Reference no: EM131065014

Question 1

 

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

 

	12 Months Ending
	12/31/2010	12/31/2009	12/31/2008	12/31/2007
Net income	$4,000	$3,050	$1,490	$420
Depreciation expense	1,010	570	310	130
Changes in working capital	600	40	40	-200
Cash from operating activities	$5,610	$3,660	$1,840	$350
Capital expenditures	($3,570)	5(6,980)	($3,330)	5(2,000)
Cash from investing activities	5(3,570)	5(6,980)	5(3,330)	5(2,000)
Interest and financing cash flow items	$370	$630	$0	$3
Total cash dividends paid	0	0	0	0
Issuance (retirement) of stock	22	2,370	4,400	1,190
Issuance (retirement) of debt	0	0	-4	-3
Cash from financing activities	5392	$3,000	$4,396	$1,190
Net change in cash	$2,432	5(320)	$2,906	($460)

 

Describe Goggle's main source of financing in the financial markets over the period.

 

Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $985 million.
Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $10 million.
Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $8,034.
Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $985 million.

 

Question 2

 

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below.

 

	12 Months Ending
	12/31/2010	12/31/2009	12/31/2008	12/31/2007
Net income	$4,000	$3,050	$1,490	$420
Depreciation expense	1,010	570	310	130
Changes in working capital	600	40	40	-200
Cash from operating activities	$5,610	$3,660	$1,840	$350
Capital expenditures	($3,570)	5(6,980)	($3,330)	5(2,000)
Cash from investing activities	5(3,570)	5(6,980)	5(3,330)	5(2,000)
Interest and financing cash flow items	$370	$630	$0	$3
Total cash dividends paid	0	0	0	0
Issuance (retirement) of stock	22	2,370	4,400	1,190
Issuance (retirement) of debt	0	0	-4	-3
Cash from financing activities	5392	$3,000	$4,396	$1,190
Net change in cash	$2,432	5(320)	$2,906	($460)

 

Based solely on the cash flow statements for 2007 through 2010, select the best choice below, that describes the major activities of Goggle's management team over the period.

 

Googles management team has been investing heavily in working capital and financing them with the issuance of stocks and internally generated funds.
Google's management team has been investing heavily in capital expenditures and financing them with the issuance of stocks and internally generated funds.
Google's management team has been spending heavily in paying cash dividends and financing them with the issuance of stocks and internally generated funds.
Google's management team has been investing heavily in capital expenditures and financing them with the issuance of debt and internally generated funds.

 

Question 3

 

When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________.

 

agency problem
ownership problem
management problem
moral problem

 

Question 4

 

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

 

	12 Months Ending
	12/31/2010	12/31/2009	12/31/2008	12/31/2007
Net income	$4,000	$3,050	$1,490	$420
Depreciation expense	1,010	570	310	130
Changes in working capital	600	40	40	-200
Cash from operating activities	$5,610	$3,660	$1,840	$350
Capital expenditures	($3,570)	5(6,980)	($3,330)	5(2,000)
Cash from investing activities	5(3,570)	5(6,980)	5(3,330)	5(2,000)
Interest and financing cash flow items	$370	$630	$0	$3
Total cash dividends paid	0	0	0	0
Issuance (retirement) of stock	22	2,370	4,400	1,190
Issuance (retirement) of debt	0	0	-4	-3
Cash from financing activities	5392	$3,000	$4,396	$1,190
Net change in cash	$2,432	5(320)	$2,906	($460)

 

How much did Goggle invest in new capital expenditures over the period? (Round to the nearest integer.)

 

The amount that Google invested in new capital expenditures over the period is $15,930 million.
The amount that Google invested in new capital expenditures over the period is $14,710 million.
The amount that Google invested in new capital expenditures over the period is $16,290 million.
The amount that Google invested in new capital expenditures over the period is $11,030 million.

 

Question 5

 

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

 

	12 Months Ending
	12/31/2010	12/31/2009	12/31/2008	12/31/2007
Net income	$4,000	$3,050	$1,490	$420
Depreciation expense	1,010	570	310	130
Changes in working capital	600	40	40	-200
Cash from operating activities	$5,610	$3,660	$1,840	$350
Capital expenditures	($3,570)	5(6,980)	($3,330)	5(2,000)
Cash from investing activities	5(3,570)	5(6,980)	5(3,330)	5(2,000)
Interest and financing cash flow items	$370	$630	$0	$3
Total cash dividends paid	0	0	0	0
Issuance (retirement) of stock	22	2,370	4,400	1,190
Issuance (retirement) of debt	0	0	-4	-3
Cash from financing activities	5392	$3,000	$4,396	$1,190
Net change in cash	$2,432	5(320)	$2,906	($460)

 

What years did Goggle generate positive cash flow from its operations?

 

Goggle has generated positive cash flow from its operations during the years 2007, 2008, and 2010.
Goggle has generated positive cash flow from its operations during the years 2008, 2009, and 2010.
Goggle has generated positive cash flow from its operations during the years 2007, 2008, 2009, and 2010.
Goggle has generated positive cash flow from its operations during the years 2007, 2009, and 2010.

 

Question 6

 

(Calculating rates of return) The common stock of Placo Enterprises had a market price of $8.34 on the day you purchased it just one year ago. During the past year, the stock had paid a dividend of $0.54 and closed at a price of $10.47. What rate of return did you earn on your investment in Placo's stock? (Round to two decimal places.)

 

Question 7

 

(Annuity payments) Ford Motor Company's current incentives include 4.7 percent APR financing for 72 months or $1,100 cash back on a Mustang. Let's assume Suzie Student wants to buy the premium Mustang convertible, which costs $34,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,100 cash back, Suzie can borrow from the VTech Credit Union at 6.7 percent APR for 72 months.

 

a. If Suzie chooses 4.7 percent APR financing for 72 months to buy the premium Mustang convertible, which costs $34,000 = PMT(62.632529), what will her monthly payment be? (Round to the nearest cent.)

 

b. If Suzie chooses $1,100 cash back to buy the premium Mustang convertible and borrows $32,900 from the VTech Credit Union at 6.7 percent APR for 72 months, how much will her monthly payment be?

 

c. Which option should Suzie Student choose?

 

Question 8

 

(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? (Round to two decimal places.)

 

Common Stock A		Common Stock B
Probability	Return	Probability	Return
0.35	12%	0.25	- 6%
0.30	17%	0.25	8%
0.35	18%	0.25	13%
		0.25	20%

 

a. Given the information in the table, what is the expected rate of return for stock A?
b. What is the standard deviation of stock A?
c. What is the expected rate of return for stock B?
d. Based on the risk (as measured by the standard deviation) and return of each stock which investment is better?

 

Question 9

 

(Annuity interest rate) Your parents just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $14,217.56 that will pay them $2,500 per year for 15 years. They do not have the slightest idea what return they would be making on their investment of $14,217.36. What rate of return would they be earning? (Round to two decimal places.)

 

Question 10

 

(Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 11 percent interest. The market's required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.

 

a. What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)

 

b. What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)

 

c. Should you purchase the bond at the current market price?

 

Question 11

 

(Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.84 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years.

 

a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to two decimal places.)

 

b. Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 5.2 percent, and Hetterbrand's beta is 0.78. What is your estimate of the firm's cost of common equity using this method? (Round to two decimal places.)

 

Question 12

 

(Cost of debt) Sincere Stationery Corporation needs to raise $451,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 8.6 percent.

 

a. Compute the market value of the bonds.

 

b. How many bonds will the firm have to issue to receive the needed funds?

 

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

 

Question 13

 

(Weighted average cost of capital) The target capital structure for Jowers Manufacturing is 52 percent common stock, 12 percent preferred stock, and 36 percent debt. If the cost of common equity for the firm is 20.8 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 10.4 percent, what is Jowers' cost of capital? The firm's tax rate is 34 percent.

 

Question 14

 

(Weighted average cost of capital) The target capital structure for QM Industries is 37 percent common stock, 9 percent preferred stock, and 54 percent debt. If the cost of common equity for the firm is 18.6 percent, the cost of preferred stock is 10.6 percent, the before-tax cost of debt is 7.7 percent, and the firm's tax rate is 35 percent, what is QM's weighted average cost of capital?