Hayesville Corporation had a net income of $4 million this year on net sales of $122 million per year. At the beginning of this year, its total equity was 67.7 million and it held $57 million in total liabilities. It paid out $1.7 million in dividends for the year. What is Hayesville Corporation’s sustainable growth rate? (Round to nearest whole percent)
The sustainable growth rate…
is the highest growth rate attainable for a firm without issuing new stock.
can be increased by decreasing leverage.
can never be greater than the return on equity.
is the highest growth rate attainable for a firm that pays no dividends.
Which one of the following will increase the sustainable rate of growth a corporation can achieve?
None of the options are correct.
increase in corporate tax rates
reduction in the retention ratio
avoidance of external equity financing
decrease in sales given a positive profit margin
decrease in the dividend payout ratio
JKL Corporation has a projected limes-interest-earned ratio of 4.0 for next year. What percentage
could EBIT decline next year before JKL’s limes-interest-earned ratio would fall below 1.0‘?
30%
90%
75%
3%
Insuffieient information is provided.
300%
A company incurs costs of financial distress only after declaring bankruptcy.
True
False
If the maturity of a company’s liabilities is less than that of its assets, the company incurs a refinancing risk.
True or False
What is the benefit-cost ratio (profitability ratio) for an investment with the following cash flows at a 12.6°/o required return? (Round to two decimal places)
Year Cash Flow
0 “$ (42,013)”
1 “10,082”
2 “38,272”
3 “14,372”
In a discounted cash flow analysis of Giant Corp.’s project described in the problem above, what would be the projected Year 1 free cash flow?
0 1 2
Revenue “$1,505” “$1,505”
Expense 845 845
Depreciation 308 308
Taxes 277 277
Plant and equipment “$1,811″ -792
Increased working capital 261 -26·1
Mary and Jane Olsen have decided to establish a scholarship fund that will make annual scholarship payments for the foreseeable future. The fund is expected to make scholarship payments of $11,442 next year and each subsequent year the payment will increase by 1.9°/o . The fund is expected to earn 8.0°/o each year. How much funds should Mary & Jane set aside today?
What is the present value of a series of $4,879 end-of-the-year cash flows to be received forever if the required rate of return is 9% per year and the first cash flow is one year from today?
Under what circumstances will IRR and NPV not yield the same investment recommendations?
What are sunk costs? How should these costs be included in the cash flows for valuing a project?
B&B Inc. is expected to an annual dividend of $1.27 per share next year. The firm anticipates the growth rate in dividends will be 2.4% annually for the foreseeable future. If the current price is $90 per share, what is the required rate of return for the firm’s equity? (Round to 2 decimal places)
Explain the difference between systematic and non systematic risk.
Provide an example of a diverisifiable risk that a small hotel may face and explain why this risk would be considered as a diversifiable risk
Which of the following factors favor the issuance of debt in the financing decision?
I. Market signaling
II. Distress costs
III. Tax benefits
IV. Financial flexibility
II and IV only
None of the options are correct.
Iand II only
I, II, and IV only
I, II, and III only
Iand III only
Question 17
According to the pecking order theory of capital structure, why do firms avoid issuing equity?
Because they want to avoid dilution of earnings per share
Because fees associated with issuing new equity are so high
Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall
Because they don’t want to commit to paying dividends on the new equity”