A budget deficit would result when a person's or family's Actual expenses are less than planned expenses b. Assets exceed liabilities a. C. Actual expenses equal planned expenses d. Actual expenses are greater than planned expenses
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- For firms that have debt on their balance sheets, interest expense is commonly seen as an expense on the firm's income statement. In capital budgeting, however, we ignore interest expense. Why? Group of answer choices A) Because the cost of debt is already included in the WACC, and including interest expense in the calculation of cash flows would then be "double counting" it. B) Capital budgeting is done from the perspective of the common stockholders, so it ignores interest expense C) Like depreciation, interest expense is a "non-cash" expense D) Because firms ignore the pleas of banks and bondholders to pay their interest. This is why Silicon Valley Bank failed.Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the WACC. True or FalseExplain the following: The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the formof retained earnings versus some equity from the sale of new common stock? Would thecalculated WACC depend in any way on the size of the capital budget? How mightdividend policy affect the WACC? Assume that the risk-free rate increases. What impact would this have on the cost of debt?What impact would it have on the cost of equity? Note: Explain Shortly And To the Point Answer
- The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the form ofretained earnings versus some equity from the sale of new common stock? Would the calculatedWACC depend in any way on the size of the capital budget? How might dividendpolicy affect the WACC?David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?
- The management of the Keribels Company wishes to apply the Miller-Orr model to manage its cash investments. They have determined that the cost of either investing in or selling marketable securities is P 100. By looking at the Keribels Company’s past cash needs, they have determined that the variance of daily cash flow is P 75,000. Keribels Company’s opportunity cost of cash per day is 0.05%. Based on their experience the cash balance should not fall below P 50,000. WHAT IS THE LOWER LIMIT? (Use a number, no decimal value, no currency, no space, no commas) *The management of the Keribels Company wishes to apply the Miller-Orr model to manage its cash investments. They have determined that the cost of either investing in or selling marketable securities is P 100. By looking at the Keribels Company’s past cash needs, they have determined that the variance of daily cash flow is P 75,000. Keribels Company’s opportunity cost of cash per day is 0.05%. Based on their experience the cash balance should not fall below P 50,000. WHAT IS THE UPPER LIMIT?The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the calculated WACC depend in any way on the size of the capital budget?
- Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, it A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than Bs. a. True b. False Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy- to-use estimates of a firm's liquidity position. a. True b. FalseAlderson Metals is compiling a cash balance projection by quarter for next year. Which one of the following adjustments to this projection will decrease the cumulative surplus? A. Reducing payroll costs from its current projection amount B. Decreasing the accounts receivable period by changing the firm's credit policy effective the first of next year C. Receiving more favorable credit terms from the firm's suppliers D. Increasing the dividend per share on the firm's outstanding common stock E. Refinancing the firm's long-term debt at a lower interest rateWorldTrans has the following data, and it follows the residual dividend model. Some Whitman family members would like more dividends, and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased, holding other things constant? Original capital budget $3,000,000 New capital budget $2,150,000 Net income $3,500,000 % Debt 33% Group of answer choices $569,500 $694,790 $626,450 $558,110 $438,515
