1. You are given the following information for Magnatron Corp.: Increase in inve

Question

1. You are given the following information for Magnatron Corp.:
Increase in inventory $380
Increase in accounts payable $255
Decrease in notes payable $100
Increase in accounts receivable $190
Based on this information the firm's cash position
a. decreased by $415
b. decreased by $385
c. incrased by $135
d. increased by $235

2. Divided Parcel Delivery common stock sells for $24 per share. You expect the company to pay an annual dividend of $1.00 next year. You expect the firm to increase dividends annually at a 4.8% rate. What is the expected rate of return on this stock?
A 7.89%
B 8.97%
C 4.84%
D 9.71%
E 4.05%

3. After a meeting with the firm's banker's Jefferson Inc.'s Treasurer concludes the firm should decrease financial leverage. Which of the following actions would definitely affect balance sheet measures of financial leverage in the desired direction?
a. negotiating a lower interest rate on an existing loan.
b. foregoing dividend payments and using the funds instead to repurchase some of the firm's common stock.
c. taking out a new loan with a lower interest rate than existing loans.
d. selling new common stock and using the proceeds to repurchase outstanding bonds.

4. Ribbon Steel Co. issued $50 million in 10-year 4% coupon bonds to support a permanent increase in inventory of $50 million. As a result of this change alone, you would most likely conclude that ratio indicators of Ribbon Steel Co.'s
a. short-term solvency and liquidity increased.
b.overall financial leverage declined.
c. asset management improved.
d. profitability on assets improved.

Explanation / Answer

Cash position Question-1 Increase in inventory 380 -380 Increase in accounts payable 255 255 Decrease in notes payable 100 -100 Increase in accounts receivables 190 -190 Net change in cash position -415 So the cash position will decrease by 415 Question 2 Annual dividend 1 Growth rate 4.80% Stock price` 24 Using dividend discount model - Stock price = D1*(1+growth rate)/(Rate of return on stock - growth rate) Rate of retrun 9.17% Using the above formula Question 3 Answer will be D By selling new common stock will increase the total equity of the firm and by repurchading outstanding bonds will reduce total debt Hence the financial leverage would reduce Question 4 Asset management improved

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