calculate the maximum percentage drop in asset prices can the firm withstand before becoming insolvent?

calculate the maximum percentage drop in asset prices can the firm withstand before becoming insolvent?

A firm has assets valued at $750M
Subject: Business    / Finance   
Question
Question 1 (3 points) Question 1 Unsaved
A firm has assets valued at $750M, liabilities properly valued at $600M. What is the maximum
percentage drop in asset prices can the firm withstand before becoming insolvent?
Question 1 options:
A)
80.0%
B)
20.0%
C)
44.4%
D)
25.0% Question 2 (3 points) Question 2 Unsaved
Which of the following is an advantage of using IRR as a capital budgeting tool?
Question 2 options:
A)
Estimates are extremely sensitive to changes in the discount rate
B)
There is not a simple Excel function to calculate IRR
C)
IRR allows for an easy comparison against the discount rate or WACC
D)
It is easier to ignore sunk costs when using IRR
Question 3 (3 points) Question 3 Unsaved
Which of the following is an important use for Weighted Average Cost of Capital (WACC)?
Question 3 options:
A)
WACC reflects cash expenses as opposed to accounting expenses B)
WACC helps evaluate if capital returns are enough to benefit shareholders
C)
WACC allows you to estimate the affect capital costs have on profit
D)
WACC helps you estimate the book value of a company Question 4 (3 points) Question 4 Unsaved
Which of the following is an accurate description of expected return?
Question 4 options:
A)
If you invest in a project, you are guaranteed to earn its expected return
B)
Expected return tells you how likely the return is to deviate from its average
C)
The investment with the highest expected return is always the best option
D)
If you made the same investment 1,000 times, the average of your returns would approximately equal
the expected return Question 5 (3 points) Question 5 Unsaved
Which statement is correct regarding illiquidity and/or insolvency?
Question 5 options:
A)
Higher leverage increases the risk of becoming insolvent
B)
Illiquidity can cause a solvent company to become insolvent, but insolvency can never cause a liquid firm
to become illiquid C)
Bankruptcy occurs when you are deemed illiquid or insolvent
D)
The most liquid and solvent firms are always the best investments
Question 6 (3 points) Question 6 Unsaved
Cash Conversion Cycle is influenced by how well a company does the following:
Question 6
options:A)
Rolls over its short-term debt to stay liquid
B)
Gets paid in cash on its stock investments
C)
Marks up the price it charges customers from the price it pays suppliers
D)
Converts inventory into sales into cash Question 7 (3 points) Question 7 Unsaved
Which of the following is not a reason net income can differ from cash flows?
Question 7 options:
The issuance of equity does not involve a change in net income comparable to the amount of
cash received B)
Selling equipment for no gain involves cash but no profit
C)
Earnings from bank deposits are not included in net income
D)
When companies sell products they don’t always collect cash right away Question 8 (3 points) Question 8 Unsaved
Which of the following is not a key assumption of the Sustainable Growth Rate? Question 8 options: A)
The company will manage liabilities to keep their leverage rate constant
B)
The company must pay dividends
C)
The company’s return on equity remains constant
D)
The percentage of net income paid out in dividends will remain constant Question 9 (3 points) Question 9 Unsaved
Which of the following cannot be found if you know a company’s most recent year’s dividend, retention
rate, dividend growth rate and stock price? Question 9 options:
A)
Dividend paid two years from now
B)
Required return on the stock
C)
Sustainable growth rate
D)
Dividend yield Save
Question 10 (3 points) Question 10 Unsaved
A company’s bond is most likely said to be trading at a premium in which scenario?
Question 10 options:
A)
The bond’s yield to maturity is greater than its coupon rate
B)
The bond is undervalued
C)
The bond’s yield to maturity is less than its coupon rate
D)
The bond is overvalued Question 11 (10 points) Question 11 Unsaved
Calculate the expected return and standard deviation (square root of the variance) of the following
probability distribution of returns: 25% Return occurs with probabilty of 10% 10% return occurs with probability of 65% -5% return occurs with probability of 20% -30% return occurs with probability of 5% Question 11 options:
Spell check
Save
Question 12 (10 points) Question 12 Unsaved You have run a lemonade stand with enough success to build up some extra cash. There is an
opportunity to open another stand and have your friend run it for a fee, and this new stand will not
affect the performance of your current stand. Opening the stand requires $50 to acquire cups and the
initial ingredients. Last summer, when you were considering opening a new stand (you ultimately
decided against it), you paid $100 for a stand that you can now use in this new venture. Your friend will
only work the weekends and will be paid $200 per month to run the new stand. Your original stand will
earn profits of $150 per month, and your stand will generate a gross margin (revenues minus cost of
goods sold. The only other expense, your friend’s wages, is not considered in gross margin) of $250 per
month. Calculate the new stand’s payback period and NPV if the monthly discount rate to be used is
0.02.
Question 12 options:
Spell check
Save
Question 13 (10 points) Question 13 Unsaved
Calculate the sustainable AND internal growth rate for a company with the following financial
information. Assume all ratios are constant.
2014 Company Data: Sales = $5B Net Income = $450M Dividends = $350M Average Assets = $4B Average Equity = $2B Question 13 options:
Spell check
Save
Question 14 (10 points) Question 14 Unsaved You take out a loan to buy a brand new car. If the Effective Annual Rate (EAR) is 8.3% when
compounding monthly, calculate the EAR when compounding quarterly. (Hint: use the given EAR to
compute the APR. Then use the APR to compute the quarterly compounding EAR).
Question 14 options:
Spell check
Save
Question 15 (15 points) Question 15 Unsaved
You work for a cash management consulting firm, and you are in charge of creating a brief bulletin on
cash conversion cycle reduction. Offer two ways to improve EACH of the three cash conversion cycle
components. I will give away one answer as an example (you can use this one). My example: Reduce Days Inventory Outstanding by putting poor selling items on clearance (discount
pricing). Question 15 options:
Spell check
Save
Question 16 (15 points) Question 16 Unsaved
You have performed financial analysis on two companies resulting in the following table of financial
comparisons. Using only the information in the table, state which company is more likely to be
described in the following ways and provide a brief explanation (a sentence or two).
Company A Data: Profit Margin = 9% Current Assets = $300M Current Liabilities = $280M Asset Turnover = 3.0 Equity Multiplier = 2.5 Cash Conversion Cycle = 21 Company B Data Profit Margin = 20% Current Assets = $175M Current Liabilities = $120M Asset Turnover = 1.1 Equity Multiplier = 4.0 Cash Conversion Cycle = 36 Which company likely has the better brand strength relative to its competitors? Which company is more liquid? Which company could withstand a larger percentage decrease in asset values and still remain solvent?