Financial Reporting And Analysis And Corporate Finance 2011 Edition Kaplan Schweser - Solutions

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With respect to the takeover defenses described by Clamon, he is:A. incorrect with regard to the pre-offer defenses listed, and incorrect with regard to the post-offer defense listed.B. incorrect with regard to the pre-offer defenses listed, but correct with regard to the post-offer defense
With regard to the list of sensible motives for undertaking a merger cited by Clamon in Johnson's case study, he is:Self-Test: Corporate Finance A. correct with regard to operating inefficiencies, and correct with regard to diversification.B. correct with regard to operating inefficiencies, but
Suppose that the firm has a project code-named Richmond. The dollar amount of the investment in Richmond is $40 million. Last year, Richmond's EBIT was$6 million. Ifthe relevant tax rate is 35%, what was Richmond's economic profit during the past year?A. $900,000.B. $3,900,000.C. $2,100,000.
When the value of a given project is contingent upon future decisions of management, the project can be best described as containing: A. real options. B. flexibility options. C. timing options.
Suppose that there are two scenarios for projects Andover and Baltimore. Under Scenario 1, the projects cannot be replicated, while under Scenario 2, the projects can be replicated. Which project should be accepted? Scenario 1 Scenario 2
The three categories of cash flows that are typically associated with a capital project are: A. financing, operating, and terminal year. B. initial investment outlay, operating, and financing. C. initial investment outlay, operating, and terminal year.
Are Collier and Baldwin correct in regard to their suggestions to Tyler about potential courses of action if there is a hostile takeover? A. Both are correct. B. Both are incorrect. C. Only one is correct.A. Both are correct.B. Both are incorrect.C. Only one is correct.
The fair acquisition price for Flueger Systems using the comparable transaction approach is closest to: A. $30.33. B. $32.50. . C. $37.20.
Using the comparable company approach, the mean takeover premium and the estimate of the fair acquisition price for Flueger Systems are closest to a: A. 22.4% premium and a $37.12 acquisition price. B. 22.4% premium and a $40.28 acquisition price. C. 15.6% premium and a $37.12 acquisition price.
The average stock price of Flueger Systems under the comparable company approach for the three relative valuation ratios, assuming it is traded at the mean of the three valuations, is closest to: A. $27.50. B. $30.33. C. $32.00.
The value per share of Flueger stock using the discounted cash flow approach is closest to: A. $27.50. B. $29.78. C. $33.02.
If the deal is completed as a stock transaction with an exchange ratio of 0.7, the amount of the gain for Madura Publishing's shareholders is closest to:
If the deal is completed as a cash transaction, the amount of the gain for Dorman-Gladwell's shareholders is closest to: A. $90 million. B. $112 million. C. $160 million.
The form of integration and type of merger in this transaction would be best described as: A. statutory vertical. B. statutory horizontal. C. subsidiary horizontal.
Which of the following is least likely to be a reason for making a divestiture? A. Management feels that they would have greater access to capital markets as part of a more focused company. B. A division is making significant profits as part of a high growth industry. C. Management believes that
Vona Whatley, an analyst for Discovery Electronics, is considering alternatives for divesting the company's personal computer (PC) business. Whatley believes that the PC industry offers a high degree of competition and few growth opportunities, so Whatley wants to explore Discovery's options for
Vinova Corporation is seeking to acquire JJK Systems, Inc. The management teams of both JJK and Vinova feel confident that estimates of synergies resulting from the merger and the valuation of JJK are extremely precise. Given the confidence of both firms, which method of payment would each firm
Andrew Barton is an intern with the Gilmore Capital Group. Barton's supervisor, Barbara Clemens, asks him to compile information about academic studies concerning the distribution of benefits in a merger. After a week, Barton sends Clemens an e-mail with the following statements:
Naomi Hirauye and Michael Klinkenfus, financial analysts with Mintier Textiles, are discussing potential ways to value a target firm that Mintier is considering acquiring. As they are discussing which valuation method to use, Klinkenfus makes two statements:"One of the advantages to the DCF method
Spears Financial is seeking to merge with the Cyrus Capital Group, but the managers of Spears are concerned that regulators may consider the merger an antitrust violation. The market consists of nine competitors. The largest company has a 20% market share and the second largest company has an
Cross-Reference to CFA Institute Assigned Reading #31 - Mergers and Acquisitions Which of the following U.S. antitrust acts required all merger deals to be reviewed by the Federal Trade Commission in advance of the transaction?A. Hart-Scott-Rodino Act.B. Clayton Antitrust Act.C. Celler-Kefauver Act.
Which of the following is a typical characteristic of an asset purchase of less than 50% of the target's assets?A. Majority shareholder approval is typically required.B. The target company is responsible for any capital gains taxes associated with the deal.C. The acquirer takes on a portion of the
Gusto Technologies, a semiconductor manufacturer with high profit margins, is seeking to merge with Hexelon, Inc., a maker of aerospace materials, in a conglomerate merger in order to gain access to Hexelon's large capital base.Gusto is most likely in the:A. rapid growth stage.B. mature growth
Bootstrapping occurs when a:A. high P/E firm acquires a low P/E firm for cash.B. low P/E firm acquires a high P/E firm for stock.C. high P/E firm acquires a low P/E firm for stock.
The management team of Acme Machinery wants to acquire Viera Equipment.Which of the following is least likely to be a motivation for the merger?A. Acme's management team believes that external growth will increase revenues faster than organic growth.B. Acme has large accumulated tax losses on its
Uritus Pharmaceuticals, a maker of flu vaccines and cancer drugs, is acquiring Troup Healthcare Systems, a distributor of branded and generic drugs to hospitals and retail customers. After the merger, a press release is made by the companies announcing that a new company called Sovereign Health is
Activist shareholders are pressuring Yellow Frond, Inc. for a change in senior management after 6 consecutive quarters of poor earnings and a declining share price. The Board of Yellow Frond, votes to enact a series of aggressive anti- takeover provisions with all independent directors dissenting,
Whose statements are most consistent with corporate governance best practice? A. Albright-Williams' letter. B. Davidson's statement. C. Pyle's statement.
Which of the following pairs of concerns most accurately describes the problems with the structure that Albright-Williams has put together for the board of directors? A. Five family members on the board does not meet the best practices concerning the proportion of independent board members, and
Benjamin Myers is an analyst for Hanover Capital Management, an equity manager specializing in large capitalization growth stocks. Myers believes that investment results for the firm could be improved if a corporate governance assessment were included as part of the criteria for analyzing
Which of the following statements concerning having a CEO serve as chairman of the board is most accurate? Having a CEO also serve as chairman is considered: A. good corporate governance practice as the CEO is the best person to provide the board with information about the company's strategy and
Which of the following statements concerning having a CEO serve as chairman of the board is most accurate? Having a CEO also serve as chairman is considered:
Are the Observations 3 and 4 likely to be consistent with corporate governance best practice? A. Both observations are correct. B. Only one of the observations is correct. C. Neither observation is correct. Which of the following is least likely to be useful in evaluating a company's corporate
Are the Observations 1 and 2 likely to be consistent with corporate governance best practice? A. Both observations are correct. B. Only one of the observations is correct. C. Neither observation is correct.
Which of the following situations is the best example of the principal-agent problem? A. The senior management team of a supplier of condiments to the restaurant industry purchases a supplier of cups and napkins. The merger increases the size of the business by 50% and is immediately accretive to
Charlene Harmon is meeting with her supervisor, Cipriano Bernal, about the implementation of a new corporate governance structure at their business. Bernal tells Harmon that there are two primary objectives of corporate governance:
Which of the following is least likely to be a core attribute of an effective corporate governance system? A. There is clear and measurable accountability for managers and directors in assuming their responsibilities. B. Company management receives compensation that is fair and reflective of job
Bee Heaven management believes the company's stock is undervalued at $50 a share and is interested in repurchasing three million shares. Which of the following share repurchasing methods is Bee Heaven least likely to consider? A. Make a tender offer to repurchase three million shares at $55. B.
The board of directors at Saturn Networks, a company specializing in computer hardware, is considering implementing the firm's first annual dividend. Saturn currently trades at a price per share of $77.76, which is a P/E ratio of 18 times its current earnings. The cost of equity applied to the firm
A company has provided the following financial data:Target capital structure is 50% debt and 50% equity.After-tax cost of debt is 8%.Cost of retained earnings is estimated to be 13.5%.Cost of equity is estimated to be 14.5% if the company issues new common stock.Net income is $2,500.
Last year, Wolverine Shoes and Boots had earnings of $4.00 per share and paid a dividend of $0.20. In the current year, the company expects to earn $4.40 per share. The company has a 30% target payout ratio and plans to bring its dividend up to the target payout ratio over an 8-year period. Next
An analyst gathered the following information about a company's investment budget:Expected net income of $800,000 during the nenext year.Target and current capital structure is 40% debt and 60% common equity.Optimal capital budget for next year is $1.2 million.If the company uses the residual
An analyst gathered the following information about a company's investment plan:Capital budget of $5,000.Target capital structure is 70% debt and 30% equity.Net income is $4,500.If the company follows a residual dividend policy, the portion of its net income it will pay out as dividends this year
If a firm follows a residual dividend policy and has an optimal capital budget that will require the use of all this year's earnings, the firm would most likely pay: A. no dividends to common stockholders. B. dividends financed by borrowing the money. C. dividends but only out of past retained
Firms that use a residual dividend model are least likely to: A. determine their optimal capital budgets. B. issue common stock to maintain the dividend payout schedule. C. determine the amount of equity needed to meet the capital budget.
Two public companies, one based in the United States and one based in Japan, unexpectedly announce decreases in the regular quarterly dividends on their common shares. What is the most likely reaction of the two firms' share prices? A. Both shares decrease. B. Only US shares decrease. C. Only
Which of the following factors would encourage a company to maintain a high dividend payout ratio?A. The double-taxation system is in place in the company's home country.B. Most ofthe shares in the company are held by income-oriented mutual funds.C. The company's debt covenants require an interest
Northern Financial Co. has a BVPS of $5.00. The company has announced a$15 million share buyback. The share price is $60 and the company has 40 million shares outstanding. After the share repurchase, the company's BVPS will be closest to:A. $4.65.B. $4.90.C. $5.03.
Arizona Seafood, Inc., plans $45 million in new borrowing to repurchase 3,600,000 shares at their market price of $12.50. The yield on the new debt will be 12%. The company has 36 million shares outstanding and EPS of $0.60 before the repurchase. The company's tax rate is 40%. The company's EPS
Nick Adams is recommending to the Board of Directors that they share the profits from an excellent year (totaling $56 million) with shareholders by either declaring a special cash dividend of $20 million, or using the $20 million to repurchase shares of Volksberger common stock in the open market.
Jenni White and Janet Langhals are each shareholders that live in Nikto, and each owns 100 shares of OCP, Inc., which has €1.00 per share in net income.OCP pays out 100% of its earnings as dividends. White is in the 25% tax bracket, while Langhals is in the 42% tax bracket. The effective tax rate
An investor living in Barada holds 100 shares of Prowse, Inc. Prowse's pre-tax earnings in the current year are $1.00 per share, and Prowse pays dividends based on a target payout ratio of 40%. The individual tax rate that applies to dividends is 28%, and the individual tax rate that applies to
An investor living in Klaatu holds 100 shares of stock in the Lucas Corporation.Lucas' pretax earnings for the current year are $2.00 per share, and the company has a payout ratio of 100%. The investor's individual tax rate on dividends is 30%. The effective tax rate on a dollar of funds to be paid
Studdard Controls (STU) recently declared a quarterly dividend of $1.25 payable on Thursday, April 25, to holders of record on Friday, April 12.What is the last day an investor could purchase STU stock and still receive the quarterly dividend? A. April 9. B. April 10. C. April 12.
After the split, the company's price-to-earnings ratio will remain 41.7 earnings. How many of the statements are correct? A. Three. B. Two. C. One
The company's dividend yield after the split will be 1.2%.
The board of directors of Sarkel Systems Corporation is considering approving an 8-for-5 stock split for the company's common stock. The company currently has 1.5 million shares outstanding, and EPS for the prior year were $0.60. The company intends to maintain a 50% payout ratio. The company's
A bond analyst is interested in Bee Heaven's upcoming bond offering; when considering capital structure policy, she should consider each of the following except:A. changes in the company's capital structure over time.B. factors affecting agency costs, such as quality of corporate governance.C.
Barney Flint, CFA, is the CFO of Bee Heaven, a publicly traded chain of flower shops. Bee Heaven is currently rated A, but is likely to drop to BBB once the disappointing results of an ill-considered merger are released to the public. Flint receives the following quote of credit spreads:Treasuries
Are Iwinski's Statements 3 and 4 correct or incorrect?A. Both statements are correct.B. Only one of the statements is correct.C. Neither statement is correct.
Iwinski's Statements 1 and 2, respectively, correspond most closely to which of the following theories regarding capital structure?Statement 1 Statement 2 A. MM's propositions Pecking order theory'B. Static trade-off theory MM's propositions C. Pecking order theory Static trade-off theory
Romulus most likely has:A. few analysts and auditors working in the country.B. a low reliance on the banking system for raising debt capital.C. favorable tax rates on dividends.
Remus most likely has:A. a small institutional investor presence.B. a strong legal system.C. relatively illiquid stock and bond markets.
At the conference, Munn also learned about the static trade-off theory. If Munn uses the static trade-off approach, which capital structure is Munn most likely to choose? A. Either 100% equity or 100% debt. B. 50% equity and 50% debt. C. It does not matter which structure he chooses.
If Munn uses Modigliani and Miller's propositions assuming the firm pays taxes, which capital structure is Munn most likely to choose? A. 100% equity. B. 100% debt. C. It does not matter which structure he chooses.
If Munn uses Modigliani and Miller's propositions and includes all of their assumptions including the assumption of no taxes, which capital structure is Munn most likely to choose? A. 100% equity. B. 100% debt. C. It does not matter which structure he chooses.
Which of the following is least likely to be a component of a firm's expected cost of financial distress?A. Legal and administrative fees associated with bankruptcy.B. Cost of insurance premiums to guarantee management performance.C. Loss of trust from customers.
The optimal capital structure: A. maximizes firm value and minimizes the weighted average cost of capital. B. minimizes the interest rate on debt and maximizes expected earnings per share. C. maximizes expected earnings per share and maximizes the price per share of common stock.
Which of the following statements regarding the risks and potential rewards for owners and creditors of a business is most accurate? A. In the event of bankruptcy, creditors have a claim to the assets of the firm that must be met before equity owners receive anything. B. Owners have less risk than
Vischer's EBIT is $300,000, and its tax rate is 30%. If Vischer changes its capital structure (recapitalizes) to include 40% debt, what is Vischer's ROE before and after the change? Assume that the interest rate on debt is 5%. ROE at 100% equity ROE at 60% equity A. 17.5% 10. B. 25.0% 26.8% 26.8%
Jayco's degree of total leverage (DTL) is closest to: A. 2.00. B. 1.75. C. 1.50. Vischer Concrete has $1.2 million in assets that are currently financed with 100% equity.
Jayco's degree of operating leverage (DOL) and degree of financial leverage (DFL) are closest to: A. 2.50 DOL and 1.00 DFL. B. 1.67 DOL and 2.00 DFL. C. 1.67 DOL and 1.20 DFL.
If Jayco's sales increase by 10%, Jayco's EBIT increases by 15%. If Jayco's EBIT increases by 10%, Jayco's EPS increases by 12%. Jayco's degree of operating leverage (DOL) and degree of total leverage (DTL) are closest to: A. 1.2 DOL and 1.5 DTL. B. 1.2 DOL and 2.7 DTL. C. 1.5 DOL and 1.8 DTL.
Jayco, Inc., has a division that makes red ink for the accounting industry. The unit has fixed costs of $10,000 per month and is expected to sell 40,000 bottles of ink per month. If the variable cost per bottle is $2.00, what price must the division charge in order to break even?
Jayco, Inc., sells blue ink for $4.00 a bottle. The ink's variable cost per bottle is $2.00. Ink has fixed cost of $10,000. What is Jayco's breakeven point, in units? A. 2,500. B. 5,000. C. 6,000.
Which of the following statements about capital structure and leverage is most accurate? A. Financial leverage is directly related to operating leverage. B. Increasing the corporate tax rate will not affect capital structure decisions. C. A firm with low operating leverage has a small proportion of
Which of the following choices is a key determinant of operating leverage? A. Level and cost of debt. B. The competitive nature of the business. C. The trade-off between fixed and variable costs.
Business risk is the combination of: A. operating risk and financial risk. B. sales risk and financial risk. C. operating risk and sales risk.
A company is analyzing two projects. Project A has a project beta of 1.2, and Project B has a beta of 0.6. The company's weighted average cost of capital is 10%. The risk-free rate is 5%, and the market risk premium is 10%. If the company incorrectly uses the company's weighted average cost of
Marybeth Krause has been asked by her employer to evaluate different valuation models for capital projects. Krause's report makes the following two comments:Comment 1: The present value of future economic profit will be the same as the NPV found by discounted cash flow analysis in the basic capital
The economic profit for Olympic Orthotics in years 1 and 2 is closest to: A. 45 million in year 1 and 69 million in year 2. B. 45 million in year 1 and 24 million in year 2. C. 54 million in year 1 and 69 million in year 2.
The economic income for Olympic Orthotics for years 1 and 2 is closest to: A. 45 million in year 1 and 69 million in year 2. B. 45 million in year 1 and 24 million in year 2. C. 54 million in year 1 and 69 million in year 2.
Steven Munn and David Hu are discussing potential capital projects for the Tryon Corporation. Hu is concerned about making capital budgeting mistakes, and he tells Munn that he wants to avoid such mistakes. Munn tells Hu not to worry and makes two statements:
Elaine Smith of General Pacific Company is analyzing a 5-year expansion project to increase manufacturing capacity. The project requires an investment in net working capital of $500,000 that will be recovered at the end of the project and has a cost of capital of 10%. In her analysis, Smith assumes
Assuming that McCool follows the optimal abandonment strategy, the NPV of the project, inclusive of the abandonment option, is closest to:A. -$12,545.B. $7,250.C. $12,545.
Assuming that there is no abandonment option, the project's NPV is closest to:A. -$27,498.B. $12,545.C. $22,622.
Eldon Windows Inc. has an $80,000 capital budget and has the opportunity to invest in five different projects. The initial investment and NPV of the projects is shown in the table. In which combination of projects should Eldon Windows invest?A. Projects 1, 3, and 5.B. Projects 2, 3, and 4.C.
Which of the following statements is least accurate? A. If a project is riskier than the firm's normal project, the firm should adjust the project's discount rate upward.
Which of the following statements about Monte Carlo simulation is least accurate? Monte Carlo simulation: A. can be useful for estimating a project's stand-alone risk. B. is capable of using probability distributions for variables as input data. C. uses best and worst case scenarios to determine
Albert Duffy, Project Manager at Crane Plastics, is considering taking on a new capital project. When presenting the project, Duffy shows members of Crane's executive management team that the project is marginally profitable, but since the company has the ability to use various materials
Which of the following statements about cash flow analysis is least accurate? A. Financing cash flows are considered in the incremental cash flow analysis. B. If two projects are independent, the fact that they have unequal lives does not affect the analysis. C. An incremental cash flow represents
Elaine Smith has been given responsibility for developing General Pacific Company's capital budgeting policy manual. In a meeting with her team, she makes the following statements: Statement 1: The equivalent annual annuity approach assumes continuous replacements can and will be made each time the
Which of the following statements about replacement decisions is least accurate?A. Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an initial cash outflow.B. The present value of depreciation expense on the new equipment multiplied by the tax rate is
Mayco, Inc. is evaluating two mutually exclusive investment projects. Assume both projects can be repeated indefinitely. Printer A has an NPV of $20,000 over a 3-year life, and Printer B has a NPV of $25,000 over a 5-year life. The project types are equally risky, and the firm's cost of capital is
Mayco, Inc. wants to buy a new printer. Mayco is looking at two mutually exclusive projects: A and B.Printer A costs $100,000 and generates positive after-tax cash flows of$75,000 at the end of each of the next two years.Printer B also costs $100,000 and has positive after-tax cash flows of$50,000
Bruce Spang is teaching a finance class about the impact of inflation on capital budgeting analysis. Spang makes the following statements to his class:Statement 1: Project cash flows should always be discounted at the real interest rate in order to avoid double counting inflation in the capital
Michael Eastman and David Mann are part of the management team responsible for evaluating capital projects at Anasi, Inc. The tax laws in the country where Anasi is located allow the company to choose the depreciation method for tax purposes. Eastman is trying to explain to Mann the importance of
An analyst has collected the following information on a replacement project:Purchase price of the new machine $8,000 Shipping and installation charge 2,000 Sale price of old machine 6,000 Book value of old machine 2,000 Inventory increase if the new machine is installed 3,000 Accounts payable
Assume for this problem only that the machine is depreciated to zero over six years using the straight line method and all other information is the same. The NPV of the project is closest to: A. -$20,780. B. -$18,753. C. -$17,125.
The first year's MACRS depreciation and the initial cash outlay are closest to:A. $10,000 depreciation and $60,000 initial outlay.B. $12,000 depreciation and $45,000 initial outlay.C. $12,000 depreciation and $60,000 initial outlay.

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Financial Reporting And Analysis And Corporate Finance 2011 Edition Kaplan Schweser - Solutions

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