FIN4424 EXAM 3

The High-Rise Building Company (HRBC) uses 400,000 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the optimal carrying costs. (Assume a linear usage rate and that HRBC runs its inventory down close to zero as the replenishment order arrives.)

$100,000

The High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the optimal annual order costs.

$100,000

Terry's Place is currently experiencing a bad debt ratio of 4 percent. Terry is convinced that, with looser credit controls, this ratio will increase to 8 percent; however, she expects sales to increase by 10 percent as a result. The cost of goods sold is 80 percent of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?

$13.20

The default rate of Don's new customers has been running at 20 percent. The average sale for each new customer amounts to $500, generating a present value of profit of $200 and a 30 percent chance of a second order next year. The default rate on second orders is only 5 percent. If the interest rate is 6 percent, what is the expected profit from each new customer?

$139.62

The High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the total costs of optimal inventory.

$200,000

Tom's Toys is currently experiencing a bad debt ratio of 6 percent. Tom is convinced that, with tighter credit controls, he can reduce this ratio to 2 percent; however, he expects sales to drop by 8 percent as a result. The cost of goods sold is 75 percent of the selling price. Per $100 of current sales, what is Tom's expected profit under the proposed credit standards?

$21.20

Equity investors have contributed $250,000 to your start-up business, while creditors provided a loan of $300,000. You have calculated your firm's WACC at 10 percent. The annual interest payment is $25,000 and the marginal corporate tax rate is 21 percent. How much profit will your equityholders need to earn in order to break even in economic terms (i.e., EVA of zero)?

$35,250

The default rate of Demurrage Associates' new customers has been running at 10 percent. The average sale for each new customer amounts to $800, generating a present value of profit of $100 and a 40 percent chance of a second order next year. The default rate on second orders is only 2 percent. If the interest rate is 9 percent, what is the expected profit from each new customer? (Examine only the first two periods of potential orders.)

$47.74

Assume a book value per share of $10 and a price per share of $24. What is the market capitalization of a firm with 2,000,000 outstanding shares?

$48,000,000

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Accounts receivable = 200. Calculate the cash ratio. (Assume that the firm has no marketable securities.)

0.4

Which of the following factors would be influential in a typical financial plan? 1. how a firm can generate superior long-term returns; 2. choice of industry; 3. position within the industry

1, 2, and 3

Efficiency ratios indicate 1. whether the firm is using its assets productively; 2. whether the firm is liquid; 3. whether the firm is profitable; 4. how highly the firm is valued by investors

1. only

If the debt ratio is 0.5, what is the debt-equity ratio? (Assume no leases.)

1.00

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200. Calculate the quick ratio.

1.2

Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80. Calculate the debt-equity ratio

1.50

Assume the following data: EBIT = 400; Net income = 100; Equity = 1,000. Calculate the ROE (return on equity).

10.0 %

Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Average total assets = 1,500. Calculate the profit margin.

10.0 %

The High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the economic order quantity per order.

2,000 tons

Which of the following transaction(s) involve(s) credit?

2/30, net 60 and 2/10, EOM, net 60

Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Total assets = 1,500. Calculate the ROA (return on assets).

20.0 %

Suppose you purchase goods on terms of 1/10, net 30. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

20.1

Suppose you purchase goods on terms of 2/10, net 50. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.

20.2 %

The High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the optimal number of orders per year.

200

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Receivables = 200. Calculate the accounts receivable period.

22.8

Suppose you purchase goods on terms of 3/10, net 60. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

25 %

Market value ratios indicate 1. whether the firm is using its assets productively; 2. whether the firm is liquid; 3. whether the firm is profitable; 4. how highly the firm is valued by investors

4 (IV) only

If the short-term commercial paper rate is 6 percent and the corporate tax rate is 35 percent, what yield would a corporation require on an investment in auction-rate preferred stock? Assume the default risk is the same as for commercial paper.

4.4 %

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Total assets = 1,600; Inventory = 200. Calculate the inventory period.

45.6

The discount on a 91-Treasury bill is 5.2 percent. What is the annually compounded rate of return? (Assume a 360-day discount basis.)

5.4 %

The discount on a 91-Treasury bill is 5.65 percent. What is the annually compounded rate of return? (Assume a 360-day discount basis.)

5.9 %

The net credit period for a company with terms of 3/10, net 60 is

50 days

If the short-term commercial paper rate is 10 percent and the corporate tax rate is 35 percent, what yield would a corporation require on an investment in auction-rate preferred stock? Assume the default risk is the same as for commercial paper.

7.3

In the United States, small-value electronic transfers are made through

ACH.

The following groups are stakeholders of a public company: shareholders; bankers; suppliers; employees; bondholders; management

All of the above

Which of the following trade credit terms is not valid?

All of these options are valid credit terms.

Negotiable CDs are issued by

Banks

As an example of trade credit terms, "3/10, EOM, net 60" is not valid.

False

Concentration banking is used to slow down disbursements.

False

If a commercial draft is an order to pay immediately, it is called a time draft.

False

If goods are sold on an open account, the customer is asked to sign an IOU.

False

Market value ratios indicate how highly the firm is valued by managers.

False

Net working capital equals total assets minus total liabilities

False

On the balance sheet, assets are listed in increasing order of liquidity.

False

Suppose that a firm sells goods on terms of 2/30, net 60. Those customers who do not take the cash discount are effectively borrowing money at approximately 2 percent per year.

False

The market for short-term investments is known as the capital market.

False

Which of the following is a real-time gross settlement system?

Fedwire

In the United States, large-value electronic payments are made through

Fedwire and CHIPS.

Which of the following statements are true? I) New companies must be prepared to incur more bad debts than established businesses as part of the cost of building up a good-customers list. II) Generally, repeat orders warrant easier credit terms. III) Companies with high profit margins need to be particularly careful about extending credit to high-risk customers.

I and II only

When a firm grants credit to a customer, this gives rise to a(n) I) accounts receivable II) cash on delivery (COD) III) cash before delivery (CBD)

I only

Which of the following statements regarding "bankers' acceptances" is true? I) Bankers' acceptances are used in overseas trading. II) Bankers' acceptances are bought and sold on a discount basis. III) Bankers' acceptances are guaranteed by the bank.

I, II, & III

A municipal variable rate demand note (VRDN) I) is a long-term security; II) has interest payments linked to the level of short-term interest rates; III) may periodically be sold back to the issuer at face value; IV) is tax-exempt

I, II, III, and IV

Companies frequently use information from the following sources when conducting their credit analysis: I) financial statement supplied by the customer; II) payment history supplied by other firms; III) payment history supplied by banks

I, II, and III

A customer has ordered goods generating a present value of $1,200. The present value of production costs is $800. Under what conditions should you extend credit if there is no possibility of repeat orders?

If the probability of payment exceeds 0.67

A customer has ordered goods generating a present value of $800. The present value of production costs is $600. Under what conditions should you extend credit if there is no possibility of repeat orders?

If the probability of payment exceeds 0.75

A customer has ordered goods generating a present value of $2,000. The present value of production costs is $1,800. Under what conditions should you extend credit if there is no possibility of repeat orders?

If the probability of payment exceeds 0.90

The market for short-term investments is called

Money Market

When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called an

Open account

Which of the following costs are not accounted for on the income statement?

Opportunity Cost

The economic order quantity (EOQ) is calculated using

Q = √[(2 × sales × cost per order)/(carrying cost)].

Which measure would be most useful in comparing the operating profitability of two firms in different industries?

Return on assets

The following are electronic funds transfer systems available in the United States except

SWIFT.

A trade acceptance, when immediate payment is not required, is a(n)

Time draft

Which of the following have the most developed secondary market?

Treasury Bills

A commercial draft is simply an order to pay

True

A factor buys a firm's receivables, and then the firm's customer makes payments directly to the factor.

True

According to the DuPont system: ROE = (assets/equity) × (sales/assets) × [(after-tax interest + net income)/sales] × [(net income)/( after-tax interest + net income)].

True

Bankers' acceptances are used in overseas trade.

True

Direct deposits are processed through Automated Clearing House (ACH) system.

True

Fedwire is a system that transfers money between banks.

True

In the United States, export credit insurance is provided by the Export-Import Bank in association with a group of insurance companies known as the Foreign Credit Insurance Association (FCIA).

True

Leverage ratios indicate how heavily the company is in debt.

True

Lockbox systems are used to speed up collections.

True

One good reason to hold cash is that cash provides more liquidity than other marketable securities.

True

ROA can be increased by increasing asset turnover.

True

The P/E ratio measures the price that investors are prepared to pay for each dollar of earnings.

True

The calculation of market value added for a firm requires the use of the book value per share.

True

A repurchase agreement occurs when

an investor buys part of a government security dealer's inventory and simultaneously agrees to sell it back.

A tax-paying corporation would prefer to invest short-term money in

auction-rate preferred stock.

The costs of holding inventory include

carrying cost, order cost, and insurance cost.

In the economic order quantity (EOQ) inventory model, the optimal order size is achieved when

carrying costs = order costs.

Firms that receive a large volume of checks use the following to speed up availability of funds:

concentration banking

Net working capital (NWC) is calculated as

current assets - current liabilities

The following is (are) the main methods that firms use to send and receive money electronically:

direct payments, direct deposits, wire transfers. (All of the above)

"Eurodollars" or "international dollars" are

dollars deposited in banks in Europe.

The main advantage of using a netting system to settle foreign currency payments is that it

drastically reduces the number of payments.

The difference between total assets of a firm and its total liabilities is called

net worth.

The following are money market instruments except

preferred stocks

Firms employ the following types of inventories:

raw material, work in process, finished goods (all are correct)

Inventory consists of:

raw material, work in process, and finished goods.

If a firm grants credit with terms of 3/10, net 30, the customer

receives a discount of 3 percent when payment is made in less than 10 days after the sale.

Check 21 allows banks to:

send digital images of checks to one another instead of the checks themselves.

A commercial draft can be a

sight draft and time draft.

Auction-rate preferred stock offers competitive rates of return with traditional money market instruments but

still provides the corporate investor with the tax exclusion on dividend income

In the United States, export business is insured by

the Export-Import Bank in association with Foreign Credit Insurance Association (FCIA).

Which of the following countries is the heaviest user of checks?

the US

The following are advantages of electronic payment systems except:

the initial investment is high.

Factoring refers to

the sale of a firm's accounts receivable to another firm.

A large firm may hold substantial cash balances because

these balances are required by the bank in the form of compensating balances, the company may have accounts in many different banks, the company may have a very decentralized organization.

Earnings before interest and taxes are calculated as

total revenues − costs − depreciation

Accounts receivable include

trade credit and consumer credit.