Details

1. What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.
2. Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long- term profits.
3. Could a company’s cash flow to stockholders be negative in a given year?       Explain how this might come about.
4. Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales $ 196,000; costs $ 104,000; other expenses $ 6,800; depreciation expense $ 9,100; interest expense $ 14,800; taxes $ 21,455; dividends $ 10,400. In addition, you’re told that the firm issued $ 5,700 in new equity during 2009 and redeemed $ 7,300 in outstanding long- term debt.

1. What is the 2009 operating cash flow?
2. What is the 2009 cash flow to creditors?
3. What is the 2009 cash flow to stockholders?

1. In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
2. Y3K, Inc., has sales of $ 5,276, total assets of $ 3,105, and a debt– equity ratio of 1.40. If its return on equity is 15 percent, what is its net income?
3. Why do you think most long- term financial planning begins with sales forecasts? Put differently, why are future sales the key input?
4. The most recent financial statements for Zoso, Inc., are shown here (assuming no income taxes): Income Statement                                                      Balance Sheet

Sales                $ 6,300                                    Assets  $ 18,300        Debt    $ 12,400

Costs                  3,890                                                                        Equity        5,900

Net income   $ 2,410                                    Total $ 18,300        Total $ 18,300

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $ 7,434. What is the external financing needed?

1. Would you be willing to pay $ 24,099 today in exchange for $ 100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?
2. You are scheduled to receive $ 20,000 in two years. When you receive it, you will invest it for six more years at 8.4 percent per year. How much will you have in eight years?
3. Suppose two athletes sign 10-year contracts for $ 80 million. In one case, we’re told that the $ 80 million will be paid in 10 equal installments. In the other case, we’re told that the $ 80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who got the better deal?
4. A 5- year annuity of ten $ 7,000 semiannual payments will begin 8 years from now, with the first payment coming 8.5 years from now. If the discount rate is 10 percent compounded monthly, what is the value of this annuity five years from now? What is the value three years from now? What is the current value of the annuity?
5. Is it true that a U. S. Treasury security is risk- free?
6. Say you own an asset that had a total return last year of 11.4 percent. If the inflation rate last year was 4.8 percent, what was your real return?
7. A substantial percentage of the companies listed on the NYSE and NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given the belief that the price of a share of stock is the Present Value of future dividends?
8. Marcel Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 13 percent and the company just paid a $ 1.80 dividend, what is the current share price?
9. Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.
10. A project that provides annual cash flows of $ 28,500 for nine years costs $ 138,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent between accepting the project and rejecting it?
11. The Present Value of a perpetuity equals . Show how this equation reduces to .
12. CWU receives funding from the state for each student up to a certain limit.       If enrollment goes above that limit the only funding for each additional student comes from tuition and fees. In determining whether or not it is profitable to allow enrollment to exceed the limit which is more important, average cost per student or marginal cost per student? Argue your case.