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WorksheetsCorporate issues
Total questions: 10
Worksheet time: 21mins
Compared to the prior year, Chart Industries has reported that its operating cycle has remained relatively stable while its cash conversion cycle has decreased. The most likely explanation for this is that the firm:
has improved its inventory turnover.
is relying more on its suppliers for short-term liquidity.
is paying its bills for raw materials more rapidly.
Which of the following is not the primary source of a company’s liquidity
Short-term funds
Cash flow management
Negotiating debt contract.
With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:
cannibalization.
interest costs.
opportunity costs
Which action is most likely considered a secondary source of liquidity?
Applying for new bank lines of credit.
Increasing the accuracy of cash forecasting.
Renegotiating current debt contracts for a new due date.
The internal rate of return (IRR) is best described as the:
opportunity cost of capital.
time-weighted rate of return.
discount rate that makes the net present value equal to zero.
A three-year investment requires an initial outlay of £1,000. It is expected to provide three year-end cash flows of £200 plus a net salvage value of £700 at the end of three years. Its internal rate of return is closest to:
10%
11%
20%
Paloma Villarreal has received three suggestions from her staff about how to address her firm’s liquidity problems.
Suggestion 1. Reduce the firm’s inventory turnover rate. Suggestion
2. Reduce the average collection period on accounts receivable.
Suggestion 3. Accelerate the payments on accounts payable by paying invoices before their due dates.
Which suggestion should Villarreal employ to improve the firm’s liquidity position?
Suggestion 1
Suggestion 2
Suggestion 3
Dot.Com has determined that it could issue $1,000 face value bonds with an 8% coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot. Com’s marginal tax rate is 38%, its after-tax cost of debt is closest to:
6.2%
6.4%
6.6%
The Gearing Company has an after-tax cost of debt capital of 4%, a cost of preferred stock of 8%, a cost of equity capital of 10%, and a weighted average cost of capital of 7%. 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:
4%.
7%.
8%
Happy Resorts Company currently has 1.2 million common shares of stock outstanding, and the stock has a beta of 2.2. It also has $10 million face value of bonds that have five years remaining to maturity and an 8% coupon with semiannual payments and are priced to yield 13.65%. If Happy issues up to $2.5 million of new bonds, the bonds will be priced at par and will have a yield of 13.65%; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16%. Happy has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 3%, and the expected market return is 10%. Happy’s marginal tax rate is 30%. If Happy raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital will be closest to:
14.5%.
15.5%.
16.5%
