FIN 571 Week 1 Practice Quiz
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FIN 571 Week 1 Practice Quiz

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Pollution Busters Inc. is considering a purchase of 10 additional carbon sequesters for $115,000 apiece. The sequesters last for only 1 year before becoming saturated. Then the carbon is sold to the government. o A: Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is $136,850 for sure. How would you determine the opportunity cost of capital for this investment? o b-1. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters’ CFO learns that average rates of return from investments on that exchange have been about 24%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case? o b-2. If the expected return on the investment is still 19%, but instead depends on the price of carbon (so that it is no longer risk-free), then is the purchase of additional sequesters an attractive investment for the firm? Which of the following are investment decisions, and which are financing decisions? Which of the following are real assets, and which are financial? Choose the type of company in each case that best fits the description. Which of the following statements always apply to corporations? Which of the following are correct descriptions of large corporations? Is limited liability always an advantage for a corporation and its shareholders? Which of the following statements more accurately describes the treasurer than the controller? We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with that goal? Read the following passage and choose the appropriate terms to complete the sentences. Here is a simplified balance sheet for Locust Farming: Locust has 661 million shares outstanding with a market price of $99 a share. a. Calculate the company’s market value added. (Enter your answers in millions.) b. Calculate the market-to-book ratio. (Round your answer to 2 decimal places.) c. How much value as the company created for its shareholders as a percent of shareholders’ equity, that is, the net capital contributed to the firm by its shareholders? (Enter your answer as a percentage rounded to the nearest whole number.) Here are simplified financial statements for Watervan Corporation: The company’s cost of capital is 8.5% Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) a. Economic value added = After­tax interest + Net income – (Cost of capital × Total capitalization)Economic value added = (1 – 0.32) × $21 + 62.41 – (8.5% × [$265 + 130]) = $39.07 What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) - What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.) - Is the company creating value for its shareholders? - Home Depot entered fiscal 2017 with a total capitalization of $21,886 million. In 2017, debt investors received interest income of $871 million. Net income to shareholders was $8,636 million. (Assume a tax rate of 21%.) - Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) - Here are simplified financial statements for Phone Corporation in a recent year: Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

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