Reference no: EM132816086

Question 1 A) All income statement items are tied directly to sales. Which of the following assumptions is assumed in the % of sales forecasting method?

B) Accounts receivables and accounts payables are tied directly to sales.

C) Preferred stock and short-term debt are tied directly to sales.

D) Fixed assets and current assets are tied directly to sales.

Question 2

Which of the following statements about dividend is NOT true?

A) Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends.

B) Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms.

C) Based on the Bird-in-the-hand theory, a firm should set low dividend payout ratio to increase firm value.

D) Based on the Tax preference theory, a firm should pay less dividends to increase firm value.

Question 3

You currently own 1 share of stock in Berkshire Hathaway Inc. The stock currently trades at $359,000 a share. The company is contemplating a 100-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place?

A) You will have 1 share of stock with $359,000 a share.

B) You will have 1 share of stock with $3,590 a share.

C) You will have 100 shares of stock with $359,000 a share.

D) You will have 100 shares of stock with $3,590 a share.

Question 4

Which of the following statements about dividend policies is CORRECT?

A) Based on the Bird-in-the-Hand Theory, investors are indifferent between dividends and retention-generated capital gains. If they want cash, they can sell stock. If they don't want cash, they can use dividends to buy stock.

B) One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.

C) One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.

D) The clientele effect suggests that companies should follow a stable dividend policy.

Question 5

A firm has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

A) A sharp reduction in its forecasted sales.

B) A sharp increase in its forecasted sales.

C) The company reduces its dividend payout ratio.

D) The company discovers that it has excess capacity in its fixed assets.

Question 6

What is the most correct implication of the additional funds needs (AFN)?

A) If AFN is negative, then you must secure additional financing.

B) If AFN is positive, then you have extra funds to pay off debt.

C) If AFN is positive, then you have extra funds to buy some short-term investments.

D) If AFN is positive, then you must issue additional new stock.

Question 7

A firm has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $400,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure?

A) $952,500

B) $1,080,300

C) $1,236,500

D) $1,356,300

Question 8

A company expects to have net income of $3,100,000 during the next year. Its target capital structure is 30% debt and 70% equity. The company has determined that the optimal capital budget for the coming year is $3,000,000. If Davis follows a residual distribution policy (with all distributions in the form of dividends) to determine the coming year's dividend, then what is Davis's dividend payout ratio?

A) 50.0%

B) 32.3%

C) 26.7%

D) 16.0%

Question 9

A stock was trading at $2 per share before its recent 1-for-4 reverse stock split. The 1-for-4 reverse split led to a 5% increase in the stock price. What was the stock price after the reverse stock split?

A) $7.6

B) $8.0

C) $8.4

D) $0.525

Question 10

You are going to forecast a firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Last year's sales (S0) = $350 million; Sales growth rate (g) = 30%; Last year's total assets (A0*) = $500 million; Last year's profit margin (PM) = 5%; Last year's accounts payable=$40 million; Last year's notes payable=$50 million; Last year's accruals = $30 million; Target payout ratio= 60%. Based on the AFN equation, what is the AFN for the coming year?

A) $102.8

B) $108.2

C) $113.9

D) $119.9