount will be allocated for the growth plans. A finance manager should draw a plan according for the dividend policy.For Example The firm has $10 million as equity capital and $6 million as debt capital and the firm made a profit (after tax) of $2 million, and the fund allocated to the growth plan was $1 million. For suppose there are 10,000 shareholders in the company and as per capital structural theories some amount will be allocated for the liquidity that is five hundred thousand and the remaining amount should be distributed as Dividends. In this case each shareholder or the owner will receive $50 as dividend.Capital structural theories say that if a firm is in profit and it is looking to expand the business, the profit can be furled over to the investment option. In this case there will be no dividends or bonuses issued to the shareholders or the owners. For Example Low-payout consequences, which is done when the cash gets accumulated the finan-cial manager may be tempted to take on more projects that do dont meet the minimum rate of return investments. If a firm has $1 million as operating income with 1000 shareholders and firms adopts to take new projects with the profit.Then this may cause unrelated relationship balances between the share-holders and the management of the firm. Optimal Capital Structure Even though Modigliani-Miller Model says that there is nothing like Opti-mal Capital Structure, but the non-traditional methods say that a firm can attain profits only by im-plementing Optimal Capital Structure. Some firms adopt this capital structure to minimize the risk, flexibility on the investments and the profitability.The finance manager should be able to identify that optimal point (profit point) for the firm precisely, but not to attempt to steer the optimal range for the capital structure. Optimal Capital Struc ture differs from different firms, Existing Firm and a New Firm. For Example Existing Firm may require additional capital funds for get together the requirements of growth, expansion, and diversification or even for working capital management. The decision for a particular source of funds is to be taken in the totality of capital structure, i. e. n the light of the re-sultant capital structure after the proposed issue of capital or debt. The Capital Structure of the new firm is designed in the initial stages of the firm and the financial manager has to take care if many considerations, the present capital structure be designed in the light of a future target capital structure. Future plans, growth and diversifications strategies should be considered and factored in the analysis, so optimal capital structure greatly influences the divi-dend policy of any firm, depending upon there capital structure.Broadly speaking the dividend policy can be determined by two basic analyses required to find the valuation of the proposed capital structure of the firm, i. e. one from the point of view of profitability and another from view of liquidity. Capital structure will always determine the profits of the firm and the development of the firm. Equity and Debt capital are well managed by the capital structure of the firm. A well designed capital structure will have a very good impact on the dividend policy of the company.