BEC - B2 MC

Gartshore Inc is a mail-order book company. The company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360-day year?

$1,512 360 x .7 x .12 x 30/360 = 2.520 432 x .7 x .12 x 40/360 = 4.032 4.032 - 2.520 = 1.512

A company purcahsed property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property?

$11,500 14,000/1.12 = 12,500 12,500 - 1,000 = 11,500

A firm averages $4,000 in sales per day and is paid, on an average, within 30 days of the sale. After they receive their invoice, 55% of the customers pay by check, while the remaining 45% pay by credit card. Approximately how much would the company show in accounts receivable on its balance sheet on any given date?

$120,000

A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company's average collection period for new customers is expected to be 75 days; and the payment behavior of the existing customers is not expected to change. Variable costs are 80 percent of sales. The firm's opportunity is 20 percent before taxes. Assuming a 360-day year, what is the company's benefit (loss) on the planned change in credit terms?

$120,000 Benefit (Loss) = Variable Margin - Opportunity Cost Variable Margin = Sales - Variable costs = 720,000 - (720,000x.8) = 144,000 Opportunity Cost = Variable costs x days in period/days in year x opportunity cost rate = (720,000x.8) x (75/360) x .2 = 24,000 144,000 - 24,000 = 120,000

A compant plans to tighten its credit paolicy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70 to 60 percent. The company estimates that projected sales would be five percent less if the proposed new credit policy is implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.

$3,333,334 decrease 50 x .7 x 75/360 = 7.291667 (50x.95) x .6 x 50/360 = 3.958333 7.291667 - 3.958333 = 3.333334

A company has equity of $9,000. Long-term debt is $1,900. Net working capital. other than cash, is $2,500. Fixed assets are $2,200. What amount of cash does the company have?

$6,200 A = L + E CA + FA + Cash = CL + LTD + E

Bates Corp has $100,000 in bonds payable with a fair market value of $120,000. it also has 1000 shares of common stock issued at $50 per share with a fair market value of $80 per share. What amount represents the corporation's market capitalization?

$80,000 1,000 shares * $80 per share

A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:

(6,000) 150,000 * 4 = 600,000 * .04 = 24,000 2,500 * 12 = 30,000 24,000 - 30,000 = -6,000

What are methods of converting accounts receivable into cash?

-Collection agencies (used to collect over due AR) -Factoring AR (selling AR to a factor for cash) -Cash discounts (offering cash discounts to customers for paying AR quickly) -Electronic fund transfers (a method of payment which electronically transfers funds between banks

The primary differences between selecting the binomial (Cox-Ross-Rubinstein) model for valuing stock options versus the Black-Scholes option pricing model is:

-the consideration of the option over a period of time -it can be used for stocks that pay dividends without model modification

What are some advantages to a corporation that uses the commercial paper market for short-term financing?

-the market provides a broad distribution for borrowing -a benefit accrues to the borrower because its name becomes more widely known -the borrower avoids the expense of maintaining a compensating balance with a commercial bank

A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?

1.5 Fixed costs/Variable costs = 60,000/40,000 = 1.5

A company has income after tax of $5.4 million, interest expense of $1 million for the year, depreciation expense of $1 million, and a 40% tax rate. What is the company's times-interest-earned ratio?

10

Iota Corporation is using the PEG ratio to forecast its stock price in the coming year. The company's PEG ratio is 4x and tis current earnings per share is $10. Growth is expected to be 2.5%. What is the projected stock price

102 PEG = (P0/E1)/G P0 = PEG x E1 x G = 4 x (10x1.025) x 2.5

Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next eight years. The analyst is attempting to determine the appropriate "end-of-life" cash flows for the analysis. At the end of eight years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000 a cost to remove of $40,000, and scrap salvage value of $10,000. Kore's effective tax rate is 40 percent. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis?

12,000 The 75,000 will reduce taxable income (increase income) by 30,000 (75*.4) The 40,000 will increase costs by 24 (40*.6) The 10,000 will increase income by 6,000 (10*.6) 30,000 + 6,000 - 24,000 = 12,000

A corporation obtains a loan of $200,000 at an annual rate of 12%. The corporation must keep a compensating balance of 20% of any amount borrowed on deposit at the bank, but normally does not have a cash balance with the bank. What is the effective cost of the loan?

15% 200*.12 = 24 200*(1-.2) = 160 24/160 = 15%

Edwards Manufacturing Corporation uses the standard EOQ model. If the EOQ for Product A is 200 units and Edwards maintains a 50-units safety stock for the item, what is the average inventory of Product A?

150 units Reorder quantity / 2 = Avg inventory excl safety stock Avg inventory + safety stock = Total Avg inventory 200 / 2 = 100 + 50 = 150

The Frame Supply Company has just acquired a large accounts and needs to increase its working capital by $100,000. The controller of the company has identified a source of funds which is given below: Pay a factor to buy the company's receivables, which averages $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face values of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance. Using a 360-day year in all your calculations, the cost of factoring is:

16% AR x Fee x Days in yr / Days in period 125 x 2% x 360/30 = 30,000 (125x.8) x (10%/12) x 360/30 = 10,000 10+30 = 40-24 = 16 = cost 16/100 = 16%

Spotech Co's budgeted sales and budgeted cost of sales for the coming year are 212,000,000 and 132,500,000 respectively. Short-term interest rates are expected to average 5%. If Spotech could increase inventory turnover from current 8 times per year to 10 times per year, its expected cost savings in the current year would be:

165,625 [(132,500,000/8) - (132,500,000/10)] * 5%

The following information regarding inventory policy was assembled by the JRJ Corporation. The company uses a 50-week year in all calculations. Sale = 10,000 units per year Order quantity = 2,000 units Safety stock = 1,300 units Lead-time = 4 weeks

2,100 10,000/50 = 200 200 * 4 = 800 800 + 1,300 = 2,100

McLean Inc is considering the purchase of a new machine that will cost $150,000. The machine has an estimated useful life of three years. Assume for simplicity that the equipment will be fully depreciated 30, 40, 30 percent in each of the three years, respectively. The enw machine is expected to save the company $85,000 per year in operating expenses. McLean uses a 40 percent estimated income tax rate and a 16 percent hurdle rate to evaluate capital projects. The payback period for this investment would be:

2.09 Using the depreciation tax shield and the annual savings after tax

Quantree Company is quoted credit terms of 3/15, net 60 (using a 360-day year). The effedctive cost of not taking this discount and paying on day 60 is:

24.74% 360/(Total pay period - discount period) * Discount percent/100 - discount percent [360/(60-30)] * [3/97]

CyberAge outlet has the following monthly purchases and credit terms. Web Master $25,000 2/10, net 30 Softidee $50,000 5/10, net 90 What is the company's weighted annual interest rate for trade credit assuming they keep paying on the last day of the credit period?

28% [(1/3) x (360/20) x (2/98)] + [(2/3) x (360/80) x (5/95)]

Newman products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7 percent per year assuming that all proposals will produce equivalent results and using a 360-day year, which one of the following proposals is optimal for Newman? 1) A fee of 0.03 percent of the amount collected 2) a fee of $0.35 per check plus 0.01 percent of the amount collected 3) a flat fee of $125,000 per year 4) a compensating balance of $1,750,000

4) a compensating balance of $1,750,000

Assume the following facts about Martin Corporation: -Martin Corp can issue debt at 150 basis points over US treasury bonds -The current risk-free rate is 7 percent -Martin's effective corporate income tax rate is 40 percent What is the current net after-tax cost of debt for Martin Corporation?

5.1 percent 150 basis points = 1.5% 7% + 1.5% = 8.5% 8.5% * .6 = 5.1%

A company recently issued 9% preferred stock. The preferred stock sold for $40 a share with a par of $20. The cost of issuing the stock was $5 a share. What is the company's cost of preferred stock?

5.1%

Rock Records Inc. is attempting to value the copyrights to one of its artist's album collections. Given the lack of comparable market information, the company decides to use the replacement cost approach, assembling the following cost data: Legal Fees 350 Materials and Labor 495 Overhead 75 Production Costs 3,900 Development costs 1,250 Opportunity Costs 130 General Admin Allocation 64

6,200

An auto parts store must maintain inventory of a wide variety of parts to satisfy its diverse customer base. As a result, the store inventory has a high risk of obsolescence. What ratio (kind and high or low) would be most desirable to the store's creditors during a financial review of the auto parts store?

A high quick ratio Indicates the company has more liquid short-term assets on its balance sheet

A company currently has 1,000 shares of common stock outstanding with zero debt. It has the choice of raising an additional $100,000 by issuing 9% long-term debt, or issuing 500 shares of common stock. The company has a 405 tax rate. What level of earnings before interest and taxes would result in the same earnings per share for the two financing options? And what is the EPS? 18,000 27,000 10,800

An EBIT of 27,000 would result in EPS of $10.80 for both

B2 M4

Cost of safety stock/stockout

What are three things that affect the optimal level of inventory?

Cost per unit of inventory Cost of placing an order for merchandise Lead time to receive merchandise ordered

What about the old equipment is relevant to a manufacturing equipment replacement decision?

Disposal price of the old equipment

Freer Co. purchases a piece of machinery for $50,000. Freer will use the machinery in the production of its product line for five years at which time the machinery will have a residual value of $5,000. Freer anticipates that it will produce 90,000 units the first year with total units of 450,000. Which of the following methods will allow Freer to claim the greatest amount of depreciation in the first year?

Double Declining balance

What type of bond is most likely to maintain a constant market value?

Floating-rate would automatically adjust the return on a financial instrument to produce a constant market value

What are three things thatwould be relevant when determining the risk premium on a specific security?

Length of maturity Relative seniority Relative liquidity

What is an inventory management technique that focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials?

Materials requirements planning

Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. What is a corporate objective that is consistent with the announcement?

Maximize the net worth of the firm

What are strategies for maximizing net worth of a firm?

Maximizing earnings per share Minimizing the cost of debt Minimizing the cost of equity Maximizing cash flow

An organization would usually offer credit terms of 2/10, net 30 when:

Most competitors are offering the same terms and the organization has a shortage of cash

An analyst is reviewing a company's balance sheet and footnotes to determine how accounting estimates were factored into these line items. Would net realizable value for inventory represent a questionable methodology for using accounting estimates by the company?

No

Do you take into account the underpricing of a stock and flotation costs per share in determining the cost of funds from retained earnings?

No

Does commercial paper generally have an active secondary market?

No

Does commercial paper have a maturity date greater than one year?

No

Does commercial paper have an interest rate lower than treasury bills?

No

Does the internal rate of return use incremental average operating income in its computation?

No

Is the accounting rate of return used in net present value analysis?

No

Is trade credit a course of long-term financing to the seller?

No

Would earnings per share be relevant when determining the risk premium on a specific security?

No

Would the optimal level of inventory be affected by the current level of inventory?

No

Is commercial paper generally sold only though investment bankers?

No Brokers, dealers, investment brokers, one company to another

Is trade credit an inexpensive source of external financing?

No, its expensive

Are inspections part of inventory carrying costs?

No, they are part of order costs

Considering the SCOR Model of supply chain operations, which of the following key management processes does assessing the ability of the suppliers to supply resources fall into?

Plan

Kemple Cleaning Services is a newly established janitorial firm, and the owner is deciding which type of checking account to open. Kemple is planning to keep a $500 minimum balance in the account for emergencies and plans to write an average of 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. Kemple also has the option of a premium checking account, which requires a $1,500 minimum balance but has no monthly fees or per check charges. If Kemple's cost of funds is 10 percent, which account should Kemple choose?

Premium account, since the savings is $16 per year Standard = ($10 + ($0.10 x 80)) x 12 = 216 Premium = (500 + 1,500) x 0.10 = 200

A valuation estimation technique that can be adapted to start up companies and other situations where earnings are very low is:

Price Sales ratio

An analyst is reviewing a startup company with no net earnings. If the analyst wants to use a price multiples approach to valuation rather than a discounted cash flow method, the analyst would most likely select:

Price-sales ratio projection

Whent the EOQ model is used for a firm, which manufactures its inventory, ordering costs consist primarily of:

Production set-up

The overall cost of capital is the:

Rate of return on assets that covers the costs associated with the funds employed

What is one way to increase the working capital of a firm using liabilities?

Refinancing a short-term note payable with a two-year note payable

In applying the SCOR Model, a company would include all of the following in its planning except for: Selecting vendors Making make/buy decisions Determining demand requirements Assessing capacity concerns and capabilities

Selecting vendors

What statment is true if a seller extends credit to a purchaser for a period of time longer than the purchaser's operating cycle?

The seller is in effect financing more than just the purchaser's inventory needs

An analyst is reviewing a company's balance sheet and footnotes to determine how accounting estimates were factored into these line items. Would the outcome of similar litigation settlements for contingent lawsuits (liabilities) represent a questionable methodology for using accounting estimates by the company?

Yes

Are there restrictions to the type of corporation that can enter into the commercial paper market for short-term financing?

Yes

Can the binomial (Cox-Ross-Rubinstein) model for valuing stock options be used for stocks that pay dividends without model modification?

Yes

Can the binomial (Cox-Ross-Rubinstein) model for valuing stock options be used in consideration of an option over a period of time?

Yes

Does the internal rate of return use net annual cash flows in its computation?

Yes

Does the internal rate of return use net incremental investment in its computation?

Yes

Is trade credit an important source of financing for small firms?

Yes

Is trade credit subject to the risk of buyer default?

Yes

Would a required immediate increase in working capital of $35,000 be included in the calculation of a net initial cash outflow in a capital budgeting decision?

Yes

Datacomp Industries, which has no current debt, has a beta of .95 for its common stock. Mangement is considering a change in the capital structure to 30% debt and 70% equity. This change would increase the beta on the stock to 1.05 and the after-tax cost of debt will be 7.5%. The expected return on equity is 16% and the risk free rate is 6%. Should Datacomp's management proceed with the capital structure change?

Yes, because the weighted average cost of capital will decrease

A working capital technique, which delays the outflow of cash, is:

a draft

As a company becomes more conservative with respect to working capital policy, it would tend to have an:

increase in the ratio of current assets to noncurrent assets

As a company becomes more conservative in its working capital policy, it would tend to have a(n):

increase in the ratio of current assets to units of output

A company has unlimited capital funds to invest. The decion rule for the company to follow in order to maximize the shareholders' wealth is to invest in all projects having a:

net present value greater than zero

The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances: fluctuating or permanent assets with short-term or long term debt

permanent current assets with short-term debt

The net present value method of capital budgeting assumes that cash flows are reinvested at:

the discount rate used in the analysis