Millman Electronics will produce 60,000 stereos next year

Unit 9 – finance - Millman Electronics will produce 60,000 stereos next year

 

1. Millman Electronics will produce 60,000 stereos next year. Variable costs will equal 50% of sales, while fixed costs will total $120,000. At what price must each stereo be sold for the company to achieve an EBIT of $95,000? (Points: 6)

$6.57  $6.87  $7.17 $7.47 $7.77

 

2. Firms A and B are identical except for their level of debt and the interest rates they pay on debt. Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt, while Firm B has a 30% debt ratio and pays only 10% interest on its debt. What is the difference between the two firms' ROEs? (Points: 6)

1.25%  1.91%  2.23%  2.64%  2.86%

 

3. The firm’s target capital structure is consistent with which of the following? (Points: 4)

Maximum earnings per share (EPS).  Minimum cost of debt (rd).  Highest bond rating.  Minimum cost of equity (rs).  Minimum weighted average cost of capital (WACC).

 

4. Jones Co. currently is 100% equity financed. The company is considering changing its capital structure. More specifically, Jones’ CFO is considering a recapitalization plan in which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company’s total assets nor would it affect the company’s basic earning power, which is currently 15%. The CFO estimates that the recapitalization will reduce the company’s WACC and increase its stock price. Which of the following is also likely to occur if the company goes ahead with the planned recapitalization? (Points: 6)

The company’s net income will increase.  The company’s earnings per share will decrease. The company’s cost of equity will increase. The company’s ROA will increase. The company’s ROE will decrease.

 

5. Fletcher Corp. has a capital budget of $1,000,000, but it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts this year’s net income to be $600,000. If the company follows a residual dividend policy, what will be its dividend paid? (Points: 6)

$120,000 $140,000 $160,000 $180,000 $200,000

 

6.Rooney Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $90 per share. The firm's total market value was unchanged by the split. What was the price of the company’s stock following the stock split? (Points: 6)

$ 45.00  $ 50.00  $ 60.00  $ 90.00  $135.00

 

7. Which of the following should not influence a firm’s dividend policy decision? (Points: 6)

The firm’s ability to accelerate or delay investment projects.

A strong preference by most shareholders in the economy for current cash income versus capital gains.

Constraints imposed by the firm’s bond indenture.

The fact that much of the firm’s equipment has been leased rather than bought and owned.

The fact that Congress is considering tax law changes regarding the taxation of dividends versus capital gains.

 

8. When the Bell System was originally broken up, the old AT&T was split into a new AT&T plus seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry.

In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified, and much attention was given to the increased competition telephone companies could expect in the future.

 

How do you think the optimal capital structure after the breakup compared to the pre-breakup optimal capital structure? Using the concepts learned in this objective, explain your position. (Do not research AT&T’s financial statements—there is no need to do so). 

 

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