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A sharp increase in its forecasted sales.<br />
A switch to a just-in-time inventory system and outsourcing production.<br />
The company reduces its dividend payout ratio.<br />
The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a<br />
supplier whose terms are 3/15, net 35.<br />
The company discovers that it has excess capacity in its fixed assets.<br />
Question 12. Which of the following assumptions is embodied in the AFN equation?<br />
None of the firm’s ratios will change.<br />
Accounts payable and accruals are tied directly to sales.<br />
Common stock and long-term debt are tied directly to sales.<br />
Fixed assets, but not current assets, are tied directly to sales.<br />
Last year’s total assets were not optimal for last year’s sales.<br />
Question 13. Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50<br />
annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00%<br />
of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the<br />
WACC?<br />
8.72%<br />
9.08%<br />
9.44%<br />
9.82%<br />
10.22%<br />
Question 14. Myron Gordon and John Lintner believe that the required return on equity increases as the<br />
dividend payout ratio is decreased. Their argument is based on the assumption that<br />
investors are indifferent between dividends and capital gains.<br />
investors require that the dividend yield and capital gains yield equal a constant.
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