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M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

How much are your cash flows today?

 

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$12.38

 

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$4.50

 

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$150

 

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$15

 

 

 

You are provided the following working capital information for the Ridge Company:

Ridge Company

Account

$

   

Inventory

$12,890

Accounts receivable

12,800

Accounts payable

12,670

   

Net sales

$124,589

Cost of goods sold

99,630

Operating cycle: What is the operating cycle for Ridge Company?

 

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47 days

 

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85 days

 

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36 days

 

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51 days

 

 

 

 

 

 

The asset substitution problem occurs when

 

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managers substitute riskier assets for less risky ones to the detriment of equity holders.

 

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managers substitute less risky assets for riskier ones to the detriment of equity holders.

 

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managers substitute riskier assets for less risky ones to the detriment of bondholders.

 

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managers substitute less risky assets for riskier ones to the detriment of bondholders.

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