FIN3403 Exam 1 Desai Conceptuals

Increased leverage allows companies to control more assets and increase their ROE. What's bad about leverage?

Leverage multiplies losses, too, as it increases acompany's risk.

What types of companies are more likely to have high leverage?

Companies in stable industries with reliable cash flows

In 2009, Warren Buffett invested $3 billion in Dow Chemical, via an issuance of preferred stock. Which of the following is NOT an advantage of preferred stock to the owner of the preferred stock?

Preferred stock dividends must be in even-numbered percentages (2 percent, 4 percent, etc.).

Which of the following is least likely to be listed as an asset on a balance sheet?

Gilead Sciences Inc.'s patent for the highly profitable hepatitis C treatment it developed in-house

Which of the following companies is most likely to have the highest inventory turnover?

Subway, a fast-food restaurant company

Which ratio is a distinguishing feature of retail companies?

Low receivables collection period

BHP Billiton is one of the world's largest mining companies, and accounts receivable make up 21 percent of its total assets (in 2016). Which of the following companies is most likely to owe BHP Billiton money as part of BHP Billiton's accounts receivable?

United States Steel Corporation, a steel manufacturer

Which of the following constituencies care most about a company's current ratio?

Suppliers

True or false: a high ROE is always a good thing.

False

Home Depot, a home improvement supply store, issued $2 billion in debt in late 2016. What is the main difference between debt and other liabilities, like accounts payable?

Debt carries an explicit interest rate.

You oversee the purchasing department of Best Buy, the electronics and appliance retailer, and are concerned about the funding gap in your cash conversion cycle. Which of the following will NOT reduce the funding gap?

Increasing Sales

Which of the following is a disagreement between finance and accounting? (Choose all that apply.)

What constitutes economic returns, how to value assets, how to value equity

In 2016, Pfizer invested $350 million in a new plant in China. For which of the following present values of the plant's cash flows does that decision make sense? (Choose all that apply.)

$400 or $500 million

You are considering starting up a Five Guys Burgers & Fries franchise, which you estimate will cost $250,000. You expect to make considerable free cash flow for the next five years, after which you will sell off the franchise for $200,000. The discounted values of those cash flows are $90,000, $80,000, $70,000, $60,000, and $180,000 (which includes the fifth-year cash flow, as well as the proceeds of the sale), respectively. Which of the following is likely to be the net present value of your investment?

$230,000 (480k - 250k)

Why does finance add back depreciation and amortization in its measure of economic returns?

Depreciation isn't a cash expense.

One share of Facebook stock is being traded at $150. If so, which of the following does the stock market believe to be true?

The present value of all future free cash flows from

Facebook's business, after netting out cash and debt, implies a Facebook stock value of $150.

United States Steel Corporation has a receivables collection period of thirty-three days, a days inventory of sixty-eight days, and a payables period of forty-nine days. How long is its funding gap?

52 days (68+33-49)

If your supplier offers you a 2 percent discount if you pay twenty days earlier than you would have otherwise, how much is the supplier implicitly charging you for a twenty-day loan?

2 percent

Your company builds a new plant with an investment of $100 million and an expected present value from its future cash flows of $150 million. Two years later, it becomes apparent that the new product isn't selling as well as expected, and the present value of future cash flows at that point is only worth $50 million. Should the company shut down the plant?

No, present value is still $50 million

Which of the following is true about free cash flow?

It is for all capital providers and is tax adjusted.