Which of the following statements regarding corporate shareholders is most accurate?

Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. 

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to:

Hermann Corporation is considering an investment of €375 million with expected aftertax cash inflows of €115 million per year for seven years and an additional after-tax salvage value of €50 million in Year 7. The required rate of return is 10 percent. What is the investment’s PI?

Projects 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects, the required rate of return is 10 percent. 

The two projects are mutually exclusive. What is the appropriate investment decision?

Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 percent. 

What discount rate would result in the same NPV for both projects?

The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:

Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in 80 countries, with the previous year's global revenues at €5.6 billion. Recently, Kruspa’s CFO announced plans for expansion into China. Sandell worries that this expansion will change the company's risk profile and wonders if he should recommend a sale of the position. Sandell provides Knudsen with the basic information. Kruspa’s global annual free cash flow to the firm is €500 million and earnings are €400 million. Sandell estimates that cash flow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa’s after-tax free cash flow to the firm on the China project for next three years is, respectively, €48 million, €52 million, and €54.4 million. Kruspa recently announced a dividend of €4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency fluctuations. He expects the Chinese plant to sell only to customers within China for the first three years. Knudsen is asked to evaluate Kruspa’s planned financing of the required €100 million with a €80 public offering of 10-year debt in Sweden and the remainder with an equity offering. Additional information: 

In his report, Sandell would like to discuss the sensitivity of the project's net present value to the estimation of the cost of equity. The China project's net present value calculated using the equity beta without and with the country risk premium are, respectively:

Boris Duarte, CFA, covers initial public offerings for Zellweger Analytics, an independent research firm specializing in global small-cap equities. He has been asked to evaluate the upcoming new issue of TagOn, a US-based business intelligence software company. The industry has grown at 26 percent per year for the previous three years. Large companies dominate the market, but sizable “pure-play” companies such as Relevant, Ltd., ABJ, Inc., and Opus Software Pvt. Ltd also compete. Each of these competitors is domiciled in a different country, but they all have shares of stock that trade on the US NASDAQ. The debt ratio of the industry has risen slightly in recent years. 

The average asset beta for the pure players in this industry, Relevant, ABJ, and Opus, weighted by market value of equity is closest to:

Boris Duarte, CFA, covers initial public offerings for Zellweger Analytics, an independent research firm specializing in global small-cap equities. He has been asked to evaluate the upcoming new issue of TagOn, a US-based business intelligence software company. The industry has grown at 26 percent per year for the previous three years. Large companies dominate the market, but sizable “pure-play” companies such as Relevant, Ltd., ABJ, Inc., and Opus Software Pvt. Ltd also compete. Each of these competitors is domiciled in a different country, but they all have shares of stock that trade on the US NASDAQ. The debt ratio of the industry has risen slightly in recent years. 

Using the capital asset pricing model, the cost of equity capital for a company in this industry with a debt-to-equity ratio of 0.01, asset beta of 2.27, and a marginal tax rate of 23 percent is closest to:

An analyst gathered the following information about a company and the market: 

Using the Capital Asset Pricing Model (CAPM) approach, the cost of retained earnings for the company is closest to:

An analyst gathered the following information about a private company and its publicly traded competitor: 

Using the pure-play method, the estimated equity beta for the private company is closest to:

Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company and the Grundlegend Company have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Basic Company, the Grundlegend Company has:

Mary Benn, CFA, is a financial analyst for Twin Fields Investments, located in Storrs,Connecticut, USA. She has been asked by her supervisor, Bill Cho, to examine two small Japanese cell phone component manufacturers: 4G, Inc. and Qphone Corp. Cho indicates that his clients are most interested in the use of leverage by 4G and Qphone. Benn states, “I will have to specifically analyze each company’s respective business risk, sales risk, operating risk, and financial risk.” “Fine, I’ll check back with you shortly,” Cho, answers. Benn begins her analysis by examining the sales prospects of the two firms. The results of her sales analysis appear in Exhibit 1. She also expects very little price variability for these cell phones. She next gathers more data on these two companies to assist her analysis of their operating and financial risk. When Cho inquires as to her progress Benn responds, “I have calculated Qphone’s degree of operating leverage (DOL) and degree of financial leverage (DFL) at Qphone’s 2009 level of unit sales. I have also calculated Qphone’s breakeven level for unit sales. I will have 4G’s leverage results shortly.” Cho responds, “Good, I will call a meeting of some potential investors for tomorrow. Please help me explain these concepts to them, and the differences in use of leverage by these two companies. In preparation for the meeting, I have a number of questions”: “You mentioned business risk; what is included in that?” “How would you classify the risk due to the varying mix of variable and fixed costs?” “Could you conduct an analysis and tell me how the two companies will fare relative to each other in terms of net income if their unit sales increased by 10 percent above their 2009 unit sales levels?” “Finally, what would be an accurate verbal description of the degree of total leverage?” The relevant data for analysis of 4G is contained in Exhibit 2, and Benn’s analysis of the Qphone data appears in Exhibit 3: 

Based on the information in Exhibit 1 and Exhibit 3. Qphone’s expected percentage change in operating income for 2010 is closest to:

Mary Benn, CFA, is a financial analyst for Twin Fields Investments, located in Storrs,Connecticut, USA. She has been asked by her supervisor, Bill Cho, to examine two small Japanese cell phone component manufacturers: 4G, Inc. and Qphone Corp. Cho indicates that his clients are most interested in the use of leverage by 4G and Qphone. Benn states, “I will have to specifically analyze each company’s respective business risk, sales risk, operating risk, and financial risk.” “Fine, I’ll check back with you shortly,” Cho, answers. Benn begins her analysis by examining the sales prospects of the two firms. The results of her sales analysis appear in Exhibit 1. She also expects very little price variability for these cell phones. She next gathers more data on these two companies to assist her analysis of their operating and financial risk. When Cho inquires as to her progress Benn responds, “I have calculated Qphone’s degree of operating leverage (DOL) and degree of financial leverage (DFL) at Qphone’s 2009 level of unit sales. I have also calculated Qphone’s breakeven level for unit sales. I will have 4G’s leverage results shortly.” Cho responds, “Good, I will call a meeting of some potential investors for tomorrow. Please help me explain these concepts to them, and the differences in use of leverage by these two companies. In preparation for the meeting, I have a number of questions”: “You mentioned business risk; what is included in that?” “How would you classify the risk due to the varying mix of variable and fixed costs?” “Could you conduct an analysis and tell me how the two companies will fare relative to each other in terms of net income if their unit sales increased by 10 percent above their 2009 unit sales levels?” “Finally, what would be an accurate verbal description of the degree of total leverage?” The relevant data for analysis of 4G is contained in Exhibit 2, and Benn’s analysis of the Qphone data appears in Exhibit 3: 

In response to Cho’s question regarding an increase in unit sales above 2009 unit sales levels, it is most likely that 4G’s net income will increase at:

Mary Gonzales is evaluating companies in the office supply industry and has compiled the following information: 

Which of the companies has the lowest accounts receivable turnover in the year 20X2?

Mary Gonzales is evaluating companies in the office supply industry and has compiled the following information: 

Which of the companies reduced the average time it took to collect on accounts receivable from 20X1 to 20X2?

Benefits of effective corporate governance and stakeholder management most likely include:

The method of ESG integration that does not exclude any sectors but seeks to invest in the companies with the best practices regarding employee rights and environmental sustainability is:

An analyst has gathered the following data about two projects, each with a 12% required rate of return.                Project Y      Project Z Initial cost     $15,000        $20,000 Life             5 years        4 years Cash inflows   $5,000/year   $7,500/year If the projects are mutually exclusive, the company should:

A company is considering the purchase of a copier that costs $5,000. Assume are quired rate of return of 10% and the following cash flow schedule: Year 1: $3,000. Year 2: $2,000. Year 3: $2,000. What is the project’s payback period?

Which of the following statements is least accurate? The discounted payback period:

Fullen Machinery is investing $400 million in new industrial equipment. The present value of the future after-tax cash flows resulting from the equipment is $700 million. Fullen currently has 200 million shares of common stock outstanding, with a current market price of $36 per share. Assuming that this project is new information and is independent of other expectations about the company, what is the theoretical effect of the new equipment on Fullen’s stock price? The stock price will:

Jay Company has a debt-to-equity ratio of 2.0. Jay is evaluating the cost of equity for a project in the same line of business as Cass Company (Cass) and will use the pure-play method with Cass as the comparable firm.Cass has a beta of 1.2 and a debt-to-equity ratio of 1.6. The project beta most likely:

Derek Ramsey is an analyst with Bullseye Corporation, a major U.S.-baseddiscount retailer. Bullseye is considering opening new stores in Brazil and wantsto estimate its cost of equity capital for this investment. Ramsey has found that: The appropriate beta to use for the project is 1.3. The market risk premtextum is 6%. The risk-free interest rate is 4.5%. The country risk premtextum for Brazil is 3.1%. Which of the following is closest to the cost of equity that Ramsey should use inhis analysis?

The least likely item to be a requirement for good stakeholder management is:

Which of the following statements about capital structure and leverage is most accurate?

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:

Firm A and Firm B have the same quick ratio, but Firm A has a greater current ratio than Firm B. Compared to Firm B, it is most likely that Firm A has: