Falcon Financial Services is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a moderate (or maturity matching) working capital financing policy, what is the most likely total of long-term financing (that is, long-term debt plus equity capital)?
The use of financial leverage by the firm has a potential impact on which of the following?
(1) The risk associated with the firm’s operations
(2) The risk experienced by the stockholders
(3) The return required by the stockholders
(4) The variability of net income
A. 1, 2, 3, 4
B. 2, 3, 4
C. 1, 3, 4
D. 1, 2, 3
E. 1, 2, 4
Falcon Media wants to reduce its cash conversion cycle. Which of the following actions should it take?
A. Sell common stock to retire long-term bonds.
B. Increase average inventory without increasing sales.
C. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
D. Sell long-term bonds and use the proceeds to buy back some of its common stock.
E. Take steps to reduce the days sales outstanding.
You are evaluating two mutually exclusive projects with the following net cash flows:
Year Project X Project Z
0 ($100,000) ($100,000)
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000
If both Porject X and Z require a 15% rate of return, which project would you choose?
A. Project Z, since it has the higher NPV.
B. Project X, since it has the higher IRR.
C. Neither project should be chosen.
D. Project X, since it has the higher IRR.
E. Project X, since it has the higher NPV.
Detail Required: LOW; Urgency: HIGH
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