Part 1a: Business Firm Will No Longer Exist After It Has Bee

Part 1a Business Firm Will No Longer Exist After It Has Been

Part 1a Business Firm Will No Longer Exist After It Has Been

Part 1 A business firm will no longer exist after it has been _________________. paid with dividends restructured with its capital components liquidated reorganized repurchased with its stock The discount rate assigned to an individual project must be estimated according to I. the firm's depreciation rate for a levered firm. II. the actual sources of funding used for the project. III. an average of the firm's overall cost of capital for the past five years. IV. none of the above statements is correct. I only II, III and V only II only IV only III and IV only The net present value (NPV) of a project can be reduced by I. moving each of the cash inflows forward to a sooner time period II. increasing the required discount rate III. increasing the amount of the final cash inflow IV. decreasing the project's initial cost at time zero I only II only I, II, III and IV. II and III only II, III and IV only _____________ is defined as the average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure. Subjective cost of capital Structured cost of capital Reward to risk ratio Weighted average cost of capital Weighted capital gains rate Pro forma financial statements for a proposed project should: I. generally include interest expense. II. be compiled individually specific to the project only. III. include all the incremental cash flows related to the project. IV. exclude all project-related fixed asset acquisitions and disposals. II, III, and IV only II and III only I and II only I, II, and IV only none of the options is correct If Microsoft accepts Project A, it will not have the required resources to go for Project B. We call these two projects ______________________ projects. economically scaled interdependent mutually exclusive independent operationally distinct M&N Co. made an announcement yesterday. According to this announcement, the company will make a $.25 regular quarterly cash payment per share to its shareholders. This will be paid out of its net income for the year. This kind of cash payment is considered as __________. repurchase regular cash dividend special dividend extra cash dividend liquidating dividend The dividend growth model can be used to compute the cost of equity for a firm I. that pays no dividend II. that pays a constant dividend III. that pays dividend with a constant rate of decrease IV. that pays dividend with a constant rate of increase II and III only I and III only I and II only I, II and III only II, III and IV only The cost of capital for a(n) _________________ is referred to as unlevered cost of capital. private entity governmental entity corporate shareholder private individual all-equity firm If we do not consider the effect of taxes and the transaction related costs, a stock repurchase will : I. reduce the total debt of a firm. II. reduce the total equity of a firm. III. decrease the earnings per share. IV. increase the total assets of a firm. II and IV only I and II only II, III, and IV only IV only II only The correct definition for depreciation tax shield is the ___________________. amount of tax that is due when an asset is sold amount of tax that is saved because of the depreciation expense amount by which the aftertax depreciation expense lowers net income tax that is avoided when an asset is sold as salvage amount of tax that is saved when an asset is purchased The advantage(s) of the discounted payback method over the regular payback method in capital budgeting analysis include I. ease of use II. liquidity bias III. the consideration of time value of money IV. works well for research and development projects II only III and IV only III only II, III and IV only I, II and III only The CORRECT statement(s) include : I.

Regular cash dividends reduce par value of a stock. II. Extra cash dividends will never be repeated by a firm. III. A dividend is a liability even before it has been declared.

IV. The dividend yield expresses the annual dividend as a percentage of current stock price. IV only I, II and IV only I and III only II and III only II, III and IV only The correct statement(s), with respect to M&M Proposition II with no taxes, include : I. Financial risk determines the return on assets. II.

Financial risk is determined by the debt-equity ratio. III. The cost of equity declines when the amount of leverage used by a firm rises. IV. The required return on assets is higher than the weighted average cost of capital.

I and IV only III and IV only II only III only I and II only Ignoring any tax effect, a project's cash flows include the cash flows associated with I. increase in accounts payable II. increase in inventory III. decrease in accounts receivable IV. equipment acquisition V. payment of wages I , II and III only II, IV and V only I and III only I, II, III, IV and V III only The CORRECT statement(s) include : I. Another name for financial risk is business risk. II. Financial risk has no impact on the cost of equity. III.

Financial risk is the risk associated with the use of debt. IV. Financial risk remains the same no matter how much debt the firm uses. I, II, III and IV III only II and III only I, II, and III only I and IV only The CORRECT statement(s) include : I. Automatic dividend reinvestment plans help shareholders create their own homemade dividend policies.

II. Automatic dividend reinvestment plans allow stockholders reinvest part or all of the dividends to which they are entitled. III. Automatic dividend reinvestment plans sometimes grant employees the privilege of purchasing additional shares at a discounted price. I and II only I, II and III III only II only II and III only Mary has invested in the stock of Roberta Fitness, Inc. which is now an all-equity firm.

To lever her position, Mary needs to sell some shares of the Roberta Fitness stock and hold the proceeds in cash. create a personal debt-equity ratio of 0.50. borrow some money and purchase some more shares of the Roberta Fitness stock. sell some shares of the Roberta Fitness stock and loan out the proceeds. keep her current equity position as the debt of the firm does not affect her personally. When calculate the weighted average cost of capital (WACC) of a firm, we need to know the costs of the capital components as well as ____________ of the firm. I. tax rate II. liquidity ratio III. depreciation rate IV. price earning ratio V. inventory turnover rate II and IV only I and III only I, II, and IV only I, III, and IV only I only Which of the following do(es) not apply to the use of average accounting return method of project analysis?

I. no time value of money consideration II. need of a cutoff rate III. easily obtainable information for computation IV. based on retained earnings and book value of asset I, II, and IV only IV only III and IV only I and II only I, II, III, and IV The CORRECT statement(s) include : I. The IRR is equal to the required return when the net present value is equal to 1. II. The IRR always yields the same accept and reject decisions as the net present value method given mutually exclusive projects. III.

The IRR method is a better method of analysis than the average accounting return from a financial point of view. IV. An investment project with an IRR higher than the required return should be accepted. I, II, III and IV III and IV only I, II, and III only I and III only I, III and IV only Top of Form Example of sunk cost is _____________________. $2,100 increase in comic book sales if a store commences selling puzzles $2,000 spent on investigating whether local residents will buy recycle candles before the consideration of the large scale production of them. $24,000 project that must be given up since a similar project is accepted. none of the given costs is a suck cost. $4,500 of lost sales due to a similar item is introduced.

Bottom of Form Indiana Subway, Inc. had declared a $0.35 per share dividend on Tuesday, November 8. The dividend will be paid on Thursday, January 30 to shareholders of record on Thursday, December 26. The ex-dividend date is Tuesday, November 8 Thursday, January 30 Wednesday, January 1 Thursday, December 26 Tuesday, December 24 When estimating the operating cash flow for a project, we cannot include ____________. I. taxes II. sunk costs III. variable costs IV. interest expenses V. depreciation tax shield I, II, III and V only I, II, III, IV and V II and IV only I and V only I and II only The INCORRECT statement(s) include : I. The IRR method of analysis does not work well for projects with non-conventional cash flows.

II. The IRR that causes the profitability index (PI) of the differences between two project's cash flows to equal zero is called the discount rate. III. Just the timing, not the amount, of a project's cash flows will affect the value of the project's IRR. IV.

The IRR does not consider the time value of money. I, II, and III only II, III and IV only I, III and IV only III and IV only I, II, III and IV I. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash outflow to the project. II. Project analysis should only include the cash flows that affect the income statement.

III. The depreciation tax shield creates a cash inflow for a project. IV. Interest expense should not be included as a cash outflow when analyzing a project. I only I, II and III only I, III and IV only I, II, and III only II and IV only I.

Paper For Above instruction

The collapse of a business firm is a complex event that typically occurs after a series of financial, operational, and strategic factors have eroded the company's value and profitability. The question "A business firm will no longer exist after it has been ______________" encapsulates the various processes through which a firm's operational life can come to an end. Common scenarios include the firm being liquidated, restructured, or reorganized. Liquidation involves selling off assets to satisfy creditors and shareholders, often marking the definitive end of the firm. Reorganization may be undertaken to revive the company's financial health, though if unsuccessful, it can ultimately lead to liquidation. Similarly, restructuring with its capital components may involve changing the firm's debt-equity ratio or internal structure, which might be a step towards cessation of its current form. The only option that signifies the complete end of business operations is liquidation, which involves dissolving the firm's assets and legal existence.

Estimating the discount rate for a project is crucial in capital budgeting decisions. The options suggest various methods, but the most accurate approach aligns with using a rate that reflects the firm's weighted average cost of capital (WACC) or the specific risk associated with the project. The statements that are correct in this context are II, which considers the actual sources of funding, as the cost of capital for a project should mirror the funding mix. The firm's depreciation rate for a levered firm (statement I) is less relevant in determining project discount rates, and assuming an average cost based on historical capital costs (statement III) is not ideal. The option that states only II is correct is most suitable for estimating project discount rates.

The net present value (NPV) method evaluates the profitability of a project by discounting future cash inflows and outflows to their present value. Increasing the discount rate generally decreases NPV by raising the barrier for project acceptance. Similarly, moving cash inflows to an earlier period increases NPV, but increasing the final cash inflow or decreasing initial costs would tend to increase the project's valuation, not reduce it. Therefore, increasing the final cash inflow (statement III) and decreasing initial cost (statement IV) would tend to raise NPV. The only factors that reduce NPV are increasing the discount rate and moving inflows forward (which effectively increases the timing discounting). The combination that correctly describes NPV reduction is II and III.

The weighted average cost of capital (WACC) is defined as the average rate weighted by the proportion of each capital component—equity and debt—in the firm’s capital structure. It reflects the average cost to the firm of financing its assets and is essential for valuation and investment decisions. The calculation requires knowledge of the costs of each component, typically the cost of equity and after-tax cost of debt, weighted by their market value proportions. The concept of subjective or structured costs of capital is less precise than the WACC, which explicitly considers the firm's capital components. The weighted average cost of capital provides a benchmark for evaluating investment opportunities and is particularly important when assessing projects or firm valuation.

Pro forma financial statements tailored for a specific project should capture all incremental cash flows associated with that project. Unlike general financial statements, they focus exclusively on the project, excluding expenses and cash flows unrelated to it, such as fixed asset disposals or non-incremental fixed asset acquisitions. They generally include all relevant cash flows, including interest expense if directly tied to the project financing, unless explicitly excluded under project evaluation criteria. The statements help determine project viability by analyzing projected revenues, costs, working capital changes, and terminal cash flows.

When evaluating mutually exclusive projects, selecting one project precludes undertaking the other. If accepting Project A means abandoning Project B due to resource constraints or strategic incompatibilities, these projects are called mutually exclusive. This scenario requires comparison of their NPVs or IRRs to select the most beneficial project, as allocating resources to one excludes the other’s potential benefits.

The dividend payout policy of a firm affects its cash flows and shareholder value. A regular quarterly dividend paid out of net income is termed a standard or regular dividend. This regular payout signals steady earnings and attracts investors seeking reliable income. The specific option stating that this kind of cash payment is a "regular cash dividend" is accurate, as it reflects routine earnings distribution. Other options such as special dividends or liquidating dividends refer to non-recurring payments or liquidation events, respectively.

The dividend growth model (or Gordon Growth Model) helps estimate the cost of equity by assuming dividends grow at a constant rate. It is applicable to firms that pay dividends and grow them at a steady, sustainable rate. The model explicitly requires dividends that are either constant or growing at a predictable rate. It does not suit firms that do not pay dividends or have dividends decreasing over time. The correct application of the model is for those paying dividends with a constant rate of increase, making statement II the accurate choice.

The unlevered cost of capital refers to the rate of return required by investors when a firm has no leverage, i.e., no debt in its capital structure. This measure isolates the firm's operating risk without the impact of debt financing. It is relevant for comparing firms or projects that are financed entirely with equity. The unlevered cost is crucial in capital budgeting, valuation, and when considering the effects of leverage on the overall cost of capital.

Stock repurchase, or buybacks, are methods firms use to return value to shareholders, often financed through excess cash or debt. In a repurchase, the firm buys back its shares, decreasing equity and potentially increasing the stock's price or earnings per share. If no new debt is issued, the total debt remains unchanged, but the equity decreases, and assets are reduced accordingly. The process is popular for executing value-returning strategies and for adjusting capital structure without issuing new equity.

The depreciation tax shield offers a tax benefit from deducting depreciation expenses. It is calculated as the depreciation expense multiplied by the corporate tax rate, resulting in tax savings that effectively lower the firm's tax liability. This shield enhances project cash flows by reducing overall tax payments, thus increasing the project's net cash inflows. Recognizing the depreciation tax shield in project analysis provides a more accurate estimate of the project's benefit.

The discounted payback period improves upon the regular payback method by incorporating the time value of money, recognizing that cash flows received sooner are more valuable. Its advantages include ease of understanding and screening projects for liquidity. However, it may still be biased towards shorter projects and does not consider cash flows beyond the payback period. Its consideration of discounted cash flows makes it more precise for financial decision-making compared to the simple payback method.

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