AGB 374 Exam 02

Fixed (F), Variable (V), or Mixed (M): Sales Commissions

Variable (V)

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In a normal economy, the earnings per share (EPS) of Big Ben's Buffet is:

7.80 [(30,000*.65)/2,500 = 7.80]

The manager of a fast-food restaurant featuring hamburgers is adding salads to the menu. There are two options, and the price to the customer will be the same for each. The option is to install a salad bar stocked with vegetables, fruits, and toppings and then let the customer assemble the salad. The salad bar will have to be leased and a part-time employee hired. The manager estimates fixed costs at $12,000 and variable costs totaling $1.50 per salad. The buy option is to have pre-assembled salad available for sale. They will be purchased from a local supplier at $2.00 per salad. Offering pre-assembled salads will require installation and operation of additional refrigeration, with an annual fixed cost of $2,400. The manager expects to sell 25,000 salads per year. If the projected sales is only 15,000 salads, s/he should decide to:

Buy the salads [2,400 + 2*15,000 = $32,400 vs. 12,000 + 1.5*15,000 = $34,500]

Vivian had a lifelong dream of opening a bookstore, but with big box national chains like Borders and Internet options like Amazon, she decided to focus on a niche market. She operates vending machines selling books dealing with planting and taking care of ornamental flowers at two airports in the Washington, DC area. This is not quite consistent with her original vision, but it satisfies her fixation on selling books. Now she has an opportunity to set up a third machine at the nearby Baltimore airport. She will lease the machine for $2,000 per year and pay rent (including all related expenses, such as electricity) of $2,000 per year to the Airport Commission. She figures her labor in servicing the machine will be about $150 per month. She buys the books for $2 each and sells them for $4 each. She is exempt from sales tax. Based on experience at other airports, Vivian projects that she will sell about 700 books per month. What will her profit be (if any) in the first year?

$11,000 [(700*12) = 8,400 - 2,900 = 5,500*2 = $11,000]

Vivian had a lifelong dream of opening a bookstore, but with big box national chains like Borders and Internet options like Amazon, she decided to focus on a niche market. She operates vending machines selling books dealing with planting and taking care of ornamental flowers at two airports in the Washington, DC area. This is not quite consistent with her original vision, but it satisfies her fixation on selling books. Now she has an opportunity to set up a third machine at the nearby Baltimore airport. She will lease the machine for $2,000 per year and pay rent (including all related expenses, such as electricity) of $2,000 per year to the Airport Commission. She figures her labor in servicing the machine will be about $150 per month. She buys the books for $2 each and sells them for $4 each. She is exempt from sales tax. What is Vivian's break-even revenue?

$11,600 [(2,900*4) = $11,600]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In recession, the EBIT of Big Ben's Buffet will decrease to:

$12,000 (30,000*.4 = $12,000)

Highland feed is considering one of two locations to construct a new processing plant. Location A would result in annual fixed costs of $300,000, variable costs of $63/unit, and price of $68/unit. Annual fixed costs at location B are $800,000, variable costs are $32/unit, and price per unit of $86/unit. Sales volume is estimated to be 25,000 units/year. Total estimated profits (loss) at location A are:

$175,000 loss [(25,000-60,000) = -35,000*5 = (175,000)]

Vivian had a lifelong dream of opening a bookstore, but with big box national chains like Borders and Internet options like Amazon, she decided to focus on a niche market. She operates vending machines selling books dealing with planting and taking care of ornamental flowers at two airports in the Washington, DC area. This is not quite consistent with her original vision, but it satisfies her fixation on selling books. Now she has an opportunity to set up a third machine at the nearby Baltimore airport. She will lease the machine for $2,000 per year and pay rent (including all related expenses, such as electricity) of $2,000 per year to the Airport Commission. She figures her labor in servicing the machine will be about $150 per month. She buys the books for $2 each and sells them for $4 each. She is exempt from sales tax. What is the contribution margin per unit (per book)? That is, for each book sold, what contribution is made to cover the fixed costs of Vivian's business?

$2.00 per book. ($4-$2)

You have just received notification that you have won the $1.4 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 78 ears from now. The appropriate discount rate is 8 percent. What is the present value of your winnings?

$3,460

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In expansion, the EBIT of Big Ben's Buffet will increase to:

$39,000 (30,000*1.3 = $39,000)

A firm has net working capital of $640. Long-term debt of $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

$5,860

Highland feed is considering one of two locations to construct a new processing plant. Location A would result in annual fixed costs of $300,000, variable costs of $63/unit, and price of $68/unit. Annual fixed costs at location B are $800,000, variable costs are $32/unit, and price per unit of $86/unit. Sales volume is estimated to be 25,000 units/year. Total estimated profits (loss) at location B are:

$549,990 profit [(25,000 - 14,815) = 10,185*54 = $549,990]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. The debt-to-equity ratio of Big Ben's Buffet before changing the capital structure is:

0 [0/x = 0]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. What is the debt-to-equity ratio of Big Ben's Buffet after the proposed change in the capital structure?

0.67 [60,000/(150,00-60,000) = 60,000/90,000 = 0.67]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. By issuing debt, Big Ben's Buffet can buy back how many shares?

1,000 (60,000/60 = 1,000)

Russell's Deli has cash of $136, accounts receivables of $95, accounts payable of $210, and inventory of $409. What is the value of the quick ratio.

1.10

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In expansion, the earnings per share (EPS) of Big Ben's Buffet would be:

10.14 [(39,000*.65)/2,500 + $10,14

Al's Sport Store has sales of $897,400, cost of goods sold of $628,300, inventory of $208,400, and accounts receivables of $74,100. What is the average holding period in days (rounded number)? Assume 365 days as working days.

122 days.

Highland feed is considering one of two locations to construct a new processing plant. Location A would result in annual fixed costs of $300,000, variable costs of $63/unit, and price of $68/unit. Annual fixed costs at location B are $800,000, variable costs are $32/unit, and price per unit of $86/unit. Sales volume is estimated to be 25,000 units/year. What are the break-even units for location B?

14,815 (800,000/54 = 14,815)

The manager of a fast-food restaurant featuring hamburgers is adding salads to the menu. There are two options, and the price to the customer will be the same for each. The option is to install a salad bar stocked with vegetables, fruits, and toppings and then let the customer assemble the salad. The salad bar will have to be leased and a part-time employee hired. The manager estimates fixed costs at $12,000 and variable costs totaling $1.50 per salad. The buy option is to have pre-assembled salad available for sale. They will be purchased from a local supplier at $2.00 per salad. Offering pre-assembled salads will require installation and operation of additional refrigeration, with an annual fixed cost of $2,400. The manager expects to sell 25,000 salads per year. What is the break-even quantity?

19,200 [(12,000 +1.5x) = (2,400 + 2x); x - 19,200

Vivian had a lifelong dream of opening a bookstore, but with big box national chains like Borders and Internet options like Amazon, she decided to focus on a niche market. She operates vending machines selling books dealing with planting and taking care of ornamental flowers at two airports in the Washington, DC area. This is not quite consistent with her original vision, but it satisfies her fixation on selling books. Now she has an opportunity to set up a third machine at the nearby Baltimore airport. She will lease the machine for $2,000 per year and pay rent (including all related expenses, such as electricity) of $2,000 per year to the Airport Commission. She figures her labor in servicing the machine will be about $150 per month. She buys the books for $2 each and sells them for $4 each. She is exempt from sales tax. What is Vivian's break-even quantity (BEQ) of books after a year of operation?

2,900 books [(4,000 + (12*150))/2 = 5,800/2 = 2,900]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In recession, the earnings per share (EPS) of Big Ben's Buffet would be:

3.12 [(12,000*.65)/2,500 = 3.12]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. The market price of the outstanding shares of Big Ben's Buffet, based on the current market value of the company, is:

60 (150,000/2,500 + $60)

Highland feed is considering one of two locations to construct a new processing plant. Location A would result in annual fixed costs of $300,000, variable costs of $63/unit, and price of $68/unit. Annual fixed costs at location B are $800,000, variable costs are $32/unit, and price per unit of $86/unit. Sales volume is estimated to be 25,000 units/year. What are the break-even units for location A?

60,000 (300,000/5 = 60,000)

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

Compounding

Net working capital is defined as:

Current assets minus current liabilities

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

Decreases

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In a recession, the earnings per share (EPS) of Big Ben's Buffet:

Decreases to $3.03 per share after the proposed change in capital structure [([(12,000-(60,000*0.05)]*0.65)/1,500 = $3.03]

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. Based on the analysis, you can reach the following conclusion:

Financial leverage helps increase the return on equity at the time of expansion

Fixed (F), Variable (V), or Mixed (M): Administrative Salaries and Wages

Fixed (F)

Fixed (F), Variable (V), or Mixed (M): Manager's salary

Fixed (F)

Fixed (F), Variable (V), or Mixed (M): Manufacturing equipment lease

Fixed (F)

Fixed (F), Variable (V), or Mixed (M): Rent for administrative, manufacturing, and warehouse facilities

Fixed (F)

Fixed (F), Variable (V), or Mixed (M): Sales salaries

Fixed (F)

Big Ben's Buffet, Inc. has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes (EBIT) are projected to be $30,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Big Ben's Buffet is considering a $60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. The tax rate is 35%. In a normal economy, the earnings per share (EPS) of Big Ben's Buffet:

Increases to $11.70 per share after the proposed change in capital structure. [([30,000-(60,000*0.05)]*0.65/1,500 = $11.70]

Highland feed is considering one of two locations to construct a new processing plant. Location A would result in annual fixed costs of $300,000, variable costs of $63/unit, and price of $68/unit. Annual fixed costs at location B are $800,000, variable costs are $32/unit, and price per unit of $86/unit. Sales volume is estimated to be 25,000 units/year. Which location would you choose?

Location B

The manager of a fast-food restaurant featuring hamburgers is adding salads to the menu. There are two options, and the price to the customer will be the same for each. The option is to install a salad bar stocked with vegetables, fruits, and toppings and then let the customer assemble the salad. The salad bar will have to be leased and a part-time employee hired. The manager estimates fixed costs at $12,000 and variable costs totaling $1.50 per salad. The buy option is to have pre-assembled salad available for sale. They will be purchased from a local supplier at $2.00 per salad. Offering pre-assembled salads will require installation and operation of additional refrigeration, with an annual fixed cost of $2,400. The manager expects to sell 25,000 salads per year. Given that the manager expects to sell 25,000 salads, s/he should decide to:

Make the salads [12,000 +1.5*25,000 = $49,500 vs. 2,400 + 2*25,000 = $52,400)

Fixed (F), Variable (V), or Mixed (M): Office Supplies

Mixed (M)

The following are the sources of equity finance for agriculture cooperatives, except

Municipal Bonds

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Option B has a higher present value at time zero than does option A

Fixed (F), Variable (V), or Mixed (M): Direct labor

Variable (V)

Fixed (F), Variable (V), or Mixed (M): Raw materials

Variable (V)

Fixed (F), Variable (V), or Mixed (M): utilities related to production only

Variable (V)